The Ultimate Solution Summary Book Nov'23

The Ultimate Solution!
Message from the Author!
Dear Future CA,
Hope you are taking good care of yours and your family's health.
My name is Shubham Singhal and I am the author of this book. I had cleared my CA Final in
Nov 2018 attempt with an All-India Rank 4. I have done my Articleship with Deloitte,
Mumbai in the Statutory Audit department. I am a CA by profession and teacher by passion.
This book is a result of a year's dedicated efforts to bring to you the crispest and quality
content for Law. I truly believe that the content of this book is what I would have personally
used for my preparation. This book consists of everything that you would basically need on
your last day and the content great enough for getting exemption.
Hope you utilize this to the fullest and clear your exams with Flying colors!
I dedicate this book to my MoM. But for her blessings, this book would have been impossible.
Warm regards,
CA Shubham Singhal
In case if you find any errors, typo or otherwise, in this note - Feel free to highlight via
email at - [email protected]
Telegram YouTube
Your Feedback Matters!
(To be filled as and when you find any points)
5 things that you loved about the notes:
 .
 .
 .
 .
 .
5 points of improvement that can make these notes even more useful for your juniors
(Trust me I will work on it)
 .
 .
 .
 .
 .
Once you have jotted down your points, do share a photo of this page with me either at
[email protected] or share it on Instagram and tag me - @cashubham_air 4
Index and Last Day Revision Plan
SN Name of Chapters Page No. Pages Target Mins

on Exam Day
1 Preliminary 1 11
2 Incorporation of Company and Incidental Matters 12 18
3 Prospectus and Allotment of Securities 30 14
4 Share Capital and Debentures 44 18
5 Acceptance of Deposits by Company 62 10
6 Registration of Charges 73 4
7 Management and Administration 77 25
8 Declaration and Payment of Dividend 102 8
9 Accounts of Companies 111 19
10 Audit and Auditors 130 14
11 The Indian Contract Act, 1872 144 32
12 The Negotiable Instruments Act, 1881 176 23
13 The General Clauses Act, 1897 199 9
14 Interpretation of Statutes - -
205
SN Appendix SN Appendix
1 Matters requiring Ordinary Resolution 6 Important Limits of Companies Act
2 Matters requiring Special Resolution 7 Exemptions to Private Companies
3 Matters requiring Unanimous Resolution 8 Exemptions to Govt and Sec 8 Companies
4 Matters for Postal Ballot 9 Exemptions to Nidhi Cos.
5 Chapter-wise trend analysis 10 Exemptions to OPC and Small Cos
Steps to nail your theory papers – The Ranker’s Way:

1. Take as much as you can from the classes – Conceptual clarity, concise notes, funny mnemonics
and examples and what not.
2. Do a lot of writing practice in addition to the writing practice that we do in our classes.
3. Cover the full question bank in the first revision along with this summary notes and mark
selected questions for next revision
4. Plan 2 revision for full syllabus of law and 3-4 revision for important or difficult topics
5. Use revision videos along with this summary notes for comprehensive revision
6. Boom – You are ready to nail Law exams – The Ranker’s Way
Learn Law - The Ranker’s Way By CA Shubham Singhal 1
Objective of this Act:

Act to consolidate and amend the law relating to companies.
Enactment:
 Received the assent of the Hon’ble President of India on 29th August 2013
 Notified in Official Gazette on 30th Aug 2013 (different dates may be appointed for enforcement)
Flow:
 29 Chapters (+ Generally, 1 rule per chapter)
 470 Sections (Sec 1 to 148 covered in Intermediate)
 7 Schedules
Company: An incorporated association which is an artificial person, having a separate legal entity, with a
perpetual succession, a common seal (optional).
Section 1: Short Title, Extent, Commencement and Application:

Short Title Companies Act, 2013
Extent Whole of India (by default includes J&K)
Commencement From date as appointed by CG by notification in OG
Applicability The provision of this Act shall apply to:
a. companies incorporated under this Act or under any previous company law.
b. insurance cos., except where provisions are inconsistent with that of Insurance
Act, 1938 or IRDA Act, 1999;
c. banking companies, except where provisions are inconsistent with that of
Banking Regulation Act, 1949
d. cos. engaged in generation/supply of electricity, except where provisions are
inconsistent with that of Electricity Act, 2003
e. other company governed by any Special Act, except where provisions are
inconsistent with that of Special Act (Ex: LIC, RBI)
f. such body corporate, incorporated by any Act for the time being in force, as
may be notified by CG [Example - Food Corporation of India (FCI), National
Highway Authority of India (NHAI)]
Section 2: Definitions: (‘Internal aids to construction’)

In this Act, unless the context otherwise requires:
Cal Definition:
use
1 Abridged Prospectus
Means a memorandum containing such salient features of a prospectus as may be specified by
the Securities and Exchange Board by making regulations in this behalf
Chapter 1 – Preliminary
2 Accounting Standards
Means the standards of accounting or any addendum thereto for companies or class of
companies referred to in section 133;
Section 133: Central Government to Prescribe Accounting Standards
As per Sec 133, CG may prescribe the AS or any addendum thereto, as recommended by ICAI,
constituted u/s 3 of the CA Act, 1949, in consultation with and after examination of
recommendations made by National Financial Reporting Authority (NFRA)
Rule 7 of Companies (Accounts) Rules, 2014: Accordingly,

i. The standards of accounting as specified under Companies Act, 1956 shall be deemed to be
AS until AS are specified by CG u/s 133.
ii. Till the NFRA is constituted u/s 132 of the Act, the CG may prescribe AS or any addendum
thereto, as recommended by ICAI in consultation with and after examination of
recommendations made by National Advisory Committee(NAC) on AS constituted u/s 210A of
Companies Act, 1956.
Further, in exercise of powers conferred u/s 133, the CG in consultation with the National
Advisory Committee on AS prescribed that Companies (AS) Rules, 2006 and Companies (Ind AS)
Rules, 2015 may be followed.
3 Alter or Alteration
Includes the making of additions, omissions and substitutions;
5 Articles
Means the articles of association of a company:
 as originally framed, or
 as altered from time to time, or
 applied in pursuance of any previous company law or this Act;
6 Associate Company
In relation to another co., means a company in which that other co. has a significant influence,
but which is not a subsidiary company of the company having such influence and includes a joint
venture company.
Explanation: For the purpose of this clause:

(a) "Significant influence" means control of at least 20% of total voting power, or control of or
participation in business decisions under an agreement;
(b) "Joint venture" means a joint arrangement whereby the parties that have joint control of
the arrangement have rights to the net assets of the arrangement
Clarification: Shares held by a company in another company in a fiduciary capacity shall not be
counted for the purpose of determining the relationship of associate company
A fiduciary is a person who holds a legal or ethical relationship of trust with one of more
parties (persons or group of persons). Typically, a fiduciary prudently takes care of money or
other assets for another person.
7 Auditing standards
means the standards of auditing or any addendum thereto for companies or class of companies
referred to u/s 143(10)
Section 143(10) - CG may prescribe the standards of auditing or any addendum thereto, as
recommended by ICAI, constituted u/s 3 of the CA Act, 1949, in consultation with and after
examination of recommendations made by NFRA.
Provided that until any auditing standards are notified, any standard or standards of auditing
specified by the ICAI shall be deemed to be the auditing standards.
8 Authorised Capital or Nominal Capital

means such capital as is authorised by the memorandum of a company to be the maximum
amount of share capital of the company;
10 Board of Directors or Board
means the collective body of the directors of the company
11 Body corporate or Corporation
Includes a company incorporated outside India, but does not include:
i. a co-operative society registered under any law relating to co-operative societies; and
ii. any other body corporate (not being a company as defined in this Act), notified by CG;
12 “Book and Paper” and “Book or Paper”: Includes: [WARM DVD]

Books of
Deeds Voucher Writings Documents Minutes Registers
Accounts
maintained on paper or in electronic form;
13 “Books of account” includes records maintained in respect of:

(i) all sums of money received and expended by a company and matters in relation to which the
receipts and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and
(iv) the items of cost as may be prescribed u/s 148 in the case of a company which belongs to
any class of companies specified under that section;
14 Branch office, in relation to a company, means any establishment described as such by the co.;
15 Called-up capital means such part of the capital, which has been called for payment;
16 Charge means an interest or lien created on the property or assets of a company or any of its
undertakings or both as security and includes a mortgage;
17 Chartered accountant means a CA as defined in section 2(1)(b) of the Chartered Accountants
Act, 1949 who holds a valid certificate of practice u/ss 6(1) of that Act;
18 Chief Executive Officer means an officer of a company, who has been designated as such by it;
19 Chief Financial Officer means a person appointed as the Chief Financial Officer of a company;
20 Company means a company incorporated under this Act or under any previous company law;
Example: RIL (1973), Tata Steel (1907), Infosys (1981).
21 Company limited by guarantee means a company having the liability of its members limited by
the memorandum to such amount as the members may respectively undertake to contribute to
the assets of the company in the event of its being wound up;
22 Company limited by shares means a company having the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares respectively held by them;
Example: A shareholder who has paid Rs. 75 on a share of face value Rs. 100 can be called upon
to pay the balance of Rs. 25 only.
26 Contributory means a person liable to contribute towards the assets of the company in the
event of its being wound up.
Explanation: For the purposes of this clause, it is hereby clarified that a person holding fully
paid-up shares in a company shall be considered as a contributory but shall have no liabilities of
a contributory under the Act whilst retaining rights of such a contributory;
27 Control shall include:

 the right to appoint majority of the directors or
 to control the management or policy decisions exercisable by a person(s) acting individually
or in concert, directly or indirectly,
 including by virtue of their shareholding or management rights or shareholders agreements
or voting agreements or in any other manner
30 Debenture includes debenture stock, bonds or any other instrument of a company evidencing a
debt, whether constituting a charge on the assets of the company or not.
Provided that, following instrument shall not be shall not be treated as debenture:
a. instruments referred to in Chapter III-D of the RBI Act, 1934; and
b. such other instrument, as may be prescribed by CG in consultation with RBI, issued by a
company,
34 Director means a director appointed to the Board of a company;

35 Dividend includes any interim dividend;
36 Document includes summons, notice, requisition, order, declaration, form and register, whether
issued, sent or kept in pursuance of this Act or under any other law for the time being in force
or otherwise, maintained on paper or in electronic form;
37 Employees stock option means the option given to the directors, officers or employees of a
company or of its holding company or subsidiary company or companies, if any, which gives such
directors, officers or employees, the benefit or right to purchase, or to subscribe for, the
shares of the company at a future date at a pre-determined price;
38 “Expert” includes an engineer, a valuer, a CA, a CS, a cost accountant and any other person who
has the power or authority to issue a certificate in pursuance of any law for the time being in
force;
40 Financial statement in relation to a company, includes:

i. Balance sheet as at the end of the financial year;
ii. a profit and loss account, or in the case of a company carrying on any activity not for profit,
an income and expenditure account for the financial year;
iii. cash flow statement (CFS) for the financial year*;
iv. a statement of changes in equity, if applicable; and
v. any explanatory note annexed to, or forming part of, any doc. referred in above sub-clause:
*Provided that the FS, with respect to OPC, small co. and dormant co. and Private company
(startup), may not include CFS;
41 Financial Year, in relation to any company or BC, means period ending on 31st day of March
every year, and where it has been incorporated on or after the 1st day of January of a year,
the period ending on the 31st day of March of the following year, in respect whereof FS of the
company or BC is made up.
Provided that where a company or BC, which is a holding company or a subsidiary or associate
company of a company incorporated outside India and is required to follow a different FY for
consolidation of its accounts outside India, the CG may, on an application made by that company
or BC in such form and manner as may be prescribed, allow any period as its FY, whether or not
that period is a year.
43 Free reserves means such reserves which, as per the latest audited balance sheet of a company,
are available for distribution as dividend.
Provided that, following shall not be treated as free reserve:

i. any amount representing unrealised gains, notional gains, or revaluation of assets, whether
shown as a reserve or otherwise, or
ii. any change in carrying amount of an asset or of a liability recognised in equity, including
surplus in profit and loss account on measurement of the asset or the liability at fair value;
45 Government company means:
 any co. in which not less than 51% of paid-up share capital is held by CG, or by any SG, or
partly by CG and partly by one or more SG, and
 includes a company which is a subsidiary co. of such Government co.;
46 Holding company, in relation to one or more other companies, means a company of which such
companies are subsidiary companies;
50 Issued Capital means such capital as the company issues from time to time for subscription;
51 Key Managerial Personnel, in relation to a company, means:
i. the CEO or the managing director or the manager;
ii. the company secretary;
iii. the whole-time director;
iv. the Chief Financial Officer
v. such other officer, not more than one level below the directors who is in whole-time
employment, designated as key managerial personnel by the Board; and
vi. such other officer as may be prescribed;
52 Listed company means a company which has any of its securities listed on any recognised stock
exchange (“RSE”);
Provided that such class of companies, which have listed or intend to list such class of
securities, as may be prescribed in consultation with the SEBI, shall not be considered as listed
companies.
According to Rule 2A of the Companies (Specification of definitions details) Rules, 2014, the
following classes of companies shall not be considered as listed companies, namely:
a. Public companies which have not listed their equity shares on a RSE but have listed their:
i. non-convertible debt securities issued on private placement basis in terms of SEBI
(Issue and Listing of Debt Securities) Regulations, 2008; or
ii. non-convertible redeemable preference shares issued on private placement basis in terms
of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares)
Regulations, 2013;
iii. both categories of (i) and (ii) above.
b. Private companies which have listed their non-convertible debt securities on private
placement basis on a RSE in terms of SEBI (Issue and Listing of Debt Securities)
Regulations, 2008;
c. Public companies which have not listed their equity shares on a RSE but whose equity shares
are listed on a stock exchange in a jurisdiction as specified in section 23(3) of the Act.
53 Manager means an individual who:

 subject to the superintendence, control and direction of the Board of Directors,
 has the management of the whole, or substantially the whole, of the affairs of a company,
and
 includes a director or any other person occupying the position of a manager, by whatever
name called, whether under a contract of service or not;
54 Managing Director means a director who

 By virtue of the articles of a company or an agreement with the company or a resolution
passed in its general meeting, or by its Board of Directors,
 is entrusted with substantial powers of management of the affairs of the company and
 includes a director occupying the position of managing director, by whatever name called.
Explanation: For the purposes of this clause, the power to do administrative acts of a routine
nature when so authorised by the Board shall not be deemed to be included within the
substantial powers of management;
Power to do administrative act:
power to affix draw and endorse draw and endorse sign any direct registration
the common seal any cheque in any any negotiable certificate of of transfer of any
to any document bank instrument share share
55 Member in relation to a company, means:

i. the subscriber to the memorandum of co. who shall be deemed to have agreed to become
member of the company, and on its registration, shall be entered as member in its register
of members;
ii. every other person who agrees in writing to become a member of the company and whose
name is entered in the register of members of the company;
iii. every person holding shares of the company and whose name is entered as a beneficial owner
in the records of a depository;
56 Memorandum means the MoA of a company as originally framed or as altered from time to time
in pursuance of any previous company law or of this Act;
57 Net worth means the:
Aggregate value of: After deducting aggregate Does NOT include:

1. paid-up share capital, value of: 1. Reserve created out
2. All reserves created out of 1. the accumulated losses, of revaluatn of assets
the profits, 2. deferred expenditure & 2. Write-back of
3. Securities premium account & 3. miscellaneous expense depreciation and
4. debit or credit balance of P&L not written off amalgamation
58 Notification means a notification published in OG and expression "notify" to be construed

accordingly;
59 Officer includes any director, manager or KMP or any person in accordance with whose
directions or instructions the BoD or any one or more of the directors is or are accustomed to
act;
60 Officer who is in default, for the purpose of any provision in this Act which enacts that an
officer of the company who is in default shall be liable to any penalty or punishment by way of
imprisonment, fine or otherwise, means any of the following officers of a company, namely:
(i) Whole-time director;
(ii) KMP;
(iii) where there is no KMP, such director(s) as specified by the Board in this behalf and who
has or have given his consent in writing to the Board to such specification, or all the
directors, if no director is so specified;
(iv) any person who, under the immediate authority of Board/KMP, is charged with any
responsibility including maintenance, filing or distribution of accounts or records,
authorises, actively participates in, knowingly permits, or knowingly fails to take active steps
to prevent, any default;
(v) any person in accordance with whose advice, directions or instructions the BoD of co. is
accustomed to act, other than a person who gives advice to BoD in a professional capacity;
(vi) every director, in respect of a contravention of any of the provisions of this Act, who is
aware of such contravention by virtue of the receipt by him of any proceedings of the Board
or participation in such proceedings without objecting to the same, or where such
contravention had taken place with his consent or connivance;
(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents,
registrars and merchant bankers to the issue or transfer;
62 One Person Company (OPC) means a company which has only one person as a member;
63 Ordinary or Special Resolution means an OR/SR as referred to in section 114;
64 Paid-up share capital or share capital paid-up means:

such aggregate amount of money credited as paid-up as is equivalent to the amount received as
paid-up in respect of shares issued and also includes any amount credited as paid-up in respect
of shares of the company, but does not include any other amount received in respect of such
shares, by whatever name called;
65 Postal ballot means voting by post or through any e-mode;
66 Prescribed means prescribed by rules made under this Act;
68 Private Company means a company having a minimum paid-up share capital as may be prescribed,
and which by its articles:
i. restricts the right to transfer its shares;
ii. except in case of OPC, limits the number of its members to 200:
Provided that in case joint holding – Treat them as single member.
Provided further, following shall not be included in number of members:

a. persons who are in the employment of the company; and
b. persons who, having been formerly in employment of co., were members of company while
in that employment and have continued to be members after the employment ceased.
iii. prohibits any invitation to the public to subscribe for any securities of the company;
The requirement of having a minimum PUSC shall not apply to a Section 8 provided it has not
committed a default in filing its financial statements u/s 137 or annual return u/s 92 with RoC.
69 Promoter means a person:

a) who has been named as such in a prospectus or is identified by co. in annual return u/s 92,
b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
c) in accordance with whose advice, directions or instructions the Board of the company is
accustomed to act (except where such person is acting merely in professional capacity)
70 Prospectus means any document described or issued as a prospectus and includes a red herring
prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting
offers from the public for the subscription or purchase of any securities of a body corporate;
71 Public company means a company which:

i. is not a private company; and
ii. has a minimum paid-up share capital as may be prescribed (N.A. to Sec 8 companies)
Provided that subsidiary of a public co. shall be deemed to be public co. for the purposes of this
Act even where such subsidiary company continues to be a private company in its articles;
74 Register of companies means the register of companies maintained by the Registrar on paper or
in any electronic mode under this Act;
75 Registrar means a Registrar, an Additional Registrar, a Joint Registrar, a Deputy Registrar or
an Assistant Registrar, having the duty of registering companies and discharging various
functions under this Act
76 Related Party:
Person Firm Private Company Public Company
Director and Director, Director, Manager Such director or manager

Relatives Manager or or Relative is - or Relative is - a director
KMP and relative is a Member or AND holds along with
Relatives partner Director relatives >2% of PUSC
Body Corporate (N.A to Private Company) Any person Other person
BOD / MD / Manager is accustomed As may be

to act as per advice or instruction on whose advice
prescribed
of director or manager and relative or instruction of
director or
holding, subsidiary, co-subsidiary or manager and
associate of such company Director (other
relative is than I.D), KMP of
Investing company or venturer of accustomed to the holding co. or
the company (such investment leads act relatives of such
to the company becoming associate) directors or KMP
77 Relative:
Anyone who is related to another and covers the following:
a) they are members of a HUF (Hindu Undivided Family);
b) they are husband and wife; or
c) one person is related to the other in the prescribed manner as under:
Father (including Mother (including Son (including step-
Son’s wife;
step-father); step-mother); son);
Daughter (including Brother (including Sister (including

Daughter’s husband;
step-daughter); the step-brother); the step-sister).
78 Remuneration means any money, or its equivalent given or passed to any person for services
rendered by him and includes perquisites as defined under the Income Tax Act, 1961
84 Share means a share in the share capital of a company and includes stock;
85 Small company means a company, other than a public company:
i. PUSC of which does not exceed Rs. 50 lakh or such higher amount as may be prescribed
which shall not be > Rs. 10 crores; and
ii. turnover of which as per P&L account for the immediately preceding FY does not exceed Rs.
2 crores or such higher amount as may be prescribed which shall not be > Rs. 100 crores
Provided that nothing in this clause shall apply to:

i. a holding company or a subsidiary company;
ii. a company registered under section 8; or
iii. a company or body corporate governed by any special Act.
As per the Companies (Specification of Definitions Details) Rules, 2014, for section 2(85),
PUSC and T/O of small company shall not exceed Rs. 4 crores and Rs. 40 crores respectively.
[Amendment]
86 Subscribed capital means such part of the capital which is for the time being subscribed by the
members of a company;
87 Subsidiary company or Subsidiary, in relation to any other co., means a company in which the
holding company:
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than ½ of the total voting power either at its own or together
with one or more of its subsidiary companies.
Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed.
Explanation: For the purposes of this clause:

a) a company shall be deemed to be a subsidiary company of the holding company even if the
control referred to in sub-clause (i) or (ii) is of another subsidiary company of holding co.;
b) the composition of a company’s BoD shall be deemed to be controlled by another company if
that other company by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
c) the expression “company” includes any body corporate;
d) layer in relation to a holding company means its subsidiary or subsidiaries;
Note - Shares held by a company or power exercisable by it in another company in a fiduciary

capacity shall not be counted for purpose of determining the holding – subsidiary relationship.
88 Sweat equity shares means such equity shares as are issued by a company to its directors or
employees at a discount or for consideration, other than cash, for providing their know-how or
making available rights in the nature of intellectual property rights or value additions.
89 Total voting power, in relation to any matter, means the total number of votes which may be
cast in regard to that matter on a poll at a meeting of a company if all the members thereof or
their proxies having a right to vote on that matter are present at the meeting and cast their
votes;
90 Tribunal means the NCLT constituted u/s 408;
91 Turnover means the gross amount of revenue recognised in the P&L account from the sale,
supply, or distribution of goods or on account of services rendered, or both, by a company
during a FY;
92 Unlimited company means a company not having any limit on the liability of its members;
93 Voting Right means the right of a member of a company to vote in any meeting of the company
or by means of postal ballot;
Introduction to the Chapter:
 A person who initiates promotion of a company is called as Promoter [as defined u/s 2(69)]
 In this chapter we are going to read about – Incorporation of company, constitutional documents
(MoA and AoA) and various other key provisions.
 Types of company on the basis of Liability:
o Limited by Shares
o Limited by Guarantee with Share Capital
o Limited by Guarantee without Share Capital
o Unlimited company with Share Capital
o Unlimited company without Share Capital
Note – Specified IFSC company shall be formed on as company limited by shares.
Section 3 – Formation of Company:

A company may be formed for any lawful purpose by:
(a) > = 7 persons in case of a public company;
(b) > = 2 persons in case of a private company; or
(c) 1 person, where the company to be formed is to be OPC that is to say, a private company,
by subscribing to a memorandum and complying with the requirements of this Act.
In case of OPC, MoA to specify nominee:

1. Nominate a person: In case of OPC, the MoA shall indicate:
 the name of the other person,
 with his prior written consent in the prescribed form,
 who shall, in the event of the subscriber’s death or his incapacity to contract
 become the member of the company
The written consent so obtained shall also be filed with the Registrar at the time of incorporation
of the OPC along with its MoA and AoA
2. Withdrawal: Nominee may withdraw consent any time in prescribed form

3. Replacement of Nominee - Member of OPC may, at any time, change the name of Nominee by:
a. Giving notice in prescribed form
b. Intimating the company about such change
c. On receipt of such intimation, company to inform Registrar.
d. Change of such name shall NOT be deemed as Alteration of MoA
Section 3A – Members severally liable in certain cases:
Chapter 2 – Incorporation
If at any time, the no. of members is Company carries on business for > 6
reduced below prescribed limit i.e., 7 months while no. of members is so
(public) or 2 (private) reduced
Every person who is a member during the time that it so carries on business after those 6m and is cognizant
of the fact that it is carrying on business with < 7 or 2 members, as the case may be,
shall be severally liable for payment of whole debts contracted during that time, and may be severally sued
therefor
Section 4 – Memorandum of Association: [As defined u/s 2(56)]

Basics of MoA:
 Base document for the formation of the company (MoA + AoA = Constitutional Document)
 Content of MoA need to be in compliance with Companies Act, 2013
 MoA contains object for formation of co. beyond which its actions cannot go.
 A memorandum is a public document u/s 399 of the Companies Act, 2013. Consequently, every
person entering into a contract with the company is presumed to have knowledge of conditions
contained therein.
 Shareholders must know the purposes for which his money can be used by the company and what
risks he is taking in making the investment.
 Co. cannot depart from provisions contained in MoA – Otherwise, ultra vires Act.
Legal provision:
1. The MoA of a company shall state: [NR SOLO]
the Name of co. with last word Objects for which the company
the state in which the
"Limited" (public) or "Private is proposed to be incorporated
Registered office of the
Limited" (Pvt co.); and any matter incidental
company is to be situated
(Not applicable to Sec 8 Co.) thereto
In case of company having SC:

a. Amount of registered SC
in case of OPC  Name of
the Liability of members of (divided into amt and no. of
person who, in event of death
company, whether limited or shares)
of subscriber, shall become the
unlimited** b. the no. of shares each
member of OPC (nominee).
subscriber intends to take
opposite to his name
** Liability clause: Also, state that liability is limited to unpaid amt of shares (in case of co. limited
by shares) or amt upto which member undertake to contribute in event of winding up (in case of ltd.
by Guarantee)
2. Name Clause: The name stated in the memorandum shall:

(a) NOT be identical with or resemble too nearly to name of an existing co. under this/previous Act;
(b) NOT be such that its use by the company:
(I) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the CG.
3. Without prejudice to provision u/ss (2), a co. shall not be registered with a name which contains:
a. any word or expression which is likely to give the impression that the company is in any way
connected with, or having the patronage of, the CG, any SG, or any local authority, corporation
or body constituted by the CG/SG under any law for the time being in force; or
b. such word or expression, as may be prescribed,
unless the previous approval of CG has been obtained for the use of any such word or expression.
Rule 8B of Companies (Incorporation) Rules, 2014:

Following words and combinations thereof shall not be used in the name of a company in English or
any of the languages depicting the same meaning unless the previous approval of the CG has been
obtained:
 Board;  National;  Authority;  Forest  Development
 Union;  Republic;  Municipal; corporation; Authority;
 Nation;  President  Panchayat;  Development  Small Scale
 Central;  Minister;  Commission; Scheme; Industries;
 Federal;  Governor;  Undertaking;  Court or  Financial Corporation
 Bureau  Rashtrapati; Judiciary; and the like;
 PM or CM;  Statute or  Khadi and Village
Statutory; Industries
Corporation;
 The use of word of Scheme with the name of Government (s), State, India, Bharat or any
Government authority or in any manner resembling with the schemes launched by CG/SG or
local Governments/auth
Approval of Regulator:
If the proposed name include words such as ‘Insurance’, ‘Bank’, ‘Stock Exchange’, ‘Venture Capital’,
‘Asset Management’, ‘Nidhi’, ‘Mutual fund’ etc., unless a declaration is submitted by the applicant
that the requirements mandated by the respective regulator, such as IRDA, RBI, SEBI, MCA etc.
have been complied with by the applicant;
Bonus Points:
a. In case of Govt co., the suffix – “Pvt Ltd” or “Ltd” is not required provided 92 + 137
b. In case of OPC, add the suffix – (OPC) Private Limited
4. A person may make an application (SPICe+/RUN form) to Registrar for reservation of a name as:
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name.
5. Reservation of Name:
i. Upon receipt of appln u/ss (4), the Registrar may, on the basis of info. and docs furnished with
application, reserve the name:
 for 20 days from the date of approval or such other period as may be prescribed in case of
new co.
 for 60 days from the date of approval in case of an application by an existing company
ii. Where after reservation, it is found that name was applied by furnishing wrong or incorrect
info, then:
a. if co. is not yet incorporated  Cancel reserved name + Applicant liable for penalty upto Rs. 1
lakh;
b. if company is incorporated  Registrar may, after giving the company an OOBH:
i. either direct the company to change its name within 3 months, after passing an OR;
ii. take action for striking off the name of the company from the register of companies; or
iii. make a petition for winding up of the company.
General Circular No. 29/2014 dated 11th of July, 2014:

CG directed Registrar that while allotting names to Cos./LLPs, the RoC concerned should exercise
due care to ensure that the names are not in contravention of the provisions of the “Emblems and
Names (Prevention of Improper Use) Act, 1950. It is necessary that Registrars are fully familiar
with provisions of the said Act.
6. MoA shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be

applicable.
7. In case of co. limited by guarantee and not having a share capital - Any provision in MoA/AoA
purporting to give any person a right to participate in the divisible profits of co. otherwise than as a
member, shall be void.
Doctrine of Ultra Vires
 In case of a company, whatever is not stated in the memorandum as the objects or powers is
prohibited by the doctrine of ultra vires.
 An act which is ultra vires is void, and does not bind the company.
 Neither the company nor the contracting party can sue on it.
 The company cannot make it valid, even if every member assents to it (i.e., ultra vires act cannot be
ratified)
Important Case Laws:

Rajendra Nath Dutta v. Shailendra Nath Mukherjee, 1982
An act which is intra vires the company but outside the authority of the directors may be ratified by
the company in proper form.
House of Lords in - Ashbury Railway Carriage and Iron Co. Ltd. v. Riche
Facts of the case:
 MoA defined its objects as - “The objects for which the company is established are to make and
sell, or lend or hire, railway plants to carry on the business of mechanical engineers and general
contractors…….”.
 The company entered into a contract with M/s. Riche, a firm of railway contractors to finance the
construction of a railway line in Belgium.
 On subsequent repudiation of this contract by the company on the ground of its being ultra vires,
Riche brought a case for damages on the ground of breach of contract, as according to him the
words “general contractors” in the objects clause gave power to the company to enter into such a
finance contract and, therefore, it was within the powers of the company.
 More so because the contract was ratified by a majority of shareholders, it is a valid contract.
Decision by The House of Lords:

 Held that the contract was ultra vires the company and, therefore, null and void.
 The term “general contractor” was interpreted to indicate as the making generally of such
contracts as are connected with the business of mechanical engineers.
 The Court held that if every shareholder of the company had been in the room and had said,
“That is a contract which we desire to make, which we authorise the directors to make”, still it
would be ultra vires.
 The shareholders cannot ratify such a contract, as the contract was ultra vires the objects
clause, which by Act of Parliament, they were prohibited from doing.
Author’s Note - The purpose of doctrine of ultra vires has been defeated as now the object clause can
be easily altered, by passing just a special resolution by the shareholders
Section 5 – Article of Association: [Defined u/s 2(5)]

[Nothing in this sec shall apply to articles of a company registered under previous act]
1. AoA shall contain the regulations for management of the company (internal rules and regulations)
2. AoA to include such matters, as may be prescribed.

Provided that company may include such additional matters in AoA as may be considered necessary
for mgt.
Entrenchment Provision:
3. AoA may contain provisions for entrenchment
Effect of such provision - AoA may be altered only if conditions or procedures as that are more
restrictive than those applicable in case of special resolution, are met or complied with.
4. Provisions for entrenchment shall only be made:

 either on formation of a company, or
 by an amendment in AoA agreed to by:
o all members (in case of private company) or
o by a special resolution (in case of public company)
5. Where AoA contain prov. for entrenchment  Co. shall give notice to Registrar of such prov. (in
presc. form)
6. AoA shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as applicable to

such co.
7. A co. may adopt all or any of the regulations contained in the model articles applicable to such co.
8. In case of any company, which is registered after the commencement of this Act, in so far as the
registered articles of such company do not exclude or modify the regulations contained in the model
articles applicable to such company, those regulations (in the model) shall, so far as applicable, be
the regulations of that company in the same manner as if they were contained in the duly registered
articles of the company.
Doctrine of Indoor Management:

 Persons dealing with the company cannot be assumed to have knowledge of internal problems of the
company.
 Stakeholders need not enquire whether the necessary meeting was convened and held properly or
whether necessary resolution was passed properly. They are entitled to take it for granted that it
is all done.
 The doctrine helps protect external members from the company and states that the people are
entitled to presume that internal proceedings are as per documents submitted with the RoC.
Doctrine of Indoor Management (DIM) vs Doctrine of Constructive Notice (DCN)
The DIM evolved around 150 years ago in the context of the DCN. The role of DIM is opposed to the
role of DCN. Whereas the DCN protects a company against outsiders, the DIM protects outsiders
against the actions of a company. This doctrine also is a possible safeguard against the possibility of
abusing the DCN
Basis for Doctrine of Indoor Management

 What happens internal to a company is not a matter of public knowledge. An outsider can only
presume the intentions of a company, but not know the information he/she is not privy to.
 If not for the doctrine, the company could escape creditors by denying the authority of officials to
act on its behalf.
Exceptions to DIM (i.e., Applicability of DCN):

Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of irregularity within the
company, the benefit under DIM would no longer be available. In fact, he/she may well be considered
part of the irregularity.
Negligence: If with a minimum of effort, the irregularities within a company could be discovered, the
benefit of the DIM would not apply. The protection of the rule is also not available where the
circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing
with the company does not make proper inquiry.
Forgery: The rule does not apply where a person relies upon a document that turns out to be forged
since nothing can validate forgery. A company can never be held bound for forgeries committed by its
officers.
Section 6 – Act to Override Memorandum, Articles, etc.

Save as otherwise expressly provided in this Act—
a. the provisions of this Act shall have effect notwithstanding anything to the contrary contained in:
Memorandum/Articles any agreement executed by co. BoD resolution or SH resolution
b. any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to
which it is repugnant to the provisions of this Act, become or be void, as the case may be.
Self-Notes!
Section 7 – Incorporation of Company:

1. File the following documents and information with the Registrar within whose jurisdiction the
Registered Office (RO) of a company is proposed to be situated:
Declaration, that req. of Act/Rules w.r.t.,
incorporation is complied with, by:
MoA and AoA - Address for
1. Advocate, CA, Cost Accountant, CS in
duly signed by correspondence till
practice engaged in formation of co., AND
Subscribers RO is estb.
2. Person named in AoA (director, manager or
secretary of co. )
Related to first
Particulars (name, residential Particulars of first directors
directors - Interest in
address, nationality and others) - Names, DIN, residential
other firms/BC +
of every subscriber + Proof of address, nationality and other
Consent to act as
identity particulars + Proof of identity
directors
Declaration from each Subscribers and First Directors that:

(a) he is not convicted of offence w.r.t., promotion, formation or mgt. of any co., or
(b) that he has not been found guilty of any fraud/misfeasance or breach of duty to any co.
during preceding 5 years AND
(c) all docs filed with RoC for registration contain correct, complete and true information to
best of his knowledge and belief
Add on – In case of OPC, file the written consent of nominee in addition to above documents!
2. Issue of Certificate of incorporation (“COI”) - RoC shall, on basis of above doc and info, register
and issue a COI in the prescribed form to the effect that the proposed company is incorporated
under this Act
3. Allotment of Corporate Identity Number (CIN) - RoC shall allot to the co. a CIN, which shall be a
distinct identity for the company and which shall also be included in the COI
4. Company shall maintain & preserve at its RO copies of all docs & info. as originally filed u/ss (1) till
dissolution.
5. If person furnishes any false/incorrect particulars of info. or suppresses any material info., of
which he is aware in any of docs filed with RoC above  Such person shall be liable u/s 447
6. If after incorporation, it is proved that co. is incorporated by furnishing false/incorrect info. or

representation or by suppressing any material info. for incorporating such co., or by any fraudulent
action:
a. promoters, first directors & persons making declaration u/s 3(1)(b) shall each be liable u/s 447
b. Tribunal may, on an application made to it [MR. LOW]:
i. pass orders for regulation of Management of the co. including changes, if any, in its
MoA/AoA, in public interest or in the interest of company and its members and creditors; or
ii. direct that Liability of the members shall be unlimited; or
iii. direct Removal of the name of the company from the register of companies; or
iv. pass an order for the Winding up of the company; or
v. pass such Other orders as it may deem fit
Prior to such orders – Reasonable OOBH to Co. + take into consideration transaction entered
into by co.
Simplified Proforma for Incorporating Company Electronically (SPICe) – For ease of doing business,
MCA has now simplified the process of filing of forms for incorporation of company though SPICe.
Formation of One Person Company (OPC):

 MoA of OPC to indicate name of other person (nominee) who becomes member of the OPC in case of
death/ incapacity of subscriber.
 Nominee to give his prior written consent in prescribed form.
 Such written consent to be filed with RoC along with MoA/AoA
 Nominee may withdraw consent any time in prescribed form
 Member of OPC may, at any time, change the name of Nominee by:
b. Giving notice in prescribed form
c. Intimating the company about such change
d. On receipt of such intimation, company to inform Registrar.
e. Change of such name shall NOT be deemed as Alteration of MoA
 Only a natural person who is an Indian citizen whether resident in India or otherwise:
o shall be eligible to incorporate OPC;
o shall be a nominee for the sole member of OPC.
"Resident in India" means a person who has stayed in India for > = 120 days during immediately
preceding FY.
 A natural person shall not be member of > 1 OPC at any point of time and the said person shall not
be a nominee of > 1 OPC.
 Where a natural person being member in OPC becomes member in another such company by virtue
of his being a nominee in that OPC, such person shall meet eligibility criteria (as given in point
above) within 180 days.
 No minor shall become member or nominee of the OPC or can hold share with beneficial interest.
 Such Company cannot be incorporated or converted into a section 8 company. OPC may be converted
to private/public companies in certain cases. The procedure of conversion is given in the Rules 6 & 7
of Chapter II of the Companies Act, 2013.
 OPC cannot carry out Non-Banking Financial Investment activities including investment in securities
of any BC.
Self-Notes!
Section 8 - Formation of companies with charitable objects, etc:

1. Where CG (power delegated to RoC) is satisfied that a person/AOP proposed to be registered as
Limited co.:
a. Has its objects to promote –
Commerce Art Science Sports Education Research Social Welfare
Religion Charity Protection of envirnoment Other Object
b. intends to apply its profits, if any, or other income in promoting its objects; and
c. intends to prohibit the payment of any dividend to its members,
CG may issue a license and thereupon the RoC shall register such company as Limited Company.
[Without addition of the word “Limited” or “Pvt. Ltd” as the case may be]
2. Sec 8 co = Privileges and obligation of Limited company.
3. Can a Firm become member of Section 8 company – Yes!
4. Additional points relating to Section 8 co.:

a. Not alter provision of MoA or AoA w/o prior approval of CG
b. May be converted to any other kind of company – Subject to passing SR at GM approving such
conversion
5. CG may suo motu also issue license u/s 8 to an existing public or private co.
6. Revocation of License and conversion to normal company: Where the company:

a. contravenes any requirements of this section or
b. contravenes any conditions subject to which a license is issued or
c. the affairs of co. are conducted fraudulently or in manner violative of objects of co. to public
interest,
CG may, by order (after reasonable OOBH):

 revoke license
 direct the company to Convert its status and
 change its name to add the word" Limited" or the words "Private Limited", as the case may be,
to its name and thereupon the Registrar shall register the company accordingly:
7. Where license is revoked, CG may, in public interest, order (reasonable OOBH),:

 winding up under this Act, or
 amalgamate such co. with other company registered under this section and having similar
objects, constitution, powers, rights, etc. to be defined by CG
8. If on winding up/dissolution, there remains, after satisfaction of its liabilities, any asset, it may be:
a. transfer to another sec 8 co. having similar objects subject to T&C imposed by Tribunal, or
b. sold and proceeds thereof credited to Insolvency and Bankruptcy Fund formed u/s 224 of IBC
9. Section 8 co. shall amalgamate only with another Sec 8 co. having similar objectives
10. Punishment for default in complying with this section:

If a co. makes any default in complying with requirements of this section, the co. shall be punishable
with fine which shall not be less than Rs. 10 lakhs but which may extend to Rs. 1 crores AND the
directors and every officer of the company who is in default shall be punishable with fine which
shall not be less than Rs. 25,000 but which may extend to Rs. 25 lakhs [Amendment]
Provided that when it is proved that affairs of co. were conducted fraudulently, every OID liable
u/s 447.
Company Directors and OID
Minimum fine Rs. 10 lakhs Rs. 25,000
Maximum fine Rs. 1 crore Rs. 25 lakhs
Affairs of co. – fraudulent - Sec 447
Examples of exceptions to Sec 8 companies:

a. Call for GM by giving clear 14 days’ notice (instead of 21)
b. Requirement of min. no. of director, ID, does not apply.
c. Need not constitute NRC or SRC
Concept Clarity Check:

1. Can a Sec 8 co. be incorporated with unlimited liability? – No. Sec 8 co. only be a limited company
2. Can an existing public/private co. seek license u/s 8? – Yes. In such case, it will drop the suffix Ltd
or pvt ltd.
3. Can a Firm become member in a public co. (non sec 8 co.) – No. Partnership firm is not separate legal
entity.
Section 9 – Effect of Registration:

From the date of incorporation mentioned in COI, such subscribers to MoA and all other persons, as
may, from time to time, become members of the company, shall be:
 a body corporate by the name contained in the memorandum,
 capable of exercising all the functions of an incorporated company under this Act and
 having perpetual succession with power to acquire, hold and dispose of property, both movable and
immovable, tangible and intangible, to contract and to sue and be sued, by the said name.
Certain case laws to understand the effect of registration:
Hari Nagar Sugar Mills From date of incorporation, the co. becomes a legal person separate from
Ltd. vs. S.S. the incorporators; and there comes into existence a binding contract b/w
Jhunjhunwala company and its members as evidenced by MoA/AoA
State Trading A company on registration acquires a separate existence and the law
Corporation of India vs. recognizes it as a legal person separate and distinct from its members
Commercial Tax Officer
Spencer & Co. Ltd. Merely because a company purchases all shares of another company, it will
Madras vs. CWT Madras not serve as a means of putting an end to the corporate character of
another company and each company is a separate juristic entity
Heavy Electrical Union The mere fact that entire share capital has been contributed by CG and
vs. State of Bihar all its shares are held by the President of India and other officers of CG
does not make any difference in the position of registered company and it
does not make a company an agent either of the President or CG
Section 10 – Effect of Memorandum and Articles
1. Subject to the provisions of this Act, the MoA and AoA shall, when registered bind the company
and the members thereof to the same extent as respectively signed by them and contained
covenants on its and his part to observe all the provisions of the MoA/AoA.
2. All monies payable by any member to the co. under MoA/AoA shall be a debt due from him to co.
(i.e., co. can recover calls in arears from members as if it a loan recovery)
Note – Company is liable to members and vice-versa. But members are not liable to each other.
Section 10A: Commencement of business etc.
1. A company having a share capital shall not commence any business or exercise any borrowing powers
unless:
declaration by a director, within 180 days of incorp.
The co. has filed with RoC a
(in prescribed form and manner) is filed with RoC
verification of RO provided
that - As on date of declaration, every subscriber
u/s 12(2)
has paid the value of shares agreed to be taken
2. If any default under this section  Co. – Rs. 50,000 and every OID – Rs. 1,000/day upto Rs. 1 lakh
3. If no declaration within 180 days + RoC has RGTB that co. is not carrying on any business or
operations  RoC may initiate action for the removal of the name of the company from register of
companies
As per the Companies (Incorporation) Rules, 2014:

 Declaration u/s 10A by a director shall be in prescribed form and contents of the said form shall be
verified by a CS/CA or a Cost Accountant, in practice.
 In case of a co. pursuing objects requiring registration/approval from any sectoral regulators such
as RBI, SEBI, etc., the regt./approval from such regulator shall also be obtained and attached with
the declaration.
Section 12: Registered Office of Company

1. Co. shall, within 30 days of incorporation and at all times, thereafter, have a RO, capable of
receiving comm.
2. Co. to furnish to RoC verification of RO within 30 days of incorporation
3. Every company shall:
a. paint or affix its name, address of its RO on the outside of every office or place in which its
business is carried on, in a conspicuous position, in legible letters in languages in general use in
that locality.
b. have its name engraved in legible characters on its seal; if any
c. get its name, address of its RO and the CIN along with telephone number, fax number, if any, e-
mail and website addresses, if any, printed in all its business letters, billheads, letter papers and
in all its notices and other official publications; and
d. have its name printed on hundies, promissory notes, bills of exchange and such other docs as
prescribed.
Provided that, in case name change during the last 2 years, print or affix the former name as well.
In case of OPC – The words “One Person Company” to be mentioned in bracket below such name.
Change in RO:
4. Notice of change in situation of RO, verified in manner prescribed  Send to RoC within 30 days of
change.
5. Except by passing a SR, the RO shall NOT be changed:

a. in the case of an existing company, outside the local limits of any city, town or village where such
office is situated at commencement of this Act or where it may be situated later by virtue of SR
passed by co.;
b. in the case of any other company, outside the local limits of any city, town or village where such
office is first situated or where it may be situated later by virtue of a SR passed by the company:
Provided that no company shall change RO from jurisdiction of one RoC to another RoC within the
same State unless confirmed by Regional Director (RD) on appln made in this behalf by co. in
prescribed manner.
6. On application u/ss 5, RD to communicate confirmation within 30 days from date of receipt of
application
On such confirmation, co. to file the same with RoC within 60 days of date of confirmation
RoC shall register the same and certify the registration within 30 days from date of filing such
confirmation.
7. The certificate referred u/ss (6) shall be conclusive evidence that all the requirements of this Act
w.r.t, change of RO have been complied with and the change shall take effect from the date of the
certificate.
8. If any default is made in complying with this section  Company and every OID shall be liable to
penalty of Rs. 1,000/day during which the default continues but not > Rs. 1 lakhs.
9. If RoC has RGTB that co. is not carrying on any business or operations, he may cause a physical
verification of the RO in prescribed manner and if any default is found to be made in complying with
requirements of sub-section (1)  Initiate action for the removal of the name of the company from
register of companies.
Can RO be different from Head Office or Corporate office? – Yes!
Concept Clarity Check:

A Ltd. has current Registered office at Dadar, Mumbai, Maharashtra under Mumbai RoC. It is
considering changing the location of RO. Help A Ltd. with the approvals required.
Proposed RO RoC Sec Board SR CG (RD) approval
Resolution
Bandra, Mumbai Mumbai 12 Yes No No
(within local limits) (Notice to RoC – 30 days)
Thane District Mumbai 12 Yes Yes No (Notice to RoC – 30 days)
Pune, MH Pune 12 Yes Yes Yes
(RD to approve in 30 days of application. Co.
to submit RD’s approval to R0C in 60 days.
Post that, RoC to register & certify in 30
days)
Ahmedabad, Gujarat 13 Yes Yes Yes
Gujarat (RD to approval within 60 days and then
ROC to register within 30 days of
application)
Section 13 – Alteration of Memorandum [Alteration = Addition, Omission or substitution]

1. Co. may alter provisions of MoA by a SR + by complying with procedure of this section
Filing with RoC: A company shall, in relation to any alteration of its memorandum, file with the
Registrar:
(a) the SR passed by the company u/ss (1);
(b) the approval of CG u/ss (2), if alteration involves any change in the name of the company.
2. Change in Name – Effective only with approval of CG in writing (power delegated to RoC)
Provided that – No approval if the only change is addition/deletion of the word “Private” on
conversion.
3. On change of name – RoC shall enter the new name in register of cos. and issue new COI. Name
change effective from issue of CoI
4. Alteration of registered office from one state to another – Effective only on approval of CG
(delegated to RD) on application in prescribed form:
 Certified copy of the order of CG approving such change to be filed with RoC of each of the
States.
 Such RoCs shall register the same, and
 Registrar of the State where the RO is being shifted to, shall issue a fresh CoI
5. On application to CG u/s 13(4) for approval of change in state where RO is situated:

a. CG to dispose application within 60 days
b. Before passing order, may satisfy itself that:
i. Alteration has the consent of creditors, DH and other persons concerned with the
company, or
ii. sufficient provision has been made by co. for due discharge of all its debts and
obligations or
iii. adequate security has been provided for such discharge.
6. Change in object for which money raised from Public:

Co., which has raised money from public through prospectus + still has any unutilised amount, shall
not change its objects for which it raised such money unless a special resolution is passed and:
a. prescribed details of such resolution shall be:
 published in newspapers (English + vernacular which is in circulation at place where RO is
situated) and
 placed on the website of the company, if any,
indicating the justification for such change;
b. the dissenting shareholders shall be given an opportunity to exit by the promoters and
shareholders having control in accordance with regulations to be specified by the SEBI.
7. Alteration of Object clause of MoA:

The RoC shall register any alteration of MoA w.r.t, the objects of the company and certify the
registration within 30 days from the date of filing of the SR u/ss (6)(a) of this section.
8. No alteration made under this section shall have any effect until it has been registered as per this
section.
9. Any alteration of the MoA of a company limited by guarantee and not having a share capital,
purporting to give any person a right to participate in divisible profits of the company otherwise
than as a member, shall be void.
Summary of provision related to Amendment of MoA:

MOA SH External
Outcome
clause Resolution approvals
Approval of CG Change effective from date of issue of Fresh CoI by
Name SR
(ROC) + Sec 4 & ROC
16 N.A. where only word “Pvt” is added/deleted on
conversion
Approval of CG CG shall dispose appln within 60 days and before
(RD) approving, may satisfy itself that consent of crs, DH,
Domicile
SR (only when RO is etc. or that sufficient provision is made for due
(State)
changed from one discharge or that adequate security is provided for
state to another) discharge of debts.
Co., which has raised money from public through
prospectus + still has any unutilised amount, shall not
change its objects for which it raised such money unless
a SR is passed and:
i. the details of SR - published in newspapers + Placed
Objects SR -
on website of co. indicating justification for such
change;
ii. the dissenting SH shall be given an opportunity to
exit by the promoters and SH having control as per
SEBI regulatn
Section 14 – Alteration of articles

1. Company may, by SR, alter its AoA.
Alteration of AoA includes conversion of:
a. Pvt co. to public co.
b. Public co. to Private co. (subject to approval of CG by application in prescribed form)
Provided that – Where a private co. alters its article such that it does not include restriction/
limitation which a Pvt. co. is required to include in AoA as per Act, such Pvt. co. shall cease to be
private from date of alteration.
2. Following shall be filed in prescribed manner with RoC, within 15 days of alteration of AoA, for
registration:
 Every Alteration of AoA
 Approval of CG for such alteration
 Printed copy of the altered articles,
3. Any alteration of AoA registered u/ss (2) shall be valid as if it were originally in the articles.
Andrews vs Gas Meter Co. – The power to alter articles vests with the Company by virtue of Companies
Act, 2013. A company cannot divest itself of these power.
Section 15: Alteration of MoA/AoA to be noted in every copy.
(1) Every alteration in MoA/AoA shall be noted in every copy of the MoA/AoA, as the case may be.
(2) If default u/s 15(1)  Co. + Every OID - Liable to penalty of Rs. 1,000 for every copy issued w/o
alteration.
Section 16: Rectification of Name of Company:

1. If, through inadvertence or otherwise, a company on its first registration or on its registration by a
new name, is registered by a name which:
a. in opinion of CG, is identical with or too nearly resembles the name by which a company in
existence had been previously registered, it may:
 direct the co. to change its name and
 the co. shall change its name within 3m from such direction, after adopting an OR;
b. on an application:
 by a registered proprietor of a trade mark
 made to CG within 3 years of incorporation or registration or change of name of the co.
 that the name is identical with or too nearly resembles to a registered trade mark of such
proprietor under the Trade Marks Act, 1999,
 in the opinion of CG, is identical with or too nearly resembles to an existing trade mark,
 CG may:
 direct the co. to change its name and
 the co. shall change its name within 3m from such direction, after adopting an OR;
2. Where a co. changes its name or obtains a new name u/ss (1), it shall, within 15 days from date of
such change, give notice of the change to Registrar along with the order of CG, who shall carry out
necessary changes in the CoI and memorandum.
3. If a co. is in default in complying with any direction given u/ss (1), the CG shall allot a new name to
the co. in prescribed manner and Registrar shall enter the new name in register of companies in
place of the old name and issue a fresh CoI with the new name, which the company shall use
thereafter [Amendment]
Provided that nothing here shall prevent a company from subsequently changing its name as per Sec 13
Section 17: Copies of memorandum, articles, etc., to be given to members.

1. Co. shall, on being so requested by a member, send to him within 7 days of the request and subject
to the payment of such fees as may be prescribed, a copy of each of the following documents,
namely:
Memorandum Articles agreement and resolutions u/s 117(1) not so included in MoA/AoA
2. If default u/s 17  Co. + Every OID - Liable for each default - Rs. 1,000/day or Rs. 1 lakh WEL
Section 18: Conversion of Companies Already Registered:

Application to RoC to issue No affect on
Alter MoA/AoA
RoC fresh CoI debts/liabilities
1. A co. of any class registered under this Act may convert itself as a company of other class under
this Act by alteration of MoA and AoA of the co. as per the provisions of this Chapter.
2. Application to RoC for fresh CoI:

 Where conversion is required to be done under this section,
 the RoC shall, on an application made by co, after satisfying himself that provisions of this
Chapter is complied with,
 close the former registration of the co. and
 after registering docs referred u/ss (1), issue a CoI in same manner as its first registration.
3. The registration of a co. under this section shall not affect any debts, liabilities, obligations or
contracts incurred or entered into, by or on behalf of the company before conversion and such
debts, liabilities, obligations and contracts may be enforced in the manner as if such registration
had not been done.
Section 19: Subsidiary Company not to hold Shares in its Holding Company
1. Restriction:
 No co. shall (itself/nominees) hold any shares in its holding co., and
 No holding co. shall allot/trf its shares to any of its subsy co. and
 any such allot/trf of shares of a co. to its subsy. shall be void
Provided that nothing in this sub-section shall apply to a case:

a. where subsy co. holds such shares as legal representative of a deceased member of holding co.;
or
b. where the subsy co. holds such shares as a trustee; or
c. where subsy company is a SH even before it became a subsidiary co. of the holding co.
Provided further that subsy co. referred to in the above proviso shall have a right to vote at a meeting
of holding co. only w.r.t., the shares held by it as a LR/trustee, as referred to in said proviso.
2. The reference in this section to shares of a holding co. which is a co. not having share cap (ltd. by
guarantee or unlimited), shall be construed as reference to interest of its members, whatever be
the form of interest.
Concept clarity check:

As on April’22 - A Ltd holds 5% shares in B Ltd.
As on June’22 - Due to some transactions, A Ltd. becomes subsidiary of B Ltd.
As on July’22 – A Ltd calls for AGM.
Question 1 – Can B Ltd. vote in such AGM as A Ltd. is a subsidiary of B Ltd?

Answer – No! The exception of right to vote at a meeting is only in case shares as held as a LR/Trustee.
It is not applicable in the third exception that is ” where subsy co. is SH even before it became a subsy
of holding company”
Question 2 – Can B Ltd. issue bonus shares to A Ltd (say, in the ratio 1:1)
Answer – Yes, as this transaction is under purview of exemption, such bonus shares can be issued.
Section 20: Service of Documents

1. A document may be served on a co. or an officer thereof by sending it at the RO of the co. by:
registered speed courier leaving it means of such electronic or other
post post service at its RO mode as may be prescribed
However, where securities are held with a depository, the records of the beneficial ownership may
be served by such depository on the company by means of electronic or other mode.
2. A document may be served on Registrar or any member by sending it to him by:

registered speed courier delivering at his means of such e-mode or
Post
post post service office or address other prescribed mode
Provided that member may request delivery through a particular mode by paying fees as determined
in AGM.
Author’s Note – Law only provides for an option to pay extra fees and decide an alternate mode for
receiving notice. However, the notice will still be sent at the registered address of the member only.
Company is not responsible for sending the notice to any other address (even if extra fees is paid)
Exception to Nidhi Co.
In case of Nidhi Company, u/s 20 (2), docs may be served only on members who hold shares more
than:
 Rs. 1,000 in face value or
 1% of the total PUSC
whichever is less.
For other SHs, docs may be served by a public notice in newspaper circulated in the district
where the RO of Nidhi is situated; and publication of the same on the notice board of the Nidhi.
Rule 35 of Companies (Incorporation) Rules,2014

 Electronic transmission means a communication that creates a record that is capable of retention,
retrieval and review (RRR), and which may thereafter be rendered into clearly legible tangible form.
It includes:
posting of electronic message other mode capable of
fax email
board or network verifying the sender
 In case of delivery by post, such service shall be deemed to have been effected:
(i) in case of notice of a meeting, at expiration of 48 hours after letter containing the same is
posted; and
(ii) in any other case, at time at which the letter would be delivered in the ordinary course of post
Section 21: Authentication of documents, proceedings and contracts

Save as otherwise provided in this Act,
(a) a document or proceeding requiring authentication by a company; or
(b) contracts made by or on behalf of a company,
may be signed by any KMP or an officer or employee of the company duly authorised by the Board in
this behalf.
Section 22: Execution of bills of exchange (BOE), etc.

1. A BOE, hundi or promissory note shall be deemed to have been made, accepted, drawn or endorsed
on behalf of co. if it is made or drawn by any person acting under its authority, express or implied.
2. Company having seal: A company may, by writing under its common seal, if any, authorise any person
as its attorney to execute other deeds on its behalf in any place (India/outside India)
Company not having seal: Provided that in case if no common seal, the authorisation under this
subsection shall be made by 2 directors or by director + CS, wherever the company has appointed a
CS.
3. A deed signed by such an attorney on behalf of the company and under his seal shall bind the co.
Self-Notes!
Form Section No Purpose
Advt. providing details of notice of SR for varying terms of contracts
PAS - 1 27
referred to in Prospectus or Objects for which Prospectus was issued
PAS - 2 31 Information Memorandum
PAS - 3 39 & 42 Return of allotment of securities
PAS - 4 42 Private placements offer cum application letter
PAS - 5 42 Record of Private placement offers
PAS - 6 29 Unlisted Public company to file with RoC within 60 days of each half year
Sec No. Section Name

23 Public Offer and Private Placement
24 Power of Securities and Exchange Board to Regulate Issue and Transfer of Securities, etc.
25 Document Containing Offer of Securities for Sale to be Deemed Prospectus
26 Matters to be Stated in Prospectus
27 Variation in Terms of Contract or Objects in Prospectus
28 Offer of Sale of Shares by Certain Members of Company
29 Public Offer of Securities to be in Dematerialised Form
30 Advertisement of Prospectus
31 Shelf Prospectus
32 Red Herring Prospectus
33 Issue of Application Forms for Securities
34 Criminal Liability for Misstatements in Prospectus
35 Civil Liability for Misstatements in Prospectus
36 Punishment for Fraudulently Inducing Persons to Invest Money
37 Action by Affected Persons
38 Punishment for Personation for Acquisition, etc., of Securities
39 Allotment of Securities by Company
40 Securities to be Dealt with in Stock Exchanges
41 Global Depository Receipt
42 Offer or Invitation for Subscription of Securities on Private Placement
Overview
This Chapter is divided in two parts:
Part I – Provisions relating to issue of securities through Public Offer (Sec 23 – 41)
Part II – Provisions relating to issue of securities through Private Placement (Sec 42)
Section 23 - Public Offer (PO) and Private Placement (PP)
Chapter 3 – Prospectus
1. Public co. may issue securities:
through prospectus Private Right issue and Bonus issue as per this Act (and SEBI
to public (PO) Placement in case of listed co./co. intending to get listed)
2. Private co. may issue securities:

through prospectus Private Right issue and Bonus issue as per this Act (and SEBI
to public Placement in case of listed co./co. intending to get listed)
Note – Public offer includes IPO, FPO and OFS

Important Definitions:
 Securities [Sec 2(81)] - As defined in Section 2(h) of SCRA, 1956
 Prospectus [Sec 2(70)] – Any document described or issued as a prospectus and includes:
o Red Herring Prospectus (RHP) as per Sec 32 and
o Shelf Prospectus (SP) as per sec 31
o Notice, circular, advt. /other doc inviting offers from public for subscription or purchase of
any securities of BC
Section 25 – Document Containing Offer of Securities for Sale to be Deemed Prospectus
Document =
Company Issue House Public at large
Deemed Prospectus
Meaning - Where a company (A) allots or agrees to allot any securities of the co. (A) with a view that
those securities shall be offered for sale to public, any document by which the offer for sale to the
public is made shall, for all purposes, be deemed to be a prospectus.
Effect of deeming provision-

1. Law relating to content of prospectus and liabilities u/s 34,35 shall apply
2. Person making offer were person named as director in the co.
Presumptions: Unless the contrary is proved, it shall be evidence that an allotment of securities was
made with a view to the securities being offered for sale to the public if it is shown:
a. that offer for sale to the public was made within 6m after the allotment or agreement to allot; or
b. that at the date when the offer was made, the whole consideration had not been received by the co.
In addition to matter stated u/s 26, following additional matter is to be included in the document:
a. Net amt. of consideration received/to be received by the co.
b. time and place at which contract for allotment of said securities may be inspected
Signature of document:
In case of co. – 2 directors; In case of Partners – At least ½ of Partners
Section 26 - Matters to be Stated in Prospectus
Dated and Copy to RoC for Signed by RoC not to register unless consent in
Signed Registration dir./proposed dir. writing of all person named received
1. Every prospectus issued by/on behalf of public co. shall be dated and signed.
Prospectus shall state information and set out such reports on financial information as specified by
SEBI + CG. Unless specified by SEBI, the regulations already made by SEBI shall apply.
Prospectus to include:
a. declaration about compliance with this Act, and
b. statement that nothing in prospectus is contrary to this Act, SEBI and SCRA.
2. Nothing u/ss (1) shall apply to the issue of prospectus/form of application for:
a. Issue of shares/debentures to existing members or DH, whether or not there is right to
renounce u/s 62(1)
b. Issue of shares/debentures which are, in all respects, uniform with shares/debentures
previously issued and are currently quoted on RSE.
3. Provision of 26(1) shall apply to prospectus or form of application issued on formation of co. or
subsequently.
Explanation – Date indicated in prospectus shall be deemed to be the date of publication.
4. File prospectus with RoC: No prospectus shall be issued unless, on or before its publication, a copy
thereof has been delivered to RoC for filing, signed by:
 every person who is named therein as a director or proposed director of the co. or
 by his duly authorised attorney.
5. Prospectus shall not include a statement purporting to be made by expert, unless:

 expert is a person who is not engaged/interested in formation/promotion/mgt. of co., and
 has given his written consent to the issue of the prospectus and has not withdrawn such consent
before filing of such prospectus with RoC and a statement to that effect shall be included in
the prospectus.
Read definition of Expert – Sec 2(38) [Chapter 1]
6. Every prospectus shall, on the face of it,:

(a) state that a copy has been delivered to RoC u/ss (4); and
(b) specify docs attached to the copy so delivered
8. Prospectus not valid if issued more than 90 days after date of delivery of copy thereof to RoC
9. Issue of prospectus in contravention of this section – Co. and every person who is knowingly a party
– - Rs. 50,000 to Rs. 3 lakhs
Section 27 – Variation in Terms of Contract or Objects in Prospectus
General Rule – Company shall not vary terms of contract referred to in prospectus/objects
Co. shall not vary the terms of a contract referred to in the prospectus or objects for which the
prospectus was issued, except with:
a. Prior approval by way of special resolution in GM and:
b. prescribed details of such resolution shall be:
 published in newspapers (English + vernacular which is in circulation at place where RO is
situated) and
 placed on the website of the company, if any,
indicating the justification for such change;
c. Amount so raised cannot be used for buying, trading or otherwise dealing in Eq. shares of listed cos.
d. the dissenting shareholders shall be given an exit offer by the promoters and controlling
shareholders in accordance with regulations to be specified by the SEBI.
Rule 7 of The Companies (Prospectus and Allotment of Securities) Rules, 2014:

1. SR u/s 27 shall be passed through Postal Ballot. Notice of proposed SR to contain following info:
extent (%) of
Original purpose/ total money money utilised for
achievement of
object raised stated objects
proposed obj.
particulars of the reason and risk factors

unutilised amount proposed justification for pertaining to the
variation variation new objects
proposed time limit within

other relevant
which the proposed varied
info
objects would be achieved
2. Advertisement of the notice – Form PAS-1 (published simultaneously with dispatch of notice)
3. Place notice on website of co.
4. The dissenting shareholders shall be given an exit offer by the promoters and controlling
shareholders in accordance with regulations to be specified by the SEBI. (repeated in rule)
Section 28 – Offer of Sale of Shares by Certain Members of Company [Vijay selling stakes in Paytm]
1. Authorise the co.
 Where certain members (indv./BC) of a co. propose in consultation with BoD
 To offer whole/part of their holding to public
 the members shall then collectively authorize the co. to take necessary action for OFS and
 then they shall reimburse the company of all expense incurred.
2. Document by which such OFS is made to public shall be deemed to be a prospectus issued by the
company and all provisions related to content and mis-statement shall apply.
Rule 8: Exception to certain matters

The following provision of this chapter shall not be applicable in case of OFS:
a. the provisions relating to minimum subscription;
b. the provisions for minimum application value;
c. the provisions requiring any statement to be made by BoD in respect of utilization of money; and
d. any other provision/information which cannot be compiled or gathered by the offeror, with
detailed justifications for not being able to comply with such provisions.
Note: Prospectus to disclose name of the person(s)/entity bearing cost of making the OFS + reasons.
Section 29 - Public Offer of Securities to be in Dematerialized Form (Demat Form)

1. Notwithstanding anything contained in any other provisions of this Act:
a. every company making public offer; and
b. such other class or classes of public companies as may be prescribed,
shall issue the securities only in dematerialised form by complying with the provisions of the
Depositories Act, 1996 and the regulations made thereunder.
Rule 9 of Companies (Prospectus and Allotment of Securities) Rules, 2014:

The promoters of every public company making a public offer of any convertible securities may
hold such securities only in demat form.
Provided that the entire holding of convertible securities of the co. by promoters held in physical
form (up to the date of IPO) shall be converted into demat form before such offer is made.
Example - Vijay Shekhar sharma OFS in Paytm – Has to be in demat form first
2. In case of prescribed class of unlisted companies, the securities shall be held or transferred only in
Demat form in the manner laid down in the Depositories Act, 1996 and regulations made thereunder.
Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014:

Issue of securities in demat form by UNLISTED Public Company (UPC):
1. Every UPC shall:
a. Issue securities in demat form, and
b. Facilitate dematerialisation of all existing sec.
as per the Depository Act, 1996 and regulations made thereunder.
2. For UPC intending to make offer for:

issue of securities buyback issue of bonus shares right shares
shall ensure that, before making such offer, entire holding of securities of:
promoter directors KMPs
has been dematerialized as per the Depository Act, 1996 and regulations made thereunder
3. On or after 2nd October 2018, every holder of securities of UPC:

a. who intends to transfer such securities, shall get such sec. dematerialised before transfer
b. who subscribe to any sec. of UPC – Ensure existing securities are held in demat form.
4. Every UPC shall:

a. Facilitate dematerialisation of existing securities by making necessary application to
Depository (as defined u/s 2(1)(e) of the Depository Act), and
b. Secure International security Identification Number (ISIN) for each type of securities,
c. Inform existing security holder about such facility.
5. Every UPC shall ensure:
a. Timely payment of fees to Depository, Registrar to Issue & Share Transfer Agent (DRS)
as per the respective agreement
b. It maintains security deposit of >=2 years of fees with DRS as per agreement
c. Complies with regulations of SEBI or Depository w.r.t, dematerialisation of shares
6. No UPC which has defaulted in above payment, shall make offer of issue of any securities or
buyback or bonus/right issue till payment to DRS has been made.
7. Provision of Depositories Act, SEBI (Depositories and Participants) Regulations, 2018 and
SEBI (RTI and STA) Regulations, 1993 – Apply Mutatis Mutandis
8. Every UPC shall submit Form PAS-6 + Fees with ROC within 60 days of conclusion of each half
year (FY). Such form shall be certified by a CA/CS/CMA in practice)
8A. Any diff. b/w issued capital and capital in demat form – Co to bring to notice of Depository
9. Grievances of securities holders of UPC – File with IEPF Authority. IEPF authority shall
initiate action against DRS after consultation with SEBI
10. This rule shall N.A. to an UPC which is – Nidhi, Govt. company or a WOS
3. Any co., other than above, may convert its securities into demat form or issue its securities in
physical form in accordance with the provisions of this Act or the Depositories Act, 1996 and the
regulations made thereunder.
Section 30 - Advertisement of Prospectus

Where an advertisement of prospectus of a co. is published in any manner, it is necessary to specify
therein the contents of MoA as regards to:
Amount of SC names of the No. of shares Capital
Objects Liability
of Co. (ASC) signatories subscribed by them Structure
Section 31 – Shelf Prospectus (SP)

Meaning
 SP means a prospectus in respect of which
 the securities or class of securities included therein
 are issued for subscription in one or more issues over a certain period
 without the issue of a further prospectus.
Provision:
 Any class(es) of cos., as the SEBI may provide by regulations in this behalf, may file SP with RoC
 at the stage of the first offer of securities included therein
 which shall indicate the period of validity of such prospectus, not exceeding 1 year
 validity shall commence from date of opening of first offer of securities under that prospectus,
 w.r.t., second/subsequent offer of such securities issued, no further prospectus is required.
Information Memorandum (IM): (Form PAS-2)

 Within 1 month prior to second/subsequent offer., co. to file IM with RoC
 IM to contain material facts relating to:
New charges Changes in financial position of co. between
Other changes as prescribed
created previous offer and subsequent offer
Intimation of Changes:
 Where a co. has received applications for the allotment of securities along with advance payments
of subscription before making of any such change,
 Co. to intimate such changes to applicant.
 If they desire to withdraw application – Refund payment within 15 days of subscription
Note: IM together with shelf prospectus shall be deemed to be prospectus.
Section 32 – Red Herring Prospectus (RHP)

Meaning - Prospectus which does not include complete particulars of quantum/price of securities
included therein.
1. Co. proposing to make an offer of securities may issue a RHP prior to prospectus
2. RHP to be filed with RoC at least 3 days prior to opening of subscription list and the offer
3. RHP to have same obligation as prospectus.
Variation b/w RHP and prospectus to be highlighted as variation in prospectus
4. Upon closing of offer – Prospectus (not RHP) stating therein the total capital raised and closing
price and any other details as are not included in RHP shall be filed with the RoC and the SEBI.
Read section 2(1) – Abridged prospectus.
Section 33 – Issue of Application Forms for Securities

1. Every form of application for purchase of any securities of a co. shall be accompanied by an
abridged prospectus.
This sub-section shall N.A. if it is shown that the form of application was issued in connection with:
a. a bona fide invitation to a person to enter into an underwriting agreement w.r.t. such sec.; or
b. in relation to securities which were not offered to the public (Example – Private placement)
2. Copy of the prospectus shall, on a request being made by any person before the closing of the
subscription list and the offer, be furnished to him.
3. Default in this section – Co. liable for Rs. 50,000 for each default
Self-Notes!
Section 34 and Section 35 – Liability for Misstatement
Section 34 – Criminal Liability Section 35 – Civil Liability
If prospectus includes any Applicability:
statement - untrue or misleading,  Where a person has subscribed for securities of a co +
every person who authorizes the  Acting on any statement included/omitted in prospectus
issue of such prospectus shall be which is misleading, and
liable under section 447.  has sustained loss or damage as a consequence thereof
Section N.A. if a person proves Person Liable: Company and every person who is:
that: 1. Director at the time of issue of prospectus or authorized
a. such statement/omission was himself to be named as director
immaterial or 2. Agreed to become director in future
b. that he had RGTB that 3. Promotor of co.
statement was true or the 4. Authorized the issue of prospectus
inclusion or omission was 5. Expert u/s 26(5)
necessary.
Above person shall be liable to pay compensation to every
person who has sustained such loss or damage.
No person shall be liable if he proves that:

a. Having consent to become director, withdrew the consent
and prospectus was issued w/o consent.
b. Prospectus issued w/o knowledge or consent + on becoming
aware gave reasonable public notice
c. Such statement was made on basis of expert’s report +
such statement was true and fair representation of
expert’s statement + such person had RGTB that expert is
competent + expert has given consent + not withdrawn
consent.
If proven that prospectus issued with intent to defraud -

every person u/ss (1) shall be personally responsible – without
any limitation of liability
Peek Vs. Gurney (not covered in ICAI material but was included in past paper question)
The remedy u/s 35 by way of damage will not be available to a person if he has not purchased the
shares on the basis of prospectus. (for example, a person bought shares from open market, in such
case, it can’t be said that he relied on the information of prospectus and hence, no remedy available)
Self-Notes!
Sec 447: Punishment for Fraud
Without prejudice to any liability including repayment of any debt under this Act or any other law in
force, any person guilty of fraud shall be liable as follows:
Amount involved in the At least Lower of: Less than Lower of:
fraud a. Rs. 10 lakhs a. Rs. 10 lakhs
b. 1% of T/O b. 1% of T/O
Whether public No Yes No
interest involved?
Jail 6m – 10 years 3 years – 10 years Upto 5 years
And/or AND AND OR
Fine Up to 3x amt involved Up to 3x amt involved Upto Rs. 50 lakhs or both
Fraud bole toh?:

Act Ommission Concealment of Fact Abuse of position
Committed with:
Intent to decieve Gain undue advantage Injure interest. of co/SH/crs/others
whether or not there is a wrongful gain/loss.
Sec 36: Punishment for Fraudulently Inducing Persons to Invest Money

Any person who:
 either knowingly/recklessly makes any statement, promise or forecast
 which is false, deceptive/misleading or
 deliberately conceals any material fact,
 to induce another person to enter into any agreement:
for Subscribing, the purpose of which is to for obtaining credit
Acquiring, Disposing or secure a profit to any of the facilities from any bank
Underwriting securities parties from such securities or financial institution
shall be liable for action u/s 447.
Section 37: Action by Affected Persons

A suit may be filed, or any other action may be taken u/s 34,35 or 36 by any person, group of persons
or any association of persons affected by any misleading statement or the inclusion or omission of any
matter in the prospectus.
Note – If Mr. M had purchased the shares based on statement in the prospectus, only Mr. M can
initiate a suit against the co. and not Mr. X (to whom shares are transferred post allotment)
Allotment means appropriation of previously un-appropriated capital of the company.

[Issue of Prospectus – Invitation to offer; Receiving Application – Offer; Allotment – Acceptance]
Section 39: Allotment of Securities by Company
1. Co. can allot share to public only when:
a. amount stated in prospectus as min. amount has been subscribed and
b. sums payable on application have been paid to and received by co. by cheque/other instrument.
2. Application money shall not be <5% of nominal amt. of securities (or other amt. specified by SEBI)
3. If stated min. amount has not been subscribed and application money is not received within 30 days
/other period by SEBI from date of issue of prospectus – Return amount in pres. time & manner
Rule 11 of Cos (Prospectus and Allotment of Securities) Rules, 2014 – Refund of Appln Money:
1. If min. amt not subscribed + Application money not received within prescribed time –
Application money to be repaid within 15 days from close of issue.
If not repaid – Directors who are OID – Jointly & severally liable to repay with intt. @15% p.a.
2. Refund shall be credited only to the bank account from which the subscription was remitted.
4. When a co. having SC makes any allotment of sec.- File with RoC - Return of allotment (Form PAS-3)
Rule 12 – Return of Allotment:

1. Return of allotment to be filed in Form PAS – 3 within 30 days of allotment of securities.
2. Along with the Return of allotment, attach - List of allottees stating name, address, occupation
and no. of securities allotted.
In case of issue of: Attach to Form PAS-3:
Securities (not being  A copy of contract duly stamped together with any contract
bonus shares) allotted as of sale if relating to a property or an asset, or a contract
fully or partly paid up for for services or other consideration.
consideration other than  If such above contract is not reduced to writing, complete
cash particulars of the contract stamped with the same stamp
duty as would have been payable if the contract had been
reduced to writing
 A report of registered valuer w.r.t. valuation of the
consideration to be attached
Bonus securities Copy of resolution passed in GM authorizing such issue
Shares u/s 62(1)(c) by Valuation report of registered valuer
co. other than listed co.
5. Default u/ss (3) and (4) - Co. and its OID - Liable – Rs. 1,000/day or Rs. 1 lakh WEL for each default
Section 40: Securities to be Dealt with in Stock Exchanges

1. Before Public Offer – Co. to make an application to one or more RSE(s) and obtain permission for
securities to be dealt with in such RSE.
2. Where prospectus states application u/ss (1) has been made – Also state the name(s) of RSE in
which the securities shall be dealt with.
3. Application money shall be kept in a separate bank account in a scheduled bank + Not to be utilised
for any purpose other than:
a. Adjustment against allotment – If sec. have been permitted to be dealt with on RSE
b. Repayment within the time specified by SEBI – If co. is unable to allot securities
4. Any condition purporting to require or bind any applicant for securities to waive compliance with any
of the requirements of this section shall be void.
5. Default in complying with this section:
Company OID
Minimum Rs. 5 lakhs Rs. 50,000
Maximum Rs. 50 lakhs Rs. 3 lakhs
6. Co. may pay commission to any person w.r.t, subscription to its sec. subject to conditions prescribed.
Rule 13 of Companies (Prospectus and Allotment of Sec) Rules, 2014 – Payment of Commission:
Commission can be paid subject to following conditions:
a. Such payments to be authorized by AOA
b. Comm. may be paid out of (a) Proceeds of issue, or (b) Profit of co., or both
c. Rate of comm.
In case of sec. issue being: Commission shall NOT exceed
Shares Lower of:
a. 5% of price of share issue or
b. Rate auth by AOA
Debentures Lower of:
a. 2.5% of price at which debenture issued or
b. Rate auth. by AoA
d. Prospectus to disclose:
name of rate and amount of no. of sec. underwritten or
underwriters commission payable to u/w subsc. by u/w
e. No commission to be paid if securities are not issued to public.
f. Copy of contract for payment of comm. – File with RoC along with prospectus for registration

1. A Ltd. applies in BSE and NSE for obtaining permission prior to IPO. Of them, NSE rejected the
application and BSE approved such application. Can A Ltd. issue IPO? – No. All the RSE where
application has been made has to approve such application
2. Can underwriting commission be paid in kind (say, in forms of flats) – Yes, there is no such
restriction in law that commission has to be paid only in cash.
Section 42: Offer or Invitation for Subscription of Securities on Private Placement (PP)
Definition:
 “Private placement" means any offer or invitation to subscribe
 to a select group of persons by a company (other than by way of public offer)
 through private placement offer-cum-application (“PPOCA”), which
 satisfies the conditions specified in this section.
Provision:
1. Subject to this section, a company may make private placement (PP) of securities
2. Private placement:
 PP to be made only to select group of person identified by BoD (“Identified Persons” (IPs)).
 No. of IPs shall not exceed 50 or higher no. prescribed (200 members in aggregate in FY)
 Above limit of 200 not to include – QIBs and employees being offered securities under ESOP
u/s 62 [N.A. – NBFC and HFC if Regulation by RBI/NHB complied with)
Explanation- It is hereby clarified that restrictions of 200 members would be reckoned individually
for each kind of security that is equity share, preference share or debenture.
Rule 14: Private Placement:

The proposal to make PP has to be previously approved by SH of co. by a SR for each such PP.
ES annexed to notice for SH approval shall made following disclosure:

a. particulars of the offer including date of passing of Board resolution;
b. kinds of securities offered and the price at which security is being offered:
c. basis or justification for the price (incl. premium, if any) at which offer/invitation is made;
d. name and address of valuer who performed valuation;
e. amount which the company intends to raise by way of such securities;
f. material terms of raising such securities
Provided that this sub-rule shall not apply (i.e., SR not required) in case of offer for NCD if
amount raised <= Limit u/s 180(1)(C) and in such case, BoD resoln is adequate.
Provided also that, if amount raised exceed limit u/s 180(1)(c) – It shall be sufficient if co. passes
a previous SR only once in a year for all such offers during the year.
Provided also that: In case of offer to QIBs, if co. passes previous SR only in a year for all such
allotments during the year
Provided also that no offer or invitation of any securities under this rule shall be made to a body
corporate incorporated in, or a national of, a country which shares a land border with India,
unless such body corporate have obtained Government approval under FEM (Non-debt
Instruments) Rules, 2019 & such approval is attached with PPOCA.”. [Amendment]
3. Co. making PP shall issue PPOCA in Form PAS-4 to IPs whose names and addresses are recorded by
co. in prescribed manner.
Note - PPOs shall NOT carry right of renunciation.
Note: Deemed Public Offer:

 If a co. makes an offer to allot securities to > prescribed no. of IPs,
 the same shall be deemed to be an offer to public and
 shall accordingly be governed by the provisions of Part I of this Chapter
 irrespective of whether or not the payment for securities has been received or
 whether the company intends to list its securities or not on any RSE in or outside India
4. Mode of payment of subscription money:

IPs willing to subscribe to PP issue shall apply in the PP and application issued to such person along
with subscription money paid either by cheque/DD or other banking channel & not by cash.
Application money not to be utilized unless allotment made and return of allotment filed with RoC.
5. Prohibition on Fresh offer:

No fresh offer unless:
a. allotments w.r.t, any offer or invitation made earlier have been completed or
b. that offer or invitation has been withdrawn or abandoned by the co.

The prohibition applies for different kind of securities also i.e., if PP of Equity is yet to finish, you
cannot start PP of debentures also unless PP of equity is completed or withdrawn.
6. Allotment:
 Co. shall allot its securities within 60 days from receipt of application money
 If co. fails to allot securities in 60 days - Repay same within 15 days from expiry of 60 days
 If co. fails to repay – It shall be liable to repay that money + Intt. @ 12% p.a. from expiry of
60th day (read again, from which day?)
Application money shall be kept in a separate bank account in a scheduled bank + Not to be utilized
for any purpose other than:
a. Adjustment against allotment
b. Repayment – If co. unable to allot sec.
7. Co. making PP shall NOT release any public advertisements or utilise any media, marketing or
distribution channels or agents to inform the public at large about such an issue.
8. Return of Allotment to be filed with RoC within 15 days from allotment date
Co. making PP to file with RoC a “Return of Allotment” in Form PAS-3 within 15 days from the date
of the allotment. (Incl. a complete list of all allottees, with their full names, addresses, no. of sec.
allotted , etc.)
Rule 14: Private Placement (Continued)
Return of allotment in Form PAS – 3 shall include the following details:
 the full name, address, permanent Account Number and E-mail ID of such security holder;
 the class of security held;
 the date of allotment of security ;
 no. of securities held, nominal value and amount paid on such securities; and particulars of
consideration received if tire securities were issued for consideration other than cash.
9. Default in filing Return of allotment u/ss (8) – Co., its promoters and directors – Fine Rs. 1,000/day
for each default upto Rs. 25 lakhs
10. If co. makes PP in contravention of this section - Company, its promoters and directors – Fine which
may extend to amount raised through the PP or Rs. 2 crores, whichever is lower, and the company
shall also refund all monies with interest (12%) within 30 days of order imposing the penalty.
"Qualified Institutional Buyer" means the QIB as defined in SEBI (ICDR) Regulations, 2009.
Rule 14: Private Placement (Continued)

 PP offer cum application letter shall be in Form PAS-4 serially numbered and addressed
specifically to the person to whom the offer is made and shall be sent to him, either in writing or
in e-mode, within 30 days of recording the name of such person u/s 42(3).
 Co. to maintain complete record of PP offers in Form PAS-5
 Co. shall issue PP offer only after relevant SR/BR filed with RoC
Note – Any offer or invitation which is not in compliance with the provision of Sec 42 shall be treated
as public offer and relevant provisions shall apply accordingly.
Self-Notes!
Form Sec Purpose
SH-3 54 Issue of Sweat Equity Shares
SH-4 56 Form for transfer of security held in physical form
SH-5 56 Notice by the co. to the transferor and transferee in case of partly paid-up shares
SH-7 64 Notice to Registrar for the alteration of share capital
SH-9 68 Solvency declaration – File with RoC (+ SEBI in case of listed cos) in case of Buyback
SH-10 68 Register of shares or other securities bought back
SH-11 68 Return on completion of the buyback of shares or other securities
Sec No. Section Name

43 Kinds of Share Capital
44 Nature of Shares or Debentures
45 Numbering of Shares
46 Certificate of Shares
47 Voting Rights
48 Variation of Shareholders' Rights
49 Calls on Shares of Same Class to be Made on Uniform Basis
50 Company to Accept Unpaid Share Capital, Although not Called Up
51 Payment of Dividend in Proportion to Amount Paid-Up
52 Application of Premiums Received on Issue of Shares
53 Prohibition on Issue of Shares at Discount
54 Issue of Sweat Equity Shares
55 Issue and Redemption of Preference Shares
56 Transfer and Transmission of Securities
57 Punishment for Personation of Shareholder
58 Refusal of Registration and Appeal against Refusal
59 Rectification of Register of Members
60 Publication of Authorised, Subscribed and Paid-Up Capital
61 Power of Limited Company to Alter its Share Capital
62 Further Issue of Share Capital
63 Issue of Bonus Shares
64 Notice to be Given to Registrar for Alteration of Share Capital
65 Unlimited Company to Provide for Reserve Share Capital on Conversion into Limited co.
66 Reduction of Share Capital
67 Restrictions on Purchase by Company or Giving of Loans by it for Purchase of its Shares
68 Power of Company to Purchase its Own Securities
69 Transfer of Certain Sums to Capital Redemption Reserve Account
70 Prohibition for Buy-Back in Certain Circumstances
71 Debentures
72 Power to Nominate
* Sec 44, 45, 60, 65 and 72 are not applicable for students
Key Definitions:
Chapter 4 – Share Capital and Debentures

Section 2(84): "Share" means a share in the share capital of a company and includes stock.
Section 43 – Kinds of Share Capital [N.A. to pvt. Co. if mentioned so in MoA/AoA, subject to 92/137]
with voting rights
Equity Share
Capital with differential rights as to
Kinds of Share dividend, voting or otherwise
Capital
carries preference w.r.t payment of
Preference
dividend and repayment of capital at
Share Capital
time of winding up
Explanations:
1. “Equity share capital" - w.r.t., any co. limited by shares, means all share capital which is not
preference share capital;
2. "Preference share capital", w.r.t, any co. limited by shares, means that part of the issued share
capital of company which carries or would carry a preferential right w.r.t,:
(a) payment of dividend (fixed amt or amt calculated at fixed rate)- free or subject to tax
(b) repayment, in the case of a winding up, of amount of PUSC.
3. Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or

both the rights w.r.t payment of dividend and repayment of capital at time of winding up.
Rule 4 of Cos (Share Capital and Debentures) Rules, 2014 - Equity Shares With Differential Rights:-
Conditions to issue equity shares with Differential Rights (DR): [A2 VP FD2]
1. AoA authorizes the issue of such shares;
2. Such issue is authorized by an ordinary resolution passed at GM.
If eq. shares are listed on RSE – Seek approval through postal ballot (still OR).
3. Voting Power (VP) of shares with DR shall not be > 74% of total VP (incl. VP on shares with DR)
4. Omitted
5. Co. has not defaulted in filing FS and AR for 3 immediately preceding FY
6. Co. has no subsisting default in:
payment of repayment of matured Redemption of Redemption of
declared dividend deposit + Intt. pref. shares debenture + Intt
7. Co. has not defaulted in:
payment of repayment of term loan + Default in
Stat. dues w.r.t.,
dividend on pref. Intt. - PFI/State FI / Sch. crediting amt. in
Employee
shares Bank. IEPF to CG
Provided that co. may issue DVR on expiry of 5 years from end of FY in which default made good.
8. the co. has not been penalized by Court/Tribunal during last 3 years of offence under the RBI
Act, 1934 , the SEBI Act, 1992, the SCRA , 1956, the FEMA, 1999 or any other special Act
Additional Points:
1. ES to notice for GM or Postal Ballot to contain prescribed details about the issue (size of issue)
2. Co. shall NOT convert existing ESC with Voting Rights into ESC carrying DVR and vice versa
3. Details of such issue to be disclosed in BOD Report
4. Holders of Eq. shares with DR shall enjoy all other rights such as bonus shares, rights shares
etc., which holders of eq. shares are entitled to, subj to DR with which such shares are issued.
5. Register of Members u/s 88 to contain relevant particulars of such shares with details of SHs.

Section 46 – Certificate of Shares
1. Certificate to be Prima Facie Evidence of title of such shares: - If such certificate is issued under:
a. Common seal, if any or
b. Signed by 2 dirs. or a dir. + CS (if co. has a CS)
2. Duplicate certificate may be issued if:

a. It is proved to have been lost or destroyed; or
b. has been defaced, mutilated or torn + Surrendered to company.
3. Details regarding manner of issue of certificate/duplicate – As may be prescribed (Rule 6)
4. Where share is held in depository form - Record of depository is prima facie evidence of interest of
beneficial owner.
5. If Co. issues a duplicate certificate of shares with intent to defraud:

Co. – Fine – Not less than 5x Face Value of Shares involved | Extend to (10x or Rs. 10 crores WEH)
OID – Liable for action u/s 447
Section 47 – Voting Rights [N.A. to Private Co. if mentioned so in MoA/AoA, subject to 92 + 137]
1. Subject to certain provisions of this Act:
a. every member holding ESC, shall have right to vote on every resolution placed before co.; and
b. his voting right on a poll shall be in proportion to his share in the paid-up ESC of the co.
2. Every member holding PSC shall, in respect of such capital, have a right to vote only:
a. on resolutions which directly affect the rights attached to his preference shares and,
b. any resolution for the winding up of the company or
c. for the repayment or reduction of its EQUITY or PSC and
his voting right on a poll shall be in proportion to his share in the paid-up PSC of the co.
Provided that proportion of voting rights of ESH to voting rights of PSH shall be in the same
proportion as the ESC bears to PSC.
Provided further that where dividend in respect of a class of pref. shares has not been paid for 2
years or more, such class of PSH shall have a right to vote on ALL resolutions placed before the co.
Section 48 – Variation of Shareholder’s Rights

1. How to vary the rights?
Rights attached to shares of any class may be varied with:
- Consent in writing of not less than 3/4th of issued shares of that class, or
- SR (at a separate meeting of such class)
if provision for such variation is contained in AoA/MoA or in absence of such provision, it is not
prohibited by terms of issue of such shares
If variation by one class of SH affects rights of any other class, consent of 3/4th of such other
class of SH shall also be obtained and the provisions of this section shall apply to such variation.

2. Resistance to such variation
 Where holders of not less than 10% of issued shares of a class
 did not consent to such variation or vote in favor of SR
 they may apply to Tribunal to have variation cancelled.
 Where such appln is made - Variation shall not have effect until it is confirmed by Tribunal:
Provided that – Such application to be made within 21 days after date of consent/resolution
3. The decision of the Tribunal on any application u/ss (2) shall be binding on the shareholders.
4. Co. shall, within 30 days of the date of order of Tribunal - File a copy thereof with the Registrar.
Section 49 - Calls on shares of same class to be made on uniform basis

Where any calls for further share capital are made on shares of a class, such calls shall be made on
uniform basis on all shares falling under that class (Shares of same nominal value with different PUSC
are not said to be in same class)
Section 50 - Company to accept unpaid share capital, although not called up (call in advance)
1. Co. may, if so authorized by its articles, accept from any member, the whole or a part of the amount
remaining unpaid on any shares held by him, even if no part of that amount has been called up.
2. A member shall NOT be entitled to any voting rights w.r.t., amt. paid u/ss (1) until it is called up.
Section 51 – Payment of dividend in proportion to amount Paid-Up.

Co. may, if so authorised by its articles, pay dividends in proportion to amount paid- up on each share
OTHERWISE – In general, dividend is paid on nominal value
Can a company pay dividend on the advance payment received u/s 50 – No!
Section 52 – Application of Premiums Received on Issue of Shares

1. Where co. issues shares at premium (cash/otherwise) – Transfer such aggregate amount of premium
to Securities Premium Account (SPA)
Except as provided in this section, provisions relating to reduction of share capital shall apply as if
the SPA were the PUSC of the company.
2. Application/Utilisation of amount in SPA account:

a. towards issue of unissued shares of co. to members as fully paid bonus shares
b. write off Preliminary expenses of the co.
c. write off – Expenses/Commission paid or discount allowed on issue of shares/debentures of co.
d. providing for premium payable on Redemption of any redeemable pref. shares/ any debentures
e. purchase of its own shares u/s 68 (Buyback)
3. Notwithstanding above (1) and (2), in case of such class of cos. as may be prescribed + whose FS
comply with prescribed AS u/s 133, the SPA shall be utilised for:
a. towards issue of unissued shares of co. to members as fully paid bonus shares
b. write off Preliminary expenses of the co.
c. write off – Expenses/Commission paid/Discount allowed on issue of shares/debentures of co.
d. providing for premium payable on Redemption of any redeemable pref. shares/ any debentures
e. purchase of its own shares u/s 68 (Buyback)

Section 53 – Prohibition on Issue of Shares at Discount
1. Except as u/s 54, a company shall NOT issue shares at discount.
2. Any share issued by a company at a discount price shall be void.
Exception - Notwithstanding anything contained above, a co. may issue shares at a discount to its
creditors when its debt is converted into shares in pursuance of any statutory resolution plan or
debt restructuring scheme in accordance with any guidelines or directions specified by the RBI.
3. Default under this section:

 Co. and OID – Fine up to amt. raised through such issue or Rs. 5 lakhs, whichever is less, and
 Co. shall also be liable to refund such money + Intt. @12% p.a. from date of issue of such shares
Section 54 - Issue of Sweat Equity Shares (SES) to Directors/Employees

Sweat Equity Shares [Sec 2(88)]
 Such equity shares as are issued by a co.
 to its directors or employees
 at a discount or for consideration, other than cash,
 for providing their know-how or making available rights in the nature of intellectual property rights
(IPRs) or value additions, by whatever name called;
Provisions:
1. Notwithstanding anything contained in sec 53, co. may issue sweat equity shares (SES) (of class of
shares already issued), provided that:
a. the issue is authorized by a SR
b. Resolution specifies:
No. of shares Current Mkt. Price Consideration, if any Issued to whom
c. If eq. shares are listed, such issue is as per SEBI Regulations. If not listed, as per Rules.
2. Rights, limitations and provisions of equity shares shall be applicable to sweat equity shares too and
it shall rank pari passu with other Equity shares.
Rule 8 - Issue of Sweat Equity Shares:

‘‘Employee’’ means:
(a) a permanent employee of the company who has been working in India or outside India, or
(b) a director of the company, whether a whole time director or not; or
(c) Dir/Employee as per (a) or (b) above of subsidiary (India or o/s India) or of holding co. of the co.;
“Value additions” means actual or anticipated economic benefits derived/to be derived by co. from an
expert or a professional for providing know-how or making available rights in the nature of IPRs, by
such person to whom sweat equity is being issued for which the consideration is not paid or included
in the normal remuneration payable under the contract of employment, in the case of an employee.
Additional Points:
Validity of SR Allotment of sweat eq. shares to be made within 12 months of passing SR
Maximum issue size In a FY, a co. shall NOT issue SES > 15% of existing PUESC or issue value of
per year: Rs. 5 crores, WEH

Provided that, issuance shall not > 25% of PUESC at any time.
Prov. further that – In case of Startup – Issue not > 50% (instead of 25%) of
its Paid up equity share capital upto 10 years from incorp.
Lock in 3 years from date of allotment [Mention lock-in in share certificate]
Issue price To be determined by Registered Valuer with proper justification
Valuation Valuation of IPR/Know how/Value Add – By RV with a proper report to BoD.
Treatment of non- a. Where non-cash consideration is a depreciable/amortizable asset – Carry
cash consideration to BS as per AS
in books: b. Where clause (a) N.A. – Expense as per AS
BoD report Co. to disclose specific details of such issue in BoD report
Register Co. to maintain register of SES in Form SH-3 at RO or such other place
decided by Board
Section 55 - Issue and Redemption of Preference Shares (PS)

1. No company limited by shares shall issue preference shares that are irredeemable
2. Conditions for issue of PS:
a. The issue has to be authorized by AoA
b. The issue has been authorised by passing SR in the GM
c. At the time of such issue – there is no subsisting default in:
 Redemption of any pref. share or
 Payment of dividend due on preference shares.
d. Such PS is redeemable within period not exceeding 20 years
Provided that – Co. engaged in setting up and dealing with infrastructural projects may issue pref.
shares of period exceeding 20 years but not exceeding 30 years provided that – Min. 10% of such
pref. share is redeemed each year from 21st year at the option of PSH
3. Redemption of preference share:

 Redemption of PS shall be only on terms on which it was issued or varied u/s 48.
 PS may be redeemed:
At a fixed time or happening
Any time at company's option Any time at PSH option
of certain event
 Source of redemption:
Such shares shall be redeemed only out of –
(i) profits of the co. available for dividend or
(ii) proceeds of fresh issue made for purpose of such redemption
 Only fully paid up preference shares can be redeemed
 Creation of CRR:
o Where such shares are proposed to be redeemed out of profits, transfer a sum = Nominal
value of shares to “Capital Redemption Reserve” A/C
o Provision relating to reduction of SC shall apply as if CRR were PUSC of the company.
o CRR may be applied for – paying up unissued shares to be issued as fully paid bonus shares.
 Premium on redemption of PS:
o Such premiums shall be provided for out of profits or SPA.
However, in case of prescribed class of co. whose FS comply with AS u/s 133, such premium
shall be provided for out of profits (and not SPA as u/s 52)
o Such premium shall be provided for before such redemption

4. Other relevant points:
 Register of members u/s 88 shall contain particulars w.r.t, such pref. SHs
 If co. intends to list such pref. shares – Issue preference shares as per SEBI regulations
5. Where a company is not in position to redeem/pay divided on any pref. shares, it may:
 with consent of 3/4th in value of PSH and
 approval of Tribunal on petition made by it
issue further redeemable preference shares = amount of unredeemed pref. shares + dividend.
On such issue – Unredeemed pref. shares shall be deemed to have been redeemed.
Provided that Tribunal shall, while giving approval, order redemption forthwith of pref. shares held
by such persons who have not consented to issue of further redeemable preference shares.
Note – Issue or redemption of pref. share is not = Reduction in SC of co.

A co. proposes to redeem a pref. share of nominal value Rs. 100 with a premium of Rs. 20 per share.
Such redemption was to be made by further issue of pref. shares. Decide the amount to be transferred
to CRR? – Zero! CRR is only needed when amt. is paid out of profit (as you are utilizing dividend money)
Section 56 - Transfer and Transmission of Securities

1. Company to register transfer of securities.
 Co. shall not register transfer of securities (or interest of member in case of company not having
SC) unless:
a. proper instrument of transfer (Form SH-4) duly stamped and dated has been executed by
transferor (TOR) and transferee (TEE)
b. Such instrument specifies the name, address and occupation of transferee
c. Such instrument has been delivered to co. by TOR or TEE within 60 days of execution along
with share certificate or letter of allotment (if no certificate is in existence)
Above provision shall not apply in case of transfer between persons both of whose names are
entered as beneficial owners in records of depository.
 If instrument of transfer is lost/has not been delivered to co. within prescribed time, co. may
register on such terms as to indemnity as Board may think fit.
 In case of Govt co., instrument of transfer shall not be required w.r.t. transfer of bonds issued
by a Govt. co provided that an intimation by TEE specifying name, address and occupation + Bond
certificate or Letter of Allotment is delivered to the co.
2. A co. can register TRANSMISSION of any right to securities by operation of law on receipt of
intimation for the same from any person to whom such right is transmitted (transferee) (i.e.,
transfer instrument not required in case of transmission. Instead, it requires intimation of
transmission)
Cases of Transmission:
Death (to Insolvency (to Lunacy (to administrator
Legal Rep) resolution professional) appointed by Court)

3. Notice to transferee in case of partly paid shares:
Where an application for registration of trf. of partly paid shares is made by TOR alone, a co. shall
not register such trf. unless:
 Co. has given notice (in Form SH -5) of such application to TEE and
 TEE to give no objection to the transfer within 2 weeks from receipt of notice.
4. Unless prohibited otherwise, co. to deliver certificates of all securities allotted, trfd/transmitted:
In case of: Within a period of:
Subscribers to MoA within 2m of incorporation
Any Allotment of its shares within 2m of allotment
Transfer or transmission within 1m from date of receipt of transfer instrument or
Intimation of Transmission (IOT)
Allotment of debentures within 6m from date of allotment
Note - where sec are dealt with in a depository, co. to intimate details of allotment to depository
immediately on allotment.
5. Transfer of any security of a deceased person made by his LR shall, even if the LR is not a holder
thereof, be valid as if he had been holder at the time of execution of instrument of transfer.
6. Default in compliance of above provisions – Fine – Co. and OID – Rs. 50,000 [Amendment]
7. Without prejudice to any liability under the Depositories Act, 1996, where any depository or DP,
with an intention to defraud a person, has transferred shares, it shall be liable u/s 447.
Difference between Transfer and transmission (just for knowledge)

Transfer Transmission
Voluntary? Yes No. Operation of Law
Transfer Instrument? Yes No. Intimation of Transfer
Consideration Likely, Yes. No.
Note – Forged Transfer is a Nullity and is not legally binding. A company can be forced to delete name
of TEE in case of Forgery.
Case:
Mr. A is shareholder of RIL. Mr. Chor forged signature of Mr. A and transferred his shares to Mr. B.
Mr. B then further transferred the shares to Mr. C & RIL registered such trf. Discuss consequences.
Answer:
 Co. to restore ownership to Mr. A. Co. shall not be liable to Mr. B or Mr. C
 Genuine buyer (Mr. C) shall be indemnified by Mr. B.
 Mr. B, who indemnified Mr. C, shall, in turn, chase Mr. Chor.
Exam question:
What if a share certificate is transferred via forgery (Q2 of QB):
 A forged transfer is a nullity.
 It does not give the transferee any title to the shares. Similarly any transfer made via such forgery
will also not give a good title to shares as the title of buyer is only as good as that of seller.
 If a co. acts on a forged transfer & removes name of real owner, then co. is bound to restore such
name and pay him any dividends which he ought to have received
(Barton v. North Staffordshire Railway Co.)

Section 57 - Punishment for Personation of Shareholder
 If any person deceitfully personates as owner of any security/interest/share warrant/coupon, and
 thereby obtains or attempts to obtain any such security or interest or any such share warrant or
coupon, or receives or attempts to receive any money due to any such owner,
 he shall be punishable with imprisonment – 1 year to 3 years AND with fine Rs. 1 lakh to Rs. 5 lakhs.
Section 58 - Refusal of registration and appeal against refusal.
Refusal by Private company: In case of Public Co:

Where a private co limited by shares refuses  Securities of public companies are freely
to register transfer or transmission, it shall: transferrable.
 within 30 days of delivery of trf. inst. or  Any contract w.r.t., trf of securities shall
intimation of transmission (IOT). be a valid contract and enforceable.
 send notice of refusal to TOR and TEE or
to person giving IOT
 stating the reason for refusal to register Refusal by a Public co. without sufficient
cause:
If a public co., without sufficient cause
Appeal in case of refusal: refuses to register the transfer of sec.
TEE or IOT person may appeal to Tribunal: within 30 days from date on which
 within 30 days of receipt of notice of instrument of transfer or IOT, is delivered
refusal to the co., transferee may appeal to tribunal:
 where no notice of refusal is received,  within 60 days of receipt of notice of
within 60 days of delivery of instrument refusal
of trf or IOT to co.  where no notice of refusal is received,
within 90 days of delivery of instrument
Order by Tribunal:
After hearing the parties, Tribunal may either dismiss the appeal or by order:
a. Direct co. to register trf/transmission & co. shall comply within 10 days of receipt of such order, or
b. Direct rectification of the register and also direct the co. to pay damages to party aggrieved.
Contravention of order of Tribunal - Imprisonment – 1 year to 3 years AND Fine Rs. 1 lakh to Rs. 5 lakh
Section 59 - Rectification of Register of Members

1. Application for Rectification of Register of Member (RoM):
If without sufficient cause, the name of any person is:
entered into RoM ommitted from RoM unnecessary delay in entering/removing name
Aggrieved person or Any Member may make an application for rectification of RoM to:
a. Tribunal, or
b. Competent court o/s India specified by CG – In case of foreign members or DHs o/s India
2. Tribunal may either dismiss the appeal or by order:

a. Direct co. to register trf/transmission and co. to comply within 10 days of receipt of order, or
b. Direct rectification of the register and also direct the co. to pay damages to party aggrieved.

3. The sections shall not restrict the holder of the sec. from transferring such sec. and any person
acquiring such sec. shall be entitled to Voting Rights.
4. Where a trf. is made in contravention of any Law, Tribunal may, on application to it, direct the
company or depository to set right the contravention and rectify registers.
Section 61 - Power of Limited Company to Alter its Share Capital

1. A limited co. having a SC may, if so authorised by its AoA, alter its MoA in its GM to:
a. increase its ASC by such amount as it thinks expedient;
b. consolidate & divide its SC into shares of a larger amount than its existing shares.
Provided that no consolidation and division which results in changes in voting % of SHs shall take
effect unless approved by Tribunal on an application in prescribed manner;
c. convert its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of
any denomination;
d. sub-divide its shares into shares of smaller amount than is fixed by the memorandum, However,
in such sub-division, the proportion between the amount paid and the amount unpaid on each
reduced share shall be same as it was earlier;
e. cancel shares which have not been taken by any person and diminish amount of its share capital
by amt. of the shares so cancelled.
2. The cancellation of shares u/ss (1) shall not be deemed to be a reduction of share capital.
Note - The capital clause of memorandum, if authorised by the articles, shall be altered by passing an
ordinary resolution (and not SR) as per Section 61 (1) of the Companies Act, 2013.
Section 62 - Further Issue of Share Capital (Right issue/preferential allotment/Right of Pre-emption)

1. Where a co. proposes to increase it subscribed capital, by issue of further shares, such shares shall
be offered to –
a. Persons who, on the date of such offer, are ESH of the company:
Such offer shall be made in proportion to PUSC by sending a letter of offer subject to:
i. Offer to be made by notice specifying no. of shares offered & limiting time to accept offer.
Time limit shall be not < 15 days or days as may be prescribed and shall not > 30 days.
If not accepted within time limit – Deemed declined.
Note – In Pvt. co (92 + 137) – If 90% of member give consent, then less than 15 days allowed
ii. Right to Renounce – Unless AOA provides otherwise, above offer shall be deemed to include
right to renounce shares offered. A statement to this effect is to be included in the offer .
iii. After expiry of time limit/receipt of intimation declining offer – BoD to dispose such shares
in manner not dis-advantageous to SH and the company
b. Offer to employees – Under ESOPs subject to SR and prescribed T&C

(In case of Pvt co (92+137) – Pass OR instead of SR)
c. Offer to any person:

if it is authorised either for cash or if the prices to be determined by
by SR consideration other than cash. a valuation report by RV

2. Dispatch of notice referred above: to existing SH
 Via – Registered post or speed post or e mode or courier or other mode having proof of delivery
 at least 3 days before opening of issue.
3. Provision of this section – N.A. in case of conversion of debenture/loan by way of exercise of option
as per terms attached to such debt issued/loan raised. Provided that such an option in the issue of
debenture/loan raised was approved by SR.
4. Conversion of Debenture issues to Government on T&C as per Govt.:

 Notwithstanding provision u/ss(3),
 where any debentures/loan has been obtained from any Government, and
 if that Govt. considers it necessary in public interest so to do,
 it may, by order, direct that debentures/loans or part thereof shall be converted into shares
 on terms as may appear reasonable to Govt.
 even if terms of debentures/loan do not include option for such conversion.
Provided that where terms of such conversion are not acceptable to co., it may, within 60 days from
date of communication of such order, appeal to Tribunal for order as NCLT may deem fit.
5. In determining the terms, Govt. shall have due regard to:

Financial Position terms of issue of such debt rate of intt. on such debt/loan Others
6. Effect of Govt passing such order + No appeal or where appeal is made has been dismissed, if the
order has effect of increasing the ASC:
a. the MoA stands altered
b. ASC stands increased by amt equal to value of shares to which such debt/loan is converted into.
Rule 12 – Issue of Employee Stock Options (ESOP)

“Employee” means-
(a) a permanent employee of the company who has been working in India or outside India; or
(b) a director of the co., whether whole time or not but excluding an independent director; or
(c) an employee referred in (a) or (b) of a subsidiary (India or outside) or of a holding co.
but does not include:
(a) an employee who is a promoter or a person belonging to the promoter group; or
(b) director who (himself or via relative/any BC) holds more than 10% of o/s equity shares of the co.
In case of Startups – Above 2 exceptions N.A. for first 10 years.
To issue ESOP:
Listed company – Comply with SEBI Regulations.
Other than listed co, comply with following conditions:

Co. to make specified Co. has freedom to
Such issue is approved by
disclosure in ES annexed to determine “Exercise Price”
way of SR
notice as per applicable policies
No right to vote/receive
Min. period of 1 year
Co. has freedom to specify dividend unless shares
between grant and vesting
lock in period. issues on exercise of
of options*
option.
Options granted shall not No person other than

Options are non-
be pledged, hypothecated, employee entitled to
transferrable
etc ESOPs.
In case of permanent
In case of death – options In case of resignation/
incapacity – Option granted
granted to him shall vest termination – option to
to vest on such employees
with legal heirs or nominees expire.
on that day
* In case of amalgamation – Adjust the period for which options were held in prior co. with min.
vesting period. (If you didn’t understand this, read the detailed text below or else, skip.)
Provided that in a case where options are granted by ABC Ltd. under its ESOP in lieu of options held by the same person
under an ESOP in XYZ Ltd, which has merged or amalgamated with ABC Ltd., the period during which the options granted by
ABC Ltd. were held by him shall be adjusted against the minimum vesting period required under this clause;
Section 63 - Issue of Bonus Shares

A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of:
Free Reserve Sec. premium Account CRR Account
Provided that no issue of bonus to be made by capitalizing reserves created by revaluation of assets.
Conditions for issuing bonus shares:

No company shall capitalise its profits or reserves for issuing fully paid-up bonus shares, unless:
Auth. by On recommendation of Not defaulted in payment of intt/principal
AOA BoD - Auth in GM w.r.t., fixed deposit or debt sec. issued by it
Not defaulted - Stat Partly paid up shares Condition prescribed - Bonus once
due of employee are made fully paid up announced by BoD, cannot be withdrawn
1. Can a company issue bonus out of revaluation reserve after complying with above 6 conditions? – No!
2. Bonus shares shall not be issued in lieu of dividend.
Section 64: Notice to be Given to Registrar for Alteration of Share Capital

1. In the following cases:
Alteration of SC u/s 61(1) Increase in ASC u/s 62(6) Redemption of pref. shares
Co. shall file a notice (Form SH – 7) along with Altered MoA to RoC within 30 days of such action.
2. Contravention – Co. & OID – Fine of Rs. 500 / day subject to max. Rs. 5 lakhs (Co) or Rs.1 lakh (OID)
Section 65: Not in syllabus

Section 66: Reduction in Share Capital
1. A company may reduce its share capital subject to:
a. Confirmation by Tribunal on application by company, and
b. By a Special Resolution, and
c. Alter MoA by reducing the amt. of SC and no. of shares.
Manner of Reduction in SC:

i. Extinguish or reduce the liability on any shares not paid up
ii. With or without extinguishing or reducing liability on its shares:
1. Cancel any PUSC which is LOST or is unrepresented by available asset.
2. Pay off any PUSC which is in excess of the wants of the co.
Provided that no such reduction shall be made if the company is in arrears in the repayment of any
deposits accepted by it, or the interest payable thereon.
2. On receipt of application u/ss (1), the Tribunal shall give a notice thereof to:
CG RoC Creditors of co. SEBI (in case of Listed Co.)
and shall take into consideration the representation, if any, made within 3 months of such notice.
If no representation – Presume no objection.
3. Tribunal to order confirming reduction of SC on T&C as it may deem fit – Only when it is satisfied
that debt/claim of every creditors has been discharged or his consent is obtained.
Provided that Tribunal shall not sanction unless: A/C treatment, proposed by co. for such reduction
is in conformity with AS u/s 133 + Certificate by company's auditor has been filed with Tribunal.
4. Order of Tribunal shall be published in manner as directed by Tribunal.
5. Co. to deliver copy of order of Tribunal and of a minute approved by Tribunal showing the following
with ROC within 30 days of receipt. RoC shall register and issue a certificate thereof.
The minute approved by Tribunal shall include the following info:

Amount No. of shares into which Amt. of each Amt. at the date of registration
of SC it is to be divided share deemed to be paid up
6. Nothing in this section shall apply to buy-back of its own securities by a company u/s 68.
7. A member, past or present, shall not be liable to any call/contribution w.r.t, any share held by him
exceeding [Amount paid up on the share - Amount of share as fixed by the order of reduction].
8. Where the name of a creditor is not entered in the list of creditors by reason of his own ignorance
of proceeding for reduction or otherwise AND after such reduction, the co. commits a default (Sec
6 of IBC) of his debt,:
a. Every member of co. on the date of registration by RoC of order for reduction shall be liable to
contribute to payment of that debt an amt not > amt he would be liable in case of WUP, AND
b. If co. is wound up, the Tribunal may, on application of such cr. + proof of his ignorance – Settle a
list of person so liable to contribute and enforce such calls on contributories as if they were
ordinary contributories.
9. If any officer of the company:

a. knowingly conceals the name of any creditor entitled to object to the reduction;
b. knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
c. abets or is privy to any such concealment or misrepresentation as aforesaid
he shall be liable under section 447.
Alteration (sec 61) vs Reduction (sec 66) – Refer QB Q19
Section 67: Restrictions on Purchase by Company or Giving of Loans by it for Purchase of its Shares
1. No company having SC shall have power to buy its own shares without consequent reduction in SC.
2. No public company shall give any loans, guarantee or provide security or any financial assistance for
purchase/ subscription of shares of the company or its holding co.
3. Nothing u/ss (2) shall apply to:

a. lending of money by a banking company in the ordinary course of its business;
b. the provision by a co. of money as per any scheme approved by co. through SR for the purchase/
subscription, fully paid-up shares in co. or its holding co., if the purchase/subscription of the
shares is held by trustees for benefit of employees or such shares are held by employees
c. Loan to employee for purchase of shares of company:
 Giving of loans by a company to employees (other than directors or KMP),
 for an amount not exceeding 6m salary or wages
 with a view to enabling them to subscribe for fully paid-up shares in co. or its holding co.
Provided that disclosures in respect of voting rights not exercised directly by employees in
respect of shares to which scheme relates shall be made in BOD report in prescribed manner.
4. Nothing in this section shall affect the right of a co. to redeem any preference shares issued by it.
5. Contravention:
Co. - Rs. 1 lakh to Rs. 25 lakh and OID – Jail upto 3 years and fine Rs. 1 lakh to 25 lakhs.

Section 68: Power of Company to Purchase its Own Securities (“Buy-back/BB”)
This section talks about purchase of own shares or other specified securities (Buy-back). Specified
Securities include ESOPs or securities notified by CG.
1. Notwithstanding other provision of the Act, co. may BB out of:

Free Reserve Sec. premium Account proceeds of issue of any share/other sec.
Proviso– No buy-back of a kind of share/sec. shall be made out of proceeds of an earlier issue of the
same kind.
2. Conditions to be fulfilled prior to BB:

i. Auth. by AoA
ii. Auth. by SR in the GM
Note - SR not needed where:
a. Limit – buy-back is <=10% of total PUESC + FR, and
b. Auth. by Board by means of resolution passed at BM
iii. BB is <=25% of total PUC + FR

[In case of BB of equity share in any FY, reference to 25% shall be construed w.r.t., PUESC + FR
in that FY]
iv. Ratio  Debts (secured + unsecured) owed after BB

= Not > 2 (or higher ratio by CG)
Paid up Equity Capital + FR
v. All the shares/sec. for buy-back is fully paid up.

vi. If securities are listed on RSE – BB as per SEBI Regulations. If not listed, then as per this Act
Proviso – BB shall NOT be made within 1 year reckoned from date of closure of preceding BB
3. The ES of the notice of meeting at which SR is proposed to be passed shall state: [FAST N]
full disclosure of Necessity for securities intended to Amount to be Time-limit for
material Facts; the buy-back; be purchased; invested; and completion
4. Time limit for completion – Within 1 year from date of passing SR/BR as the case may be
5. Source of BB: buy-back may be from:

Existing SH on prop. basis Open Market Sec. issued to employee (ESOP or sweat shares)
6. Declaration of Solvency:
 Before making buy-back, co. to file with RoC and SEBI (only if listed),
 a “Declaration of solvency” in Form SH-9
 signed by at least 2 directors (1 MD compulsory).
 verified by an affidavit stating BoD has made full inquiry into affairs of co. and are of opinion
that it is capable of meeting liabilities + will not be rendered insolvent within 1 year from date of
declaration adopted by BoD.
7. Post buy-back – Co. to extinguish and physically destroy the share so bought back within 7 days of
last date of completion of BB
8. Where a company complete a buy-back – Co. shall NOT make further issue of shares/sec. of SAME
kind including allotment u/s 62(1)(a) within 6m (except for bonus shares or shares to discharge

subsisting obligations such as conversion of warrants, ESOPs, sweat equity or conversion of pref.
shares/debentures into equity)
9. Co. to maintain register (in Form SH-10) showing:

shares/sec. so consideration Date of cancellation of date of extinguishing/ Other
bought back paid sec. so bought back physically destroying shares part.
 After completion of buy-back – File return with RoC + SEBI (if listed) within 30 days in Form SH-11
 Default under this section  Company and OID – Rs. 1 lakh to Rs. 3 lakhs
Section 69: Transfer of Certain Sums to Capital Redemption Reserve Account

1. Where a co. purchases its own shares out of free reserves or SPA, a sum equal to the nominal value
of shares so purchased shall be transferred to CRR A/C
2. Details of such transfer shall be disclosed in the balance sheet.
3. CRR A/C may be applied by the company, in issue of bonus shares.
Concept clarity check -

A co. does BB from proceeds from issue of any other shares. How much amt is to be trf to CRR? None!
Trf. to CRR is to be done only in case of purchase out of FR or SPA
Section 70: Prohibition for Buy-Back in Certain Circumstances:

1. No company shall directly or indirectly purchase its own shares or other specified securities:
a. through any subsidiary co. including its own subsidiary companies; (Section 19)
b. through any investment company or group of investment companies; or
c. if a default, is made by the co., in the repayment of deposits + interest payment thereon,
redemption of debentures or pref. shares or payment of dividend to any shareholder, or
repayment of any term loan or interest payable thereon to any banking company or FI:
Provided that the buy-back is not prohibited, if the default is remedied and 3 years has lapsed
after such default ceased to subsist.
2. No company shall, directly or indirectly, purchase its own shares or other specified securities in
case such company has not complied with the provisions of sections 92, 123, 127 and section 129.
Debenture (Section 71)

Section 2(30) – Debenture:
Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt,
whether constituting a charge on the assets of the company or not.
Provided that, following instrument shall not be treated as debenture:

a. instruments referred to in Chapter III-D of the RBI Act, 1934; and
b. such other instrument, as may be prescribed by CG in consultation with RBI, issued by a company.
Section 71:
1. A co. may issue debentures with an option to convert such debentures into shares, either wholly or
partly at time of redemption.

Provided that the issue of such convertible debentures shall be approved by a SR passed at a GM.
2. No company shall issue any debentures carrying any voting rights.
3. Secured debentures may be issued by a company subject to such T&C as may be prescribed.
Rule 18 – Issue of Secured Debenture:
1. Redemption period
In case of secured debenture, the date of redemption shall not > 10 years from date of issue.
Provided that, in following class of cos, it may exceed 10 years but not exceeding 30 years:
Companies engaged in Infra finance Infra debt Co. as may be permitted by
setting up infra projects companies fund NBFC CG/RBI/NHB for > 10 years
2. How will it be secured – Creation of charge:

 Such an issue of debentures shall be secured
 by the creation of a charge on properties or assets (in favor of debenture trustee)
 of company or its subsidiaries or its holding co. or its associates companies,
 having value which is sufficient for due repayment of the debentures and interest thereon
3. Appointment of debenture trustee:

 Company shall appoint debenture trustee (“DT”)
 before issue of prospectus or letter of offer for subscription of its debentures and
 execute a debenture trust deed (“deed”) to protect the interest thereon not later than 60
days after allotment of debentures
4. Creation of DRR and Deposit of sums:

 Co. shall create a Debenture Redemption Reserve (DRR) account
 out of the profits available for distribution as dividend, and
 Amt. credited to DRR account shall be utilised only for redemption of debentures.
Rule 18: Creation of DRR and investment of sums for redemption of Debentures:
DRR:
All India Financial Institutions and Banking companies are generally not required to create DRR.
For unlisted co. other than NBFCs – Adequate DRR is 10% of outstanding debentures in that FY.
Deposit/Investment:
Co. which has raised debentures shall:
 on or before 30th April in each year,
 in respect of debentures issued by such co., invest or deposit,
 a sum not less than 15% of amount of debentures maturing on 31st March of next year
 in any one or more methods of investments or deposits as follows:
unencumbered unencumbered unencumbered bonds of any
deposit with
secuities of secuities as per other cos. notified under
scheduled bank
CG/SG Indian Trust Act Indian Trust Act
Provided that amount invested or deposited shall not:

 at any time fall below 15% of amount of debentures maturing during the year ending on 31st day
of March of that year.
 be used for any purpose other than redemption of debentures maturing during the year

5. No co. shall issue a prospectus to the public or to its members ( > 500) for subscription of its
debentures, unless the co. has, appointed one or more debenture trustees.
(i.e., if offers to public or members (> 500), appoint debenture trustee)
Rule 18: Eligibility of Debenture Trustee?

The co. shall appoint DT after complying with following conditions:
1. Name of DT to be stated in prospectus or letter of offer and in subsequent communications
2. Before appointment, written consent of DT obtained and statement to that effect included in
the letter of offer.
3. A person shall not be appointed as DT if he:
a. Beneficially holds shares in co.
b. is promoter, director or KMP or other officer or employee of CASH
c. beneficially entitled to moneys to be paid by the co. (other than remuneration as DT)
d. indebted to CASH or subsidiary of such holding co.
e. furnished guarantee in respect of principal debts secured by debentures
f. has pecuniary relationship with co. >= Lower of [ 2% of Gross T/O or total income or 50
lakhs or higher amount as may be prescribed] in preceding 2 FY or CY
g. Relative of [promoter or director or KMP] of the company
4. Board to fill casual vacancy in office of trustee (in case of resignation, obtain written consent
of majority of DH prior to filling such vacancy)
5. DT may be removed if approved by not less than 3/4th in value of DHs
6. A debenture trustee shall take steps to protect the interests of the debenture-holders and redress
their grievances in accordance with such rules as may be prescribed.
Rule 18: Meeting of DHs:
Meeting of all the DHs shall be convened by the DT on:
(a) requisition in writing signed by DHs holding >= 1/10th in value of outstanding debentures;
(b) happening of any event, which constitutes breach, default or which in the opinion of DT affects
interest of DHs.
7. Any provision in trust deed which has the effect of exempting DT from liability for breach of trust
or indemnifying him where he fails to due care and diligence – Shall be void.
Provided that – Liability of DT shall be subject to exemption as agreed by - Majority of DHs holding >
3/4th in value of total debentures.
8. Co. shall pay interest and redeem debentures as per the terms and conditions of their issue.
9. Where at any time, DT comes to conclusion that assets of co. are insufficient/likely to become
insufficient to discharge principal amount when it become due, DT may file petition before Tribunal.
Tribunal may, after hearing, impose restriction on further liability of co. (in interest of DH)
10. If co. fails to redeem debentures on date of maturity or fails to pay interest when due, Tribunal
may, on application of DHs or DT, order co. to redeem it forthwith with payment of principal and
interest thereon.
11. A contract with co. to take up and pay for any debentures of co. may be enforced by a decree for
specific performance.

Additional points:
1. As per sec 180(1)(C) – Co. to obtain SR if borrowings exceed 100% of PUSC + FR +SPA
2. Co. to file return of allotment in Form PAS -3 within 30 days of allotment of such debentures

Form Section Purpose
DPT 1 73 & 76 Circular or advertisement in a newspaper inviting deposits
DPT 2 76 Deposit trust deed
DPT 3 73 & 76 Return of deposits
DPT 4 74 Statement on existing deposits as on date of commencement of Co. Act
Overview of the chapter:
Acceptance of Deposits Prohibition on Repayment of Acceptance of Punishment for

Acceptance of Deposits deposits from Non-Compliance
Deposits public / Contravention
 Definition  Section 73  Section 74  Section 76  Section 76A
 Related terms
Let’s understand what’s Deposit:

Deposits [Sec 2(31)] - "Deposit":
 includes any receipt of money by way of deposit or loan or in any other form by a co.,
 but does not include such categories of amt. as may be prescribed in consultation with the RBI
Note:
1. Repayment of ‘deposit’ is time-bound.
2. It can be secured (by creating charge on tangible asset) or unsecured (no security).
3. Private co. can accept deposits from its members only.
4. Public co. can accept deposits from members and public subject to certain parameters
Rule 2 of the Companies (Acceptance of Deposit by Company) Rules, 2014:

Deposits shall not include the following:
SN From Amount received from:
1 Government  CG/SG/Local Authority
 Stat. Auth. constituted under any Act of Parliament or State Leg.
 Any other source where repayment is guaranteed by CG/SG
2 Foreign Source  Foreign Govt.,
(subject to  Foreign or international banks,
FEMA)  Multilateral financial institutions
3 Banks and PFIs Amt. received as a loan or facility from
 any banking company or SBI or subsidiary or co-operative bank
 PFIs
4 Issue of CPs Amt. received against issue of CPs or other Instruments as per RBI
Guidelines
5 Inter-corporate Any amount received by a company from any other company;
Chapter 5 – Acceptance of Deposit

6 Application Any amount received pursuant to an offer made towards subscription to
Money any securities, including share application money or advance towards
allotment of securities pending allotment.
Explanation – If securities for which appln. money was received is not

allotted within 60 days from receipt thereof or is not refunded within 15
days from completion of 60 days, such amount to be treated as a deposit
as per these rules.
Any adjustment, other than what is allowed of such application money, will
NOT be considered as refund.
7 Director Amount received from person – who at the time of such receipt, was:
a. Director of the co. (public or private), or
b. Relative of the director of the co. (only in case of private co.)
Following conditions are to be met:

 At the time of giving such money, director or relative to furnish a
declaration to co. that such amt. is not being given out of
loans/borrowings from others
 Co. to disclose money so accepted – In Board’s Report.
8 Bonds or Amount raised by issue of:
Debentures  Bonds/Debentures secured by a first charge or Pari Passu with first
[Secured or charge on any assets referred to in Sch III, excluding intangible asset
Convertible or (provided, amount of such bond/debt <= Market value of such asset as
Listed] assessed by RV)
 Bonds/Debentures compulsorily convertible into shares of co. within 10
years
 Non-convertible bond/debenture unsecured and listed on RSE as per
SEBI
9 Sec. Deposit Amt. received from Employee of co. <= Annual Salary in nature of non-
from Employee interest-bearing security deposit.
10 Trust Any non-interest-bearing amount received and held in trust
11 In course of Any amount received in course of business of co:
business i. As an advance for supply of goods/services provided that such
advance is appropriated against supply of goods/services within 365
days of acceptance of such advance (except where advance is
subject matter of any legal proceeding)
ii. as advance received towards consideration for an immovable
property as per an agreement provided that such advance is
adjusted against such property as per the terms of agreement
iii. as security deposit for performance of contract for supply of
goods/services
iv. as advance received under long term projects for supply of capital
goods except those covered under item (b) above
v. as an advance towards consideration for providing future services in
form of a warranty/maintenance contract as per written agreement,

provided that period for providing such services is not > 5 years or
period as per common business practice whichever is less;
vi. as advance received and as allowed by sectoral regulator or as per
CG/SG
vii. as an advance for subscription towards publication, whether in print
or in electronic to be adjusted against receipt of such publications;
Provided that if amount received under (a), (b) and (d) above becomes
refundable (with or w/o interest) due to reasons that the co. does not have
necessary permission to deal in goods or properties or services for which
advance is received  On expiry of 15 days from date they become due for
refund, it shall be deemed to be a deposit.
12 Promotors Any amount brought in by promoters of Co. by way of unsecured loan

subject to following conditions that the:
a. loan is brought in pursuance of stipulation imposed by lending
institutions/banks on promoters to contribute such finance
b. loan is provided by promoters themselves or their relatives or both; &
c. exemption under this sub-clause shall be available only till the loans of
financial institution or bank are repaid and not thereafter
13 Nidhi Co. or Amt. accepted by a Nidhi co. u/s 406 and Rules made thereunder or amt
subs. to Chit received by way of subscription of a chit under the Chit Fund Act, 1982.
14 CIS any amount received under any collective investment scheme as per SEBI
15 Start-Up An amount of >= Rs. 25 lakhs received by a start-up company, by way of a
Convertible convertible note (convertible into equity shares or repayable within period
Note not > 10 years from date of issue in a single tranche) from a person.
Explanation: For this sub-clause:

a. Start-up co. means a Pvt. co. and recognized as per notification issued
by Department for Promotion of Industry and Internal Trade (DPIIT);
b. Convertible Note means an instrument:
 evidencing receipt of money initially as a debt,
 which is repayable at the option of holder, or
 which is convertible into such number of Eq. shares of start-up
company upon occurrence of specified events and as per the other
T&C agreed to and indicated in the instrument.
16 Amt. received Any amount received by a company from:
from AIF  Alternate Investment Funds,
 Domestic Venture Capital Funds,
 Infrastructure Investment Trusts
 Real Estate Investment Trusts and
 Mutual Funds registered with SEBI
“Depositor’’ means:
i. any member of company (public or private) who has made a deposit as per Sec 73(2), or
ii. any person who has made a deposit with a public company as per Sec 76;

Section 73: Prohibition on Acceptance of Deposits from Public
1. On and after the commencement of this Act, no company shall invite, accept or renew deposits
under this Act from the public except in a manner provided under this Chapter:
Provided that nothing in this sub-section shall apply to:

 Banking company and NBFC as per RBI Act and
 Such other company as CG + RBI may specify in this behalf.
2. A company may, subject to passing a resolution (ordinary) in GM, accept deposit from its members
after complying with the following conditions:
a. Issuance of a circular to members (Form DPT -1) authorized by BoD including statement
showing:
Credit Rating Total no. of Amt. due towards previously Other
Fin. position
Obtained depositors accepted deposit particulars
Rules relating to Circulars:

Manner of  Issue to all members by RPAD or Speed post or e-mode
issuance  Publish in newspaper – English + Vernacular.
 Place on website of the co.
Attachments to Certificate from Stat. Auditor stating that:
Form DPT-1  Co. has not defaulted in repayment of deposit + interest or
 Default, if any, has been made good and 5 years have lapsed from
the date such default was made good.
Register with RoC Co. to send to RoC – Copy of circular signed by majority of the directors
- At least 30 days prior to issue  for registration
Validity of Earliest of:
Circular in form of  Until 6m from date of closure of FY in which it is issued, or
Advt.–  Date on which Fin. Statement is laid in AGM
 If AGM not held – Last date for holding AGM
Fresh Circulars To be issued, in each succeeding FY for inviting deposits during that FY.
b. Filing copy of circular + Such Statement with RoC within 30 days before issue of the circular;
c. Deposit Repayment Reserve – Refer common points after Sec 76
d. Co. to certify that no default in repayment of deposits + Interest and where default had
occurred, it was made good, and 5 years have lapsed since date of making the default good.
e. Providing security, if any, for the due repayment of the amount of deposit or the interest
thereon including the creation of such charge on the property or assets of the company.
Provided that in case where a co. does not secure the deposits or secures partially, then, the
deposits shall be termed as "unsecured deposits" and shall be so quoted in every circular, form,
advertisement or in any doc. related to invitation or acceptance of deposits.
Note:

1. Partly secured deposits are termed as unsecured.
2. Where a co. issues secured deposit, it shall appoint a trustee for depositors (provision
discussed in detail in Sec 76)
Exemption to Private Companies:

The above provision of Sec 73(2) clause (a) to (d) shall not apply to a Pvt. co. which:
a. accepts from its member’s monies not > 100% of PUSC + FR + SPA; or
b. is a start-up  For 5 years from the date of its incorporation; or
c. Fulfils ALL the following conditions:
 Not an associate or subsidiary of any other co.
 Borrowings from banks/FI or BC is < Lower of - 2x PUSC or Rs. 50 crores, AND
 Co. has no subsisting default in repayment of borrowing at time of accepting deposit.
However, the above cos. will have to file details of deposit accepted with RoC (Form DPT-3).
3. Every deposit accepted by a co. u/ss (2) shall be repaid with interest as per the T&C of agreement.
4. Where co. fails to repay the deposit or part thereof or any interest thereon - Depositor concerned
may apply to the Tribunal for an order directing the company to pay the sum due or for any loss or
damage incurred by him as a result of such non-payment and for such other orders as the Tribunal
may deem fit.
Other provisions relating to Deposits (from Rules):

Max. amount of deposit from Members (existing + new): 35% of (PUSC + FR + SPA)
Exception – Specified IFSC Public Co. or Private Companies – 100% of (PUSC + FR + SPA)
The above maximum limit will not apply to a Private co. which is:
a. is a Start-up  For 10 years from the date of its incorporation; or
b. Fulfils ALL the following conditions:
 Not an associate or subsidiary of any other co.
 Borrowings from banks/FI or BC is < Lower of - 2x PUSC or Rs. 50 crores, AND
 Co. has no subsisting default in repayment of borrowing at time of accepting deposit
However, the above cos. will have to file details of deposit accepted with RoC (Form DPT-3).
Section 76: Acceptance of Deposits from Public by Certain Companies

“Eligible Company” means a public co. as referred u/s 76 (1), having
i. a net worth of not less than Rs. 100 crores or
ii. a turnover of not less than Rs. 500 crores and
iii. which has obtained the prior consent in general meeting by means of a SR* and
iv. filed the said resolution with RoC before any invitation to public for acceptance of deposits
*Eligible co. accepting deposits within limits u/s 180 (1) (c), may accept it by means of an OR (not SR)
Eligible companies may accept deposits from persons other than its members subject to:
 Passing SR (or ordinary resolution) and filing the same with RoC
 Compliance with requirements u/s 73(2) and
 Rules as CG + RBI may prescribe.
Provided that such eligible companies shall obtain credit rating from recognised credit rating agency (as
approved for NBFCs) and inform such rating to public.

Rule 3:
 Rating shall be obtained every year during the tenure of deposits.
 Copy of credit rating  RoC along with Return of Deposits in Form DPT-3.
 Rating shall not be below min. investment grade rating or other specified rating for FDs.
Other relevant points:

a. Maximum amount of Deposit:
Eligible companies other than Eligible Govt co.:
From Members – 10% of PUSC + FR + SPA
From person other than Members – 25% of PUSC + FR + SPA
Eligible Govt. co. – 35% of PUSC + FR + SPA
b. Issuance of a circular (in Form DPT -1) in the name of BoD of co. to the members including:
Statement Credit Amt. due towards

Total no. of Other
showing Fin. Rating previously accepted
depositors particulars
position Obtained deposits
As per Rules relating to Circulars:

Manner of  Issue to all members by RPAD or Speed post or e-mode
issuance  Publish in newspaper – English + Vernacular.
 Place on website of the co.
Circular to be Co. to send to RoC – Copy of circular signed by majority of the directors -
signed and At least 30 days prior to issue  for registration
Registered
Validity of Earliest of:
Circular in  Until 6m from date of closure of FY in which it is issued, or
form of Advt.–  Date on which Fin. Statement is laid in AGM
 If AGM not held – Last date for holding AGM
Fresh Circulars To be issued, in each succeeding FY for inviting deposits during that FY.
Effective Date Date of issue of advertisement =Date on which advt. appeared in newspaper
Date of issue of circular = Date on which the circular was dispatched.
Common Points of Deposits u/s 73 and 76 [Companies (Acceptance of Deposit) Rules 2014]:
1. Deposit Repayment Reserve A/C:
Co. to deposit, on or before 30th April each year, sum >= 20% of amt. of deposit maturing during
following FY & keep in a scheduled bank in separated bank a/c called – DRR A/C
Purpose - The amt. so deposited shall not be utilised for purpose other than repayment of deposit.
Minimum Balance – 20% of amount maturing in CURRENT FY
2. Tenure of deposit – A company cannot accept deposit which is:

 Repayable on demand
 Repayable within 6m* (see exception below)
 Max. period > 36 months (3 years)
*Exception: Co. may accept deposit repayable within 6m for short term fund requirement if:
 Deposit <= 10% of PUSC + FR + SPA, AND
 Deposit repayable on or after 3m from date of such deposit.

3. Creating of Charge in case of Secured Deposits:
 Within 30 days of acceptance.
 In favor of deposit holders or trustee for the depositor as per prescribed rules
 Amt. of charge (value of security) shall >= Amt. of deposits accepted (& intt. payable thereon)
 Market value of such asset to be determined by RV.
 Charge to be created only on its tangible assets. (Rule 6)
4. Appointment of Trustee for Depositors:

 1/more trustees for depositors to be appointed by the co. for creating security for deposits.
 Obtain written consent of trustee prior to appointment.
 Statement that the trustees have given their written consent shall appear in the circular.
 Co. to execute a deposit trust deed (DTD) at least 7 days before issuing circular (DPT-2).
Qualification of Trustee [DR. DGP]:

Person (incl. a company) shall NOT be appointed as a trustee if such person is:
a. is a Director, KMP or any other officer/employee of CASH or a depositor in the company;
b. is inDebted to CASH or a subsidiary of such holding company;
c. has any material Pecuniary relationship with the company;
d. has entered into any Guarantee arrangement w.r.t, principal debts secured by the deposits or
interest thereon;
e. is Related to any person specified in clause (a) above.
Removal of Trustee: Procedure to remove:

 Consent of all the directors present at a meeting of the board.
 In case Co. is required to have Independent Dir. - At least 1 ID present in such meeting

1. Can a company be appointed as Trustee? – Yes. Law says “Person”.
2. Is it necessary to have depositor trustee even when the deposits are unsecured? – No!
5. Register of Deposits: Co. accepting deposits shall maintain one/more separate registers for deposits
accepted or renewed at its RO. Following particulars shall be entered in the case of each depositor:

particulars of the deposit
name, address & particulars of date & amt of
guardian (In case receipt
PAN the nominee; each deposit;
of minor) number;
duration & mandate & instructions for

rate of due date for
Repayment payment of interest and for non-
interest payt. of interest;
date deduction of tax at source
date on which the charge created for any other

payment of interest repayment of relevant
shall be made; deposits particulars
Entries in Register to be made within 7 days from issuance of receipt + Authenticated by dir./CS.
Preserve in good order for >= 8 years from FY in which the latest entry is made in the register.
6. Premature Repayment of Deposits:

 After 6m but before expiry of actual date of maturity,
 if depositor requests for premature repayment
 RoI shall be 1% less than what would be payable for period for which deposit has actually run
Note – Where deposit had run contains any part of a year, then, if such part is <6m – Exclude.
If such part is >=6m, it shall be reckoned as 1 year.
Reduction of rate of interest (i.e., 1%) is not applicable in the following cases: Where the deposit is
prematurely repaid in order to:
 Comply with Rule 3 i.e., tenure of deposit under this new act; or
 provide for war risk or other related benefits to the personnel of naval, military or air forces or
to their families during emergency declared under Article 352 of the constitution.
7. Premature Closure of Deposit by Holder to Earn Higher Rate of Interest:

In case a depositor desires to avail higher rate of interest by renewing the deposit before its actual
maturity date, the company shall pay him the higher rate of interest only if the deposit is renewed
for a period longer than the unexpired period of deposit.
8. Ceiling on Rate of Interest and Brokerage Payable on Deposits – Maximum – As prescribed by RBI in
case of NBFC for acceptance of deposit.
Brokerage payable on to those who are auth. by co. to solicit deposit and actually procure deposit.
9. Depositor to file application form and declaration:

Co. can accept deposit only when application is submitted by intending depositor
Along with application – Declaration that money is not borrowed from any other person.
10. Deposit in Joint Names – Not > 3.

A joint deposit may be accepted with or without any of the clauses, namely, “Jointly”, “Either or
Survivor”, “First named or Survivor”, “Anyone or Survivor”. These clauses operate on maturity.

11. Depositor may nominate a person at any time.
12. Deposit Receipt: Within 21 days from date of receipt of money/realization of cheque/date of
renewal  Co. to furnish receipt to depositor/agent – Deposit Receipt - Signed by duly authorized
officer and state date, name & address, amount, rate of interest & maturity date.
13. Filing of Return of Deposit with RoC – A duly audited return in Form DPT-3 containing info upto 31st
March of that year to be filed on or before 30th June
Note - DPT-3 shall include particulars of deposits or transactions not considered as deposits or
both
14. No right to alter T&C - After circular is issued and deposits are accepted, Co. has no right to alter
any T&C of deposit, deposit trust deed & deposit insurance which may prove detrimental to interest
of depositors
15. Disclosure in FS by way of a note –

 Public co. shall disclose about money received from its directors/relatives
 Pvt. company shall disclose about the money received from directors/relatives thereof
16. Penal Rate of Interest: In case co. fails to repay deposits (both secured and unsecured) on maturity,
after they are claimed, it shall pay penal rate of interest of 18% per annum for the overdue period.
17. Punishment for Contravention: If co. inviting deposits or any other person contravenes any of the
‘deposit rules’ for which no punishment is provided in Act, the co. and OID shall be liable as under:
 With fine extendable to Rs. 5,000; and
 Continuing one - Further fine up to Rs. 500 /day during which the contravention continues.
Section 76A - Punishment for Contravention of Section 73 or Section 76

 Where co., accepts or invites or causes any other person to accept any deposit in contravention of
prov,
 if co. fails to repay deposit or any interest due thereon within the time specified u/s 73 or 76:
Penalty:
a. Co. shall, in addition to the payment of the amount of deposit or part thereof and the interest due,
be punishable with fine – From (Rs. 1 crore or 2x Amt. of deposit whichever is lower) to Rs. 10
crores; and
b. OID – Jail upto 7 years AND with fine – Rs. 25 lakhs to Rs. 2 crores.
Provided that if it is proved that the officer of the company who is in default, has contravened such
provisions knowingly or willfully with the intention to deceive the company or its shareholders or
depositors or creditors or tax authorities, he shall be liable for action u/s 447.
Section 74: Repayment of Deposits, etc., Accepted Before Commencement of this Act
1. Filing of Statement of Deposits with RoC and Repayment thereafter:
Where deposit was accepted before commencement of this Act (i.e., before 1.4.2014), and remains
unpaid as on 1.4.2014 or becomes due at any time thereafter, the company shall take the following
steps:

a. file, within 3 months from such commencement, with RoC - Statement of all deposits accepted
by co. & sums remaining unpaid on such amt. with interest
b. Repay within 3 years from such commencement or maturity date, whichever is earlier.
Note – If co. has been repaying such deposits and interest thereon without any default on due dates
for the remaining period of such deposit as per the T&C, point (b) above shall be deemed to have
been complied with.
2. Extension of time for repayment by Tribunal:

Tribunal may, on an application made by the company, after considering the financial condition of the
co., amt. of deposit and interest payable thereon & such other matters, allow further time as
considered reasonable to the company to repay the deposit.
3. Punishment for Non-Repayment of Deposits:

Company - Fine Min. of Rs. 1 crores and Max. of Rs. 10 crore; and
OID - Jail upto 7 years or with fine Rs. 25 lakhs to Rs. 2 crores or with both.
Self-Notes!

Form Sec Purpose
Application to register the creation or modification of charge (other than
CHG-1 77
debentures)
CHG-2 77 Certificate of registration of charge
CHG-3 77 & 79 Certificate of modification of charge
CHG-4 82 Intimation to the Registrar regarding particulars for the satisfaction of charge
CHG-5 82 & 83 Certificate of registration of satisfaction of the charge
CHG-6 84 notice of appointment or cessation of a receiver or a manager
CHG-7 Register of charges created, modified and satisfaction by the company
Application to CG requesting an extension of time to file details of registration
CHG-8 87 of creation or modification or satisfaction of charge as well as rectification any
omission or misstatement of any details
Application for registering creation/modification of charge for debentures
CHG-9 77
including rectification
Introduction:
Section 2(16) - Charge means:
 an interest or lien
 created on the property or assets of a company or any of its undertakings or both
 as security (for repayment of loan) and
 includes a mortgage;
Fixed Charge vs Floating Charge:

Fixed Charge Floating Charge
Charge on specific asset of borrowing company Charge on assets which are of fluctuating
nature or changing in nature
Examples – Land and Building, office premises, Examples - Raw material, stock-in-trade,
machinery, etc. debtor, etc.
Usually, mortgage or deposit of title deeds --
Not allowed to sell (except with permission of Permitted to use for trading or producing final
charge holder). But can use. goods for sale.
Vacated when money repaid in full Crystallization of floating charge – Enforce
security or company goes into liquidation
Conceptual check – Is charge passed on to the buyer in case of sale of goods which is under floating
charge? – No!
Section 77: Duty to Register Charges, etc.
Chapter 6 – Registration of Charges

1. Charge to be registered:
 Duty of every company creating a charge (in or o/s India)
 To register the particulars of the charge signed by co. and charge holder together with
instrument creating such charge in prescribed manner.
[Form CHG-1 (for other than debentures) or Form CHG– 9 (for debentures)]
 within 30 days of creation such charge
Note: All the following charges need to be registered:

a. Charge created within India or outside India
b. Charge created on property or asset which is situated within India or outside India
c. Charge on tangible asset, intangible asset, or financial asset
Rule 3 of Company (Registration of Charges) Rule, 2014:

Verification of instruments of charge filed with RoC:
a. Where underlying property is situated outside India – Verify by a certificate issued under:
seal of the hand of any dir/CS or auth. hand of some person other than the co.
co., if any officer of charge holder who is interest in such charge
b. Where underlying property is situated in India – Verify by a certificate issued under:
seal of the hand of any dir/CS or auth. hand of some person other than the co.
co., if any officer of charge holder who is interest in such charge
Nothing contained in this rule shall apply to charge required to be created/modified by banking
co. u/s 77 in favour of RBI when any loan/advance has been made to it under RBI Act, 1934
[Amendment]
nd
Extension of Time Limit: (Effective From 2 November 2018)
 On application by the Company (showing sufficient cause),
 RoC may allow such registration of charge to be made
 Within 60 days of such creation (i.e., extension of 30 days only) – On payment of Additional Fee
Further Extension:
 Where co. fails to register charge within 60 days,
 ROC is empowered to allow such registration within further 60 days – Pay ad valorem fees
Application for extension - Make in Form CHG -1 or 9 as the case may be + Declaration by company
CS or director that belated filings shall not affect right of any creditors.
2. Issuance of Certificate of Registration (CoR):

On registration u/ss (1), RoC to issue a CoR of such charge in Form CHG-2 (fresh registration) or
CHG-3 (modification of charge) to charge holder and the company.
CoR = Conclusive evidence that requirements of this Act w.r.t, charge have been complied with.
3. Consequence of non-registration (Charge becomes void):

 Notwithstanding anything contained in any other law for the time being in force,
 Such charge shall NOT be taken into account by:
o Liquidator (appointed under this Act or IBC, 2016) or
o any other creditor
 unless it is duly registered u/ss (1) and CoR is issued u/ss (2).
However, nothing u/ss (3) to prejudice any contract/obligation for repayment of money secured by
a charge.

Important consequence of non-registration or delayed registration - Charge-holder loses priority.
Section 78: Application for Registration of Charge (by Charge holder)

Charge-holder may apply for Registration:
 Where a company fails to register the charge within 30 days u/s 77,
 without prejudice to its liability w.r.t., any offence under this Chapter,
 person in whose favor charge is created may apply to Registrar for registration (along with
instruments),
 within such time and in such form and manner as may be prescribed and
 the Registrar may, on such application, within 14 days after giving notice to the company, allow such
registration on payment of such fees, as may be prescribed, unless
o the company itself registers the charge or
o shows sufficient cause why such charge should not be registered,
Recovery of Fees - Entitled to recover from company the amount of any fees or additional fees paid by
him to the Registrar for the purpose of registration of charge.
Section 79: Section 77 to Apply in Certain Matters.

The provisions of section 77 relating to registration of charges shall, so far as may be, apply to:
a. a company acquiring any property subject to a charge; or
b. any modification in T&C or the extent or operation of any charge registered under that section.
Modification includes change in T&C of the underlying borrowing (including change in rate of interest)
Rule 6 – Where the particulars of modification of charge is registered under Section 79, the Registrar
shall issue Certificate of Modification in Form CHG 3
Section 80: Registration to act as Constructive Notice (deemed knowledge)

 Where any charge is registered u/s 77,
 any person acquiring such property, assets, undertakings or part thereof
 shall be deemed to have notice of the charge from the date of such registration.
Section 82: Company to Report Satisfaction of Charge

On payment or satisfaction of any charge registered under this chapter:
a. Co. to intimate RoC in Form CHG-4 within 30 days of such payment/satisfaction.
Provided that – On application by the company or charge holder, RoC may allow such intimation
within 300 days of payment/satisfaction with additional fees.
b. Notice to Charge Holder:
On receipt of intimation u/ss (1), Registrar shall cause a notice to be sent to charge holder calling
upon him to show cause within time specified in notice (not > 14 days), as to why payment or
satisfaction in full should NOT be recorded.
Notice to CH not required – If intimation u/ss (1) is signed by CH.
If no cause is shown – RoC shall order that a memorandum of satisfaction shall be entered in
register maintained u/s 81 and shall inform the co. (in Form CHG -5)
If cause is shown – RoC shall record a note to that effect in the register of charges and shall
inform the co.

c. Preserve instrument creating charge/modification – 8 years from satisfaction of charge.
Section 83: Power of Registrar to Make Entries of Satisfaction & Release in Absence of Intimation
from Co.:
Suo motu change in Register of Charges by RoC:
RoC may, on evidence being given to his satisfaction w.r.t. any registered charge that:
a. the debt for which the charge was given has been paid or satisfied; or
b. part of property or undertaking charged has been released or ceased to form part thereof,
it may enter in register of charges:
 memorandum of satisfaction in whole or in part, or
 fact that part of the prop/undertaking has been released or ceased to form part,
notwithstanding the fact that no intimation has been received by him from the company.
The Registrar shall inform the affected parties within 30 days of making such entry. (and issue
Certificate of Registration of satisfaction of charge in Form CHG-5)
Section 84: Intimation of Appointment of Receiver or Manager

If any person appoints a receiver or manager, to manage the property subject to charge, by virtue of:
 order of court or
 any power contained in any instrument creating charge.
he shall, within 30 days from date of the passing of order or of the making of the appointment, give
notice of such appointment to company and Registrar along with a copy of the order or instrument and
the Registrar shall, on payment of the prescribed fees, register particulars of the receiver, person or
instrument in the register of charges.
Any person appointed above shall, on ceasing to hold such appointment, give to the company and the
Registrar a notice to that effect and the Registrar shall register such notice. (Form CHG – 6)
Section 86: Punishment for Contravention:

If co. is in default under this Chapter, penalty:
Co. – Rs. 5 lakhs and OID – Rs. 50,000
If willfully furnishes any false or incorrect info. - Liable for action u/s 447
Section 87: Rectification by CG in Register of Charge (or Extension of Time Limit)
The CG on being satisfied that:
Omission to give intimation to Omission or misstatement of any particular in
RoC of satisfaction of charge any filing made with RoC w.r.t. creation,
within required time modification of satisfaction of charge
 Was accidental or due to inadvertence, or

 It is not of a nature to prejudice creditors/SH of co.
it may, on the application of the company (in Form CHG – 8) or any person interested and on such T&C
as it deems just, direct that the time for the giving of intimation of payment/satisfaction shall be
extended or, as the case may require, that omission or misst. shall be rectified.

Note: Signing of charge e-forms by insolvency resolution professional or resolution professional or
liquidator for companies under resolution or liquidation:
The Form No.CHG-1, CHG-4, CHG-8 and CHG-9 shall be signed by Insolvency resolution professional or
resolution professional or liquidator for companies under resolution or liquidation, as the case may be
and filed with the Registrar
[Amendment]

Sec Name Sec Name
88 Register of Members, etc. 106 Restriction on Voting Rights
Declaration in Respect of Beneficial
89 107 Voting by Show of Hands
Interest in any Share
90 Register of significant beneficial owners 108 Voting through Electronic Means
Power to Close Register of Members or
91 109 Demand for Poll
DH or Other Security Holders
92 Annual Return 110 Postal Ballot
93 Omitted 111 Circulation of Members' Resolution
94 Place of Registers, Returns, etc. 112 Repr. of President & Governors in Meetings
95 Registers, etc., to be Evidence. 113 Repr. of Corporations at Co and crs meetings
96 Annual General Meeting 114 Ordinary and Special Resolutions
97 Power of Tribunal to Call AGM 115 Resolutions Requiring Special Notice
98 Power of Tribunal to call Meetings, etc. 116 Resolutions Passed at Adjourned Meeting
99 Punishment for default u/s 96 to 98 117 Resolutions and Agreements to be Filed
Minutes of GM, BoD and Other Meeting and
100 Calling of EOGM 118
Resolutions Passed by Postal Ballot
101 Notice of Meeting 119 Inspection of Minute-Books of GM
102 Statement to be Annexed to Notice 120 Maintenance & Inspection of doc in e-form
103 Quorum for Meetings 121 Report on Annual General Meeting
104 Chairman of Meetings 122 Applicability to OPC
105 Proxies
Form Sec Purpose

MGT-1 88 Register of members of the company
MGT-2 88 Register of Debenture Holders or Any Other Security Holders
MGT-3 88 Notice or change in situation or discontinuation of a location where a foreign register is kept
MGT-4 89 Declaration by Registered owner of shares who does not hold beneficial interest in shares
MGT-5 89 Declaration by beneficial owner of shares but whose name is not entered in RoM
MGT-6 89 Return to the Registrar in respect of declaration under Section 89 received by the Co
MGT-7 92 Annual Return (for companies other than OPC and small companies)
MGT –7A 92 Annual Return (for OPC and small companies)
MGT-8 92 Certificate by a Company Secretary in practice (in case of Annual Return)
MGT-11 105 Appointment of proxy for a meeting (proxy form)
MGT-12 109 Polling paper in the meeting
MGT-13 109 Scrutinizer’s report to the Chairman pertaining to the poll of the meeting
MGT-14 117 Filing of company resolutions and agreements with the Registrar
MGT-15 121 Form for filing report on the AGM
Introduction:
Chapter 7 – Management and Administration

Registers
Annual Return
Section 88 - 91
Section 92 - 94
& 95
MANAGEMENT &
ADMINISTRATION Requisites of
Applicability to Convening a
OPC Meeting
Sec 122 Section 103 -
Meetings
120
Sec 96 - 102 & 121
Section 88: Register of Members, etc.

(1) Every co. shall keep and maintain following registered in prescribed manner:
Register of Members (RoM) Register of Debenture Register of Other
for ESH and PSH Holders (DH) Security Holders
(MGT 1) (MGT 2) (MGT 2)
(2) Every register maintained u/ss (1) shall include an index of the names included therein.
Note - Maintenance of index is not necessary in case the number of members < 50.
(3) Register + Index of beneficial owners (BO) maintained by depository = Deemed compliance of Act
Rules relating to Register of Members:

 Entry to be made within 7 days of date of BoD approval for allotment or transfer of shares.
 RoM shall be maintained at RO. However, SR in GM is passed to keep register at:
o Any other place within city, town, or village of RO, or
o Any place within India in which > 1/10th of total members (as in RoM) reside.
 Every co. limited by shares shall – maintain RoM in Form MGT-1
 In case of co. not having SC, RoM shall contain following particulars w.r.t. each member:
o Basic details of members (name, address, e-mail, PAN or CIN)
In case member is a minor, name of the guardian and DOB of member;
Name and Address of Nominee;
o date of becoming member or date of cessation;
o amount of guarantee, if any;
o any other interest if any; and
o instructions, if any, given by the member w.r.t. sending of notices.
 Changes, if any, in the status of members or DH or OSH on account of death, insolvency or
transfer of shares to IEPF or any other reason – Record such change in register
(4) Foreign Register:

 If so authorized by AoA, co. may keep outside India (in prescribed manner)
 a part of the register u/ss (1) called Foreign register,
 containing names and other particulars of members, DH, OSH or BO residing o/s India.
Rule 7: Foreign Register (FR):
Particulars Details

File with RoC Co. shall, within 30 days from date of opening of FR - File with RoC - Notice of
situation of the office in Form MGT-3 + Fees
Change in In event of change in situation of office or discontinuance –Intimate within 30
situation days (MGT 3)
FR = PR FR = Deemed part of principal register
Inspection and FR shall be open to inspection and may be closed, and extracts /copies may be
advertisement taken, in same manner, mutatis mutandis, as is applicable to principal register.
for closing FR Except that advertisement before closing FR shall be inserted in at least 2
newspapers circulating in the place wherein FR is kept.
Entry in FR After BoD approves allotment
Transmit data Company shall:
to RO a. transmit to RO in India a copy of every entry in any FR within 15 days of
making entry;
b. keep at such office a duplicate register of every FR duly entered up from
time to time.
Discontinue FR Thereupon, all entries in that register shall be transferred to:
 some other FR kept by the company outside India or
 to the principal register.
(5) Failure to maintain register u/s 88:

Company – Penalty of Rs. 3 lakhs ; OID – Rs. 50,000
Note:
1. Can a minor’s name be entered in RoM? – No. Only legal guardian’s name can be entered
2. Joint SHs may request the co. to enter their names in RoM in a certain order, or execute transfers
to have their holding split, with the result that part of the holding is entered showing the name of
one holder and part showing the name of another. However, it is not possible that name of only one
of the joint SH is written in RoM. The reason for this is that the articles of most companies
provide that, in the case of exclusion of the other joint holders, and for this purpose, seniority
shall be determined by the order in which the names stand in the ROM.
Concept clarity:
Location of RO – Mumbai
Total Shareholders – 1,000 shares
Location No. of shares OR or SR? Can RoM be kept?
Mumbai 50 members None Yes. Irrespective of
members, it’s RO
Delhi 101 members SR Yes.
Goa 98 members SR No.
Section 89: Declaration in Respect of Beneficial Interest in any Share

(1) Where name of person is entered in RoM as holder of shares but who does not hold beneficial
interest (BI) on it - Such person shall:
 within 30 days of entry of name in RoM, in Form MGT 4
 make a declaration to the company specifying name and other particulars of beneficial owner.
(2) Every person who acquires a BI in share shall:

 within 30 days of acquiring such BI,
 in Form MGT-5
 make a declaration to co. specifying nature of his interest, particulars of person in whose name
shares are registered and other prescribed details
(3) Where any change occurs in BI such shares, such person and BO shall – within 30 days from date
of such change, make a declaration to the company in prescribed form.
(4) Where declaration under this section is made to a company, the company shall:
 make a note of such declaration in concerned register and shall
 within 30 days of receipt of declaration – File a return in Form MGT – 6 with Registrar + Fees
(5) Where declaration required under this section is not made by BO - No rights in respect of such
shares shall be enforceable by him or by any person claiming through him.
(6) Notwithstanding this section, company to pay dividend to members (not BO)
(7) Penalty:
Failure to make declaration to company – Rs. 50,000 + 200/day – Max 5 lakhs
Failure of company to file MGT 6 – Co. + OID – Rs, 1,000/day – Max 5 lakhs (co) and 2 lakhs (OID)
Exemption
Trust created to set up Mutual fund, venture capital fund or other SEBI approved fund – Need not file
such declarations.
Section 90: Register of significant beneficial owners in a company
Who is a significant beneficial owner (SBO)? [2(1)(h)]

“SBO” in relation to a reporting company means:
 an individual,
 who acting alone or together, or through one/more persons or trust,
 possesses one or more of the following rights or entitlements in such reporting co., namely:
(iii) holds indirectly, or together with any direct holdings, not less than 10% of the shares;
(iv) holds indirectly, or together with any direct holdings, not less than 10% of voting rights;
(v) has right to receive or participate in not less than 10%, of the total distributable dividend in a
FY through indirect holdings alone, or together with any direct holdings;
(vi) has right to exercise, or actually exercises, significant influence* or control, in any manner other
than through direct-holdings alone:
Note - If an individual does not hold any right indirectly under (i), (ii) or (iii) above - he shall not be
considered to be SBO. (i.e., Indirect holdings are mandatory for becoming SBO)
*Significant influence means power to participate, directly or indirectly, in financial and operating policy
decisions of the reporting company but is not control or joint control of those policies
Legal provision

(1) Every SBO shall make a declaration to the co., specifying the nature of his interest and other
particulars, in Form BEN – 1 within 30 days of becoming SBO.
(2) Every co. shall maintain a register of SBO and changes therein in Form BEN-3 which shall include the
name of individual, his date of birth, address, details of ownership and other prescribed details
(3) The register maintained u/ss (2) shall be open to inspection during business hours, at such reasonable
time of not < 2 hours, on every working day, by any member on payment of fee specified by company
(not > Rs. 50 for each inspection)
(4) Return of SBO:

Every company shall file a return of SBO of the company and changes therein in Form BEN-2 with
the Registrar containing names, addresses and other prescribed details within 30 days of receipt of
declaration from SBO in Form BEN -1
Note - Every co. shall take necessary steps to identify an individual who is a SBO in relation to the
company and require him to comply with the provisions of this section.
(5) A company shall give notice in Form BEN-4 to any person (whether or not a member) whom the
company knows or has RGTB:
(a) to be a SBO of the co.;
(b) to be having knowledge of identity of a SBO or another person likely to have such knowledge;
(c) to have been a SBO of the company at any time during 3 years immediately preceding the date
on which the notice is issued,
and who is not registered as a SBO with the company as required under this section.
(6) Info. required by notice u/ss (5) - Concerned person to give within 30 days of date of the notice.
(7) Apply to Tribunal
The company shall: apply to Tribunal within 15 days of expiry

(a) where that person fails to of period specified in notice, for an order
give info. within time directing that shares in question be subj. to
specified therein; or  restrictions w.r.t. transfer of interest,
(b) where info. given is not  suspension of rights attached thereto
satisfactory,  other matters as may be prescribed
(8) On application u/ss (7), Tribunal may, after giving OOBH to parties concerned, make such order
restricting the rights attached with the shares within 60 days of receipt of application.
(9) Co. or the person aggrieved by order of Tribunal may apply to Tribunal for relaxation or lifting of
the restrictions placed u/ss (8), within 1 year from the date of such order.
Provided that – If no appln. made within 1 year - such shares shall be transferred to IEPF Authority
Penalty u/s 90:
Sub -section (10) (11) (12)

Failure Person fails to Co. fails to maintain register or Person willfully furnishes
make declaration allow inspection thereof false or incorrect info. or
u/ss (1) suppresses material info.
Liable Person Company OID Such person shall be
Penalty Rs. 50,000 Rs. 1 lakh Rs. 25,000 liable for action u/s 447
Continuing Failure Rs. 1,000/day Rs. 500/day Rs. 200/day
Maximum Rs. 2 lakhs Rs. 5 lakhs Rs. 1 lakh
Section 91: Power to Close Register of Members or Debenture-Holders or Other Security Holders.
(1) A company may close the RoM or register of DH or OSH for any period, subject to:
 Such period shall not exceed in aggregate 45 days in each year and not exceed 30 days at any
one time
 previous notice has to be given in prescribed manner of at least 7 days (or such lesser period
as specified by SEBI for listed cos. or companies which intend to get their securities listed)
(2) In case of contravention u/ss (1), penalty shall be:

Co. and OID – Rs. 5,000 for every day during which register was closed subject to max. Rs. 1 lakh.

Section 92: Annual Return
Every company shall prepare a return containing the following details as on close of FY: [BGR SH KMP CFO]
Members, DH, OSH

Particulars of shares, debentures
RO, princial Biz. and change since
holding, associate or or other sec. and
activities Previous FY
subsy (Group cos) SH pattern
(Holders)
Penalty on co.,
Promoter/Dir/KMP Meetings - GM, BOD,
Remuneration of director or officers
and changes since Committee and
director/KMP + Compounding +
PFY attendance details
Appeals
Certification of Details of shares held by

Other matters
compliance Foreign Institutional Investors
Annual Return:
Sign on Annual  OPC & small co – AR to be signed by CS. Where there is no CS, by director
Return  Other companies - By a director + CS (where no CS, by CS in practice)
Form for AR  Other companies - MGT – 7

 OPC & Small Co – MGT - 7A
AR to be AR filed by:
certified by CS  Listed company
in Practice  Co. having PUSC not less than 10 crore or turnover not less than 50 crore
shall be certified by CS in practice in Form MGT – 8 stating that:
 AR discloses the facts correctly and adequately and
 company has complied with all the provisions of this Act.
Place on website AR on website of company and web-link thereof – Disclose in BoD’s report
File with RoC Every co. shall file with the Registrar a copy of AR + Fees:
[Section 96(4)]  within 60 days from date on which AGM is held or
 where no AGM is held in any year, within 60 days from date on which AGM
should have been held + statement specifying reasons for not holding AGM
Penalty Co. fails to file AR within prescribed time, penalty of:
Co. – Rs. 10,000 + Rs. 100/day upto max Rs. 2 lakhs
OID – Rs. 10,000 + Rs. 100/day upto max Rs. 50,000
Penalty on CS in If CS in practice certifies the AR otherwise than in conformity with the

practice requirements of this section, he shall be liable to a penalty of Rs. 2 lakhs
Section 93: Omitted
Section 94: Place of keeping and Inspection of Registers, Returns, etc.

(1) Registers u/s 88 and copy of AR filed u/s 92 shall be kept at the RO of the company.
Provided that such registers or AR may also be kept at any other place in India in which > 1/10th of
the total no. of members (as per RoM) reside, if approved by SR passed at GM
(3 conditions – Such place is within India, more than 1/10th member reside and SR is passed)
The period for which such registers or AR shall be preserved is as shown below:

Registers/Annual Return Preserve for? Custody
RoM u/s 88 + Index Permanently CS of co. or any other
person auth. by Board
Register of DH or other 8 years from date of redemption CS of co. or any other
security holders + Index person auth. by Board
Foreign Register Permanently, unless it is discontinued CS of co. or any other
and all the entries are trfd. to any person auth. by Board
other FR or to the principal register
Foreign register of DH or any 8 years from date of redemption CS of co. or any other
other security holders person auth. by Board
Annual returns prepared 8 years from date of filing with
under section 92 Registrar.
(2) Inspection of Registers, Indices and AR:

The registers, indices and AR shall be open for inspection during business hours (at such
reasonable time on every working day):
 By members, DH or OSH – without any fees
 By any other person – on payment of such fees as may be prescribed.
Note - Reasonable time of not less than 2 hours on every workday shall be considered by the co.
(3) Extract or copies by ANY person:

Any member, DH, OSH or BO or any other person may—
 take extracts from any register, or index or return without payment of any fee; or
 require a copy thereof on payment of fees as per AoA (not > Rs. 10/page). Co. to provide
copies within 7 days.
(4) On refusal of any inspection or making extract or copy:

 company and every OID – Liable for each such default, to a penalty of Rs. 1,000/day subject
to a max of Rs. 1 lakh during which the refusal or default continues.
 CG may also, by order, direct:
o an immediate inspection of the document, or
o that extract required shall forthwith be allowed to be taken by person requiring it.
Note - The following particulars of register or index or return in respect of members shall not be
made available for any inspection u/ss (2) or for extracts or copies u/ss (3), namely:
address or registered address Unique Identification PAN
e-mail ID
(in case of a body corporate); Number Number
Section 95 - Registers, etc., to be Evidence:

The registers, their indices and copies of annual returns maintained under sections 88 and 94 shall be
prima facie evidence of any matter directed or authorised to be inserted therein by or under this Act.

General Meetings
Section 96: Annual General Meeting
1. Every company (other than OPC) shall, in each year, in addition to other meetings, hold AGM, and
shall specify as such in the notices, and not more than 15m shall elapse between two AGMs
Provided that – First AGM to be held within 9m of closing of first FY. Thereafter, within 6m from
closing of each FY.
Provided further – If first AGM is held as aforesaid – No AGM necessary in year of incorporation.
RoC may, for any special reasons, extend the time within which AGM (other than first AGM) shall
be held by not > 3m.
2. AGM shall be called during business hours (9AM to 6PM) on any day other than national holiday (as
declared by CG).
Place of holding AGM:

AGM: AGM of Govt co. (92+137) –
AGM of unlisted co. – Held
Held at registered office or RO or within
at any place in India if
some other place within city, city/town/village where RO
consent in writing/emode by
town/village where RO is is situated or other place
ALL members in advance
situate approved by CG
Section 97: Power of Tribunal to call AGM:

1. Notwithstanding anything contained in Act or AOA, in case of default in holding AGM u/s 96,
Tribunal may, on appln by any member of co – call or direct calling of AGM & give such consequential
directions.
Provided that – Such directions may include that 1 member present in person or proxy shall be
deemed to constitute a meeting.
2. GM held u/ss (1) – Deemed AGM of company.
Section 98: Power of Tribunal to call meeting of members, etc (applicable only for EGM. Not AGM)
1. Other than AGM, if for any reason, it is impracticable to call a meeting or hold or conduct a
meeting in manner prescribed by Act or AOA, Tribunal may, either:
i. either suomotu, or
ii. on application of director or member entitled to vote at the meeting
order a meeting of co. to be called, held and conducted in manner as Tribunal thinks fit, and give
such ancillary directions as may be expedient.
Provided that – Such directions may include that 1 member present in person or proxy shall be
deemed to constitute a meeting.
2. Any meeting held u/ss (1) – Deemed to be a meeting of company duly called, held and conducted
Section 99: Punishment for default u/s 96 to 98.

If default is made in holding meeting u/s 96, 97 or 98 or in complying Tribunal’s directions:
Company and OID – Fine which may extend to Rs. 1 lakh + Continuing default – Further Rs. 5,000/day
Section 100: Calling of Extraordinary General Meeting (EGM)

1. Board may, whenever it deems fit, call an EGM of the company.
Place - EGM shall be held at a place in India (except in case of WOS of co. incorporated o/s India)
2. Board shall, at the requisition made by following, call an EGM of the company:
Co. having share capital – Members Co. not having SC – Members having
holding not less than 1/10th of total not less than 1/10th of total voting
PUSC that carries voting rights. power.
3. The requisition made u/ss (2) shall:

a. Set out matters for consideration at the meeting
b. Signed by requisitionists, and
c. Sent to RO of the co.
4. The Board shall:

a. Call for such meeting within 21 days from receipt of valid requisition
b. Meeting to be called on a day not later than 45 days from date of receipt of valid requisition
5. On failure of board to call such meeting – Requistonists may themselves call and hold such meeting
within 3m of date of requisition.
6. Meeting by requisitionists to be called, held & conducted in same manner as it is called, held by BoD
7. Reasonable expenses of such meeting shall be reimbursed to requistonists by co. and such sum shall
be deducted from remuneration u/s 197 of directors who were in default in calling the meeting.
Rule 17: Calling of EGM by Requistonists:

1. Such requisition has to be in writing or e-mode at least 21 clear days prior to proposed date of
EGM.
2. Notice to specify place, date, day, and hour of meeting & contain business to be transacted
thereon.
The meeting shall be convened at RO or in the same city or town where RO is situated on any day
except national holiday.
3. If proposed resolution is SR – Give notice as required u/s 114(2)
4. The notice shall be signed by all requisitionists or by a requisitionists duly authorized in writing.
5. No ES needs to be annexed to notice for such EGM. They may disclose reasons for proposed
resolutions at the meeting.
6. Notice shall be given to those members whose names appear in RoM within 3 days of receipt of a
valid requisition by the co.
7. Where meeting is not convened, the requisitionists shall have a right to receive:
 list of members
 their registered address and
 number of shares held and
the co. is bound to give such information as on 21st day from date of receipt of valid requisition
form together with such changes, if any, before expiry of 45 days from such receipt.
8. Mode of sending notice - Speed post or registered post or through e-mode.
9. Accidental omission to give notice to, or the non-receipt of such notice by, any member shall not
invalidate the proceedings of the meeting.

Concept clarity check
Are the requistonists required to specify reasons for the matters proposed to be considered? – No.
Just stating the matters is enough. Reasons not required. [LIC vs Escorts]
Section 101: Notice of meeting:

1. GM may be called by giving not less than clear 21 days’ notice in writing or e-mode - Manner
prescribed.
Provided that GM may be called after giving shorter notice if consent is accorded:
In case of AGM: In case of any other GM:

By not less than a. In case of co. having SC - Majority in numbers +
95% of members representing not less than 95% of PUSC
entitled to vote b. In case of co. not having SC - members having
thereat not less than 95% of total voting power
To calculate 21 clear days: - Exclude – Date on which notice is served AND date of meeting
2. Notice to specify place, date, day and hour of meeting & contain business to be transacted thereon.
3. Notice to be given to [MAD]:
Every member of the co. (LR of deceased Auditors of the Every director of
member or assignee of insolvent member) company, and the company
4. Accidental omission to give notice to, or the non-receipt of such notice by, any member shall not
invalidate the proceedings of the meeting
Rule 18: Modes of Sending the Notice

 Sending of notices through electronic mode (e-mode) has been statutorily recognized
 “Electronic mode’’ means:
 any communication sent by co. through authorized & secured computer programme
 capable of producing confirmation and
 keeping record of such communication addressed to the person entitled to receive
 at the last e mail address provided by the member.
 Notice may be sent through e-mail as a text, attachment or URL.
 E-mail to be addressed to entitled person (as per records of depository)
 Co. to allow changing or adding email IDs at least once in a FY
 Subject line of email – State the name of co., notice of type of meeting, place and date.
 Place notice on website of co. and other website notified by CG
Note – Where notice is sent by post, it shall be deemed to be served at expiration of 48 hours
after the letter containing the same is posted. (Refer Sec 20 of chapter 2)
1. Can an individual director call for GM? – No. Individual director is not authorized. Only BoD can.
However, if individual director ends up calling, BoD can later, ratify the same.
2. Cos obligation to send notice shall be satisfied when it transmits the email. Co. cannot be held
responsible for transmission of email beyond control.
3. If an entitled members fails to provide email address to co., co. shall not be in default for not
delivering notice via email.
4. Companies Act does not provide anything specific regarding condonation of delay in giving notice.

Example:
AGM to be held on 7th Nov. Notice was posted on 16th October. Is the notice valid or short?
Answer – Notice is invalid as it is of only 19 clear days. (because when posted on 16 th Oct, it is deemed
to be served on 18th October i.e., 48 hours later)
Section 102: Statement to be annexed to notice (Explanatory statement)

1. A statement setting out following material facts concerning each item of special business shall be
annexed to notice calling such meeting:
the nature of interest (finance/otherwise)

in respect of each items of: other info & facts that may enable
to understand meaning, scope and
- every diector & manager implication of items of business and
- every other KMP take decisions
- relatives of above
Where, as a result of non-disclosure or insufficient disclosure of interest (as required

above), if any benefit accrues to promoter, director, manager, KMP or their relatives – They
shall hold such benefit in the trust of the company + Liable to compensate the co. to extent
of such benefit.
2. Special business in AGM - In case of AGM, all business shall be deemed special, other than:
consideration of FS appointing of appointment of and
declaration of
and reports of BoD director in place of fixing remuneration
dividend
and auditors those retiring of auditors
Special business in EGM – All business shall be deemed to be special.
Provided that:
 Where any item of special business relates to or affects any other company (say, A Ltd),
 the extent of shareholding interest in that other company (A Ltd) of:
o every promoter, director, manager, if any, and
o of every other KMP of the first mentioned company
 shall be set out in the ES, if not less than 2% of PUSC of that company (A Ltd)
3. Where any item of business refers to any doc, which is to be considered at the meeting, the time
and place where such doc can be inspected shall be specified in ES.
Contravention – If default is made in complying with this section – Every promoter, director, manager,
KMP or their relatives who is in default – Liable to penalty which is higher of:
 Rs. 50,000 or
 5x the amount of benefits accrued to such promoter, director, manager, KMP or their relative
Summary of Ordinary vs Special Business:

AGM EGM
Ordinary Business FS, Dividend, Director, Auditor None
Special Business All, other than above All

Note: ES not required for transacting ordinary business
Section 103: Quorum for meetings

1. Unless articles provide for a larger number:
a. In case of a public company:
No. of members as on date of meeting Members personally present
Not more than 1,000 5
More than 1,000 but up to 5,000 15
> 5000 30
b. In case of a private co. – 2 members personally present
2. If quorum is not present within half an hour from appointed time:

a. Meeting called by requisitionists u/s 100 – stands cancelled
b. Other meetings – Adjourned to same day, next week at same time and place or such other
date as board may determine.
In case of adjourned meeting or change of day, time or place of meeting – the company shall give
not less than 3 days notice to members either individually or publish ad in newspaper (eng + vern)
3. If at adjourned meeting, quorum is not present within half an hour – Members present = Quorum
[Example – Jet Airways]

1. AOA can only provide for a larger number of quorum (i.e., not less than number given in act)
2. Preference shareholder (PSH) shall not be counted for quorum where the matter is such that it
does not affect rights of PSH or where PSH are not allowed to vote.
3. In case where a person representing a body corporate shareholder is present in meeting, he shall
be considered as personally present (i.e., Say, X ltd is a SH in A Ltd. X Ltd. sent his representative
Mr. X in the GM of A Ltd. It shall be considered personal presence)
4. One member representing 2 companies is counted as 2 members
5. Proxies will not be included for the purpose of quorum.
6. Presence of a single member can never be called as meeting (even if meeting is adjourned meeting)
Section 104: Chairman of meetings (N.A. to Pvt. Co. (92+137) unless AoA of Pvt co. specifies otherwise)
1. Unless AOA provides otherwise, members personally present shall elect one of themselves to be
chairman thereof on a show of hands.
2. If poll is demanded on election of chairman:
 Chairman elected u/ss (1) by show of hands shall continue to be chairman until some other
person is elected chairman by way of poll.
 Such other person to be chairman for rest of the meeting.
Additional points:
 Chairman is a person who manages meetings and ensures decorum is maintained.
 Chairman has prima facie authority to decide all questions arising in the meeting.
 Chairman has casting vote or second vote in BM and GM (only if empowered by AoA)

Section 105: Proxies
1. Any member entitled to attend and vote at a meeting shall be entitled to appoint another person as
a proxy to attend and vote on his behalf.
Provided that proxy shall have no right to speak at such meeting + entitled to vote only on a poll
Provided further that:

 Unless AoA provides otherwise, this sub-section – N.A. to co. not having SC
 CG may prescribe classes of cos. whose members shall not be entitled to appoint proxy
 Limit - A person shall not act as a proxy on behalf of members exceeding 50 and having
prescribed no. of shares.
Rule 19: Proxies

1. A member of sec 8 co. can only appoint another member ONLY of the co. as proxy
2. A person can act as proxy on behalf of members not exceeding 50 and holding (aggregate)
not > 10% of total share capital of the company carrying voting rights
Provided that a person holding > 10% of SC may appoint a single person as proxy and such
person shall not act as proxy for any other SH
3. Appointment of proxy shall be in Form MGT 11
2. Every notice calling for meeting, there shall appear with reasonable prominence a statement that –
 a member entitled to attend & vote is entitled to appoint a proxy, or one or more proxies
(where allowed) and
 that proxy need not be a member
3. Default u/ss (3) – OID liable to penalty of Rs. 5,000
4. Deposit of proxy form:

48 hours before meeting, proxy form or any other doc. necessary to show validity of such appt.
shall be deposited with the company (even if articles provide for longer period)
Such instrument appointing proxy shall be in writing and be signed by:

 appointer or duly authorized attorney in writing or
 if appointer is BC – under its seal or be signed by an officer or duly authorized attorney
5. If invitations to appoint as proxy a person or one of a number of persons specified in the
invitations are issued at the company's expense to any member entitled to notice of meeting and
vote thereat - Every officer who issues or authorized such issue – Liable for penalty Rs. 50,000
Provided that – Officer not liable if such issue is at the member’s request in writing.
6. An instrument appointing proxy in Form MGT – 11 shall not be questioned on the grounds that it
fails to comply with special requirements by the AOA
7. Inspecting proxy forms by member:

Every member entitled to vote at the meeting – entitled to inspect proxies lodged. Provided that:
 Inspect during period - 24 hours before time fixed for commencement of meeting and ending
with conclusion of meeting during business hours
 Not less than 3 days’ notice in writing of intention given to co.

1. In case where member and proxy both are present in a GM -
The members have a right to revoke the proxy’s authority by voting himself before the proxy has
voted but once the proxy has voted the member cannot retract his authority
2. AoA provides that the proxy form should be received at least 60 hours before the GM. Is such
provision valid? – No! The limit of 48 hours cannot be increased in any case.
Voting [Sec 106 to 110]

Section 106: Restriction on voting rights:
1. Notwithstanding anything contain in act, AoA may provide that:
A member shall not exercise voting right in respect of the shares registered in his name on which:
 call or other sum is unpaid, or
 co. has exercised any right of lien.
2. Except as specified above, a co. shall NOT prohibit member from voting right on any other ground
3. In case of poll – Member (or his proxy) entitled to more than one vote need not use all his votes or
cast in the same way all the votes he uses. (i.e., he can split his votes for and against same resoln)
Voting in case of joint shareholders:

 Unless AOA provides otherwise, joint shareholders must concur in voting.
 In case of joint shareholder, voting is done in order of seniority (determined on basis of order of
name appearing in RoM which is as per the joint shareholders instruction)
Note - A company can restrict voting right in case of unpaid calls or lien only if authorized by AoA.
Section 107: Voting by show of hands:

1. At any GM, resolution put to vote shall be decided by show of hands, unless poll is demanded u/s
109 or voting is carried out electronically.
2. Following shall be conclusive evidence of fact of passing of resolution or otherwise:
a. Declaration by chairman of passing of such resolution, and
b. Entry to that effect in the minutes of the meeting
Can insolvent SH vote by show of hands? Yes (as long as his name appears in RoM, he is entitled)
Section 108: Voting through electronic means.

CG may prescribe class(es) of cos. and manner in which member may exercise voting rights by e-means.
Rule 20: Voting through e-means:

1. Following cos. shall provide facility to vote by e-means:
a. Every co. having listed its equity shares in a RSE and
b. Every co. having >= 1000 members
Provided that – Nidhi cos or institutional investors as per SEBI Regulations – Not required to provide
such facilities.
2. Companies providing facility of voting by e-means shall comply with following procedures:
Particulars Detail
Notice of To be sent to – All members, auditors, and directors.
meeting Mode – Registered post, speed post or e-means or by courier service
Place notice On website of – Company and Agency (NSDL/CDSL)

Notice to a. Co. is providing facility for voting by e-means.
state: b. That the facility – either EVS or ballot or polling paper shall also be made
available at meeting and members attending the meeting who have not already
cast vote via remote e-voting shall be able to exercise their right at meeting
c. Members who have cast vote by remote voting prior to meeting may also
attend meeting but not vote again.
Notice shall: a. indicate process and manner for voting by e-means;
b. indicate time schedule including time period during which the votes may be
cast by remote e-voting;
c. provide login ID details.
d. specify process for generating password and voting in secure manner
Publication in Co. shall cause a public notice by way of advertisement – Immediately on dispatch
newspaper of notices but at least 21 days before date of GM in the following newspaper:
 at least once in vernacular newspaper in the language of district where RO is
situated and having wide circulation in that district,
 at least once in English newspaper having country wide circulation
specifying the following:
1. statement that business may be transacted by e-voting.
2. date and time of commencement of remote e-voting
3. date and time of end of remote e-voting
4. cut-off date (a date not earlier than 7 days before date of GM for
determining eligibility to vote)
5. manner in which person who became members after dispatch of notice may
obtain login ID and password.
6. the statement that:
a. remote voting shall not be allowed beyond said date and time.
b. manner in which co. shall provide for voting at the meeting.
c. member may participate in GM even after remote voting but not allowed
to vote again.
d. person named in RoM as on cut off date only – entitled to vote
e. website of the co. and agency
f. name, designation, etc. of person responsible for grievances addressal
Remote voting  Remain open for >= 3 days. Shall close at 5PM on date preceding date of GM.
 During such period – members holding shares in physical or demat form, as on
cut-off date, may vote
 Vote once cast – cannot be subsequently changed.
 At the end – facility to be forthwith blocked.
Provided that – If a co. decides to use the same EVS as used in remote e-
voting for voting during the GM, the said facility – The said facility shall be
operational till all resolutions are voted upon in the meeting.
Scrutiny  BoD to appoint one/more scrutinizers (CA, CS or Cost Accountant, in practice

or advocate or any person not in employment + Person of repute) to scrutinize
the voting process in fair and transparent manner.
 Scrutinizer may take assistance – Not an employee + well versed with EVS.

 Scrutiniser shall be willing to be appointed and be available for ascertaining
requisite majority.
 Chairman to allow voting at the GM by use of ballot or polling paper or by EVS
for those who didn’t vote using remote e-voting.
Counting votes Scrutiniser shall, immediately after conclusion of voting at GM:

 first count votes cast at GM,
 thereafter unblock votes cast through remote e-voting in presence of at least
2 witnesses not in employment of co. and
 make (within 3 days of conclusion of GM), a consolidated scrutiniser’s report
of total votes cast in favor or against, if any, to Chairman or a person
authorised by him in writing who shall countersign the same.
 Thereafter, CM or authorised person to declare result of voting forthwith;
 Votes to remain secret till the votes are cast at GM.
Prevent dual To ensure that members who voted via e-voting do not vote again in GM –
votes Scrutinizer to have access to details of shareholders who voted but not the
manner in which they have cast their votes.
Register of  Scrutiniser to maintain a register (manually or electronically) to record assent
assent/dissent or dissent received, mentioning particulars of name, address, folio number or
received client ID of members, number of shares held by them, nominal value and
whether the shares have DVR;
 Such register to remain in safe custody of scrutinizer till approval of minutes
by chairman. Thereafter, hand over to company
 Result of resolution – Place on website – Co + Agency + RSE (if listed)
Deemed date Date of GM
of resolution
Withdrawn Resolution proposed to be considered through voting by e-means shall not be
withdrawn
Section 109: Demand for poll

1. Before or on declaration of result of voting on any resolution on show of hands:
 a poll may be ordered to be taken by the Chairman on his own motion, and
 shall be ordered to be taken by him on a demand made in that behalf:
In case of co. having SC – In case of other co. -
By members present in person or proxy having >= By members present in person
1/10th of total VP or holding shares in aggregate or proxy having >= 1/10th of
having PUSC >= Rs. 5 lakhs or higher amount prescribed total VP
2. The demand for a poll may be withdrawn at any time by the persons who made the demand.
3. A poll demanded for adjournment of meeting or appt. of Chairman of meeting to be taken forthwith.
4. A poll demanded on any question other than adjournment/ appt. of chairman shall be taken at such
time (within 48 hours from time it was demanded), as Chairman of the meeting may direct.
5. Where poll is to be taken, the Chairman shall appoint such number of persons, as he deems necessary,
to scrutinise the poll process and votes given on poll and to report to him in manner prescribed.

6. Chairman of the meeting shall have power to regulate the manner in which the poll shall be taken
7. Result of poll shall be deemed to be decision of meeting on the resolution on which the poll was taken
Rule 21: Manner in which chairman shall get the poll process scrutinized:
Chairman of the meeting shall ensure the following:
a. Scrutizers are provided with:
 RoM, specimen signs of members, attendance and proxy register
 All documents pursuant to sec 105, 112 and 113
b. Scrutinizers to arrange Polling papers (Form MGT-12) & distribute it to members & proxies present
In case of joint SH – Give polling paper to first named holder (in his absence – joint holder)
c. Scrutinizers to keep record of the polling papers received in response to poll, by initialing it.
d. Scrutinizers shall lock and seal an empty polling box in presence of members and proxies.
Such box shall be opened in presence of at least 2 witness.
e. In case of ambiguity about validity of a proxy, Scrutinizers + Chairman to decide validity
f. Ensure that if member (who has appointed proxy) has voted in person, proxy’s vote disregarded.
g. Scrutinizers shall count votes cast on poll and prepare a report addressed to the Chairman. The
report shall be in Form MGT – 13. Such report shall be sign and submitted within 7 days from date
of poll. Chairman to counter-sign the same.
h. Where voting is conducted by e-means u/s 108 and rules made thereunder, co. shall provide all the
necessary support, technical and otherwise, to Scrutinizers in orderly conduct of voting and
counting the result thereof.
i. Scrutinizers’ report shall state total votes cast, valid votes, votes in favour and against the
resolution including the details of invalid polling papers and votes comprised therein.
j. Chairman shall declare the result of Voting on poll. The result may either be announced by him or
a person authorized by him in writing.

Section 110: Postal Ballot
As per Sec 2(65) – Postal ballot means voting by post or through e-mode
(1) Notwithstanding anything contained in this Act, a company:
shall, w.r.t., such items of business may, in respect of any item, other than ordinary
as CG may, by notification, declare business and any business in respect of which
to be transacted only by means of Directors or auditors have right to be heard at
postal ballot; and meeting, transact by means of postal ballot
in such manner as may be prescribed, instead of transacting such business at a GM.
Provided that any item of business required to be transacted by means of postal ballot under
clause (a), may be transacted at a GM by a company which is required to provide the facility to
members to vote by e-means u/s 108, in the manner provided in that section.
(2) If a resolution is assented to by the requisite majority of SHs by means of postal ballot, it shall be
deemed to have been duly passed at a GM convened in that behalf.
Rule 22: Postal Ballot:

Particulars Detail
Introduction Where a co. is required or decides to pass resolution by postal ballot, - send notice
to all SHs + draft resolution explaining reasons therefor and requesting them to
send their assent or dissent in writing on a postal ballot because postal ballot means
voting by post or through e-means within 30 days from date of dispatch of notice
Notice of To be sent to – All members, directors and auditors
meeting Mode – Registered post, speed post or e-means or by courier service
Place notice On website of company – Remain on website till last date of receipt of PB forms
Publication in Co. shall publish an advertisement about having dispatched the ballot papers, in:
newspaper  at least once in vernacular newspaper in the language of district where RO is
situated and having wide circulation in that district,
 at least once in English newspaper having country wide circulation
specifying the following:
 statement that business may be transacted by postal ballot including e-voting
 date of completion of dispatch of notice
 date of commencement of voting
 date of end of voting
 the statement that:
a. postal ballot received beyond date is invalid and voting shall not be allowed
beyond said date and time
b. members who have not received the postal ballot forms may apply to the co.
and obtain a duplicate thereof.
2. name, designation, address, etc. of person responsible for grievances addressal
Scrutiny  BoD to appoint one/more scrutinizers who is not in employment to scrutinize the
postal ballot process in fair and transparent manner
 Scrutiniser shall be willing to be appointed and be available for ascertaining
requisite majority

 Postal ballot received back from SH shall be kept in safe custody of scrutinizer
and after receipt of assent or dissent of the SH in writing on a postal ballot, no
person shall deface or destroy ballot paper or declare the identity of the SH.
 scrutinizer shall submit his report as soon as possible after last date of receipt
of postal ballots but not later than 7 days thereof
Register of  Scrutiniser to maintain a register (manually or electronically) to record assent
assent/dissent or dissent received, mentioning particulars of name, address, folio number or
received client ID of members, number of shares held by them, nominal value and whether
the shares have DVR; details of postal ballot defaced, if any
 Such register and other papers to remain in safe custody of scrutinizer till
approval of minutes by chairman. Thereafter, hand over to company to preserve
 Assent or dissent received after 30 days from the date of issue of notice shall
be treated as if reply from the member has not been received.
 Result shall be declared by placing it on website of company
Rule 20 to Provisions of rule 20 regarding voting by e-means shall apply, as far as applicable,
apply mutatis mutandis to this rule in respect of voting by e-means.
Postal Ballot Following items of business shall be transacted only by means of voting through a
ONLY postal ballot:
Section Business
13 Alteration of object clause of MoA
NA Alteration of AoA to insert or remove provisions which, u/s
2(68) are required to be included in AoA of private co.
12 Change in place of RO outside local limits of city/town/village
13/27 Change in object for which money raised from public
43 Issue of shares with differential rights
48 Variation in rights attached to class of shares
68 Buy-back
151 Election of a director
180 Sale of undertaking of co.
186 Giving loans, guarantees in excess of limit
Non- Provided further – OPC and Cos. having members up to 200 are NOT required to
applicability transact any business through postal ballot
Section 111: Circulation of Member’s Resolutions

1. On requisition in writing by such number of members as u/s 100, a company shall:
a. give notice to members of any resolutions intended to be moved at the meeting, and
b. circulate to members – any statement w.r.t. matters referred to in proposed resolution
2. A company shall not be bound u/ss (1) unless:
a. Copy of signed requisition is deposited at the RO:
i. In case of requisition requiring notice of resolution – Not less than 6 weeks before meeting
ii. In case of any other requisition – Not less than 2 weeks before meeting
b. Along with requisition, deposit a sum reasonably sufficient to meet company’s expense
Provided that – If after the requisition requiring notice is deposited at the RO + AGM is called on a
date within 6 weeks after deposit thereof – It shall be deemed to have been properly deposited.

3. Where, on an application by the co. or aggrieved person, and application is made to CG and CG declares
that rights in this section are being abused to secure needless publicity for defamatory matter - The
co. shall not be bound to circulate any statement u/ss (1)(b)
Note – Cost of such application to CG – CG may order requisitionists to pay such cost
4. Default – Co and OID – Penalty of Rs. 25,000.
Section 112: Representation of President and Governors in Meetings

(1) The President of India or the Governor of a State, if he is a member of a company, may appoint
such person as he thinks fit to act as his representative at any meeting of the company.
(2) A person appointed u/ss (1) shall, be deemed to be a member and shall be entitled to exercise the
same rights and powers, including the right to vote by proxy and postal ballot, as the President or,
he Governor could exercise as a member of the company

President of India appointed Mr. Lazy as his representative. However, Mr. Lazy, instead of going to
the meeting himself, appointed Mr. Proxy to attend and vote on his behalf. Is Mr. Lazy allowed to
appoint a proxy? – Yes. Mr. Lazy enjoys same rights as the president would and hence allowed to
appoint proxy.
Section 113: Representation of Corporations at Meeting of Companies and of Creditors

(1) A body corporate may:
if it is a member of a Co. by BoD resolution, authorise such person as it thinks fit to act as its
representative at any meeting of the company
if it is a creditor, including By BoD resolution, authorise such person as it thinks fit to act as
Debenture holder its representative at any meeting of any creditors
(2) A person appointed u/ss (1) shall, be deemed to be a member and shall be entitled to exercise the
same rights and powers, including the right to vote by proxy and postal ballot, on behalf of BC
which he represents as that body could exercise if it were an individual member, creditor or DH.
Example: Evaluate whether quorum is satisfied:

A Ltd is a company having 1,200 members. Evaluate whether quorum is met on presence of following:
Type of person Include in Quorum?
A,B and C – Shareholders of A Ltd
D and E – Joint shareholders
F, G and H – Preference shareholders
X and Y – Proxies
P – Representative of President
G – Representative of Governor
H – Representative of BC
M – Representative of BC3 and BC4
Total members counted in quorum 

Section 114: Ordinary and Special Resolutions
(1) A resolution shall be an OR if:
 notice has been duly given and
 it is required to be passed i.e., votes cast (show of hands or e-voting or poll) in favour, including
casting vote, if any, of CM, by members (personally or via proxy where allowed),
 exceed the votes, if any, cast against the resolution by members, so entitled and voting.
(2) A resolution shall be a SR when—

(a) the intention to propose the resolution as a SR has been duly specified in the notice calling the
GM or other intimation given to the members of the resolution;
(b) the notice required under this Act has been duly given; and
(c) the votes cast in favor (show of hands, poll or e-voting), by entitled members (in person or
proxy or postal ballot) is not less than 3x number of votes, if any, cast against such resolution.

1. It is not necessarily true that ordinary business require OR and special business require SR.
Example – Issue of equity share with differential rights is a special business but requires OR.
2. Whether 2 or more resolutions can be moved together at the same time in a GM? – Yes, there is
nothing illegal with the same. Except in case of resolution to appoint directors (Sec 162 requires
one resolution for each director, multiple resolutions can be moved all at once.
3. At a GM, 40 members are present. 20 votes in favor, 5 voted against. 5 votes were invalid and 10
members abstained from voting. Is SR passed? – Yes. Abstentions or invalid votes, if any, are not
to be taken into account.
Section 115: Resolutions Requiring Special Notice
 Where, by any provision contained in this Act or in the articles of a company,
 special notice is required of any resolution,
 notice of intention to move such resolution to be given to company by:
a. members holding not < 1% of total VP or
b. holding PUSC of prescribed sum (not > Rs. 5 lakhs)
 and company shall give its members notice of the resolution in such manner as may be prescribed
Rule 23 - Special Notice (SN)

(1) SN shall be signed (individually/collectively) and given by such number of members holding:
a. not < 1% of total VP or
b. holding fully paid up shares of not less than Rs. 5 lakhs on the date of the notice.
(2) Time period of sending notice – Notice to be sent to co. not earlier than 3 months but at least 14
days before date of meeting, exclusive of day on which the notice is given and day of meeting.
3m 14 days
Date of meeting
(3) Immediately on receipt of notice – Co. to give notice to its members of the resolution – At least
7 days before meeting (exclusive of date of dispatch and day of meeting)
(4) Where it is not practicable to give notice u/ss (3) in same manner as notice of GM – Publish
notice in newspaper (english/vernacular) and post it on the website of company.
(5) The notice shall be published at least 7 days before the meeting, exclusive of the day of
publication of the notice and day of the meeting.

As per Companies Act, special notice is required in following cases:
Section Provision
140 Appointment of auditor other than retiring auditor
169 Removal of director
Section 116: Resolutions passed at adjourned meeting

Where a resolution is passed at an adjourned meeting of company, shareholders or BoD – It shall be
treated as having been passed on the date on which it was in fact passed, and shall not be deemed to
have been passed on any earlier date.
Example: EGM dated – 23rd Sept. Quorum absent. Adjourned - 1st October. Two resolutions passed in
adjourned meeting. Effective date of resolution = 1st October (and not 23rd sept)
Section 117: Resolutions and Agreements to be Filed

1. The provision of this section shall apply to following resolutions and agreements: [SAB CA WPO]
agreement executed by co. related to
Special Resolution agreed to by
appointment, re-appointment or
Resolution all the members
variation of terms of MD
resolutions or agreements resolution tobe wound

any resolutions
which have been agreed to by up voluntary (u/s 59
of BoD
any class of members of IBC)
resolutions passed any other resolution

u/s 179 (3)** or agreement
**Provided that – Any person shall NOT be entitled u/s 399 to inspect copies of such resolution
Provided further that – This clause is N.A. to resolution passed to grant loans, etc. u/s 179(3)(f) in
ordinary course of business (OCOB) by a banking company, NBFC or housing finance companies.
2. A copy of every resolution or agreement mentioned above along with ES u/s 102 (if any) – File with
RoC in Form MGT 14 within 30 days of passing such resolution or making such agreement.
Where such resolution or agreement has effect of altering AoA – Annex such resolution to every
copy of AoA issued after passing such resolution/making agreement
3. In case of failure to make such filing with RoC, penalty:

Company Rs. 10,000 + Rs. 100/day after first Max – Rs. 2 lakhs
OID Rs. 10,000 + Rs. 100/day after first Max – Rs. 50,000
Section 118: Minutes of proceedings of GM, Board Meeting and Resolutions passed by Postal ballot
(1) The co. shall cause the minutes of the proceedings of the following to be prepared, signed and kept
in the minute books (with pages consecutively numbered) within 30 days of the conclusion thereof:
 GM of any class of SH or creditors
 board meetings or meetings of any committee thereof
 resolutions passed by postal ballot.

(2) Minutes shall contain fair and correct summary of the proceedings.
(3) Appointments made at any meetings shall be included in minutes.
(4) In case of meeting of BoD or committee thereof, the minutes shall also include:
where a resolution is passed, the
Names of directors present
names of dissenting directors
(5) The following matters shall not be included in the minutes which, in opinion of Chairman, is:
reasonably be regarded as irrelevant or immaterial detrimental to
defamatory of any person to proceedings interest of co.
(6) Chairman shall exercise absolution discretion w.r.t. inclusion or exclusion of any matter u/ss (5)
(7) Minutes = Evidence of the proceedings recording therein.
(8) Where minutes are kept as u/ss (1), until the contrary is proved, it shall be deemed that:
 Meeting have been duly called and held.
 Proceedings have duly taken place and resolutions duly passed.
 All appointments of director, KMP, etc. is valid.
(9) No document purporting to be a report of the proceedings of any GM shall be circulated or

advertised at company’s expense, unless it includes matters required by this section to be
contained in the minutes of the proceedings of such meeting.
(10) Every co. to observe secretarial standard specified by Institute of CS of India
(11) Default under this section – Co. – Rs. 25,000 and OID – Rs. 5,000
(12) Person found guilty of tampering with minutes – Jail upto 2 years AND Fine – Rs. 25k to Rs. 1 lakh
Rule 25 – Minutes:
1. Distinct minute books shall be maintained for each type of meeting - GM of member, crs, BM, etc.
Note – Resolution by postal ballot shall be recorded in minute of GM in which deemed to be passed
2. Minute of proceeding to be entered into such book within 30 days of conclusion of meeting.
3. In case of resolution by postal ballot, include the following in the minutes books within 30 days:
resolution proposed result of voting summary of scrutinizer's report
4. Each page of minute book – Initialed or signed.
Last page of the record of proceeding shall be dated and signed:

Minutes of proceedings of

BoD or committee meeting By chairman of said meeting or chairman of next succeeding
meeting
General Meeting By chairman of same meeting within 30 days
In event of death or inability of CM – a director duly
authorized by the BoD
Resolution passed by By chairman of the BoD within 30 days
postal ballot In event of there being no CM or death or inability of CM – a
director duly authorized by the BoD
5. Preserving minute books:

of General Meeting of BoD or committee
Kept at RO or such place as BoD may decide RO or such place as BoD may decide
Preserve Permanently Permanently
Custody CS or director duly authorized by BoD CS or director duly authorized by BoD
Note - In case of section 8 co. - the section shall not apply as a whole except that minutes may be
recorded within 30 days of conclusion of every meeting (in case of co. where AoA provide for
confirmation of minutes by circulation)
Section 119: Inspection of minute-books of GM:

(1) Minute books of proceeding of any GM, BoD meeting or of resolution by postal ballot shall be:
a. kept at RO of the co.
b. open to inspection by any member, without any charge, during business hours, subject to
imposing reasonable restriction by AoA or in GM. However, not < 2 hours in each business day
are allowed for inspection.
(2) On request to the co. + payment of fees as specified in AoA – Copy of minutes to be furnished to
member within 7 working days.
As per Rules:
A member who has requested for soft copy of minutes of any previous GM held during immediately
preceding 3 FY shall be entitled to be furnished, with the same free of cost.
(3) If inspection is refused or copy of minutes is not furnished - Penalty:

Company –Rs. 25,000 ; OID – Rs. 5,000
(4) In case of such refusal or default, Tribunal may, without prejudice to action u/ss (3), by order:
 direct an immediate inspection of the minute-books or
 direct that the copy required shall forthwith be sent to person requiring it.

Can a member authorize his friend to inspect minutes book on his behalf of him by signing a power of
authority? – No, sec 119 does not provide for authorizing anyone else to inspect the minutes book.
Section 120: Maintenance and Inspection of Documents in Electronic Form:

Without prejudice to any other provisions of this Act, any doc., record, register, minutes, (DRRM):
(a) required to be kept by a company; or

(b) allowed to be inspected or copies to be given to any person by a company under this Act,
may be kept or inspected or copies given, as the case may be, in e-form in prescribed form & manner.
Rule 27:
Every listed company or a company having >= 1000 SH, DH and other security holders, shall may
maintain its records, as required to be maintained under the Act or rules, in electronic form.
Rule 28: MD, CS or any other director or officer as BoD may decide – shall be responsible for
maintenance of e-records
Rule 29: Records in e-form shall be available for inspection in e-form (on payment not > Rs. 10/page)
Section 121: Report on AGM:

(1) Every listed public company shall prepare a report on each AGM including confirmation that the
meeting was called, held and conducted as per provision of this Act and Rules
(2) Report u/ss (1) shall be filed with Registrar within 30 days of conclusion of AGM in Form MGT 15.
(3) Default u/ss (2) – Penalty:
Company – Rs. 1 lakhs + Rs. 500/day after the first subject to maximum Rs. 5 lakhs
OID – Not less than Rs. 25,000 + Rs. 500/day after the first subject to maximum Rs. 1 lakh
Rule 31:
a. Report u/s 121 shall be in addition to minutes of GM
b. Report shall be signed & dated by CM and CS.
In case of his inability of CM – Sign by 2 directors (1MD, if any) and CS
c. Report shall contain following details: [A BOLD MCQ]
day, date, hour and venue confirmation w.r.t. appt. of no. of Members
of AGM (Details) Chairman of AGM attending AGM;
confirmation w.r.t compliance of the Act and Rules, secretarial

confirmation of Quorum;
std. made there under w.r.t. conducting AGM; (Law)
Business transacted and particulars w.r.t any Adjournment, any Other

result thereof; postponement of meeting, change in venue; relevant points

Section 122: Applicability of this chapter to OPC:
(1) Provision of Sec 98 and 100 to 111 – N.A. to OPC
(2) In case of OPC, ordinary business at AGM shall be transacted as mentioned below:
Business at AGM or EGM in case of OPC Business at BoD meeting in case of OPC
For sec 114, any business which is required to be Where there is only 1 director in BoD of OPC – any
transacted at AGM or other GM by OR/SR - it business which is to be transacted at BoD
shall be sufficient if, in case of such OPC: meeting, it shall be sufficient if, in case of OPC:
 resolution is communicated by member to co.,  the resolution by such director is entered in
 entered in minutes-book maintained u/s 118, minutes book maintained u/s 118 and
 signed and dated by member and  signed and dated by such director and
 such date shall be deemed to be the date of  such date = deemed to be the date of BoD
meeting for all the purposes under this Act meeting for all the purposes under this Act

[Section 123 to 127]
Basics Provisions Funds related to Punishment for Non-

Dividend Compliance
 Definition u/s  Sec. 123:  Sec. 125: IEPF  Sec. 127:
2(35) Declaration of  Establishment Punishment for
 Types (Final/ Dividends  Credits to the failure to
Interim)  Sec 124: Unpaid/ Fund distribute dividend
Unclaimed Dividend  Utilization within 30 days
Definition:
Section 2(35) “dividend” includes any interim dividend.
Important points relating to dividend:

 It is a distribution of profits.
 Final dividend is declared & approved by shareholders (by OR at AGM) on recommendation of Board
 The rate of dividend declared by SH shall not exceed the amount recommended by BOD.
 Dividend % is a proportion of nominal value or face value.

1. BoD recommended 10% div. Can SH, by passing unanimous resolution, declare 12% dividend? - No!
2. Calculate the amount of dividend in following case:
No. of shares held = 50
Face Value = Rs. 10; Market Value (in stock exchange) – Rs. 200; Purchase price – Rs. 190
SH approved and declared dividend = 10%
Amt. of dividend = No. of shares * Dividend * Face Value i.e., 50 shares * 10% * Rs. 10 = Rs. 50
Note – Market value or purchase price is irrelevant for the calculation of amt. of dividend
Types of dividend:
Classification based on time
Particulars Interim Dividend Final Dividend
Announcement Announced and declared by SH BOD at any Recommended by BoD and
time during the FY or from closure of FY till declared by shareholders at the
the AGM. AGM of the co.
Provision in Declared only when the AOA permits the Does not require any specific
AOA declaration. provision in the articles
Source Out of profits before final adoption of --
accounts.
Sources for interim dividend = Surplus in PL or
CY profit or Prior Profits
Ratification Shall be ratified at the AGM by the members Not applicable
Chapter 8 – Dividend
Rate of If the company has incurred loss during the CY The rate recommended by the
Dividend upto preceding quarter, then dividend not to be Board cannot be increased by the
declared at a rate higher than Avg rate of members.
dividend declared by co. during immediately
preceding 3 FYs.
Revocation Can be revoked with consent of ALL Once declared - cannot be
shareholders. revoked.
Dividend shall be deposited in separate A/c of a scheduled bank within 5 days from date of declaration
Classification of Dividend based on Nature of Shares

Preference Shares (Sec 43) Equity Shares
Cumulative Non-Cumulative (Default)
Dividend gets accumulated Dividend is payable only in a year Equity shares holder do not
of profit. No accumulation of enjoy any preferential rights
profit for dividends or repayment of
capital
Arrears in dividend due to Holder not entitled to be paid Rate of dividend depends upon
insufficiency of profits - arrears of dividend out of future the dividend policy and
Payable from future profits. years i.e., right to receive availability of profits after
Unless this dividend is paid in dividend expires if not declared satisfying Pref. SH rights
full (incl. arrears), no dividend in any year.
is payable to ESH
Section 123: Declaration of Dividend

(1) Source: Dividend shall be declared or paid by a company for any FY out of:
Money provided by
Profits* for that FY Undistributed profits* of any previous Both (a) and
CG/SG for payment
(current) arrived at FYs arrived at after providing for (b) [Current
of div. in pursuance
after providing for depreciation as per Sch II (i.e., credit + Past
of guarantee given
depreciation (Sch II) balance in P&L and free reserves) Profits]
by the Govt
*Provided that – While calculating profits – exclude:

 unrealised gains, notional gains, or revaluation of assets, and
 any change in carrying amount of an asset/liability on measurement at fair value.
Transfer to Reserves – A company MAY, before declaration of dividend in any FY, transfer such %
of its profits for that FY as it may consider appropriate to reserves of the company.
Conceptual Clarity Check:

1. Can capital reserve be used for payment of dividend? – No! Only free reserves can be used.
2. Carried over previous losses and depreciation not provided in PY has to be set off against CY
profits before declaration of dividend.
3. Capital profits are not earned in normal course of biz. Hence, not available for distribution.
4. Is it okay if a company decides not to transfer any amount to reserves before dividend? – Yes!
Whether or not to transfer and what % to be trf to reserve is left to discretion of the co.
(2) For the purposes of Sec 123(1)(a), depreciation shall be provided in accordance with Sch II
(3) Rate of Dividend –
Board may declare interim dividend during any FY or at any time from closure of FY till holding of
AGM out of:
 Surplus in the P&L account or
 Profits of the FY for which such interim dividend is sought to be declared (past FY), or
 Profits generated in the FY till the quarter preceding date of declaration of interim dividend
Interim Dividend in case of loss in recent quarter (not Final Dividend):

Provided that - In case the co. has incurred loss during the current FY up to the end of quarter
immediately preceding the date of declaration of interim dividend, such interim dividend shall not
be declared at a rate > Average dividends declared by company during immediately preceding 3 FYs.

Is upper limit on rate of dividend (i.e., not > Avg of preceding 3 FY) also applicable in case if
there is profit in current FY till preceding quarter? – No. In case of profit, % of dividend can be
higher.
Rule 3 Declaration of Dividend out of Reserves: [Very imp]

In the event of inadequacy or absence of profits in any year, a co. may declare dividend out of
free reserves subject to the fulfilment of the following 3 conditions, namely:
Total amount drawn from accumulated profits <= Balance in reserve
Rate shall not exceed
1/10th of [PUSC + FR] as per latest audited FS after such drawal
Average of dividend of
not < 15% of PUSC as
3 immediately Amount drawn shall first be utilised to set off per latest audited
preceeding FY* losses of current FY FS
* This sub-rule (1) shall not apply if a co. has not declared any dividend in each of 3 preceding FY.
(4) Dividend (incl. interim) – Deposit in separate a/c with scheduled bank within 5 days from
declaration
(5) Dividend shall be paid by a co. only to the:

 Registered shareholder of such share or
 to his order or
 to his banker and
shall not be payable except in cash.
Provided that nothing in this sub-section shall be deemed to prohibit the capitalisation of profits or
reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount
for the time being unpaid on any shares held by the members of the company.

1. Mr. Singh has purchased shares of Burraaah Ltd. from Mr. Jai by making full payment.
However, transfer of shares is not yet registered with the co. Meanwhile, the co. announces
dividend. Is the company allowed to pay the dividend to Mr. Singh? – No. In such case, the
company will keep the dividend till the registration is pending (Discussed in detail in sec 126)
2. Can a company issue bonus shares in lieu of dividend – No. Dividend can only be paid in cash.
3. Can a company pay dividend via bank? – Absolutely Yes. Cash doesn’t mean hard cash. It means
– Cash, cheque, dividend warrant or via any e-mode.
(6) A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such
failure continues, declare any dividend on its equity shares.
Note: Section 8 companies are prohibited from paying any dividend to its members. Its profits are
intended to be applied only in promoting the objects for which it is formed. [Sec 8]
Bonus Point
What is record date? - Record date is the date announced by the company for determining members
who are entitled to dividend. All person whose name is included in the register of members on the
record date shall be entitled to dividend.
Section 124: Unpaid Dividend Account (Refer timeline at the end of this chapter)
(1) Where a dividend is declared but not paid or claimed within 30 days from the date of declaration,
 the company shall, within 7 days from the expiry of the said 30 days,
 transfer the total unpaid/unclaimed amount of dividend to a special account (with scheduled
bank) called the Unpaid Dividend Account (UDA)
(2) Preparing of Statement of the Unpaid Dividend

 Within 90 days of transferring any amount to the Unpaid Dividend Account
 prepare a statement containing the following:
Name Last known address Unpaid dividend amount
 and place it on website and on any other website approved by CG for this purpose.
(3) Payment of Interest on default

If default is made in transferring the total amount u/ss (1) to UDA, company shall:
 Pay interest @12% p.a. from the date of such default
 Interest accruing on such amount shall ensure to benefit of members of the co. in proportion
to amt. remaining unpaid to them.
(4) Claimant shall apply to co. concerned for payment of unpaid amount (prior to trf. thereof to IEPF)
(5) Transfer of Unclaimed or unpaid amount to Investor Education and Protection Fund (IEPF)
 If remains unpaid or unclaimed for 7 years from the date of such transfer
 It shall be transferred by the company along with interest to the IEPF, and
 A prescribed statement containing details of such transfer shall be sent to IEPF Authority &
 Authority to issue receipt as an evidence of such transfer.
(6) Transfer of Shares to IEPF

All shares in respect of which dividend has not been paid/claimed for >= 7 consecutive years shall
be transferred by the company in the name of IEPF along with a statement containing such details.
Author’s Note – Note that this section is talking about transfer of the “shares” itself and not the
unpaid amount of dividend. The trf. of unpaid amount is already discussed u/ss (5)
Provided that any claimant of shares trfd. above shall be entitled to claim the transfer of shares
from IEPF with such procedure and on submission of such documents as may be prescribed.
Explanation:
In case any dividend is paid or claimed for any year during the said period of 7 consecutive years,
the share shall not be transferred to Investor Education and Protection Fund.
(7) Punishment for Contravention of this section:

Company Officer in default
Penalty Rs. 1 lakh + Rs. 500/day after first Rs. 25,000 + Rs. 100/day
Max penalty Rs. 10 lakhs Rs. 2 lakhs
Section 125: Investor Education and Protection Fund

(Read with IEPF Authority (Accounting, auditing, transfer and refund) Rules 2016)
(1) The CG shall establish a Fund to be called the Investor Education and Protection Fund (IEPF)
(2) There shall be credited to the Fund—

a) the amount given by the CG by way of grants after due appropriation made by Parliament by law
in this behalf for being utilised for the purposes of the Fund;
b) donations given to the Fund by CG, SG, cos. or any other institution;
c) the amount in Unpaid Dividend Account of companies transferred to Fund u/s 124(5)
d) the amount in general revenue account of the CG which had been transferred to that account
u/s 205A (5) of Companies Act, 1956 and remaining unpaid on commencement of this Act;
e) the amount lying in IEPF u/s 205C of the Companies Act, 1956;
f) the interest or other income received out of investments made from the Fund.
(fa) all shares held by IEPFA u/s 90(9) of the Act and all resultant benefits out of such shares
g) the amount received under section 38(4);
h) the application money received by companies for allotment of any securities and due for
refund;
i) matured deposits with companies other than banking companies;
j) matured debentures with companies;
k) interest accrued on the amounts referred to in clauses (h) to (j);
l) sale proceeds of fractional shares arising out of bonus shares, merger, etc. for >=7 yrs
m) redemption amount of preference shares remaining unpaid or unclaimed for >=7 yrs; and
n) such other amount as may be prescribed.
Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless
such amount has remained unclaimed and unpaid for 7 years from date it became due for payment.
Summary da summary!
Other income
Donation by Amt. of UDA General IEPF in Co. Act
CG grants from
CG/SG/Cos. u/s 124 Revenue A/C 1956
investment
Application Matured sale proceeds Shares held by

Amount Redemption of
money deposit or of fractional IEPFA +
disgorged u/s pref. shares
debenture + shares Benefits
38(4) (>= 7 years) (>=7 yrs)
Intt. (>7 yrs) (>=7 yrs) thereon
(3) The Fund shall be utilised for: [CD PRO]

a) the refund in respect of unclaimed dividends, matured deposits, matured debentures, the
application money due for refund and interest thereon
b) promotion of investors’ education, awareness and protection;
c) distribution of any disgorged amount among eligible and identifiable applicants for shares
or debentures, shareholders, debenture-holders or depositors who suffered losses due to wrong
actions by any person, in accordance with orders made by the Court which had ordered
disgorgement;
d) reimbursement of legal expenses incurred in pursuing class action suits u/s 37 and 245 by
members, debenture holders, or depositors as may be sanctioned by the Tribunal; and
e) any other purpose incidental thereto, in accordance with such rules as may be prescribed:
Provided that, where, as per provision of Sec 205C of Co. Act, 1956, amount is transferred to IEPF,
after the expiry of 7 yrs, such person shall be entitled to get refund out of IEPF (constituted
under Co. Act 2013)
(4) Any person claiming to be entitled to amt referred u/ss (2) may apply to IEPFA for payment
thereof.
(5) CG to constitute, by notification, an authority for administration of Fund consisting of:

Chairperson Members not > 7
a CEO (appt. by CG)
[Ex-officio - Secretary, MCA] (including CP)
(6) Manner of administration, appt. of members, holding of IEPFA meetings– As per prescribed rules
(7) Resources - CG may provide to IEPFA such offices, officers, employees, etc. - as prescribed.
(8) The authority shall administer the Fund and maintain separate accounts and other relevant records
in relation to the Fund in such form as may be prescribed after consultation with C&AG of India.
(9) It shall be competent for IEPFA to spend money out of Fund for carrying out the objects of IEPF.
(10) Accounts of the Fund shall be audited by the C&AG of India (at specified intervals). Audited
accounts + audit report to be forwarded annually by IEPFA to the CG.
(11)Annual Report:
 IEPFA to prepare its annual report (prescribed form and time for each FY)
 Giving full account of its activities during the FY and
 Forward a copy thereof to the CG and
 CG shall cause annual report + audit report to be laid before each House of Parliament
126. Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of
transfer of shares
 Notwithstanding anything contained in any other provision of this Act,
 Where any instrument of transfer of shares has been delivered to any co. for registration and
 Such transfer has not been registered by the co.,
 Such company shall:
Transfer the dividend w.r.t. such shares to UDA account Keep in abeyance - Any offer
(unless the co. is authorised, in writing, by registered of right shares u/s 62(1)(a) or
holder to pay such dividend to transferee specified in issue of fully paid up bonus
transfer instrument) shares
127. Punishment for failure to distribute dividends

 Where a dividend has been declared
 But, within 30 days of such declaration, it has not been paid or warrant has not been posted, to
entitled SH,
 The punishment shall be:
Every Director who is knowing a party Company
to default (not OID)
Imprisonment Extend to 2 years AND NA
Fine – During the period Not < Rs. 1k / day – Default continues Simple Interest 18% p.a.
where default continues
Provided that no offence under this section shall be deemed to have been committed where [LADDO]:
(a) the dividend could not be paid by reason of the operation of any law.
(b) SH has given directions to co. regarding payment of dividend and those directions cannot be
complied with and the same has been communicated to him
(3 conditions – Given directions + cannot comply + communicate)
(c) there is a dispute regarding right to receive the dividend;
(d) the dividend has been lawfully adjusted by the company against any sum due from shareholder;
(for example – adjustment of calls in arrears), or
(e) for any other reason, the failure to pay the dividend or to post the warrant within the period
under this section was not due to default on part of company.
Modification for Nidhi Company (w.r.t. Sec 127):

In case of Nidhi Co., where dividend payable is <= Rs 100, it shall be sufficient compliance of sec 127 if:
 declaration of dividend is announced in local language in one local newspaper of wide circulation.
 announcement is also displayed on the notice board of the Nidhi for at least 3 months.

The company is responsible to post the dividend warrant within 30 days of declaration of dividend.
However, if such post doesn’t reach SH within 30 days, it’s not the responsibility of the co. Hence,
company cannot be penalised if warrant doesn’t reach before 30 days.
Dividend Timeline:
[Section 128 to Section 138]
Sec Name Sec Name

128 Books of Accounts to be kept by co/ 133 CG to Prescribe AS
129 Financial Statement 134 Financial Statement, Boards Report, etc
129A Periodical financial results 135 Corporate Social Responsibility
130 Re-opening of accounts on Court’s or 136 Right of Member to Copies of Audited FS
Tribunal’s Orders
131 Voluntary Revision of FS/Board’s Report 137 Copy of FS to be Filed with Registrar
132 Constitution of NFRA 138 Internal Audit
Form Purpose
AOC 1 Statement containing salient features of FS of subsidiaries/ associates/JVs
AOC 2 Details containing contracts or arrangements entered into with related parties
AOC 3 Statement containing salient features of the audited FS
AOC 3A Detailed statement on FS to be filed by co. complying with Cos (Ind AS) Rules
AOC 4 Form to file a FS and other documents of the company with the Registrar
AOC 4 (XBRL) XBRL doc. in respect of FS and other documents to be filed with the Registrar
AOC 4 (CFS) Form to file CFS s and other documents with the Registrar
AOC 4 (NBFC) Form for NBFCs to file financial statement and other documents with the Registrar
AOC 5 Notice to declare the address of the location in which the BoAs are maintained
Important Definitions
“Books of account” includes records maintained in respect of:
sums of money received sales and assets and items of cost
and expended purchase liabilities u/s 148
Financial statement in relation to a company, includes:

P&L account Statement of
BS as at end Explanatory note
(in case of NPO - CFS for FY* change in
of FY annexed
Income & Exp a/c equity
*Provided that FS, w.r.t. OPC, small co. and dormant co. and Private co. (startup), may not include CFS;
“Book and Paper” and “Book or Paper”: Includes: [WARM DVD]

Books of
Deeds Voucher Writings Documents Minutes Registers
Accounts
maintained on paper or in electronic form;
Chapter 9 – Accounts
Section 128: Books of account, etc., to be kept by company:
For the purpose of this section, books of accounts (BOA) means - Books of account and other relevant
books and papers and financial statement (FS)
(1) Co. to prepare BoA:
Every co. shall prepare and keep BOA and FS at its RO every FY
 Giving a true and fair view of state of the affairs
 of - the company, including that of its branch office(s), and
 explaining all such transactions and
Such books shall be kept on accrual basis and as per the double entry system of accounting
Note – Such BOA may be kept at such other place in India as BoD may decide. Inform RoC within 7
days of such decision – by filing a notice in writing (Form AOC -5) giving full address of such place.
Provided that – Companies may keep books in e-mode in prescribed manner.
Rule 3 – Manner of maintaining BoA & FS in e-form - Companies (Accounts) Rules, 2014:
 Such BOA in e-mode shall remain accessible in India at all times so as to be usable for
subsequent reference.
 Features of accounting software:
For FY commencing after 1/4/2023 – Every co. using accounting software for maintaining
BOA shall use only such software which has the following feature:
ensuring that audit creating an edit log of each

recording audit trail of
trail cannot be change made in BOA + date
every transaction and
disabled, and of such changes.
 BoA shall be retained completely in original format info. shall remain complete & unaltered.
 Info. received from branch office - not be altered + keep in manner depicting what was
originally received from the branches.
 Info. of such e-record should be capable of being displayed in legible form.
 There shall be proper system for storage, retrieval, display or printout of the e-records
 Such e-records shall not be disposed of or rendered unusable, unless permitted by law.
 Backup of such e-records shall be kept in servers physically located in India on daily basis.
 Co. shall intimate the following to RoC on an annual basis at time of filing FS: (No LIC)
Name of the internet protocol location of where BOA are maintained on
service (IP) address of the service cloud, such address as
provider service provider provider* provided by service provider
*Where service provider is located o/s India, name & address of person in control of BoA in
India
(2) Where a co. has branch office (India or o/s India), it shall be deemed to have complied with
provisions of BoA, if:
 proper BOA relating to transactions effected at branch office are kept at that office and
 proper summarized returns periodically are sent to company at its RO or other place as u/ss (1)
(3) BOA open for inspection for directors only:
BOA maintained within  open for inspection at RO or other place in India
India  by any members director
 during business hours
BOA maintained outside  Director shall furnish a request to co. setting out the full details
India of the financial info. sought and the period for which it is sought.
 Co. shall produce such info. to director within 15 days of date of
receipt of the written request.
 Such info shall be sought for by the director himself and not by or
through his power of attorney holder or agent or representative.
Note - Inspection of BoA of any subsy co. shall be done by person authorised by a Board resolution.
(4) Where inspection is made u/ss (3), officers and other employees of co. to give all assistance to the
person making such inspection.
(5) BOA to be kept in good order:

BOA pertaining to the period:
 not less than 8 FY immediately preceding a FY, or
 where company had been in existence for <8 yrs, w.r.t. all preceding years
together with vouchers relevant to any entry in such books of account shall be kept in good order.
Note – If investigation ordered – CG may direct that BoA may be kept for longer period.
(6) In case of contravention of such provision, following shall be responsible:

WTD in charge Any other person of co. charged
MD CFO
of finance by BoD with such duty
for a fine which shall not < Rs. 50,000 which may extend up to Rs. 5 lakhs
Note – This section majorly talks about books of accounts and books and paper. Although, FS is
mentioned in the first subsection, but details of FS is discussed in Sec 129 below.
Section 129: Financial Statement (FS)

(1) FS shall:
give a true and fair view of comply with the AS shall be in form as
state of affairs of the co notified u/s 133, and prescribed in Schedule III
Provided that the items contained in such FS shall be in accordance with the AS:
Provided further that nothing contained in this sub-section shall apply to:
insurance or other class of co. for which form of FS
electicity co.
banking co. specified in other Act
Provided also that FS shall not be treated as not disclosing a true and fair view of the state of
affairs of the company, merely by reason of the fact that they do not disclose:
In case of: Matters which are not required to be disclosed by:

Insurance co. Insurance Act, 1938, or IRDA Act, 1999
Banking co. Banking Regulation Act, 1949
Electricity co. Electricity Act, 2003
Governed by other law by that law
(2) At every AGM of co. – BoD shall lay before such meeting – FS for the FY
(3) Consolidated FS (CFS):
Where a co. has one or more subsy – Prepare CFS of the co. and all subsidiaries (in addition to FS)
in manner prescribed. Such CFS – Lay before AGM along with FS u/ss (2)
Provided that co. shall also attach along with its FS - a separate statement containing the salient
features of FS of its subsidiary, associates or JV in Form AOC - 1
Rule 6 Manner of Consolidation

CFS shall be made in accordance with provisions of Sch III + Applicable AS
Provided that - If a co. is not required to prepare CFS under the AS, it shall be sufficient if it
complies with provisions of CFS in Schedule III of the Act.
Provided further that - nothing in this rule shall apply w.r.t. prep of CFS if it meets ALL the
following:
i. it is wholly/partially owned subsidiary of another company and
 all its other members, including those not otherwise entitled to vote,
 having been intimated in writing and
 do not object to the company not presenting CFS
ii. securities are not listed or are not in the process of listing (in or outside India), and
iii. ultimate or any intermediate holding co. files CFS with the RoC in compliance with Ind AS
(4) Provisions applicable to preparation, adoption and audit of FS of holding company shall, mutatis
mutandis, apply to the CFS referred u/ss (3).
(5) Without prejudice to ss (1), where FS do not comply with AS, co. shall disclose in its FS:
deviation from AS reasons for deviation financial effects, if any, of such deviation
(6) CG may, on its own or on application by cos, exempt any class of companies from complying with this
section, if it is considered necessary in public interest.
(7) If company contravention this section, following shall be responsible:

WTD in charge Any other person of co. charged by
MD CFO
of finance BoD with such duty
or in absence of any officer mentioned above, all directors
Punishable with - Jail up to 1 year or fine Rs. 50,000 to Rs. 5 lakhs or BOTH
Section 129A. Periodical financial results
CG may, require such class or classes of unlisted companies, as may be prescribed:
prepare financial to obtain approval of file copy with RoC
results of the co. on BoD & complete within 30 days of
such periodical basis audit/limited review of completions of
and in prescribed such results in manner relevant period with
form; as prescribed; prescribed fees.
Section 130 - Re-opening of Accounts on Court’s or Tribunal’s Orders:

(1) A company shall not re-open it BOA and not recast its FS unless:
 An application to Court/Tribunal in this regard is made by:
CG Income Tax Auth. SEBI Other stat. body any person concerned
 And an order is made by court or Tribunal to this effect that:

o the relevant earlier accounts were prepared in a fraudulent manner, or
o the affairs of co. were mismanaged - casting doubt on reliability of FS
Provided that the court or Tribunal shall give notice to – CG, ITA, SEBI, etc. and consider their
representation, if any, before passing orders.
(2) Without prejudice to the provisions contained in this Act the accounts so revised or re-cast under
sub-section (1) shall be final.
(3) No order shall be made u/ss (1) for re-opening of BOA relating to a period earlier than 8 FY
immediately preceding current FY.
Provided that, on investigation, where CG has directed for keeping BOA for period > 8 years, the
BOA may be ordered to be re-opened within such longer period.
Section 131 - Voluntary Revision of FS or Board’s Report (after Tribunal’s approval):

Notice Representation Order Accounts
Served Considered Passed Revised
(1) If it appears to directors of a co. that:

FS of co. do not comply with Sec 129 or BoD report do not comply with Sec 134,
they may prepare revised FS or BoD report:

 in respect of any of 3 preceding FY
 after obtaining approval of the Tribunal
 on an application made by the company in prescribed form and manner and
 a copy of the order passed by the Tribunal shall be filed with the Registrar:
Provided that Tribunal shall give notice to CG and ITA and shall consider their representation, if
any, made by that Government or the authorities before passing any order under this section.
Provided further that such revised FS or report shall not be prepared/filed more than once in a FY
Provided also that detailed reasons for revision of such FS or report shall also be disclosed in the
Board's report in the relevant FY in which such revision is being made.
(2) How much can you alter FS or report of previous FYs?

Where copies of previous FS or report have been sent out to members or delivered to Registrar or
laid before the Company in general meeting, the revisions must be confined to:
(a) correction w.r.t. which previous FS/report do not comply with provisions of sec 129 or 134; and
(b) the making of any necessary consequential alteration.
(3) CG may make rules relating to or provisions as to:

 How previous FS or report shall be supplemented by document indicating correction
 Function of company’s auditor in case of revised FS
 require the directors to take prescribed steps.
Note – Here, application will be made to Tribunal only. Courts (e.g., district court) cannot be involved.

A Ltd. applied to Tribunal for revising FS on Dec 2022. Such application was approved and revisions
were made. A ltd again applied in March 2023 for revision board report. Is such application valid?
Yes! The limit of once in a year is for each of these – FS and BoD report. As in Dec 2022, application
was made to revise FS, one application for revising Board report can be made.
Section 132 - Constitution of National Financial Reporting Authority

(1) CG may, notification, constitute NFRA to provide for matters w.r.t. accounting & auditing (A&A)
standards.
(2) Functions of NFRA: NFRA shall: [REQ-O]

a. Make Recommendation to CG on formulation & laying down of A&A policies and standards.
b. Monitor and Enforce compliance with A&A standards
c. Oversee Quality of service of professions associated with ensuring compliance of such
standards and suggest measures for improvement therein.
d. Such Other function as may be prescribed
(3) Constitution of NFRA:

 a chairperson – appointed by CG, having expertise in accountancy, auditing, finance or law, and
 such other members not > 15 consisting of part-time & full-time members as prescribed:
Each division of the NFRA shall be presided over by Chairperson or full-time Member authorised
by Chairperson. [Section 3A]
Section 3B - There shall be an executive body of the NFRA consisting of Chairperson and full-time
Members of such Authority for efficient discharge of its functions.
Such chairperson and members shall:

give declaration to CG regarding not associate with any audit firm (or
no conflict of interest or lack of related consultancy firm) during course
indepedence of such appt + 2 years after ceasing
(4) Powers to investigate: The NFRA shall:
(a) have power to investigate, either suo motu or on reference by CG into matters of professional
or other misconducts under CA Act, 1949
Provided that – where NFRA has initiated such investigation, no other institute shall initiate or
continue any proceedings in such matter.
(b) have same power as vested in civil court: [A IPC]
 Discovery and production of BoA and other docs at specified place & time;
 summoning and enforcing the attendance of persons and examining them on oath; and
 inspection of any books, registers and other docs. of co. at any place.
 issuing commissions for examination of witnesses or documents;
(c) where professional or other misconduct is proved, have the power to make order for:
(A) Imposing penalty: (B) Debarring the member/firm from:

 Individuals – Rs. 1 lakh to  Being appointed as an auditor or internal
5x of fees received auditor or any other assignment
 Firms - Rs. 5 lakhs to 10x  Performing any valuation u/s 247
of fees received for min. 6 months or such higher period (not >
10 years) as determined by NFRA
(5) Any person aggrieved by order of NFRA u/ss (4) – may prefer an appeal before Appellate Tribunal.
Additional points of NFRA:
Head office New Delhi

Meeting At any place in India as it may deem fit
Books of accounts Maintain in manner as prescribed in CG in consultation with C&AG
Audit C&AG
Annual Report Each FY, giving full account of its activities during FY
Forward to CG (annually)  Accounts as certified by C&AG
CG to lay these reports before  Auditor’s report thereon
each House of Parliament  Annual Repot
Rule 3 of NFRA Rules: Classes of companies or BC governed by NFRA:

NFRA may undertake investigation of auditors of following classes of companies and BC:
(a) companies whose securities are listed on any stock exchange in India or outside India;
(b) unlisted public companies having:
PUSC not less than T/O not less than outstanding loans, debentures and
500 crores, or Rs. 1,000 crore deposits of not less than Rs. 500 crores
as on the 31st of March of immediately preceding FY

(c) insurance cos., banking companies, electricity companies or companies governed by special Act.
(d) any BC or company or person, etc. – on a reference made to NFRA by CG in public interest
(e) BC incorporated outside India which is subsidiary or associate of any of the above mentioned
companies if the income or net worth of such subsidiary or associate company > 20% of
consolidated income or net worth of such above mentioned companies,
Every BC, (other than co. as defined in section 2(20)), formed in India, and governed under this rule
shall, within 15 days of appointment of an auditor u/s 139, inform NFRA in Form NFRA-1, the
particulars of the auditor so appointed.
Where PUSC or T/O or o/s loans fall below limit for 3 consecutive years – NFRA stops governing.
Section 133: CG to prescribe Accounting Standards (AS):
CG may prescribe AS or any addendum thereto, as recommended by ICAI, constituted u/s 3 of CA Act,
1949, in consultation with and after examination of recommendations made by NFRA
Provided that:
 Until NFRA is constituted u/s 132,
 the CG may prescribe the AS or any addendum thereto,
 as recommended by ICAI, in consultation with and after examination of recommendations by
National Advisory Committee on Accounting Standard (NACAS) constituted u/s 210A of
Companies Act, 1956 (previous law)
Section 134: Financial Statement, Board’s Report, etc.
(1) The FS, including CFS, shall be approved by the BoD before it is signed on behalf of BoD by:
 Chairperson of the co., if so authorized by BoD or else - 2 directors (1MD), AND
 CEO, CFO and CS
before it is submitted to auditor for his report thereon.
In case of OPC – Sign by one director only.
(2) Auditor’s report shall be attached to every FS.
(3) In the FS laid before company in GM, a BoD’s report shall be attached, which includes [FC WARM
Dividend Reserve 3 Policy]:
Web address where Directors's Details of fraud reported by
No. of board
AR u/s 92 has been responsibility auditors u/s 143(12) other
meetings
placed statement (DRS) than those reportable to CG
Statement on Explanation & comments on every qualifn, reservatn state of

declaration given by & adverse remark - by auditor in his report or by CS company’s
ID u/s 149(6) in practice in his secretarial audit report affairs
contracts and
particulars of loan, material change and commitments –
arrangements with
guarantee affecting fin. position of co. between
related parties u/s 188
investments u/s 186 end of FY and date of report
(Form AOC -2)
amount proposed the conservation of energy, tech

recommended amount
to be carried to absorption, forex earnings and outgo
of dividend
any reserve as prescribed
Policies on director’s
statement indicating development details of policy developed and
appointment and
& implementation of risk mgt. implemented on CSR initiatives
rem. (if covered u/s
policy and risks identified therein taken during the year
178)
in case of listed company and every other public company having such PUSC >= Rs.
Other matters as
25 crores - statement indicating the manner in which formal annual evaluation of
may be prescribed
performance of Board, its Committees and of individual Directors has been made
Provided that – where above disclosures are made in FS already, such disclosures shall be referred
to instead of repeating it in BoD’s report
Provided further that where policies are made available on company's website, if any, it shall be
sufficient compliance of the requirements under such clauses if the salient features of the policy
and any change therein are specified in brief in the Board's report and the web-address is
indicated therein at which the complete policy is available
Note – In case of OPC or Small co, CG may prescribe an abridged Board's report.
(4) BoD report shall, in case of a OPC, mean a report containing explanations or comments by the Board
on every qualification, reservation or adverse remark or disclaimer made by auditor in his report.
(5) Director’s responsibility statement shall state that: [AS AP Care GC Control Law]
a. in preparation of the annual accounts, the applicable AS had been followed along with proper
explanation relating to material departures;
b. Directors had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view of
the state of affairs of the company at the end of FY and of the P&L for that period;
c. Directors had taken proper and sufficient care for:

 the maintenance of adequate accounting records as per this Act
 safeguarding the assets of the co. and
 for preventing and detecting fraud and other irregularities;
d. the Directors had prepared the annual accounts on a going concern basis; and
e. the Directors, in the case of a listed company, had laid down internal financial controls (IFC) to
be followed by the company and that such IFC are adequate and were operating effectively.
Explanation: For the purposes of this clause, the term “IFC” means:
 the policies and procedures adopted by the company
 for ensuring the orderly and efficient conduct of its business,
 including adherence to company’s policies, the safeguarding of its assets, the prevention and
detection of frauds and errors, the accuracy and completeness of the accounting records,
and the timely preparation of reliable financial information;
f. the Directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively.
(6) Sign on BoD report – Chairman, if authorised. Or else, 2 directors (1 MD)

Note – In case where in the co. there is only 1 director, FS shall be signed by such 1 dir. (e.g. OPC)
(7) A signed copy of every FS, including CFS, if any, shall be issued, circulated or published along with:
any notes annexed to or forming part of such FS auditor’s report Board's report
(8) If a company is in default in complying with this section:

Co. liable to penalty of Rs. 3 lakhs; OID shall be liable to penalty of Rs. 50,000
Rule 8: Matters to be Included in Board’s Report
1. BoD’s report shall be prepared based on standalone FS of the co. and shall report on highlights
of performance of subsy, associates and JVs and their contribution to overall performance of co.
2. Additionally, BoD report shall include following information:

(i) the financial summary or highlights;
(ii) the change in nature of business, if any;
(iii) details of directors or KMP who were appointed or have resigned during the year;
(iiia) statement regarding opinion of Board w.r.t. integrity, expertise and experience of
independent director appointed during the year”.
(iv) names of cos. which have become or ceased to be its subsy, JV or assoc. during the year;
(v) the details relating to deposits, covered under Chapter V of the Act:
a. accepted
b. remaining unpaid or unclaimed as at the end of the year;
c. any default in repayment of deposits or interest thereon during the year and if so,
number of such cases and the total amount involved:
at the beginning of year max during the year at the end of year
(vi) the details of deposits which are not in compliance with requirements of Chapter V;
(vii) details of significant and material orders passed by regulators/courts/tribunals impacting
the going concern status and company's operations in future;
(viii) details in respect of adequacy of internal financial controls w.r.t. FS
(ix) a disclosure, as to whether maintenance of cost records as specified by the CG u/s 148, is
required and accordingly such accounts and records are made and maintained,
(x) a statement that the co. has complied with provisions relating to the constitution of
Internal Complaints Committee under the Sexual Harassment related Act
(xi) details of application made or any proceeding pending under IBC during the year along with
their status as at the end of the financial year.
(xii) the details of difference between amount of valuation done at time of one time settlement
and the valuation done while taking loan from the Banks or FI along with reasons thereof.
Section 135: Corporate Social Responsibility (CSR):

Read with Companies (Corporate Social Responsibility Policy) Rules, 2014
(1) Every co. having:

 net worth >= Rs. 500 crores, or
 turnover >= Rs. 1,000 crore or During immediately preceding FY
 net profit >= Rs. 5 crores
shall constitute CSR Committee consisting of 3 or more Directors (at least 1 independent director)
Note:
1. Where co. is not required to appoint ID u/s 149(4), CSR committee shall have 2 or more dir.
2. Pvt. co. having only 2 directors shall constitute its CSR Committee with 2 such directors
3. If any of the limits not met for 3 consecutive FYs – not required to comply with Sec 135.
4. Net profit to be consider as per Sec 198 i.e., Profit Before Tax.
Exemption – Where the amount to be spent by co. u/ss (5) <= Rs. 50 lakhs, CSR committee shall not
be applicable. In such case, function of CSR committee to be discharged by BoD.
(2) Board report u/s 134 to disclose the composition of CSR committee
(3) Function of CSR committee:

 Formulate and recommend to board CSR policy indicating activities to be undertaken
 Recommend amount of expenditure to be incurred on such activity
 Monitor CSR policy of company
(4) The Board of such company shall:

(a) after taking into account recommendations of CSR Committee, approve CSR Policy and disclose
contents of thereof in its report and place it on website.
(b) ensure that activities as are included in CSR Policy are undertaken by the company.
(5) The Board shall ensure that the company spends, in every FY,
 at least 2% of average net profits
 made during the 3 immediately preceding FY or
in pursuance of its CSR Policy
Note - Where co. has not completed 3 FY since incorp. – Take average of such immediately
preceding FYs (i.e., Jitne saal tha, unka average lo)
Provided that the co. shall give preference to the local area and areas around it where it operates,
for spending the amount earmarked for CSR activities:
Provided further that, if a co. fails to spend such amount:

 Board shall specify reasons for not spending the amount in its report u/s 134, and
 unless the unspent amt. relates to any ongoing project, transfer it to a Fund specified in
Schedule VII, within 6 months of expiry of the FY
Provided that if co. spends excess amounts, such company may set off such excess amount against
the requirement to spend for such number of succeeding FY and in such manner as prescribed.
As per Rules
Where co. spends an amount in excess of requirement, such excess amount may be set off
against requirement to spend u/ss (5) up to immediate succeeding 3 FY provided that:
(i) such excess amt. shall not include the surplus arising out of such CSR activities
(ii) the Board of the company shall pass a resolution to that effect.
(6) Transfer ongoing project to special account:

Amt. remaining unspent u/ss (5), pursuant to any ongoing project, undertaken by a co. in pursuance
of its CSR Policy, shall be:
 transferred within 30 days from end of FY to a special account to be opened in any
scheduled bank to be called “Unspent Corporate Social Responsibility Account”, and
 spent it in pursuance of obligation towards CSR Policy within 3 FY from date of such trf,
 failing which, the co. shall trf. the same to a Fund (as per sch VII) within 30 days from
date of completion of the 3rd FY.
(7) Default u/ss (5) or (6):
Co. shall be liable to penalty – Lower of: OID shall be liable to penalty – Lower of:
 2x of (amt. required to be transferred to  1/10th of (amt required to be transferred
the Fund or unspent CSR account) or to the Fund or unspent CSR account) or
 Rs. 1 crore  Rs. 2 lakhs
Companies (Corporate Social Responsibility Policy) Rules, 2014
Rule 2: Definitions
“CSR” means the activities undertaken by a Company in pursuance of its statutory obligation u/s 135
as per provisions contained in these rules, but shall not include the following, namely: (SPEL FB)
Sponsorship Political Employee Law Foreign Business
(i) activities undertaken in normal course of business of the company.
Provided that any company engaged in research and development (R&D) activity of new vaccine,
drugs and medical devices in their normal course of business may undertake R&D activity of
new vaccine, drugs and medical devices related to COVID-19 for FY 2020-21 to 2022-23
subject to the conditions that:
(a) such R&D activities is carried out in collaboration with institutes mentioned in Sch VII;
(b) details of such activity to be disclosed separately in Annual report on CSR (in BoD report);
(ii) any activity undertaken by co. outside India except for training of Indian sports personnel
representing any State or UT at national level or India at international level;
(iii) contribution of any amount directly or indirectly to any political party u/s 182 of the Act;
(iv) activities benefitting employees of the company;
(v) activities supported by cos. on sponsorship basis for marketing benefits for its products;
(vi) activities carried out for fulfilment of any other statutory obligations under any other law
“Administrative overheads” means:

 expenses incurred for ‘general mgt. and admin’ of CSR functions
 but shall not include expenses directly incurred for designing, implementation, monitoring, and
evaluation of a particular CSR project or programme.
“Net profit" means net profit of a company as per its FS, but shall not include the following, namely:
(i) profit arising from overseas branch(es) of co., whether operated as separate co. or not; and
(ii) any dividend received from other companies in India, which are covered under and complying with
prov. of sec 135 of the Act.
“Ongoing Project” means a multi-year project undertaken in fulfilment of its CSR obligation having
timelines <= 3 years excluding FY in which it was commenced, and shall include such project that was
initially not approved as a multi-year project but whose duration has been extended beyond one year
by the board based on reasonable justification.
Rule 3: Applicability:
Every co. including its holding, or subsidiary and a foreign company u/s 2(42) having branch office or
project office in India which fulfils criteria u/s 135(1) shall comply with section 135.
Provided that net worth, turnover and net profit of a foreign co. shall be computed as per Balance
sheet and P&L prepared as per Section 381 and 198 of the Act
Provided further that a co. having any amount in its unspent CSR account u/s 135(6) shall constitute
CSR committee and comply with CSR Provisions [Amendment]
Rule 4. CSR Implementation

(1) Board shall ensure that CSR activities are undertaken by the company itself or through:
(a) Sec 8 company, or a registered public trust or a registered society:
 established by the co., under Income Tax Act, either singly or along with other co., or
 established by CG or State Government; or
 having an established track record of at least 3 years in undertaking similar activities
(b) any entity established under an Act of Parliament or a State legislature; or
(2) Every entity, covered above, who intends to undertake any CSR activity, shall register itself with
the CG by filing form CSR-1 with Registrar.
Form CSR-1 shall be signed and submitted electronically and shall be verified digitally by CA, CS
or CMA in practice.
On submission thereof, a unique CSR Registration Number shall be generated automatically.
(3) A company may engage international organisations for designing, etc. of the CSR projects or
programmes as per its CSR policy as well as for capacity building of their own personnel for CSR.
(4) A company may also collaborate with other companies for undertaking projects in such a manner
that CSR committees of respective cos. are in a position to report separately on such project.
(5) Board shall satisfy itself that funds so disbursed have been utilised for purposes as approved
and CFO (or person responsible for fin. mgt.) shall certify to the effect.
(6) In case of ongoing project, Board shall monitor the implementation of the project w.r.t. the
approved timelines and year wise allocation and shall be competent to make modifications, if any,
for smooth implementation of the project within the overall permissible time period.
Rule 5: CSR committee:

CSR Committee shall formulate and recommend to the Board, an annual action plan in pursuance of
its CSR Policy, which shall include the following, namely:
(a) the list of CSR projects that are approved to be undertaken in areas specified in Sch VII;
(b) the manner of execution of such projects;
(c) the modalities of utilisation of funds and implementation schedules for the project;
(d) monitoring and reporting mechanism for the projects; and
(e) details of need and impact assessment, if any, for the projects undertaken by the company:
Provided that Board may alter such plan at any time during FY, on recommendation of its CSR
Committee, based on the reasonable justification to that effect.
Rule 7: CSR Expenditure:

(1) Board shall ensure that admin overheads shall not exceed 5% of total CSR expense for the FY.
(2) Any surplus arising out of CSR activities shall:
 not form part of business profit of a co. and
 shall be ploughed back into same project or
 trf. to Unspent CSR Account and spent as per CSR policy and annual action plan or
 trf. to a Fund specified in Sch VII, within 6 months of expiry of the FY.
(3) Covered above.

(4) CSR amount may be spent for creation or acquisition of a capital asset, which shall be held by:
(a) section 8 company, or a Registered Public Trust or Registered Society, having charitable
objects and CSR Registration Number; or
(b) beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
(c) a public authority:
Provided that any capital asset created prior to commencement of this Rule, shall within 180 days
(may seek further 90 days) comply with this provision.
Rule 8: CSR Reporting

(1) Board Report pertaining to any FY shall include an “Annual report on CSR”
(2) In case of a foreign co., the Balance Sheet u/s 381 of the Act, shall contain annual report on CSR
** Annual Report on CSR containing particulars specified in Annexure I or II, as applicable.
(3) Impact assessment:

(a) Every co. having avg CSR obligation >= Rs. 10 crores in 3 immediately preceding FYs, shall:
 undertake impact assessment,
 through an independent agency,
 of their CSR projects having outlays >= Rs. 1 crore, and
 which have been completed not less than 1 year before undertaking the impact study.
(b) Impact assessment reports - Place before BoD & annexed to the annual report on CSR.
(c) Co. undertaking impact assessment may book expense towards CSR for that FY, not
exceeding higher of [Amendment]:
 2% of total CSR exp. for that FY or
 Rs. 50 lakhs
Rule 12: [Amendment]

Every co. covered under Sec 135(1) shall furnish a CSR report in Form CSR-2 to Registrar for the
preceding FY (2020-21) and onwards as an addendum to Form AOC-4 or AOC-4 XBRL or AOC-4
NBFC (Ind AS), as the case may be.
Provided that for the preceding FY (2020-21), Form CSR-2 shall be filed separately on or before
31dt March June 2022, after filing Form AOC-4, etc.
Additional clarifications on CSR:

1. Read Sch VII from ICAI Module Pg. 9.44 (not imp. from exam point of view. Just read casually)
2. Entries in Sch VII is to be interpreted liberally.
3. CSR activity should be taken up as a project. One-off events such as marathon won’t qualify
4. Expense incurred by foreign holding co. for CSR activities in India will qualify as CSR spend of the
Indian subsidiary if, it is routed through Indian subsy.
COVID related clarifications:
1. Following spendings are eligible CSR activity:
 COVID-19 related activities
 Creating health infrastructure for COVID Care
 Establishment of medical oxygen generation and storage plants
 Manufacturing and supply of Oxygen concentrators, ventilators, cylinders and other medical
equipment for countering COVID-19
 COVID- 19 vaccination for persons other than the employees and their families
 Carrying out awareness campaigns or public outreach campaigns on COVID vaccination program.
 Setting up makeshift hospitals and temporary COVID Care facilities
 For the activities related to “Harr Ghar Tiranga” campaign, such as mass scale production and
supply of the National Flag, outreach and amplification efforts and other related activities
2. Companies including Government co. may undertake the activities or projects or programmes using
CSR funds, directly by themselves or in collaboration as shared responsibility with other cos.
Section 136: Right of member to copies of audited financial statement.

(1) A copy of following documents laid before GM:
FS CFS, if any auditor’s report every other doc. required to be attached to FS
shall be sent to every:
member trustee for DH all other entitled person
not less than 21 days before the date of meeting.
Provided that if copies of docs are sent less than 21 days before date of meeting, it shall be
deemed to have been duly sent if it is so agreed by members:
If company has share capital: If company has no SC:
Majority in numbers + 95% of PUSC 95% of total VP
Provided further that, in case of listed co., this sub-section shall be deemed to be complied with if:
 copies of docs. are made available for inspection at RO during working hours for 21 days before
date of meeting.
 a statement containing salient features of such docs or copies thereof is sent to member, DT
of DH in Form AOC-3 not less than 21 days before date of meeting unless SH ask for full FS.
Note – Cos. which are reqd to comply with Cos (Ind AS) Rules, 2015 shall send in Form AOC – 3A
Mode of sending FS: In case of all:

such public companies having:
listed companies and - NW of more than Rs. 1 crore and
- Turnover of more than Rs. 10 crore
the financial statements may be sent:
Shareholding is in: Mode
Demat form + Email IDs registered with depository E-mode
Otherwise than demat form but members have E-mode
positively consented in writing to e-mode
In all other cases Dispatch of physical copies through any
recognised mode of delivery u/s 20
Provided - Listed co. shall also place its FS including CFS, and other docs on its website
Provided also that every listed company having subsidiary(ies) shall place separate audited accounts
w.r.t. each of subsidiary on its website, if any.
Provided also that a listed company which has a subsidiary incorporated outside India (herein
referred to as “foreign subsidiary (F-sub)”):
where such F-sub is statutorily required to where F-sub is not required to get FS
prepared CFS under law of the country of audited and hence does not get FS
incorporation - this proviso is complied with if audited - holding Indian listed co. may
such CFS is placed on website of listed co. place unaudited FS on website**
**Where FS is in language other than English, place a translated copy in English on the website.
(2) Co. shall allow members/DT to inspect the documents stated u/ss (1) at its RO during biz. hours.
Provided that every co. having subsy shall provide a copy of separate audited or unaudited FS, as
prepared in respect of each of its subsidiary to any member of the company who asks for it.
(3) Default in complying with this section:

Co. - Liable to penalty of Rs. 25,000 ; OID – Liable to penalty of Rs. 5,000
Section 137: Copy of FS to be filed with RoC:
FS + CFS + All documents to be attached to FS
Duly adopted in AGM Not adopted in AGM AGM is not held
File within 30 days of AGM. File with ROC within

File with RoC RoC to take them as
within 30 30 days of last date
provisional for holding AGM along
days
with reasons for not
When adopted in adjourned
holding AGM
AGM - File within 30 days
of said AGM
(1) Filing FS with ROC:

 A copy of FS, including CFS, along with all docs required to be attached to FS,
 duly adopted at AGM shall be
 filed with RoC within 30 days of date of AGM
 in the following forms:
AOC 4 Financial Statement and other documents
AOC 4 CFS Consolidated Financial Statement
AOC-4-NBFC (Ind AS) NBFCs to file FS and other documents with the Registrar
AOC-4 CFS NBFC (Ind AS) NBFCs to file CFS with the Registrar
Note – Along with such FS, co. shall attach accounts of its subsy which have been incorporated
outside India and which have not established their place of business in India.
Where FS is not adopted in AGM or adjourned AGM:

 Such unadopted FS shall be filed with RoC within 30 days of date of AGM.
 RoC to take it in records as provisional till FS are filed after adoption in the adjourned AGM
Where FS gets adopted in adjourned AGM – File with RoC within 30 days of such adjourned AGM
In case of OPC:
File copy of FS duly adopted by its member within 180 days from closure of FY
In case of foreign subsidiary not having audited FS – Send unaudited FS to RoC

In case of a subsy incorporated o/s India (foreign subsidiary) which is not required to get FS
audited under law of such country and does not get it audited – Holding Indian company to file
unaudited FS + declaration to such effect to ROC
Where such FS is in language other than English – translated copy to be sent.
(2) Where AGM is not held, FS + Documents duly signed shall be filed with RoC within 30 days of last
date before which AGM should have been held.
(3) Co. fails to file copy of FS:

 Co. – Liable to penalty of Rs. 10,000 + Rs. 100/days – Max. Rs. 2 lakhs
 Person responsible - Liable to penalty of Rs. 10,000 + Rs. 100/days – Max. Rs. 50,000
Person responsible –
 MD and CFO, or
 in absence of MD and CFO - any other director charged with such responsibility
 in absence of any such director – all directors.
Additional Points:
1. Following class of companies shall file FS and other documents in e-form AOC-4 XBRL:
co. listed in India and Co. having Co. having Cos. required to prepare
their Indian subsy PUSC >= 5 cr. turnover >= 100 cr. FS as per Ind AS
Note – Once you come in purview of above limit, continue to file AOC-4 XBRL.
2. NBFCs, Housing finance cos. engaged in business of banking or insurance sector – exempted from
filing FS.
Section 138: Internal Audit

Prescribed class of cos. shall appoint internal auditor (CA or cost accountant, or such other
professional as may be decided by the Board) to conduct internal audit of co’s functions and activities
Rule 13: Companies required to appoint Internal Auditor:

Following companies shall be required to appoint an internal auditor (who can be either individual or
partnership firm or BC), namely:
(a) every listed company;
(b) every unlisted public company having:
outstanding loans or
PUSC >= Rs. T/O >= Rs. 200 outstanding deposit
borrowings from banks or
50 crores crores >= Rs. 25 crores
PFIs exceeds Rs. 100 cr
during preceding FY At any point during preceding FY
(c) every private company having:

outstanding loans or borrowings from
T/O >= Rs. 200 crores
banks or PFIs exceeds Rs. 100 cr
Who shall become an internal auditor – Either individual or partnership firm or body corporate - CA or
cost accountant, or CS or such professional as may be decided by the Board to conduct internal audit
What is his role? - To conduct internal audit of the functions and activities of the company
Note – An internal auditor may or may not be an employee.

If an unlisted co. has outstanding loan of Rs. 100 crores exactly, in such case, the provision of internal
auditor shall not apply as the law says – outstanding loan and borrowings from banks or financial
institution exceeding Rs. 100 crore or more. So exact 100 crore will not be covered here.
[Section 139 to 148]
Sec Name Sec Name

139 Appointment of Auditors 144 Auditor not to Render Certain Services
Removal, Resignation of Auditor and
140 145 Auditor to Sign Audit Reports, etc
Giving of Special Notice
Eligibility, Qualifications and
141 146 Auditors to Attend GM
Disqualifications of Auditors
142 Remuneration of Auditors 147 Punishment for Contravention
Powers and Duties of Auditors and CG to Specify Audit of Items of Cost in
143 148
Auditing Standards Respect of Certain Companies
Form Section Purpose

ADT-1 139 Form to inform the Registrar regarding the appointment of auditor by the co.
ADT-2 140 Application for removing the auditor before the expiry of their term by the co.
ADT-3 140 Notice of resignation of auditor
ADT-4 143(12) Form to report any suspected fraud by the auditor to the Central Government
Chapter 10 – Audit and Auditors

Section 139: Appointment of auditors
(1) Appointment of subsequent auditors and tenure:
 Every co. shall, at the first AGM appoint an individual or firm or BC as an auditor,
 who shall hold office from conclusion of that meeting till conclusion of 6th AGM and,
 thereafter, till conclusion of every 6th AGM, and
 the manner of selection of auditor shall be as may be prescribed.
Rule 3: Manner of selection of Auditor:

(1) Who will select the auditor?
In case where a Competent Responsibility: [MCQ]
company is: Authority:
Required to Such AC shall -  take into consideration Qualification and
constitute AC u/s 177 experience (Q&E) of proposed indv/ firm
Not required to the Board shall -  whether such Q&E are Commensurate with
constitute such AC size and requirements of the co.
 while considering appointment, have regard
to any order or pending proceeding related
to professional Misconduct before ICAI or
court.
(2) AC/Board may call for such other info. form proposed auditor as it may deem fit.
(3) Recommendation of name of auditor: Subject to sub-rule (1):

 Where co. is required to constitute AC – Such AC shall recommend name of indv/firm as
auditor to Board for consideration.
 In other cases – Board shall consider and recommend an indv/firm as auditors to
members in AGM for appointment.
(4) If Board agrees with AC recommendation – further recommend to member in AGM for appt.
(5) If Board disagrees – Refer back to AC for reconsideration citing reasons for disagreement
What if AC decides not to reconsider original recommendation?

If AC, after considering reasons by Board, decides not to reconsider its original recom.:
Board shall record reasons for its if Board agrees with

disagreement with AC and send recommendations of AC, it shall
its own recom. for consideration place the matter for consideration
of members in AGM; and by members in AGM.
Before such appointment, the following shall be obtained from the auditor:

 Written consent of such auditor to such appointment
 Certificate from the auditor stating that: [LET the Proceedings begin!]
indv/firm is Eligible for appt. proposed appt. is as proposed appt. is within
and is not disqualified under per the Terms Limits laid down by or
this Act or CA Act provided in this Act under authority of the Act
list of Proceedings against auditor/audit firm or any partner thereof pending w.r.t.
professional matters of conduct, as disclosed in the certificate, is true and correct
Note – Certificate shall also indicate whether auditor satisfied criteria u/s 141
On appointment of auditor: The company shall:

 inform the auditor concerned of his or its appointment, and
 file notice (Form ADT-1) of appt. with RoC within 15 days of meeting in which auditor is appt.
Explanation: For this Chapter, “appointment” includes reappointment
NFRA Rules :
Every BC [other than co. u/s 2(20)] formed in India + governed by NFRA shall inform NFRA
(Form NFRA–1) w.r.t., the particulars of auditor appt. u/s 139 (1) within 15 days of such appt.
(2) Tenure, re-appointment and cooling period of an auditor:

(For other companies, there is no tenure/cooling period)
The following companies (except OPC and small cos):
Listed UPC having Private Ltd. cos. All companies having public borrowings
co. PUSC >= 10 cr having PUSC >= 50 cr from bank/PFI or public deposit >= 50 cr
shall not appoint or re-appoint:

(a) an individual as auditor for > 1 term of 5 consecutive years; and
(b) an audit firm as auditor for > 2 terms of 5 consecutive years:
Cooling period:
individual auditor who has completed Audit firm which has completed it
his term under clause (a) term under clause (b)
shall not be eligible for re-appointment as auditor in the same company for 5
years from the completion of his term
Incoming auditors should not have common partner with retiring auditors:
As on date of appt., no audit firm having common partner(s) to other audit firm, whose tenure has
expired immediately preceding the FY, shall be appt. as auditor of same company for 5 years:
Note - Nothing contained in this sub-section shall prejudice right of the company to remove an
auditor or the right of the auditor to resign from such office of the company.
Rule 6: Manner of rotation of auditor:

1. AC shall recommend to Board – Name of indv/firm who may replace incumbent auditor on
expiry of term.
2. Where co. is required to constitute AC – Board shall consider recommendation of AC
In other cases – Board shall itself consider rotation of auditors and recommend for appt. of
next auditors by members in AGM
3. For the purpose of the rotation of auditors-

(i) in case of an auditor, period for which indv/firm has held office as auditor prior to
commencement of the Act shall be taken into account for calculating 5 or 10
consecutive years.
(ii) the incoming auditor shall not be eligible if it is associated with outgoing auditor under
the same network of audit firms.
Note – “Same network” includes firms operating under same Brand name or Trade name or
common Control (BTC)
4. Where co. has appointed 2 or more indv/firms or a combination thereof as joint auditors,
co. may follow rotation of auditors in such a manner that both or all of the joint auditors, as
the case may be, do not complete their term in the same year.
Explanation: For rotation of auditors:

(a) break in term for 5 continuous years shall be considered as fulfilling requirement of
rotation;
(b) if a partner, who is in charge of an audit firm and also certifies the FS, retires from said
firm and joins another firm of CAs, such other firm - ineligible to be appt. for 5 years.
Refer Illustration in ICAI Module Pg. 10.10 and 10.11 (not imp. as it was transition provision)
(3) Rotation of partners internally in an audit firm:

Subject to the provisions of this Act, members of a company may resolve to provide that:
(a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such
intervals as may be resolved by members; or
(b) the audit shall be conducted by more than one auditor.
(4) CG may, by rules, prescribe manner in which cos. shall rotate their auditors – Mentioned above
(5) Auditor in case of a Govt co. (Subsequent auditor)

 Notwithstanding anything contained in sub-section (1),
 in case of Govt. co. or any other co. owned/controlled (directly or indirectly) by CG or SG or
partly by CG and partly by SG,
 the C&AG shall, in respect of a FY, appoint an auditor duly qualified to be appt.,
 within 180 days from commencement of FY,
 who shall hold office till conclusion of AGM.
(6) First auditor in case of Company (other than Govt co.)

 Notwithstanding anything contained u/ss (1),

 the first auditor of a co. (other than Govt. co) shall be appointed by BoD
 within 30 days from the date of registration of co. and
 in case of failure of BoD to appoint such auditor - Inform the members, who shall within 90
days at an EGM appoint such auditor and
 such auditor shall hold office till conclusion of the first AGM.
(7) Auditor in case of a Govt co. (First auditor)

 Notwithstanding anything contained in sub-section (1) or (5),
 in case of Govt. co. or any other co. owned/controlled (directly or indirectly) by CG or SG or
partly by CG and partly by SG,
 the first auditor shall be appointed by C&AG
 within 60 days from the date of registration of the co. and
 in case C&AG fails to appt. such auditor within 60 days - BoD shall appt. within next 30 days;
 and in case of failure of BoD to appoint within next 30 days - Inform the members, who shall
within 60 days at an EGM appoint such auditor and
 such auditor shall hold office till conclusion of the first AGM
(8) Any casual vacancy in the office of an auditor shall:

Other than Govt co: Fill casual vacancy:
i.e., Co. whose accounts  By BoD – 30 days
are NOT subject to  If vacancy due to resignation – Appt. to be approved at GM
audit by C&AG (Ordinary Resolution) within 3 months of BOD recommendation.
 Hold office till conclusion of next AGM
Co. whose accounts are C&AG to fill vacancy within 30 days.
subject to audit by C&AG Failure of C&AG – BoD to fill vacancy – Next 30 days
(9) Re-appointment of retiring auditor:

A retiring auditor may be re-appointed at an AGM, if:
(a) he is not disqualified for re-appointment;
(b) he has not given a notice unwillingness to be re-appointed in writing; and
(c) SR has not been passed at that meeting:
appt. some other auditor or providing expressly that he shall not be re-appointed.
(10) Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to
be the auditor of the company.
(11) Where a co. is required to constitute AC u/s 177, all appointments, including the filling of a casual
vacancy of auditor shall be made after taking into account recommendations of such committee.
Note: For this chapter:

1. ”Appointment” includes reappointment
2. Word "firm" shall include a LLP incorporated under LLP Act, 2008
3. NFRA Rules related explanation has been intentionally skipped from notes. Student may consider
reading NFRA Rules Pg. 10.16 to 10.18 of ICAI mat.

1. Can an auditor be appointed for 4 years? – No. He cannot be appointed for less than 5 years.

2. Can an audit firm be appointed as internal auditor during cooling period? – Yes! There is no such
restriction. The only restriction is – such audit firm cannot be appointed as statutory auditor.
Section 140: Removal, resignation of auditor and giving of special notice

(1) Removal of auditor:
Auditor appointed u/s 139 may be removed from his office before expiry of his term only by:
 SR of the company
 After obtaining previous approval of CG in manner prescribed
Provided that – Before any such action, auditor shall be given ROBH
Rule 7 – Manner of removal of auditor:

 Application to CG shall be made within 30 days of BoD resolution in Form ADT-2.
 Co. to hold GM for passing SR within 60 days of receipt of approval of CG
BoD Resolution 30 CG Approval (ADT-2) 60 GM for SR
(2) Resignation of auditor:

 Auditor who has resigned shall,
 file within 30 days from date of resignation,
 a statement in Form ADT-3 with the company and Registrar and C&AG (only in case of Govt. co)
 indicating reasons and other facts as may be relevant with regard to his resignation.
(3) Contravention: Auditor fails to comply with provision u/ss (2) – Liable to:
Penalty of – Lower of Rs. 50,000 or an amount equal to remuneration of auditor
In case of continuing failure - Further penalty of Rs. 500/day after the first – Max Rs. 2 lakhs
(4) Special notice for removal of auditor and representation thereon by auditor
(i) Special notice (u/s 115) shall be required for resolution at AGM for:
a. appointing a person other than a retiring auditor, or
b. providing expressly that retiring auditor shall not be re-appointed,
except where retiring auditor has completed consecutive tenure of 5/10 years.
(ii) On receipt thereof - Company shall forthwith send a copy thereof to the retiring auditor.
(iii) Where notice is given + retiring auditor makes representation in writing (not exceeding a
reasonable length) and requests its notification to members, the company shall, unless the
representation is received by it too late for it to do so:
(a) in notice given to members, state the fact that representation is made; and
(b) send copy of representation to every member,
(c) if copy thereof couldn’t be sent (cause it was received too late or due to cos. default):
 auditor may require the representation to be read out at the meeting (without
prejudice to his right to oral representation)*
 a copy of such representation shall be filed with the Registrar:
*Tribunal may order not to send representation:

 On application by co/aggrieved person, if Tribunal is satisfied that rights are being abused,
 it may order that such copy may not be sent, and representation need not be read out

(5) Tribunal may order to change auditor:
 Tribunal may:
suo motu application by CG application by person concerned
 if it is satisfied that auditor has (directly or indirectly):

o acted in a fraudulent manner or
o abetted or colluded in any fraud by, or in relation to, Co., its Directors or officers,
 it may, by order, direct the company to change its auditors
Instead of directing the company, Tribunal may itself change auditor:

If application is made by CG and Tribunal is satisfied that any change of the auditor is required it
shall, within 15 days of receipt of such appln, make an order that:
 he shall not function as an auditor and
 the CG may appoint another auditor in his place:
Debarring the auditor: An auditor (indv/firm) against whom final order has been passed under this
section shall:
 not be eligible to be appt. as an auditor of any co. for 5 years from passing of such order and
 the auditor shall also be liable for action u/s 447.
Note – In case of a firm, the liability shall be of the firm and that of every partner (s) who acted in a
fraudulent manner or abetted or colluded in any fraud by, or in relation to, the co., dir. or officers.
Section 141: Eligibility, qualifications and disqualifications of auditors

1. Eligibility:
A person shall be eligible for appt. as auditor only if he is a CA.
A firm where majority (not all) of partners are CAs practicing in India – Such firm may be appt.
2. Who will sign on behalf of firm: Where a firm including LLP is appointed as an auditor - only the
partners who are CAs shall be authorised to act and sign on behalf of the firm.
3. Disqualification: Following persons shall not be eligible for appt. as auditor of a company, namely:
(a) Body Corporate (other than LLP)
(b) an officer or employee of the company;
(c) a person who is a partner or employee of an officer or employee of the company;
(d) a person who, or his relative or partner:
(i) is holding any security of CASH OR SOH.
Except - Relative may hold security in company or ASH of face value not > Rs. 1 lakh;
Note – If relative acquires security above Rs. 1 lakh, corrective action to maintain limits if
Rs. 1 lakh shall be taken by the auditor within 60 days of such acquisition or interest
(ii) is indebted to the CASH or SOH > Rs. 5 lakhs

(iii) has given guarantee or provided security w.r.t., indebtedness of any third person to CASH
or SOH > Rs. 1 lakh
(e) a person or a firm who, whether directly or indirectly, has business relationship with CASH or
SOH or associate of such holding co.;
Business Relationship: Any transaction entered into for a commercial purpose, except:
(i) transactions which are in nature of prof. services permitted to be rendered by auditor;

(ii) transactions in OCOB of company at arm’s length price
(f) person whose relative is a director or is in employment of company as a director or KMP;
(g) a person who is in full time employment elsewhere, or,

a person or a partner of a firm holding appointment as its auditor, if such persons or partner is
at the date of such appointment or reappointment holding appointment as auditor of > 20 cos;
While calculating the limit of 20 companies:
1. Exclude OPC, small co., dormant company and private cos. having PUSC < Rs. 100 crores
2. In case of firm, the limit of 20 shall be for each partner. i.e., limit of 20 is per person.
(h) a person who has been convicted by a court of an offence involving fraud and a 10 years has not
elapsed from the date of such conviction;
(i) a person who, directly or indirectly, renders any service referred to in section 144 to the
company or its holding company or its subsidiary company or its associate.
4. Where person appt. as an auditor incurs any disqualifications mentioned u/ss (3) after appt., he
shall vacate his office and it shall be deemed to be a casual vacancy in the office of the auditor.
Section 142: Remuneration of auditors

1. Remuneration to be fixed at GM or in such manner as may be determined in such GM.
For first auditor – BoD to fix remuneration.
2. Remuneration shall, in addition to fee payable to an auditor, include:
 expenses incurred in connection with such audit and
 any facility extended to him
but does not include any rem. paid to him for any other service rendered at request of co.

Can engagement letter be signed without stating fees and merely stating that fees shall be decided
mutually? – Yes! Such engagement letter is valid.
Section 143: Power and duties of auditors and auditing standards

(1) Power of auditors: Every auditor of a company shall:
 have right of access at all times to BoA of co., whether kept at RO or at any other place &
 be entitled to require from officers such info & explanation (I&E) as may be necessary for
performance of his duties, and
 have right to access records of all its subsidiary or associate cos. in so far as it relates to the
consolidation of its FS with that of its subsy and associate cos.
Inquiry by auditor: Amongst other matters, auditor to inquire into following matters:
(a) whether loans & advances on the basis of security have been properly secured and whether
term thereof is prejudicial to interest of co/members.
(b) whether transactions which are represented merely by book entries are prejudicial to interest
of co.
(c) whether asset of co. as consist of shares, debentures or other securities have been sold at
price < purchase price (except in case of investment co. or banking co.)
(d) whether loans & advances have been shown as deposits.

(e) whether personal expenses have been charged to revenue account
(f) where it is stated in books that shares have been allotted for cash:
 whether cash is actually received, and
 if no cash is received, whether BoA and Balance sheet is correct, regular and no misleading
(2) Auditor Report: Auditor shall make a report to members of the co.:
Report on: After taking into account: Express opinion:

1. Accounts  Provision of this Act  To the best of his info. and
examined.  AS and SAs knowledge
2. Every FS laid  Matters to be included in  Accounts and FS give true &
before co. in GM Auditor’s report. fair view of state of co’s
affairs at end of FY.
1. Accounts examined
(3) Auditor’s report shall also state:
(a) Info. and explanations (I&E):
 Whether sought and obtained all I&E which to best of his knowledge is necessary for audit
 If not, details thereof and effect of such info. on FS
(b) Books of accounts:

 whether, in his opinion, proper BoA as per law have been kept by co. (as per his examination)
 proper returns adequate for his audit have been received from branches not visited by him;
(c) Branch auditor’s report

 whether report on BoA of any branch office audited u/ss (8) by person other than
company’s auditor has been sent to him and
 manner in which he has dealt with it in preparing his report;
(d) whether BS and P&L dealt with in report are in agreement with BOA and returns;
(e) whether FS comply with the AS;
(f) observations or comments of auditors on financial transactions or matters which have any
adverse effect on the functioning of the company;
(g) whether any director is disqualified u/s 164(2);
(h) any qualification, reservation or adverse remark relating to maintenance of accounts and other
matters connected therewith;
(i) whether co. has adequate IFC w.r.t FS in place and operating effectiveness of such controls
Reporting on IFC shall not apply to a private co (92+137):

a. which is OPC or small co.
b. which has T/O < Rs. 50 crores and aggregate borrowing from bank/PFI < Rs. 25 crores
(j) such other matters as may be prescribed

Rule 11: Other matters to be included in Auditor’s report:
Include their views and comments on the following matters, namely:
(i) whether co. has disclosed impact of pending litigations on its financial position in its FS;
(ii) whether co. has made provision (as per law or AS) for material foreseeable losses, if
any, on long term contracts including derivative contracts;
(iii) whether there is any delay in transferring amt. to IEPF by the company.
(iv) Omitted
(v) Ultimate Beneficiaries:
i. Whether mgt. has represented that – no funds has been advances or lent to any
person (intermediary) with an understanding that such intermediary shall lend such
funds on behalf of co. to ultimate beneficiary or provided any guarantee or security on
behalf of such ultimate beneficiary.
ii. Whether mgt. has represented that – no funds has been received by the company from
any person (“Funding parties”) with an understanding that the co. shall lend such funds
to ultimate beneficiary or provided any guarantee or security on behalf of such
ultimate beneficiary.
iii. Nothing has come to the notice of auditor that caused him to believe that above
representations contain any material misstatement.
(vi) whether the dividend declared or paid during the year is in compliance with sec 123.
(vii) W.r.t. FY commencing on or after 1/4/22, whether company has used accounting
software for maintaining BoA which:
 has a feature of recording audit trail facility and
 same has been operated throughout the year for all transactions recorded therein &
 audit trail feature has not been tampered with and
 audit trail has been preserved as per statutory requirements for record retention.
(4) Where any matter included in audit report is answered in negative or with a qualification, the
report shall state the reasons therefor.
(5) In case of Govt co. or Govt controlled companies:

 C&AG to appoint auditor u/s 139(5) or 139(7)
 Direct such auditor the manner in which accounts are to be audited, and
 Auditor to submit a copy of audit report to C&AG which will include:
Directions issued by C&AG Action taken thereon Impact on accounts and FS
(6) C&AG may order supplementary audit.

C&AG shall, within 60 days of receipt of audit report, have right to:
(a) conduct supplementary audit of FS by person as he may authorise in this behalf.
For the purpose of such audit, authorized person may require info. as C&AG may direct.
(b) comment upon or supplement such audit report.
Provided that any such comments by C&AG shall be:
 sent by co. to every person entitled to copies of audited FS u/s 136 and
 also be placed before AGM along with audit report.

(7) C&AG may, if he considers necessary, by an order cause test audit to be conducted of the BoA of
such co. covered u/s 139 (5) or (7)
(8) Branch office:
Branch is in India: Branch is outside India:

Where co. has a branch office, BOA of branch Where co. has a branch office outside
office shall be audited either by: India, BoA shall be audited either by:
 Auditor appointed for co. (Co’s auditor), or  Company’s auditor, or
 By any other person qualified for appt. as  accountant or any other person duly
auditor of co. & appointed as such for qualified to act as auditor as per law
branch audit of that country.
Note:
 Duties and power of company’s auditor w.r.t. branch audit shall be as per Sec 143(1) to (4)
 Branch auditor to prepare report on BoA of branch examined by him and send it to Co’s auditor
 Co’s auditor shall deal with such report in his report in manner as he considers necessary.
(9) Every auditor shall comply with the auditing standards (SAs).
(10) CG may prescribe SAs or any addendum thereto, as recommended by ICAI, constituted u/s 3 of
CA Act, 1949, in consultation with and after examination of recommendations made by NFRA
Provided that – Until such SAs are notified, SAs notified by ICAI shall be deemed SAs
(11) CG may, in consultation with NFRA direct that auditor’s report may include such other matters as
may be specified.
(12) Reporting of Fraud by Auditor:

 If an auditor of a co.,
 in course of performance of his duties as statutory auditor,
 has reasons to believe that an offence of fraud, involving individually amount >= Rs. 1 crore,
 is being committed against the co. by its officers or employees,
 the auditor shall report the matter to CG.
Report to CG as under:
Inform Auditor to report matter to AC or BoD immediately (not > 2 days) of his knowledge
AC/BoD seeking reply within 45 days
Forward On receipt of reply - Auditor to forward his report + AC/BoD reply + his comments
to CG thereon to CG within 15 days of reply.
In case of no reply – Forward his report + note that details were forwarded to
AC/BoD for which no reply received (within 15 days)

Mode The report shall be sent to:
 Secretary, MCA in a sealed cover
 by Registered Post with acknowledgment due (RPAD), or speed post
 followed by an email in confirmation of the same
The report shall be sent:

 in Form ADT - 4
 on letter-head of auditor containing address, email and phone number
 and signed by auditor with his seal ,and indicate membership no.
Fraud < Auditor shall report the matter to AC u/s 177 or BoD immediately (not > 2 days) of
Rs. 1 cr. his knowledge and report the following matter [NAP]:
Nature of fraud with description Approx. amount involved Parties involved
Of each fraud reported above, following details shall be disclosed in BOD report:
Nature of fraud with description Approx. amount involved
Parties involved, if remedial action not taken remedial action taken
Above provision to apply mutatis mutandis to cost auditor & secretarial auditor.
(13) Report fraud can never lead to contravention of duty (E.g., - confidentiality):
No duty of an auditor shall be regarded as having been contravened by reason of his reporting the
matter u/ss (12) if it is done in good faith.
Penalty:
If any auditor, cost accountant or CS in practice do not comply with provisions of fraud u/s (12):
(a) in case of a listed company, be liable to a penalty of Rs. 5 lakh; and
(b) in case of any other company, be liable to a penalty of Rs. 1 lakh

If some of the employee did fraud of Rs. 10 crores on the co. and such fraud was brought to the
notice of the auditor by the management of the co., would auditor be required to report it to CG?
No. As per sec 143(12), only fraud that the auditor identified himself in course of audit is to be
brought to attention of CG. Here, the auditor just need to report to AC/BoD. Not CG.
Section 144: Auditor not to render certain services.

An auditor appointed under this Act shall:
 provide to co. only such other services as are approved by AC/BoD but
 which shall not include following services (directly or indirectly) to CASH, namely [KIS A BF OM]:
accounting and book design and implementation of actuarial
internal audit
keeping services; any financial info. system services
investment advisory and rendering of outsourced management others as

banking services financial services services prescribed
Explanation: For this section, “directly or indirectly” shall include rendering of services by auditor:

(i) auditor is individual - Either himself or relative or any other connected person or through any
entity in which he has significant influence or control or trade mark or brand is used by him;
(ii) auditor is firm - Itself or through partners or through its parent, susby/asso. entity or any other
entity in which firm/partner has significant influence or control, or trade mark or brand is used
by firm/partners.

 Can statutory auditor be appointed as GST auditors or tax auditors? Absolutely, yes.
 Can statutory auditor be appointed as cost auditors? No. Specifically restricted u/s 148
Section 145: Auditor to sign audit reports, etc.
Auditor shall sign QOC on financial transactions having adverse effect on

Auditor’s report or functioning of co. mentioned in auditor’s report shall be:
sign/certify any other  Read out before co. in GM.
doc. as per sec 141(2), and  Open to inspection by any member
Section 146: Auditors to attend general meeting

 Notices related to GM shall be forwarded to auditor.
 Auditor shall, unless otherwise exempted by co., attend such GM (himself or through auth.
representative who is qualified to be an auditor).
 Auditor shall have right to be heard on such business which concerns him as auditor.
Section 147. Punishment for contravention

(1) Contravention u/s 139 to 146:
Co. – Fine – Rs. 25,000 to Rs. 5 lakhs
OID – Fine – Rs. 10,000 to Rs. 1 lakh
(2) Auditor contravenes u/s 139, 144, 145:

Fine – Rs. 25,000 to Lower of – (Rs. 5 lakhs or 4x remuneration of auditor)
If such contravention is knowingly or wilfully to deceive co./SHs or crs or tax authorities:

Imprisonment – Up to 1 year AND
Fine – Rs. 50,000 to Lower of – (Rs. 25 lakhs or 8x remuneration of auditor)
(3) Where auditor is convicted u/ss (2), he is liable to:

a. refund remuneration
b. pay damages to co/stat bodies or members or creditors for loss arising out of incorrect or
misleading statements made in his audit report
(4) CG shall, by notification, specify any statutory body or officer for ensuring prompt payment of
damages u/ss (3) and such person specified shall, on payment file report with CG
(5) In case of an audit firm, it is proved that partner(s) of such firm:

 acted in a fraudulent manner or
 abetted/colluded in any fraud against co.
the liability (civil or criminal) as per this Act or other law, for such act shall be of partners
concerned of the audit firm and of firm - jointly and severally

In case of criminal liability, punishable with only imprisonment – Only concerned partners liable
Section 148: CG to specify audit of items of cost in respect of certain companies

(1) CG to order maintaining cost record:
 Notwithstanding anything contained in this Chapter,
 the CG may, by order, companies engaged in production of prescribed goods or providing
prescribed services,
 direct that particulars relating to utilisation of material or labour or other items of cost as may
be prescribed shall also be included in BoA
Provided that, prior to passing such order for companies regulated under special act, CG shall
consult the concerned regulatory body.
(2) CG may order audit of such cost records:

If CG is of opinion, that it is necessary to do so, it may, by order, direct audit of such cost records
of such companies having net worth or turnover of such amount as may be prescribed.
(3) Manner of appointment and remuneration of cost auditor:
In case of cos. required to constitute AC: In case of other companies:

(a) On recommendation of AC, BoD to appoint an (a) BoD to appoint an individual/firm of
individual/firm of cost accountant in practice. cost accountant in practice
(b) Remuneration thereof shall be recommended (b) Remuneration thereof, considered
by AC, considered and approved by BoD and and approved by BoD and ratified
ratified by SH by SH subsequently.
Important note – Auditor u/s 139 of the company cannot be appointed as auditor of cost records.
Such cost audit shall comply with cost auditing standards as issued by ICAI (Cost) + CG
(4) Audit u/s 148 is in addition to audit u/s 143
(5) Qualifications, disqualifications, rights, duties and obligations applicable to auditors under this
Chapter shall, so far as may be applicable, apply to a cost auditor
Report on the audit of cost records shall be submitted by Cost Accountant to BoD of the company.
(6) Forward cost auditor’s report to CG along with explanation of reservations:

Co. shall within 30 days from date of receipt of cost audit report - Furnish CG with such Report +
Full I&E on every reservation or qualification contained therein.
(7) On receipt of report + info. u/ss (6), if CG is of opinion that further I&E is necessary - it may call
for such further I&E and co. shall furnish the same within time specified by CG
(8) Default under this section:

Co. and OID – Punishable u/s 147 (1)
Cost auditor – Punishable u/s 147 (2) to (4)

Unit Chapter Name
1 Contract of Indemnity and Guarantee
2 Bailment and Pledge
3 Agency
Unit 1 – Contract of Indemnity And Contract Of Guarantee

[Sec 124 – 147]
Section 124: Definition of contract of indemnity:

Contract by which one party by conduct of promisor
is called contract
promises to save the other himself or by any
of indemnity
from losses caused other person
Mode of contract of indemnity:

 Express i.e., person expressly promises to compensate.
 Implied i.e., when it is to be inferred from conduct of parties or circumstance of the case
Contract of indemnity must fulfil essentials valid contract:

Offer and Intention to create legal competency to Free
consideration
acceptance obligation contract consent
lawful agreement not exprresly terms of agreement - not

capable of performance
object declared void vague
Example of contract of indemnity:

Mukku, a SH of a co. lost his share certificate. He applied for the duplicate. The company agreed to
issue the same on the term that Mukku will compensate co. against the loss where any holder produces
the original certificate. Here, there is contract of indemnity between Mukku and the co.

1. Loss occasioned by an accident not caused by any person, or an act of God/ natural event, is not
covered in contract of indemnity.
2. A contract of Fire Insurance or Marine Insurance is always a contract of indemnity. But there is no
contract of indemnity in case of contract of Life Insurance (due to lack of contingency)
Section 125: Rights of indemnity-holder when sued:

The promisee/indemnity-holder in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from promisor/indemnifier:
(1) All damages which he may be compelled to pay in any suit w.r.t. matter to which indemnity applies
(2) All cost which he may be compelled to pay in bringing or defending any suit provided:
 he did not contravene the orders of promisor, and
 acted as a prudent man would act if there were no contract of indemnity.
Chapter 1 – Indian Contract Act

(3) all sums which he may have paid under terms of any compromise of any such suit provided
compromise:
 was not contrary to orders of promisor, and
 was one promisee would have prudently made in the absence of such contract.
When does the liability of an indemnifier commence?

Although the Act, is silent here, on basis of judicial pronouncements it can be stated that liability of an
indemnifier commences as soon as liability of indemnity-holder becomes absolute and certain.
Section 126: Contract of Guarantee (COG):

A contract of guarantee is a contract to perform the promise made or discharge the liability, of a third
person (principal debtor) in case of his default.
3 parties involved in a COG:

Surety – Person who gives guarantee.
Principal Debtor (PD) - person in respect of whose default the guarantee is given.
Creditor- person to whom the guarantee is given.
Example
When A requests B to lend Rs. 10,000 to C and guarantees that C will repay the amount within the
agreed time and that on C falling to do so, he (A) will himself pay to B, there is a COG. Here, B is the
creditor, C the principal debtor and A the surety.
Debtor (C) Loan Given (C1) Creditor (B)
Indemnity contract (implied) (C2)

Guarantee Given (C3)
Surety (A)
In a COG, there are 3 contracts in effect:

(i) A principal contract (of loan) between the principal debtor and the creditor (C1).
(ii) A secondary contract between the creditor and the surety (C3).
(iii) An implied contract of indemnity between surety and debtor (C2) whereby debtor is under an
obligation to indemnify the surety; if the surety is made to pay or perform.
Essential feature of contract of guarantee:
Principal Debt Consideration Existence of liability No misrepresentation or concealment
Writing not necessary (Can be oral) Joining of the other co-sureties
1. Principal debt - Purpose of a guarantee being to secure the payment of a debt, the existence of
recoverable debt is necessary. If there is no principal debt, there can be no valid guarantee.
2. Consideration:
 Like every other contract, a COG should also be supported by some consideration.

 A guarantee without consideration is void.
 There is no need for a direct consideration between surety and creditor.
As per Section 127:

 Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.
 Past consideration is no consideration for the COG.
 Even if debtor is incompetent to contract, the guarantee is valid. i.e., debtor can be minor.
 But, if surety is incompetent to contract, the guarantee is void.
Examples:
 B requests A to sell goods to him on credit. A agrees to do so provided C will guarantee payment
thereof. C promises the payment in consideration of A ‘s promise to deliver the goods. As per
Section 127, there is a sufficient consideration for C’s promise. Therefore, the COG is valid
 A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in
default of B. The agreement is void.
3. Existence of a liability: There must be an existing liability or a promise whose performance is

guaranteed. Such liability or promise must be legally enforceable by law and not time barred.
4. No misrepresentation or concealment (section 142 and 143):

Any guarantee obtained by means of:
 Misrepresentation by creditor or with his knowledge
 Keeping silence as to material circumstance
is invalid.
Example: A engages B as clerk to collect money on his behalf. B fails to account for some of his
receipts, and A, then calls upon him to furnish security for his duly accounting. C gives his guarantee
for B’s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards make default.
The guarantee is invalid.
5. Writing not necessary: Sec 126 expressly declares that a guarantee may be either oral or written
6. Joining of the other co-sureties (Section 144):

Where a person gives a guarantee upon a contract that creditor shall act upon it only when another
person has joined in it as co-surety, the guarantee is not valid if that other person does not join.
Types of Guarantee:

Specific Guarantee Continuing Guarantee
- Extends to single debt/specific - Extends to a series of transaction
transaction - Surety's liab continues until revocation of
- Surety's liab. discharged when debt is guarantee or discharge of all transactions entered
paid into
Example - A guarantees payment to B of Example –

price of 5 bags of rice to be delivered by
 Guarantee given in favor a person employed
B to C and to be paid in a month.
for collecting monthly rentals on behalf of
B delivers 5 bags to C. C pays for them.
landlord.
This is contract for specific guarantee as
 A guarantees payment to B for all the loan
A intended to guarantee only for payment
that he lends to C in the next 1 year. This is a
of price of 5 bags delivered one time.
continuing guarantee
Distinction Between a Contract of Indemnity and A Contract of Guarantee

[Competent Parties Liable NT to Act can Sue on Purpose]
Distinction Contract of Indemnity Contract of Guarantee
No. of parties to 2 parties - Indemnifier [promisor] and 3 parties - Creditor, principal
the contract the indemnified [promisee] debtor, and surety.
Nature of liability Indemnifier - primary and unconditional Principal debtor – Primary liability
Surety is secondary and conditional
Time of liability The liability of indemnifier arises only The liability arises only on non-
on happening of a contingency. performance of existing promise or
non-payment of an existing debt.
Time to Act The indemnifier need not act at the The surety acts at the request of
request of indemnity holder. principal debtor.
Right to sue third Indemnifier cannot sue a third party for Surety can proceed against principal
party loss in his own name as there is no debtor in his own right because he
privity of contract. Such a right would gets all the right of a creditor after
arise only if there is an assignment in discharging the debts.
his favour.
Purpose Reimbursement of loss For the security of the creditor
Competency All parties must be competent Where minor is a debtor, the COG is
still valid.
Section 128: Surety’s liability:

The liability of the surety is co- extensive with that of PD, unless it is otherwise provided by contract.
Note –
 “Co-extensive with that of PD” means that surety is liable for what PD is liable.
 Liability of surety may be made less (not more) than debtor by express contract to that effect
 Where a debtor cannot be held liable on account of any defect in the document, the liability of the
surety also ceases.
 A creditor may choose to proceed against a surety first, unless there is an agreement to contrary
Example

A guarantees to B the payment of a bill by C, the acceptor. The bill is dishonored by C. A is liable not
only for the amount of the bill but also for any interest and charges which may have become due on it.
Section 132 – Liability of two person

 Where 2 persons contract with a 3rd person to undertake a certain liability (contract 1), and
 also contract with each other that one of them shall be liable only on default of other (contract 2),
 the third person not being a party to such contract,
 the liability of each of such two persons to the third person under the first contract (C1) is not
affected by the existence of the second contract (C2),
 although such third person may have been aware of its existence.
Example - A and B make a joint and several promissory note to C. A makes it, in fact, as surety for B,
and C knows this at the time when the note is made. The fact that A, to the knowledge of C, made the
note as surety for B, is no answer to a suit by C against A upon the note.
Discharge of surety:
By revocation of continuing COG By conduct of the creditor By invalidation of COG
By Revocation of a continuing COG:

By  The continuing guarantee may at any time be revoked by surety as to future
Notice transactions by notice to the creditors.
(Sec  Once it is revoked, the surety is not liable for any future transaction.
130)  However, he is liable for all the (past) transactions that happened before the notice
was given.
Note - A specific guarantee can be revoked only if liability to debtor has not accrued.
Example – A guarantees to B, to the extent of Rs. 100,000, that C shall pay all the bills
that B shall draw upon him. B draws the bill upon C. C accepts the bill. A gives notice of
revocation after the bill is drawn and accepted. C dishonors the bill at maturity. A is liable
upon his guarantee.
By  In absence of any contract to contrary,

Death  the death of surety operates as a revocation of a continuing COG as to future
(Sec transactions taking place after death.
131)  However, the surety’s estate remains liable for the past transactions which have
already taken place before the death of the surety.
By The surety under original contract is discharged if a fresh contract is entered into either
Novation between the same parties or between the other parties, the consideration being the
(Sec 62) mutual discharge of the old contract
Revocation by conduct of creditors:

By variance in terms of contract By release/discharge of debtor
creditor compounds with, gives time creditor’s act or omission impairing

to or agrees not to sue p.debtor surety’s eventual remedy
(a) By variance in terms of contract (Section 133):

Where there is any variance in terms of contract between PD and creditor without surety’s consent,
it discharges surety in respect of all transactions taking place subsequent to such variance
Example - A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C
contract, without A’s consent, that B’s salary shall be raised, and B will also be liable for losses on
overdrafts. B allows a customer to overdraw, and bank loses money. A is discharged from his
suretyship by variance made without his consent and is not liable to make good this loss.
Note -
Variation which is not substantial/material or beneficial to surety will not discharge him:
In M.S Anirudhan v Thomco’s Bank Ltd, the surety guaranteed repayment of loan provided by bank
to PD of only upto Rs. 25,000. Subsequently, since bank was willing to provide loan only upto Rs.
20,000, PD reduced amount to Rs. 20,000 in guarantee form and, without intimation to surety, gave
it to the bank which was then accepted. On default by the PD, the court held that the surety’s
liability was not discharged as the alteration was beneficial to him and not substantial.
(b) By release or discharge of PD (Sec 134): The surety is discharged if the creditor:
 enters into a fresh/ new contract with PD by which the PD is released, or
 does any act or omission, the legal consequence of which is the discharge of PD.
Example - A contracts with B for a fixed price to build a house for B within a stipulated time, B
supplying necessary timber. C guarantees A’s performance of the contract. B omits to supply the
timber. C is discharged from his suretyship
(c) when creditor compounds with, gives time to, or agrees not to sue, PD [Sec 135]:
A contract between creditor and PD, by which the creditor makes a composition with, or promises to
give time to, or to not sue, PD - Discharges the surety, unless surety assents to such contract
Cases where surety is not discharged:

i. Surety not discharged when agreement made with third person to give time to PD [Sec 136]
Example: C, the holder of an overdue BOE drawn by A as surety for B, and accepted by B,
contracts with M to give time to B. A is not discharged.
ii. Creditor’s mere forbearance to sue PD does not discharge surety [Sec 137]
Example: B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a
year after the debt has become payable. A is not discharged from his suretyship.
(d) Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy [Section 139]:
 If creditor does any act which is inconsistent with rights of the surety, or
 omits to do any act which his duty to the surety requires him to do, and
 eventual remedy of the surety himself against PD is thereby impaired,
 the surety is discharged.
In a case before the Supreme Court of India, “A bank granted a loan on the security of the stock in
the godown. The loan was also guaranteed by the surety. The goods were lost from godown on

account of the negligence of the bank officials. The surety was discharged to the extent of the
value of the stock so lost.” [State bank of Saurashtra V Chitranjan Rangnath Raja]
Example - A puts M as apprentice to B and gives a guarantee to B for M’s fidelity. B promises on his
part that he will, at least once a month, see that M make up the cash. B omits to see this done as
promised, and M embezzles. A is not liable to B on his guarantee.
By invalidation of COG:
a) Guarantee obtained by misrepresentation invalid [Section 142]:
Any guarantee which has been obtained by means of misrepresentation made by creditor, or with his
knowledge and assent, concerning a material part of the transaction, is invalid.
b) Guarantee obtained by concealment invalid [Section 143]:

Any guarantee which creditor has obtained by means of keeping silence as to material circumstances
is invalid.
c) Guarantee on contract that creditor shall not act on it until co-surety joins (Section 144):
Where a person gives a guarantee upon a contract that creditor shall not act upon it until another
person has joined in it as co- surety, the guarantee is not valid if that other person does not join.
Rights of surety:
Right of subrogation
Against PD
Right to indemnity
Right to security
Rights of Surety
Against creditor Right to set off
Right to share reduction
Against the co-sureties Right to contribute
(a) Right against PD

i. Rights of subrogation (Sec 140):
 Where, a guaranteed debt has become due, or default of PD to perform a guaranteed
duty has taken place,
 the surety, upon payment or performance of all that he is liable for,
 is vested with all the rights which the creditor had against the PD.
 This right is known as right of subrogation.
i.e., when surety makes payment of guaranteed debt, he steps into the shoes of the creditor.
ii. Implied promise to indemnify surety (Sec 145):

 In every COG, there is an implied promise by the PD to indemnify the surety.
 The surety is entitled to recover from PD whatever sum he has rightfully paid under the
guarantee, but not sums which he paid wrongfully.
Example - B is indebted to C, and A is surety for the debt. C demands payment from A, and on
his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so,
but is compelled to pay the amount of the debt with costs. He can recover from B the amount

paid by him for costs, as well as the principal debt.
(b) Right against the Creditor

i. Surety’s right to benefit of creditor’s securities (Sec 141):
 A surety is entitled to the benefit of every security which creditor has against the PD at
the time when the contract of suretyship is entered into,
 whether the surety knows of the existence of such security or not;
 and, if the creditor loses, or, without the consent of the surety, parts with such security,
 the surety is discharged to the extent of the value of the security.
Example - C advances to B, his tenant, Rs. 2 lakh on guarantee of A. C has also a further security
for the Rs. 2 lakh by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent,
and C sues A on his guarantee. A is discharged from liability to amt. of value of furniture.
ii. Right to set off:

If the creditor sues the surety, for payment of PD’s liability, the surety may have the benefit
of the set off, if any, that the PD had against the creditor.
iii. Right to share reduction:

The surety has right to claim proportionate reduction in his liability if the principal debtor
becomes insolvent.
(c) Rights against co-sureties

“Meaning of Co-sureties - When the same debt or duty is guaranteed by two or more persons, such
persons are called co-sureties”
(a) Co-sureties liable to contribute equally (Sec 146):

 Equality of burden is the basis of Co-suretyship.
 All the co-sureties (whether under same or different contracts and whether with or without
the knowledge of each other),
 the co-sureties in the absence of any contract to the contrary,
 are liable, as between themselves, to pay each an equal share of the whole debt, or of that part
of it which remains unpaid by the principal debtor.
(b) Liability of co-sureties bound in different sums (Sec 147):

The principal of equal contribution is, however, subject to the maximum limit fixed by a surety
to his liability. Co-sureties who are bound in different sums are liable to pay equally as far as the
limits of their respective obligations permit.
Example:
A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in
the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of 4,00,000 rupees, conditioned
for D’s duly accounting to E.
Case 1 - D makes default of Rs. 3,00,000. A, B and C are each liable to pay 1,00,000 rupees.
Case 2 - D makes default of Rs. 4,00,000; A is liable to pay Rs. 1,00,000, and B and C Rs. 1,50,000 each.
Case 3 - D makes default of Rs. 7,00,000. A, B and C have to pay each the full penalty of his bond
UNIT 2 – BAILEMENT AND PLEDGE
Section 148: Definition of Bailment:

Delivery of goods by upon a contract they shall be returned/disposed
one person to another that, when purpose as per the directions of person
for some purpose, is accomplished, delivering them
Parties to bailment:
Bailor – Person delivering the goods Bailee – Person to whom goods are delivered
Examples of Bailment:
Delivery of car for repair Giving cloth to tailor for stiching
Goods given to a friend for his own use for free Goods given to courier co. for carriage
Essential elements of Bailment:
Contract Consideration Delivery Purpose Possession Return of Goods
(a) Contract:
 Contract may be expressed or implied
 No consideration is necessary to create a valid contract of bailment
(b) Delivery of Goods:

 Bailment is only for movable goods. It is never for immoveable property or money
 Delivery of possession of goods can be:
o Actual – Goods are physically handed over (e.g., delivery of car)
o Constructive - Delivery is made by doing anything that has effect of putting goods in
possession of bailee or his authorised person (e.g., delivery of keys of the car)
(c) Purpose - Goods are delivered for some purpose. The purpose may be express or implied.
(d) Possession:
 In bailment, possession of the goods changes (by actual or constructive delivery)
 Ownership of the goods remains unchanged.
 Where a person is in custody without possession, he does not become a bailee.
(E.g., servant having possession of master’s good does not become bailee)
(e) Return of goods:

 Bailee is obliged to return good physcially to Bailor
 Return in the same form as given or may be altered as per bailor’s direction
 The bailee cannot deliver some other goods, even not those of higher value

1. Money kept in bank locker is not bailment. Because, neither can money be bailed, nor is this a case
of valid delivery.

2. Ornaments deposited in bank locker – Is it bailment? – No. It is merely in custody of the banker.
The possession (technically) is still with the owner thereof.
3. Parking a car but keeping the key with yourself – Doesn’t amount to handing over possession. Hence,
not bailment
4. Seizure by custom authorities – Yes bailment.
Types of Bailments:
 Gratuitous bailment: (free of charge)
o One when provider of service does it gratuitously i.e. free of charge.
o Such bailment would be either for exclusive benefits of either bailor or bailee (not both)
 Non-gratuitous bailment:
o where both the parties get some benefit i.e. bailment for the benefit of both bailor & bailee
Duties of bailor:
Disclose known bear necessary bound to accept the
Indemnify bailee
facts expenses goods (when returned)
Duties Gratuitous (free) Non – Gratuitous

Bailor to disclose  Bound to disclose fault of which bailor is  If bailed for hire,
faults in goods bailed aware and materially interfere with use bailor responsible
(Breaks not working thereof or extraordinary risk whether or not he was
fine in car or  Non disclosure – Bailor to pay damages aware of existense of
dangerous horse) arising directly due to such faults such fault.
Hyman & Wife v. Nye & Sons

A hired a carriage + horses + driver for a specific journey from B. During
the journey, a bolt of the carriage broke away and the carriage became
upset. A was injured. Held that - B was liable to pay damages to A for injury
sustained by A. Court observed - it was bailor’s duty to supply a fit carriage.
Pay Necessary and/or Where, the goods are kept or are to be worked Bailor is liable to pay the
Extra Ordinary upon by bailee free of cost - Bailor shall repay necessary extraordinary
expenses to bailee – Necessary expense (petrol) and expenses ONLY incurred
extra ordinary exp. (engine repair) by the bailee (E.g. Toll)
Indemnify bailee for Bailor must compensate bailee for loss or Will depend on the term of
premature damage suffered by bailee that is in excess of bailment between bailor
termination the benefit received, (in case of gratuitous and bailee
bailment is terminated before expiry)
Indemnify any loss Bailor to indemnity any loss that bailee may sustain by reason that bailor
was not entitled to make the bailment, or to receive back the goods
Bound to receive  It is the duty of bailor to receive back the goods when bailee returns
goods them after expiry of time or purpose of bailment is accomplished.
 If bailor refuses - when offered at the proper time - the bailee can
claim compensation for all necessary expenses incurred for safe custody

Duties of bailee: [CUT MAR]
take reasonable No unauth. Return the return not set up
No mixing
care use goods accretion adverse title
Duties Details
Take Bailee is bound to take as much care of such goods as a man of ordinary prudence
reasonable would, under similar circumstances, take care of his own goods of the same bulk,
care of quality and value, as the goods bailed.
bailed goods
Note - The bailee, in the absence of any special contract, is not responsible for
loss, destruction or deterioration of the thing bailed, if he has taken reasonable
amount of care of it.
Example:
1. If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments in his own locker
at his house along with his own ornaments. If all ornaments are lost/stolen - ‘Y’
will not be responsible for loss to ‘X’.
2. If ‘X’ specifically instructs ‘Y’ to keep them in a bank, but ‘Y’ keeps them at his
residence, then ‘Y’ would be responsible for the loss
Not make If the bailee makes any use of the goods bailed, which is not according to the T&Cs
inconsistent of bailment, he is liable to compensate bailor for any loss or destruction of goods
or (E.g., Speed Limit of Car – 50km/hr)
unauthroised
use Note - Bailment contract is voidable at option of the bailor, if bailee does not use
the goods according to the T&Cs of bailment
Not to mix Mixing with consent of bailor:

the goods If Bailee, mixes the goods bailed with his own goods, with consent of bailor, both
parties shall have an interest in proportion to their respective shares in the
mixture thus produced.
Mixing without consent of bailor:

 Separable – Where mixed goods can be separated or divided, property in goods
remains in the parties respectively. However, bailee is bound to bear expense
of separation and damage arising from mixture (E.g., mixing colored cottons)
 Impossible to separate – Where it is impossible to separate the goods bailed

from other goods and to deliver them back, the bailor is entitled to be
compensated by the bailee for loss of the goods (E.g., Flour, Rice, etc.)
Return the It is the duty of bailee to return, or deliver as per bailor’s directions, the goods
goods bailed without demand, as soon as bail period expired or purpose accomplished.
Bailee responsible for damage:

If, by default of the bailee, the goods are not returned, delivered or tendered at

the proper time, bailee is responsible to the bailor for any loss, destruction or
deterioration of the goods from that time. (E.g., school books given for binding)
Return an In absence of any contract to the contrary, the bailee is bound to deliver to the
accretion bailor, or according to his directions, any increase or profit which may have
from Goods accrued from the goods bailed. (E.g. Cow/Calf)
No Adverse Bailee must not set up a title adverse to that of the bailor. He must hold the goods
Title on behalf of and for the bailor. He cannot deny the title of the bailor
Rights of Bailor: [TDS WC]

Terminate Demand back goods Claim
File suit against File Suit for
Bailment is voidable any time (in case of Compensation (for
any Wrong doer enforcement
if bailee acts gratuitous unauthorized use
(see below) of duties or mixing)
inconsitent with T&C bailment)
Rights of Bailor (and Bailee) against wrong doers:

 If a 3rd person wrongfully deprives bailee of use/possession of goods bailed or does them any injury,
 bailee is entitled to use remedies as owner might have used in like case if no bailment was made; &
 either bailor or bailee may bring a suit against a third person for such deprivation or injury.
Note - Whatever is obtained by way of relief or compensation in any such suit shall, as between bailor
and bailee, be dealt with according to their respective interests
Rights of Bailee: (relate with Duties of Bailor)

Right to: Details
Deliver goods to one of Unless there is contract to contrary, bailer can deliver to any of the joint
the joint bailors bailors.
Example: A, B and C are joint owners of harvesting machine. They bailed
to to D. D may return the machine to A, B or C after expiry of term.
Indemnity (in case of For any loss arising to him by reasons that bailor was not entitled to make
bailor’s defective title) bailment or to receive back goods or to give directions in respect to them
Claim compensation (for  Bailee is entitled to receive compensation from bailor for loss caused
faulty goods) due to failure of bailor to disclose any faults in goods known to him.
 If bailment is for hire, the bailor will be liable to compensate even

though he was not aware of the existence of such faults
Claim necessary expense In case of gratuitous bailment - bailor shall repay to bailee necessary and
extraordinary exp. incurred by him for purpose of bailment.
Apply to Court to Decide If goods bailed are claimed by person other than bailor, bailee may apply
the Title to the Goods to the court to stop its delivery and to decide the title to the goods.
(E.g., TV given on rent on summer vacation by dealer. Mr. X claimed that
the TV was his and he had given to dealer for repair. Bailee can apply)
Lien Discussed later

Summary da Summary (of Rights and Duties):
(To be made in class)
Termination of Contract of Bailment (COB): [DND PE tha phone]

Expiry of If goods were given for stipulated period, COB to terminate after expiry of such
period period.
Fulfilment of If goods were given for specific purpose, COB to terminate after fulfilment of
Purpose that purpose
By Notice  Where bailee acts in a manner inconsistent with T&C of COB – Bailor can
terminate such COB by giving notice to bailee
 Gratuitous bailment can be terminated anytime by giving notice to bailee (but,
compensate bailee to extent of loss in excess of benefit)
By Death Gratuitous bailment terminates upon death of either bailor or bailee.
Destruction of COB is terminated if subject matter of bailment is destroyed or there is a change

subject matter is in nature of goods which makes it impossible to be used for purpose of bailment
Finder of Lost Goods: [Sec 168 and 169]

 A person who finds some goods which do not belong to him, is called the finder of the goods.
 It is duty of finder of goods to find true owner and surrender goods to him.
Can finder sue the real owner?

 Finder has no right to sue the owner for compensation for trouble and expense voluntarily incurred
by him in finding the owner and preserving the goods found.
 But he has a right to retain the goods against owner until he receives such compensation; and,
 However, where the owner has offered a specific reward on the lost goods, finder may sue owner
for such reward, and may retain goods until then.

Finder of goods may sell such goods:
Generally, the finder does not have right to sell the goods.
However, if owner cannot with reasonable diligence be found, or if he refuses, upon demand, to pay the
lawful charges of the finder, the finder may sell it:
 when the thing is in danger of perishing or of losing the greater part of its value, or
 when lawful charges of finder amount to 2/3rd of its value.
General Lien vs Particular Lien:
Particular Lien (Sec 170): (E.g., A gives cloth to B, a tailor, to make into a coat)
 In case of bailment for a speicified purpose,
 where the bailee has, as per the purpose of the bailment,
 rendered any service involving exercise of labour or skill w.r.t. goods bailed,
 he has a right to retain such goods until he receives due remuneration for such services.
Note –
1. In above case, the bailee has no right to sue as long as he has bailed goods. However, if bailee
returns goods w/o receiving remuneration – he has right to sue the bailor.
2. Right to particular lien is lost if - bailee does not complete the work within the time agreed.
3. Bailee has no rights to sell such goods
General Lien (Sec 171)

 Bankers, factors, wharfingers, attorneys of a High Court and policy brokers [FAB PW] may,
 in the absence of a contract to the contrary,
 retain, as a security for general balance of account
 any goods bailed to them;
 but no other persons have such a right to retain unless there is an express contract to the effect
Example of General Lien - ‘A’ borrows Rs. 500/- from bank without security and subsequently again
borrows another Rs. 1000/- but with security of say certain jewellery. In this illustration, even where
‘A’ has returned Rs. 1000/- being second loan, banker can retain jewellery given as security to second
loan towards first loan which is yet to be repaid.
Under the right of general lien the goods cannot be sold but can only be retained for dues. The right of
lien can be waived through a contract.
Difference between General and Particular Lien:

General lien Particular lien
Rights of general lien is conferred by Sec 171 Rights of particular lien conferred by Sec 170
It is the right to keep possession of goods It implies a right to retain specific goods
belonging to other against general balance of bailed for non-payment of amount.
account.
It is not automatic but is recognized through on It is automatic
agreement.

It can be exercised against goods even without It comes into play only when some labor or skill
involvement of labor or skill. is involved resulting in increase in value of good
Only Bankers, factors, wharfingers, policy Bailee, finder of goods, pledgee, unpaid seller,
brokers etc. are entitled to general lien. agent, partner etc. are entitled
Pledge:
 Bailment of goods as security for payment of a debt or performance of a promise is called “pledge”.
 Bailor in this case is called “pawnor or pledger”.
 Bailee is called the “pawnee or pledgee”.
Example – Jewellery deposited as security against loan.
Essentials of a contract of pledge:
All essentials of bailment for security subject matter Goods pledged

delivery of
a valid bailment against payment or of pledge is shall be in
goods
contract performance of promise goods existence,
Rights of a Pawnee/Pledgee:
Right to: Details
Retain the goods  May retain goods pledged, not only for payment or performance of promise,
pledged  but for the interest (of debt) and all necessary expenses incurred by him
w.r.t. the possession or for the preservation of the goods pledged.
Example – Bank may retain pledged goods if interest amt. is pending.
Retain goods for  Pawnee can retain goods pledged for any debt/promise other than the debt
subsequent debts or promise for which they are pledged.
 But he can exercise this right only when there is a contract to this effect.
Extraordinary Entitled to receive from pawnor, extraordinary expenses for preservation of

expenses incurred pledged goods. (he doesn’t have right to retain goods for this but can sue)
Where pawnor Where pawnor makes default w.r.t. payment or performance, the pawnee has
defaults, pawnee the following rights:
can file suit or sell i. the pawnee may bring a suit against pawnor and retain the goods pledged
goods as a collateral security; or
ii. he may sell goods pledged on giving the pawnor reasonable notice of sale.
Note –
If Sales proceed < Amount due – Pawnor still liable to pay balance
If Sales proceed > Amount so due – pay over surplus to pawnor
Rights of a pawnor/pledger: (rights of bailor + right of redemption)

 As the bailor of goods, pawnor has all the rights of the bailor.
 Pawnor also has right of redemption to the pledged goods
Right of redemption:

 If a time is stipulated for payment/performance, for which the pledge is made,
 and pawnor makes default in payment/performance at the stipulated time,
 he may redeem the goods pledged at any subsequent time before actual sale of them;
 but he must, in that case, pay, in addition, any expenses which have arisen from his default.
Duties of Pawnor and Pawnee:

Pawnee Pawnor
Take reasonable care of pledged goods Liable to pay debt/perform promise
Not make unauthorised use Compensate pawnee for extraordinary exp. for preserving
Not to mix with his own goods Indemnify the pawnee
Return the goods when debt Disclose all the faults which may put pawnee at extra-
paid/promise performed ordinary risk
Return accretion to the goods If pawnee sells the pledged goods and receives shortfall,
pawnor to pay the deficit.
Not act incosistent with terms
Pledge by non-owners:
Usually, the owner of the goods pledges them to secure a loan. But, under certain circumstances, the
law permits a non-owner who is in the possession of the goods to pledge the goods.
Thus, the following non-owners may create a valid pledge [Co-VISA]:

1. Mercantile Agent:
 Such agent having the possession of goods/documents to title of goods with consent of owner
 can pledge these goods while acting in the OCOB.
 This pledge is as valid as if the owner of the goods expressly authorizes him to do so.
 Valid only when the pawnee acts in good faith and
 at the time of pledge is unaware of fact that such agent did not have the authority to pledge.
2. Pledge by person in possession under Voidable contract:

 When pawnor has obtained the possession of goods pledged by him under contract voidable u/s
19 or 19A (not free consent),
 but contract has not been rescinded at the time of the pledge,
 the pawnee acquires a good title to the goods,
 provided he acts in good faith and without notice of the pawnor’s defect of title.
Example - Srushti acquired valuable diamond at a very low price by a voidable contract. The voidable
contract was not rescinded. Srushti pledged the diamond with Mr. VK. This pledge is valid.
3. Limited Interest:
When the pawnor not being the owner of the goods and having limited interest pledges the goods,
the pledge is valid only to the extent of such limited interest.
Example: Mr. X finds a defective phone lying on road. He picks it up, gets it repaired for Rs. 5000.
He later pledges phone for Rs. 10,000. True owner can recover the phone only on paying Rs. 5000
4. Pledge by a Co-owner:
When a co-owner in possession of the goods with the assent of all the other co-owners pledges
them, it is a valid pledge.

5. Pledge by Seller or buyer in possession:
A seller, in whose possession, the goods have been left after sale or a buyer who with the consent
of the seller, obtains possession of the goods, before sale, can make a valid pledge, provided the
pawnee acts in good faith and he has no knowledge of the defect in title of the pawnor.
Distinction between bailment and pledge:

Basis of distinction Bailment Pledge
Meaning Transfer of goods by one person to Transfer of goods from one person
another for some specific purpose to another as security for
repayment of debt or performance
of promise
Parties 2 – Bailor and Bailee 2 – Pawnor and Pawnee
Purpose Can be made for any purpose For securing a debt or
performance of promise
Consideration With or without consideration Always with consideration
Right to sell goods Bailee has no right to sell the goods The pawnee has right to sell the
even if the charges of bailment are goods if the pawnor fails to
not paid to him. The bailee’s rights redeem the goods.
are limited to suing the bailor for his
dues or to exercise lien on the goods
bailed
Right to use goods Use only for the purpose specified. Cannot use pledged goods
Not otherwise.

UNIT 3 – AGENCY
Definition:
Agent: means a person employed to do any act for another or to represent another in dealing with the
third persons and
Principal: means a person for whom such act is done or who is so represented.
Test of Agency
(a) Whether the person has the capacity to bind the principal and make him answerable to 3rd party.
(b) Whether he can establish privity of contract between the principal and 3rd parties.
If answer to both the above question is yes, then it’s an agency relationship.
Rule of Agency is based on the maxim “Qui facit per alium, facit per se” i.e., he who acts through an agent
does the act himself.
Who may appoint an agent?

Any person who has attained majority and who is of sound mind, may employ an agent.
Who may be an agent?

Any person may become an agent. But, no person who is not of the age of majority and of sound mind can
become an agent, so as to be responsible to his principal.
Can minor become agent? – Yes! But he can’t be held responsible for his acts but the principal will be
bound by his acts.
Example - P appoints Q, a minor, to sell his car for not less than Rs. 2,50,000. Q sells it for Rs. 2,00,000.
P will be held bound by the transaction and further shall have no right against Q for claiming the
compensation for having not obeyed the instructions, since Q is a minor and a contract with a minor is
‘void-ab-initio’.
Note - No consideration is necessary to create an agency. The acceptance of the office of an agent is
regarded as a sufficient consideration for the appointment.
Creation of agency:
Modes of Creation of Agency
Express Estoppel/ Agency by

Implied Necessity
appointment Appointment holding out ratification
Words
Spoken
Written
1. Express authority - An authority is said to be express when it is given by words (spoken or written)

Example - Appointment of caretaker by way of power of attorney
2. Implied Authority - An authority is said to be implied when it is to be inferred from:

 the circumstances of the case,
 conduct of the parties and
 things spoken or written, or
 in ordinary course of dealing, may be accounted from the circumstances of the case.
Examples –
 Person realising rental on behalf of landlord
 Manager of a shop ordering from fixed vendors on behalf of owner of the shop
3. Agency by estoppel:
Based on principle of estoppel i.e., “when a person by declaration, act or omission has intentionally
caused or permitted another person to believe a thing to be true, he shall not be allowed to deny his
previous statement”.
 When agent has without authority done acts or incurred obligations on behalf of principal
 the principal is bound by such acts or obligations if
 he has by his words or conduct (express or implied)
 induced such 3rd persons to believe that such acts were within scope of agent's authority
Example - if A gets to know that B is dealing on his behalf with C and does not take any steps to
clarify his position, A would be liable for the transaction performed by B on his behalf.
4. Necessity: An agency of necessity arises due to some emergent circumstances. Thus, here an agent
is authorised to do certain act, and while doing such an act, an emergency arises, he acquires an
extra-ordinary or special authority to prevent his principal from loss.
Essentials for a valid agency in an emergency [CRPC Act]:

 Agent was not in position/had no opportunity to Communicate with principal within available time
 Actual and definite Commercial necessity for agent to act promptly
 Agent has Acted bonafide and for the benefit of the principal
 Agent adopted most practical and Reasonable course under such circumstances
 Agent must be in Possession of goods which are subject of contract
Example –
1. If the owner is away from home, and home catches fire, caretaker can incur expenses to stop
the fire and owner shall be responsible.
2. Agent having authority to sell goods may also repair it.
3. If perishable goods are consigned to be sent from one place to another. If they begin to perish,
consignee may sell it off.
5. Ratification

Where acts are done by one person on behalf of another, but without his knowledge or authority, he
may elect to ratify or to disown such acts.
Example – Agent who was authorized to purchase only in cash purchased in credit. Now principal may
authorize such purchase.
Essentials of a valid ratification [WICKET of V]:

a. It may be Express or implied (E.g., accepting interest on loan lent without authority)
b. Proper Knowledge of the facts (i.e., complete knowledge of the transaction)
c. The Whole transaction must be ratified (i.e., part of transaction cannot be ratified)
d. Such ratification cannot Injure third parties
Example:
1. A, not being authorized thereto by B, demands on behalf of B, the delivery of a chattel, the
property of B, from C, who is in possession of it. This demand cannot be ratified by B, so as
to make C liable for damages for his refusal to deliver.
2. A holds a lease from B, terminable on three months’ notice. C, an unauthorized person, gives
notice of termination to A. The notice cannot be ratified by B, so as to be binding on A.
e. Ratify within reasonable Time.
f. Communicate ratification (to third person)
g. Valid act can only be ratified (i.e., Illegal act cannot be ratified)
6. Agency created by Legal assumption - In a case of cohabitation by a married woman (i.e., wife is
considered as an implied agent of her husband). If wife lives with her husband, there is a legal
presumption that a wife has authority to pledge her husband’s credit for necessaries.
But the legal presumption can be rebutted in the following cases:

a. Where the goods purchased on credit are not necessaries.
b. Where the wife is given sufficient money for purchasing necessaries.
c. Where the wife is forbidden from purchasing anything on credit or contracting debts.
d. Where the trader has been expressly warned not to give credit to his wife.
If the wife lives apart for no fault on her part, wife has authority to pledge her husband’s credit
for necessaries. This legal presumption can be rebutted only in cases (iii) and (iv) above.
Extent of Agent’s Authority:

The extent of an agent’s authority, whether expressed or implied is determined by:
(a) the nature of the act or the business he is appointed to do
(b) things which are incidental to the business or are usually done in the course of such business,
(c) the usage of trade or business.
Whatever be the nature or extent of the agent’s authority, it will always include the authority to do:
1) every lawful thing necessary for the purpose of carrying it out,
2) every lawful thing justified or usually done in the course, of conducting such business.,
3) in an emergency, all such acts for the purpose of protecting the principal from loss as will be done by
a person of ordinary prudence in his own case under similar circumstances.
Example:

A is employed by B to recover at Mumbai a debt due to B. A may adopt any legal process necessary for
the purpose of recovering the debt and may give a valid discharge for such debt.
Sub-agents
Definition - Person employed by, and acting under the control of, the original agent in the business of the
agency.
General Rule - Agent cannot delegate further:

 An agent cannot lawfully employ another to perform acts
 which he has expressly or impliedly undertaken to perform personally,
 unless by ordinary custom of trade a sub-agent may be employed, or
 from the nature of the agency, a sub-agent must, be employed.
Exception where an agent can appoint Sub-agent:

1. Where the terms of appt. of the agent originally contemplated appt. of sub-agents
2. Custom of trade
3. Where in the course of employment, unforeseen emergency arises making it necessary for agent to
delegate the authority that was given to him by the principal.
Representation of principal by sub-agent properly appointed (i.e., with authority) [Section 192]:
Where a sub-agent is properly appointed,
1. Principal is bound and responsible to 3rd party for acts thereof as if he were agent originally appointed
2. Agent is responsible to the principal for acts of sub-agent
3. Sub-agent responsible for his acts to agent, but not to principal, except for fraud or willful wrong
Agent’s responsibility for sub-agent appointed without authority [Section 193]:

Where an agent, without having authority to do so, has appointed a person to act as a sub-agent,
1. Agent acts as a principal to the sub-agent and is responsible for his acts to principal and third person
2. principal is not responsible for the acts of sub-agent.
3. Sub-agent is answerable to the agent but not to the principal
Substituted agents
Definition - Person appointed by the agent to act for the principal, in the business of agency, with the
knowledge and consent of the principal.
Substituted agents are not sub agents. They are agents of the principal.
Relation between principal and Substituted agents [Section 194]:

 Where an agent, holding an express or implied authority to name another person to act for the
principal in the business of the agency,
 has named another person accordingly,
 such person is not a sub- agent, but an agent of the principal for such part of the business of the
agency as is entrusted to him.
Example

A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the purpose. B
names C, an auctioneer, to conduct sale. C is not a sub-agent, but is A’s agent for the conduct of the sale.
Agent’s duty in naming such person [Section 195]:

 In selecting such agent for his principal, an agent is bound to exercise the same amount of discretion
as a man of ordinary prudence would exercise in his own case; and,
 if he does this, he is not responsible to the principal for the acts or negligence of agent so selected.
Example
A instructs B, a merchant, to buy a ship for him. B employs a ship surveyor of good reputation to choose
a ship for A. The surveyor makes the choice negligently and the ship turns out to be unseaworthy and is
lost. B is not, but the surveyor is, responsible to A.
Note - Appt. of substituted agent can never be improper. It always has to be within authority.
Difference between sub-agent and substituted agent: [WILD PR3]

SN Sub Agent Substituted Agent
1. A sub-agent does his work under the control A substituted agent works under the
and directions of agent. instructions of the principal.
2. The agent not only appoints a sub-agent but The agent does not delegate any part of his
also delegates to him a part of his own duties. task to a substituted agent.
3. There is no privity of contract between the Privity of contract is established between a
principal and the sub-agent. principal and a substituted agent.
4. The sub-agent is responsible to agent alone and Substituted agent is responsible to principal
is not generally responsible to the principal. and not to original agent who appointed him
5. The agent is responsible to principal for the The agent is not responsible to principal for
acts of the sub- agent. the acts of the substituted agent.
6. The sub-agent has no right of action against The substituted agent can sue the principal
the principal for remuneration due to him. for remuneration due to him.
7. Sub-agents may be improperly appointed. Substituted agents can never be improperly
appointed.
8. The agent remains liable for the acts of the The agent's duty ends once he has named
sub-agent as long as the sub-agency continues. the substituted agent.
Duties and obligation of an agent: [CS MIRA’S DP is Confidential]

Execute Conduct business as per Reasonable care Communicate with
Mandate principal's Direction or custom and Skill principal
avoid conflict not make any Remit maintain not not use confidential
of Interest secret Profit sums Accounts Delegate info. against principal
1. Duty to execute mandate:

 The foremost duty of every agent is to carry out the mandate of his principal. (i.e., perform work
for which he is appointed)
 Any failure in this respect would make the agent absolutely responsible for the principal’s loss
Pannalal Jankidas V Mohanlal
 Commission agent purchased goods (on behalf of principal) and stored them in a godown

 Agent was instructed to insure them. He actually charged premium for insurance but failed to
insure the goods.
 The goods were lost in an explosion on Bombay harbour.
 The agent was held liable to compensate the principal for his loss
2. Duty to follow instructions or customs: [Sec 211]

An agent is bound to conduct business as per the principal’s direction or in absence thereof, as per
the customs which prevails in doing such business.
Where agent acts otherwise – Indemnify losses sustained by principal and account for profit accrued
Example:
1. A, an agent is engaged for managing business of B, in which it is a custom to invest money at hand
for interest. If A omits to make such investment, he must indemnify B for the losses i.e., for the
interest B would have obtained for such investment.
2. B, a broker, in whose business it is not the custom to sell on credit, sells goods of A on credit to
C. C, before payment, becomes insolvent. B will have to indemnify A for the losses.
3. Duty of reasonable care and skill: [Sec 212]

An agent is bound to conduct business of the principal with as much skill as is generally possessed by
persons engaged in similar business, unless the principal has notice of his want of skill.
 The agent is always bound to act with reasonable diligence, and to use such skill as he possesses;
 Agent to compensate his principal for direct consequences of his own neglect, want of skill or
misconduct, but not in respect of loss of damage which are indirectly or remotely caused by such
neglect, want of skill or misconduct.
Example:
1. A (a merchant in Kolkata) has an agent, B (in London) to whom a sum of money is paid on A’s account,
with orders to remit. B retains money for a considerable time. A, in consequence thereof, becomes
insolvent. B is liable for interest from the day on which it ought to have been paid, as per usual
rate, and for any further direct loss- e.g., by variation of exchange rate -but not further.
2. A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without
making the proper and usual enquiries as to the solvency of B. B, at the time of such sale is
insolvent. A must compensate his principal for the loss sustained by him.
4. Agent’s duty to communicate with principal [Sec 214]:

In cases of difficulty – agent to communicate with principal and obtain his instructions.
5. Duty to avoid conflict of interest (Duty not to deal on his own account): [Sec 215]
 If an agent deals on his own account in business of agency,
 without first obtaining consent of principal and acquainting him with all material circumstances
which have come to his own knowledge on the subject,
 principal may repudiate the transaction, if:
o any material fact has been dishonestly concealed from him by the agent, or
o the dealings of the agent have been disadvantageous to him.
Examples:

1. A directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on discovering
that B has bought the estate for himself, may repudiate the sale if he can show that B has
dishonestly concealed any material fact, or that the sale has been disadvantageous to him.
2. A directs B to sell A’s estate. B, on looking over the estate before selling it, finds a mine on the
estate which is unknown to A. B informs A that he wishes to buy the estate for himself, but
conceals the discovery of the mine. A allow B to buy. A, on discovering that B knew of the mine at
the time he bought the estate, may either repudiate or accept the sale at his option.
Principals right to benefit gained by agent dealing on his account [Sec 216]:
 If an agent, without knowledge of his principal deals on his own account
 principal is entitled to claim from agent any benefit which may have resulted from such transaction
Example:
A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought and buys the house
for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the price
he gave for it.
6. Duty not to make secret profits:

Agent’s relationship with principal is of fiduciary nature and this requires absolute good faith in the
conduct of agency.
Secret Profit means any advantage obtained by the agent over and above his agreed remuneration
and which he would not have been able to make but for his position as agent.
7. Duty to render proper accounts on demand [Sec 213]:

Rendering accounts does not mean showing the accounts but the accounts supported by vouchers.
(Anandprasad vs. Dwarkanath)
8. Duty not to delegate: [Sec 190]

An agent cannot lawfully employ to perform acts which he has expressly or impliedly undertaken to
perform personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature of
agency, a sub- agent, must be employed.
9. Agent’s duty to pay sums received for principal [Section 218]
10. Duty not to use any confidential information received in the course of agency against the principal.
Rights of an Agent:
Retain sums - Retain or lien Indemnity for Compensation for
Right to
Advances, Expenses, principal's lawful acts or injury by Principal's
remuneration
Remuneration property good faith neglect
1. Right of retain out of sums received on principal’s account [Section 217]:

Agent can retain, out of any sums received on account of principal, all moneys due to himself for the
following payments:
(a) in respect of advances made
(b) in respect of expenses properly incurred by him in conducting such business
(c) such remuneration as may be payable to him for acting as agent.
2. Right to remuneration [Section 219]:

 The agent in normal course is entitled for remuneration as per contract.
 In absence of any agreed amount - Entitled for usual remuneration which is customary in business.
 However, an agent who is guilty of misconduct in the business of the agency is not entitled to any
remuneration in respect of that part of the business which he has misconducted [Section 220].
Examples
1. A employs B to recover Rs. 1,00,000 from C, and invest it in securities that give good returns. B
recovers the amount and lays out Rs. 90,000 on good securities, but lays out Rs. 10,000 on
securities which he ought to provide poor returns, whereby A loses Rs. 2,000. B is entitled to
remuneration for recovering the Rs. 1,00,000 and for investing the Rs. 90,000. He is not entitled
to any remuneration for investing the Rs. 10,000, and he must indemnify A for Rs. 2000.
2. A employs B to recover Rs. 1,00,000 from C. Because of B’s misconduct the money is not recovered.
B is entitled to no remuneration for his services, and must make good the loss.
3. Agent’s lien on principal’s property against remuneration [Sec 221]:

In the absence of any contract to the contrary, an agent is entitled to retain the goods, papers and
other property, whether movable or immovable, of the principal received by him, until the amount due
to himself for commission, disbursement and services in respect of the same has been paid or
accounted for him.
The conditions of this right are:

a. The agent should be lawfully entitled to receive such commission.
b. The property over which the lien is to be exercised should belong to the principal and
c. it should have been received by agent in his capacity and during the course of his ordinary duties
as an agent. (If the agent obtains possession of the property by unlawful means, he cannot
exercise particular lien)
The agent’s right to lien is lost in the following cases: [PWC Loses]
(a) When the possession of the property is lost.
(b) When the agent waives his right. Waiver may arise out of agreement express or implied.
(c) The agent’s lien is subject to a contract to the contrary.
4. Right to indemnity:
a. Right of indemnification for lawful acts [Section 222]:
The principal is bound to indemnify the agent against all consequences of lawful acts done in
exercise of his authority.
Example: ‘A’ residing in Delhi appoints ‘B’ from Mumbai as an agent to sell his merchandise. As a
result ‘B’ contracts to deliver the merchandise to various parties. But A fails to send the
merchandise to B and B faces litigations for non- performance. Here, A is bound to protect B
against the litigations and all costs, expenses arising of that.

b. Right of indemnification against acts done in good faith [Section 223]:
Where the agent acts in good faith on the instruction of principal, agent is entitled for
indemnification of any loss or damage from the principal.
Example: Where P appoints A as his agent and directs him to sell certain goods which in fact
turned out to be not those belonging to P and if third parties sue A for this act, A is entitled for
reimbursement and indemnification for such act done in good faith.
c. Non-liability of employer of agent to do a criminal act: [Sec 224]

Where a person employs another to do an act which is criminal, employer is not liable to the agent,
either upon an express or implied promise, to indemnify him against the consequences of that act.
Example:
A employs B to beat C, and agrees to indemnify him against all consequences thereof. B thereupon
beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.
B, the proprietor of a newspaper, publishes, at A’s request, a false statement about C in the paper,
and A agrees to indemnify B against the consequences of the publication, and all costs and damages
of any action in respect thereof. B is sued by C and has to pay damages, and also incurs expenses.
A is not liable to indemnify B.
5. Right to compensation for injury caused by principal’s neglect [Section 225]:

A principal must compensate his agent w.r.t. injury caused to such agent due to principal’s neglect or
want of skill. Every principal owes to his agent duty of care, and not expose him to unreasonable risks.
Example: A employs B as a brick layer in building a house, and puts up the scaffolding himself. The
scaffolding is unskilfully put up, and B is in consequence hurt. A must compensate B.
Principal’s Liability To Third Parties

1. Principal’s liability for the Acts of the Agent (which are within scope of authority) [Sec 226]:
Contracts entered into through an agent, and obligations arising from acts done by an agent, may be
enforced in the same manner, and will have the same legal consequences, as if the contracts had been
entered into and the acts were done by the principal in person.
Example: C buys goods from A, knowing that he is an agent for their sale, but not knowing who the
principal is. A’s principal is the person entitled to claim from C the price of the goods, and C cannot,
in a suit by the principal, set off against that claim a debt due to himself from A.
(simultaneous read point 2 of Rights of Third Party)
Example: A, being B’s agent with authority to receive money on his behalf, receives from C, a sum of
money due to B. C is discharged of his· obligation to pay the sum in question to B. (i.e., payment to
authorised agent tantamount to payment to the principal)
2. Principal’s liability when agent exceeds authority [Section 227]:

When an agent does more than he is authorised to do, and when the part of what he does, which is
within his authority, can be separated from the part which is beyond his authority, so much only of
what he does as is within his authority is binding as between him and his principal.
Example: A, being owner of a ship and cargo, authorizes B to procure an insurance for Rs. 4,00,000
on the ship. B procures a policy for Rs. 4,00,000 on the ship, and another for the like sum on the
cargo. A is bound to pay the premium for the policy on the ship, but not the premium for the policy
on the cargo.
Principal not bound when excess of agent’s authority is not separable [Sec 228]:
Where an agent does more than he is authorized to do, and what he does beyond the scope of his
authority cannot be separated, principal is not bound to recognize the transaction.
Example: A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of
Rs. 6,00,000. A may repudiate the whole transaction.
Example: A authorizes B to draw bills to the extent Rs. 200 each. B draws bills in the name of A for
Rs. 1,000 each. A may repudiate the whole transaction.
Exception:
Liability of principal inducing belief that agent’s unauthorized acts were authorized [Sec 237]:
When an agent has, without authority, done acts or incurred obligations to third persons on behalf of
his principal, the principal is bound by such acts or obligations, if he has by his words or conduct
induced such third persons to believe that such acts and obligations were within the scope of the
agent’s authority. (Because of the concept of agency by estoppel)
Example: A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C,
being ignorant of A’s instructions, enters into a contract with B to buy the goods at a price lower than
the reserved price. A is bound by the contract.
Example: A entrusts B with an instrument endorsed in blank. B sells them to C in violation of private
orders from A. The sale is good.
3. Consequences of notice given to agent [Sec 229]:

 Any information obtained by the agent, in the course of business transacted by him for principal,
 shall have the same legal consequence as if it had been obtained by the principal.
Example:
A is employed by P to buy certain goods from X (of which X is apparent owner). A buys them
accordingly. In course of such purchase, A learns that goods really belonged to M, but P is ignorant
of that fact. P is not entitled to set off any money receivable from X against the price of the goods.
Thus, the knowledge of the agent is treated as the knowledge of the principal.
4. Principal’s liability for the agent’s fraud, misrepresentation or torts [Sec 238]:

Misrepresentations or frauds by agents shall have same effect on agreements as if committed by the
principal. But misrepresentations or frauds which do not fall within agent’s authority, do not affect
their principals.
Example:
1. A, being B’s agent for sale of goods, induces C to buy them by a misrepresentation, which he was
not authorized by B to make. The contract is voidable, as between B and C, at the option of C.
2. A, the captain of B’s ship, signs bills of lading without having received on board the goods
mentioned therein. The bills of lading are void as between B and the pretended consignor.
Personal Liability of Agent to third parties:

Agent cannot personally enforce, nor be bound by, contracts on behalf of principal [Sec 230]:
 In absence of any contract to that effect,
 an agent cannot personally enforce contracts entered into by him on behalf of his principal,
 nor is he personally bound by them.
 He can neither sue nor be sued on contracts made by him on his principal’s behalf.
Exceptions: In following cases, agent is presumed to have agreed to be personally bound: [UF! CAP]
Unnamed inCompetent Agent exceeds
Foreign Principal Pretended agent
Principal principal authority
1. Where contract is for sale or purchase of goods for a merchant resident abroad/foreign principal:
Here, presumption is that agent undertakes to be personally liable for performances of such contract
2. Where agent does not disclose the name of his principal or undisclosed principal (Principal unnamed):
Here, a presumption arises that he himself undertakes to be personally liable.
Note - When the principal is undisclosed, the liability is of the agent only, and the principal cannot be
sued in such a case.
3. Non-existent or incompetent principal: Where the principal, though disclosed, cannot be sued, the
agent is presumed to be personally liable.
Example: An agent who contracts for a minor, the minor being not liable, the agent becomes personally
liable. This result, may not, however, follow where other party already knows that principal is a minor.
(Note – This is just example. However, P cannot be minor)
4. Pretended agent – If the agent pretends but is not an actual agent, and the principal does not ratify
the act but disowns it, the pretended agent will be himself liable (Sec 235).
5. When agent exceeds authority- When the agent exceeds his authority, misleads the third person in
believing that the agent he has the requisite authority in doing the act, then the agent can be made
liable personally for the breach of warranty of authority.

Rights Of Third Parties
1. Rights of parties to a contract made by undisclosed agent [Section 231]:
 If an agent makes contract with a person who neither knows, nor has reason to suspect,
 that he is an agent, his principal may require the performance of the contract;
 but the other contracting party has, as against the principal, the same right as he would have had
as against the agent if the agent had been the principal.
If the principal discloses himself before the contract is completed, the other contracting party may
refuse to fulfil the contract, if he can show that, if he had known who was the principal in the
contract, or if he had known that the agent was not a principal, he would not have entered into the
contract.
Example: SK bought for himself a ticket of IPL match at Wankhede Stadium through AB because on
personal grounds Stadium management would not have issued the ticket to SK. Stadium management
may repudiate the contract and refuse SK to enter the stadium.
2. Performance of contract with agent supposed to be principal [Section 232]:

Where one man makes a contract with another, neither knowing nor having reasonable ground to
suspect that the other is an agent, the principal, if he requires the performance of the contract, can
only obtain such performance subject to the rights and obligations subsisting between the agent and
the other party to the contract.
Example: A, who owes 50,000 rupees to B, sells 1,00,000 rupees worth of rice to B. A is acting as
agent for C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such
is the case. C cannot compel B to take the rice without allowing him to set off A’s debt.
3. Option to Third Person - Sue the Agent or the Principal:

a. Right of person dealing with agent personally liable [Section 233]: In cases where the agent is
personally liable, a person dealing with him may hold either him or principal or both of them, liable.
Example: A enters into a contract with B to sell him 100 bales of cotton, and afterwards discovers
that B was acting as agent for C. A may sue either B or C, or both, for the price of the cotton.
b. Consequence of inducing agent or principal to act on belief that principal or agent will be held
exclusively liable [Section 234]: When a person who has made a contract with an agent induces
the agent to act upon the belief that the principal only will be held liable or induces the principal
to act upon the belief that the agent only will be held liable, he cannot afterwards hold liable the
agent or principal respectively.
Termination of agency [Section 201]

Termination of agency means putting an end to the legal relationship between principal and agent.
Modes of termination: [CRR DIE]
Renunciation Completion of Death or Unsound mind Insolvency Expiry
Revocation
by agents business - principal or agent of Principal of time
a. Revocation:

 An agency may be terminated by the principal revoking the authority of the agent at any time
before the authority has been exercised so as to bind the principal [Sec 203].
 However, the principal cannot revoke the authority w.r.t. acts after authority has been partly
exercised for such acts. [Sec 204]
Example: A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out of A’s
money remaining in B’s hands.
1. B buys it in his own name, so as to make himself personally liable for the price – In this case, A
cannot revoke B’s authority so far as regards payment for the cotton.
2. B buys 1,000 bales of cotton in A’s name, and so as not to render himself personally liable for the
price. A can revoke B’s authority to pay for the cotton.
Compensation for revocation by principal [Sec 205]:

If there is premature revocation of agency without sufficient cause, the principal must compensate
the agent, for such revocation
Note – Compensation is NOT mandatory in case where it is justified with sufficient cause.
Notice of revocation [Sec 206]:

When the principal, having justification to do so, revokes the authority, he must give reasonable notice
of such revocation to the agent, otherwise, he can be liable to pay compensation for any damage
caused to the agent (Sec 206).
Revocation and renunciation may be expressed or implied [Section 207]:

Example: A empowers B to let out A’s house. Afterwards A lets it himself. This is an implied revocation
of B’s authority.
(Trick – P has to be NICE when revoking agency. Notice, Implied, Compensate or Express)
b. Renunciation by agent [Section 206]:
 An agent may renounce the business of agency in the same manner in which the principal has the
right to revoke.
 If the agency is for a fixed period, the agent would have to compensate the principal for any
premature renunciation without sufficient cause. [Sec 205]
 A reasonable notice of renunciation is necessary. Length of notice is to be determined by the same
principles which apply to revocation by the principal. If the agent renounces without proper notice,
he shall have to make good any damage thereby resulting to the principal.
c. Completion of business: An agency is automatically and by operation of law terminated when its
business is completed. Thus, for example, the authority of an agent appointed to sell goods ceases to
be exercisable when the sale is completed.
d. Death or insanity: An agency is terminated automatically on the death or insanity of the principal or
the agent. Winding up of a company or dissolution of partnership has the same effect. Act done by
agent before death would remain binding.
e. Principal’s insolvency: An agency ends on the principal being adjudicated insolvent.

f. On expiry of time: Where an agent has been appointed for a fixed term, the expiration of the term
puts an end to the agency, whether the purpose of agency has been accomplished or not. An agency
comes to an automatic end on expiry of its term
When the agency is irrevocable?

When the agent is personally interested in the subject matter of agency the agency becomes irrevocable.
(Note – In such cases, even death or insanity doesn’t lead to termination of agency contract)
Example:
1. P gives authority to A to sell P’s land, and to pay himself, out of the proceeds, the debts due to him
from P. P cannot revoke this authority, nor can it be terminated by his insanity or death.
2. A consigns 1000 bales of cotton to B, who has made advances to him on such cotton, and desires B to
sell the cotton, and to repay himself, out of the price, the amount of his own advances. A cannot
revoke this authority, nor it is terminated by his insanity or death.
When does termination take effect? [Sec 208]

The termination of the authority of an agent does not, so far as regards the agent, take effect before
it becomes known to him, or, so far as regards third persons, before it becomes known to them.
Example:
1. A directs B to sell goods for him, and agrees to give B 5% commission on the price fetched by the
goods. A afterwards, by letter, revokes B’s authority. B, after the letter is sent, but before he
receives it sells goods of Rs. 1 lakh. Sale is binding on A and B is entitled to Rs. 5000 as his commission.
2. A, at Chennai, by letter directs B to sell for him some cotton lying in a warehouse in Mumbai, and
afterwards, by letter, revokes his authority to sell, and directs B to send the cotton to Chennai. B,
after receiving the second letter, enters into a contract with C, who knows of the first letter, but
not of the second, for the sale to him of the cotton. C pays B the money, with which B absconds. C’s
payment is good as against A.
3. A directs B, his agent, to pay certain money to C. A dies, and D takes out probate to his will. B, after
A’s death, but before hearing of it, pays the money to C. The payment is good as against D.
Agent’s duty on termination of agency by principal’s death or insanity [Sec 209]:

When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to
take, on behalf of the representatives of his late principal, all reasonable steps for the protection and
preservation of the interests entrusted to him.
Termination of sub-agent’s authority [Section 210]

The termination of the authority of an agent causes the termination of the authority of all sub-agents
appointed by him.
The End

Introduction:
Meaning of Negotiable Instrument (NI) [Section 13]:
A “negotiable instrument” means a: Payable to

 promissory note, order or
 bill of exchange or a bearer.
 cheque
Explanation:
NI is payable to order when: A NI is payable to bearer when:
a) It is expressed to be so payable. a) it is expressed to be so payable e.g., pay bearer.
b) When it is expressed to be payable to b) the only or last indorsement on the instrument
a specified person and does not is an indorsement in blank.
contain words prohibiting its transfer.
Note –The property in such a NI passes to a bonafide transferee for value (i.e., notwithstanding any
defect in title of any prior party)
Characteristics of a NI: [Write STD – CPT]

necessarily in freely holder's title is
should be signed
writing transferrable free from defects
can be transferred must contain an

sum payable, time of should be delivered.
any number of unconditional
payment and payee - Mere drawing does not
times till its promise or order
must be certain create liability
satisfaction to pay money
Presumption as to a NI [Sec 118]:

Until the contrary is proved, the following presumptions shall be made:
In relation to: Presumption drawn
Consideration every NI was made or drawn for consideration
Date every NI bearing a date was made or drawn on such date
every accepted BOE was accepted within a reasonable time after its date
Time of acceptance
and before its maturity
Time of transfer every transfer of a NI was made before its maturity
Order of indorsements appearing upon a NI were made in the order in which they
indorsements appear thereon
Stamps a lost promissory note, BOE or cheque was duly stamped
Holder the holder of a NI is a holder in due course
Note: The above presumptions are rebuttable by evidence to the contrary.

Promissory Note (PN) [Section 4]:
Chapter 2 – Negotiable Instrument Act

Meaning:
 A 'promissory note' is an instrument in writing (not being a bank-note or a currency-note)
 containing an unconditional undertaking
 signed by the maker,
 to pay a certain sum of money only to, or to order of, a certain person, or to bearer thereof.
Parties to promissory note

 Maker (of the promise): The person who makes the promise to pay and must sign the instrument.
 Payee: the person to whom the amount on the note is payable.
Essential Characteristics of a Promissory Note

in writing (oral should be signed by The promise to pay
Promise to pay money
promise not maker (else should be definite
only
sufficient) ineffective) and unconditional.
must be an express The maker and payee must be properly stamped and
Promise to
promise to pay. Mere must be certain, such stamp must be duly
pay a certain
acknowledgment of definite and cancelled by maker's
sum
debt is insufficient different persons signatures or initials

1. Can promissory note be made payable to bearer? – As per definition of PN, yes. However, as per RBI
Act, PN cannot be made payable to bearer.
2. Law says that, PN shall promise to pay a certain sum. Is it okay to write – “Pay to Mr. S Rs. 50,000 +
10% interest per annum” – Will this be considered certain sum? – Yes!
Bills of Exchange (BOE) [Section 5]:

Meaning:
 A “BOE” is an instrument in writing
 containing an unconditional order,
 signed by the maker (Mr. M),
 directing a certain person (Mr. X)
 to pay a certain sum of money only to, or to order of, a certain person or to bearer of instrument
Parties to the bill of exchange

Drawer: Drawee: Payee:
The maker of The person directed by the drawer to pay is The person named in
a BOE called the 'drawee’. On acceptance of the bill, he the BOE, to whom or to
is called an acceptor and is liable for payment of whose order the money
bill. His liability is primary and unconditional is, directed to be paid
Note – The payee can be the drawer himself (i.e., self-cheque or payee making BOE) or a third party.
Essential characteristics of bill of exchange

The order to pay should be order to pay
in writing must be signed
definite and unconditional. money only
order to pay a must be an express Drawer, drawee, and

must be stamped
certain sum order to pay. payee must be certain
Difference between Promissory note and bills of exchange:

Basis Promissory Note Bill of Exchange
Definition  An instrument in writing (not being bank  An instrument in writing
or currency-note)  containing an unconditional order,
 containing an unconditional undertaking  signed by the maker,
 signed by the maker,  directing a certain person,
 to pay a certain sum of money only to,  to pay a certain sum of money
or to order of, a certain person, or to only to, or to order of, a certain
bearer thereof. person or bearer of instrument
Nature there is a promise to pay money. there is order for making payment.
Parties Maker and Payee Drawer, Drawee and Payee
Acceptance Not required as it is singed by person who is A BOE needs acceptance from the
required to pay drawee.
Payable to Cannot be made payable to bearer (RBI Act) Can be drawn payable to bearer.
bearer However, it cannot be payable to
bearer on demand

Cheques [Section 6]:
Meaning:
 A “cheque” is a bill of exchange
 drawn on a specified banker and
 NOT expressed to be payable otherwise than on demand and
 it includes the electronic image of a truncated cheque and a cheque in the electronic form.
Payable on demand means- It should be payable whenever the holder chooses to present it to the
drawee (banker). Cheques are mandatorily payable on demand.
Explanations:
Cheque in the electronic form means a a truncated cheque means cheque which is
cheque drawn in e-form by using any computer truncated during a clearing cycle, either by
resource, and signed in a secure system with a clearing house or bank whether paying or
digital signature (with/without biometric receiving payment, immediately on
signature) and asymmetric crypto system or generation of an e-image for transmission,
electronic signature, as the case may be substituting further physical movement
Parties to Cheque
Drawer Drawee: Payee:
The maker of a the the specific bank the person named in the cheque,
cheque. Liability is on whom cheque is to whom or to whose order the
primary and conditional drawn. money is, directed to be paid
Note – The payee can be the drawer himself (i.e., self-cheque) or a third party.
Essential Characteristics of a cheque:

 it should fulfil all the essential characteristics of a bill of exchange
 must be drawn on a specified banker
 it must be payable on demand
Note – All cheques are bills but not all bills are cheque.
Crossing of cheques:
There are two types of cheques:
 Open cheques – A cheque that can be paid in cash at the counter.
 Crossed cheques – Parallel transverse lines which is an instruction to the paying bank that the
payment is not to be made at the counter but through a bank.
Objects of crossing:
 Crossing affects the mode of payment of the cheque.
 It does not affect the negotiability or transferability of the cheques
Types of crossing:

General Special crossing Restrictive crossing
"Not negotiable" crossing
crossing (Line + Name of When words A/C Payee is added
(lines to General or special crossing This requires the word
banker + With
without "not negotiable" inside or
or without This becomes non-negotiable and
words) outside two parallel lines
words) is not statutorily recognized
Section 127 –
Where a cheque is crossed specially to >1 banker, the banker on whom it is drawn shall refuse
payment thereof except where the banker to whom it is crossed may cross it specially to another
banker, his agent for collection
Not negotiable Crossing [Sec 130]

 This requires writing of words “not negotiable” in addition to the two parallel Lines
 A cheque with such crossing is not negotiable but continues to be transferable as before
 If the title of the transferor is defective, the title of transferee will also be so.
 Thus, the addition of the words not negotiable does not restrict the further transferability of
the cheque, but it entirely takes away the main feature of negotiability, which is that a holder
with a defective title can give a good title to the subsequent holder in due course
Who may cross? [Section 125]

A cheque may be crossed by the following parties:
 By Drawer: A drawer may cross it generally or specially.
 By Holder: A holder may cross:
o an uncrossed cheque generally or specially.
o a generally crossed cheque may be crossed specially.
o If cheque is crossed generally or specially, he may add words “not negotiable”.
 By Banker: A banker may:
o cross an uncrossed cheque, or
o if a cheque is crossed generally, he may cross it specially to himself.
o Where it is crossed specially, the banker whom it is crossed may again cross it specially to
another banker, his agent, for collection.
Protection of liability of the paying banker [Section 85, 128 and 129]
(a) Cheque payable to order
 Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the
banker is discharged by payment in due course.
 The banker can debit his customers account even though the indorsement by the payee might
turn out to be forgery or the indorsement might have been placed by payee’s agent without his
authority.
(b) Cheque payable to bearer:

 The rule is “once a bearer always a bearer”.
 A banker gets a good discharge by payment in due course to the holder of the cheque.
 It does not matter whether the apparent holder is the owner of cheque or not.
(c) Crossed cheque

 Where the drawee banker has paid the crossed cheque in due course, the drawee banker and
drawer shall be considered to have paid such amount to the true owner thereof.
 Where payment is not made in due course (e.g., crossed cheque not paid to banker), the drawee
banker shall be liable to the true owner of the cheque for any loss he may sustain owing to the
cheque having been so paid.
Exception in case of forgery: Payment of a cheque on which drawer signatures were forged:
If any drawee banks made the payment on which drawer’s signature were forged, then such bank shall
be liable to the true owner (i.e., paying banker shall be liable if it makes payment of cheque on which
drawers’ signatures were forged)
Protection of liability of the collecting banker [Section 131]

Collecting bank acting in good faith shall not be liable:
 A banker who has in good faith and without negligence
 received payment for a customer of a cheque crossed generally or specially to himself
 shall not, in case title of cheque proves defective, incur any liability to true owner of cheque
 by reason only of having received such payment.
To avail such protection, the banker needs to prove that the:

banker had received the collection was made by the bank must have acted in good
payment of crossed cheque bank on behalf of customer faith and without negligence
“Payment in due course” [Sec 10] means payment in accordance with the apparent tenor of the
instrument in good faith and without negligence to any person in possession thereof under
circumstances which do not afford a RGTB that he is not entitled to receive payment of the amount
therein mentioned.
Acceptor and Acceptor for honour

Who is an acceptor?
 After drawee of a bill has signed his assent upon the bill (or if there are more parts of the bill,
upon one of such parts), and
 delivered the same, or given notice of such signing to holder or to some person on his behalf,
 he is called the “acceptor”.
Thus, an acceptor is the drawee who has signed his assent upon the bill and delivered it to the holder.
Then, who is acceptor for honour?

 When a BOE has been dishonoured by non-acceptance and any person accepts it for honour of the
drawer or of any indorsers, such person is called "an Acceptor for honour".
 In other words, it is an undertaking by a third party to accept and pay a BOE that was dishonoured,
either by non-acceptance or non-payment by drawee [It is also called acceptance supra protest]
How acceptance for honour must be made

A person desiring to accept for honour must, by writing on the bill under his hand, declare that he
accepts under protest the protested bill for the honour of the drawer or of a particular indorser whom
he names, or generally for honour
Essentials of valid acceptance for honour

bill must have been noted or protested for
holder must consent to acceptance for honor
non-acceptance
made by a person who is not already liable on Acceptance must be for the honor of any
the bill* party already liable on the bill
It must be made by writing on the bill must be for whole amount due on the bill
Acceptance for honor must Stranger paying for honor must, before payment, declare
be made before bill is before a notary public the party for whose honor he pays
overdue and Notary Public to record the same
*Drawee of the bill when he refuses to accept the bill becomes a stranger. He may, therefore, accept
the bill for honour of any party thereto.
Rights and liabilities of an acceptor for honour [Sections 111 & 112]
a. Acceptor for honor binds himself to all the subsequent parties to pay the amount of the bill if the
drawee does not pay (like a guarantor)
b. The party for whose honor he accepts to pay the amount and all prior parties are liable to
compensate the acceptor for honor for all loss or damage sustained by him in consequence of such
acceptance. The liability of an acceptor for honor is conditional and he is liable only if the drawee
fails to pay the bill.
Holder and Holder in Due Course
“Holder” [Section 8]
Holder of a NI means any person entitled in his own name to:
1. the possession thereof, and
2. receive or recover the amount due thereon from the parties thereto

1. Holder is person who is rightful owner of such NI. Mere possession of the NI doesn’t qualify such
person to be called holder. [E.g., a thief of such NI cannot be called holder]
2. Can an agent be called holder? – No. While the agent has the right to receive the amount, he is not
entitled in his own name to the possession. Hence, not a holder.
3. Mr. A is a payee of the cheque, but he is prohibited by a court order from receiving the amount of
the cheque. Is Mr. A holder – No. There is no right to receive.
[Solve Question 7 of QB]
Holder in due course” [Section 9] (Consideration + Before Maturity + Good Faith = HDC)
HDC means any person:
who for without having sufficient cause to

before such
consideration, believe that any defect existed in
amount became
becomes possessor/ title of the person who delivered
payable
indorsee of NI title [i.e., in good faith]
Essentials to become HDC:

1. The holder must have paid valuable adequate consideration:
a. To become HDC, a person must obtain a NI by paying valuable & lawful consideration for it.
b. When given as a gift or has been inherited, the transferee cannot be an HDC.
2. A holder must acquire NI before its maturity in order to attain the status of HDC.
3. Holder must have obtained NI in good faith.
4. NI must be complete and regular on the face of it.

5. He must have received the instrument as a holder i.e., the possessor (if the instrument is payable
to bearer), or indorsee (if the instrument is payable to order)

1. How can a person become HDC in case of demand instrument? (Because, to become HDC, you need
to negotiate before maturity. What is the maturity for demand inst.?) – Law says, in case of demand
instrument, it must be taken within a reasonable time (varies case to case)
2. HDC is protected when there is defect in the title of the prior party. But such HDC derives no title
in case of forgery by party because there is entire absence of title by prior party (QB 9)
Privileges of being an HDC:

In case of:
Inchoate Instrument  HDC can recover any amount on inchoate instrument provided it is
covered by the stamp affixed thereon.
 Holder cannot recover amount in excess of the amount intended to be
paid to signor.
Fictitious bill An acceptor of a BOE drawn in a fictitious name and payable to drawer's
order is not relieved from liability to any HDC claiming under an
indorsement by the same hand as the drawer's sign, and purporting to be
made by the drawer, by reason that such name is fictitious.
Conditional instrument When an instrument is indorsed conditionally or for a special purpose only,
or ‘escrow’ the property in it does not pass to the transferee, unless the NI is
negotiated to HDC
NI obtained by HDC gets good title even if the instrument had been lost or obtained from
unlawful means / for former by offence or fraud or for an unlawful consideration (Sec 58).
unlawful consideration
Payee’s capacity to No maker/acceptor of NI payable to order shall, in a suit thereon by a
indorse can’t be denied HDC, be permitted to deny the payee’s capacity to indorse the same
Original validity of NI No maker, drawer and acceptor for the honour shall, in a suit thereon by a
cannot be denied HDC be permitted to deny the validity of NI as originally made or drawn.

Classification of Negotiable instruments:
a. “Bearer instrument” and “order instrument” [Section 13]
Nature Bearer Order
Payee or where name of payee is blank or where payable to a person or payable to a
payable to: name of payee is specified with the person or his order or payable to order
words “or bearer” or where the last of a person or where the last
indorsement is blank indorsement is in full
Negotiation by: Mere delivery indorsement and delivery
b. Inland instrument and Foreign Instrument:

Instrument Inland Foreign
Meaning: A PN, BOE or cheque, Any instrument not so drawn, made or
 drawn or made in India and made payable (as that of inland
 made payable in India or drawn instrument) shall be deemed to be
upon any PRI foreign instrument.
shall be deemed to be an inland i.e., all instrument other than inland is
instrument. considered as foreign instrument.
Other details Examples:
1. PN made in Patna, payable in Ranchi
2. Bill drawn in Varanasi on a PRI
Jodhpur (although payable in US)
Liability of maker/drawer:
In absence of a contract to the contrary:
 liability of maker/drawer of a foreign instrument is regulated by law of place where he made
the instrument, and
 respective liabilities of acceptor /indorser by law of place where instrument is made payable
Example: A BOE is drawn by A in Berkley where rate of interest is 15% and accepted by B payable
in Washington where the rate of interest is 6%. The bill is endorsed in India and is dishonoured.
An action is brought against B in India. He is liable to pay interest at 6% only. But if A is charged
as drawer, he is liable to pay interest at 15%.
c. Inchoate instrument:
 It means an instrument that is incomplete in certain respects.
 The maker/drawer/acceptor or indorser of NI may signs AND DELIVERS it to another person
leaving the instrument wholly blank or having written the word incomplete
 Such instrument is called inchoate instrument, and this give power to its holder to make it
complete by writing any amount:
o either within limits specified therein or
o within limits specified by the stamps affixed on it.
 The person signing and delivering such instrument is liable to both - Holder and HDC.
 Holder cannot recover amount in excess of the amount intended to be paid to signor.
 HDC can recover any amount on such NI provided it is covered by the stamp affixed thereon.

d. Ambiguous Instruments
 Where an instrument may be construed either as a PN or BOE,
 the holder may at his election, treat it as either, and
 the instrument shall be thenceforward treated accordingly.
 After exercising his option, the holder cannot change that it is the other kind of instrument.
e. In case of difference in amount stated in figures & words – Amt. stated in words shall be correct.
f. Demand Instruments (Section 19)

 PN or BOE in which no time for payment is mentioned, is payable on demand.
 Bills and notes can be either payable on demand or time instruments. However, cheques are
always payable on demand.
 A BOE or PN is payable on demand when it is expressed to be payable:
o on demand, or
o "at sight" or
o "on presentment"
g. Time instrument (Section 22)

A bill or note which is payable
o After a fixed period or
o After sight or
o On a specified day or
o On the happening of an event which is certain to happen is known as time instrument.
NOTE:
In a PN or BOE, the expressions “at sight” and “on presentment” means on demand.
The expression “after sight” means,

 In a PN, after presentment for sight, and,
 In a BOE - after presentment for acceptance, or noting for non-acceptance, or protest
for non-acceptance.
h. Maturity of NI (only in case of time instrument and not NI payable on demand)

The maturity of a note or bill is the date on which it falls due.
Days of grace
A note or bill (not being a demand instrument) is at maturity on 3rd day after the day on which it
is expressed to be payable. (i.e., 3 days grace period is given in case of time instrument)
Calculation of maturity
In calculating maturity of PN/BOE, payable at stated no. of months after date/sight or event
 the stated period shall terminate on the day of the month, which corresponds with the day on
which the instrument is dated/ presented for acceptance/ sight
[E.g., If a time instrument dated 24th July, 2022 is payable 3 months after date, the maturity shall be
24th October (instead of 23rd October) and then, add 3 days of grace period, so – 27th October],
 where the instrument is a BOE made payable at stated number of months after sight and has
been accepted for honor, with the day on which it was so accepted.

 If the month in which the period would terminate has no corresponding day, the period shall be
held to terminate on the last day of such month.
[E.g., If a time instrument dated 31st Jan, 2022 is payable 3 months after date, the maturity shall be 31st
Feb 28th Feb, 2022 and then, add 3 days of grace period, so – 3rd March]
Calculating maturity of bill or note payable so many days after date or sight
In calculating date at which a note or bill made payable at certain number of days after
date/sight/event, the day of the date, or of presentment for acceptance or sight, or of protest
for non-acceptance, or on which the event happens, shall be excluded.
[E.g., If a time instrument dated 1st Jan 2022 is payable 5 days after date, the maturity shall be 6th Jan
2022 (instead of 5th) and then, add 3 days of grace period, so – 9th March],
When the day of maturity is a holiday [Section 25] - When the day on which a PN or BOE is at
maturity is a public holiday, the NI shall be deemed to be due on next preceding business day.

1. On 1st of July, Mr P. made a promissory note stating to pay Mr. X Rs. 50,000 on 27 th of July. Is
this NI eligible for grace period of 3 days? – Yes! This is a time instrument and hence every time
instrument is eligible for 3 days grace period.
2. In case of demand instrument, there are no grace days.
3. Is Sunday a public holiday? – Woho!! Yes. But, it is not a national holiday.
4. If a time instrument dated 1st Jan 2022 is payable 5 days after date, then the instrument is said
to be “at maturity” on 6th Jan or 9th Jan (i.e., including grace)
It is said to be “at maturity” on 9th Jan i.e., include grace days
Negotiation of NI:
a. When a NI is transferred to any person with a view to constitute the person holder thereof, the
instrument is deemed to have been negotiated.
b. Modes of Negotiation
c. Negotiation by delivery [Section 47]

Subject to sec 58 (instrument obtained by unlawful means or for unlawful consideration), a NI
payable to bearer is negotiable by delivery thereof.
A NI delivered on condition that it is not to take effect except in a certain event is not negotiable
(except in hands of a holder for value without notice of the condition) unless such event happens.
d. Negotiation by indorsement [Section 48]
Subject to sec 58, a NI payable to order, is negotiable by holder by indorsement + delivery.

e. Importance of Delivery in Negotiation [Section 46]
 Delivery of instrument must be voluntary and should be with an intention to pass property in the
instrument to person to whom it is delivered
 Actual delivery takes place when the instrument changes hand physically.
 Constructive delivery takes place when the instrument is delivered to the agent, clerk or servant
of the indorsee on his behalf or when indorser, after indorsement, holds the instrument as an
agent of the indorsee.
 When an instrument is indorsed conditionally or for a special purpose only, the property in it
does not pass to the transferee, unless the NI is negotiated to HDC
 Until delivery, contract on a NI remains incomplete and revocable.
 Delivery is essential not only at time of negotiation but also at time of making/drawing of NI.
 Death of indorser:
If a person makes the indorsement of instrument but before the same could be delivered to the
indorsee the indorser dies, the legal representatives of the deceased person CANNOT negotiate
the same by mere delivery thereof (Section 57) (ICAI Module Question)
Note – Promise in a NI should be unconditional. However, promise in a negotiation can be conditional.
f. Delivery when effective between the parties

Negotiation of instruments How delivery is to be made
As between parties standing Delivery to be effectual must be made by maker, acceptor or
in immediate relation indorser, or by person authorized by them
As between such parties and It may be shown that instrument was delivered conditionally
any holder (not HDC) or for a special purpose only, and not for purpose of
transferring absolutely property therein.
Indorsement of instrument (Section 15)

 When the maker or holder of a NI signs the same, for the purpose of negotiation,
 he is said to indorse the same and called as the indorser
 The person to whom the instrument is indorsed is called the indorsee.
 Sign may be on the face or back of NI or on a slip of paper annexed thereto known as allonge.
Various Kinds of Indorsement

Indorsement in Restrictive
Indorsement in full Partial indorsement
blank indorsement
Conditional indorsement
Sans recourse, Liab. dependent on contingency, facultative, Sans frais
 Indorsement in blank (Only Signature)

 An indorsement where indorser just puts his sign without specifying indorsee.
 Effect - the NI becomes payable to bearer even though originally payable to order
 Indorsement in full (name and signature)
An indorsement where along with indorser's signature, the name of indorsee is specified
 Partial Indorsement

An indorsement which purports to transfer only a part of amount of NI. Such indorsement is invalid
under law
Exception: If a bill has been paid in part, the fact of the part payment may be indorsed on the
instrument, and it may then be negotiated for the residue.
 Restrictive Indorsement
An indorsement is restrictive when indorser while making indorsement:
 restricts or excludes right of indorsee to further transfer such NI or
 constitutes the indorsee as an agent to indorse the instrument or to receive its content for the
indorser or for some other specified person.
Note - Restrictive indorsement prohibits or restricts further negotiability of the instrument. It
merely entitles the holder to receive the amount for a specific purpose. It is a valid instrument.
Examples – Pay the contents to G only, Pay G for my use, etc.
 Conditional Indorsement
Where the indorser includes a stipulation negating (excluding) or limiting his own liability to the
holder by making such liability or right of indorsee to receive amount due thereon upon happening of
a specified event although such event may never happen (certain/uncertain event)
Conditional indorsement can be achieved by an indorser in any of the following ways

 Sans recourse indorsement
By excluding his liability e.g., the holder of a bill may indorse it thus: ‘Pay A or order without
recourse to me, or Pay A or order sans recourse, or Pay A or order at his own risk’.
 Liability dependent upon a contingency

By making his liability dependent upon the happening of a specified event which may never happen,
in such a case the liability of holder as an indorser, arises only upon the happening of the event
specified, and is extinguished if the event becomes impossible
Note – However, the indorsee can sue the prior parties before the event.
 Facultative indorsement
 An indorser by express words abandons some right or increases his liability under an NI.
 Example - Notice of dishonor waived’ is a facultative indorsement.
 ‘Sans frais’ indorsement

Where the indorser does not want the indorsee or any subsequent holder to incur any expenses
on his account on the instrument, it is ‘sans frais’.

Conversion of indorsement in blank into indorsement in full [section 49]
 The holder of NI indorsed in blank may, without signing his own name, by writing above indorser’s
sign a direction to pay to any other person as indorsee, convert indorsement in blank into an
indorsement in full; and the holder does not thereby incur the responsibility of an indorser.
 If a NI, after having been indorsed in blank, is indorsed in full, the amount of it cannot be claimed
from the indorser in full, except by the person to whom it has been indorsed in full, or by one who
derives title through such person.
 Essentials of a valid indorsement

 Signature of indorser
Indorsement can be either by merely signing the NI (in case of payable to bearer) or by
mentioning name of the person to whom such amount is payable (in case of payable to order)
 Who may indorse or negotiate
Maker, drawer, payee or indorsee in lawful possession – Solely or jointly may indorse the same
unless negotiability of such instrument has been restricted or excluded as per sec 50.
 Effect of indorsement
Indorsement followed by delivery transfers to the indorsee the property therein with right of
further negotiation, unless specifically restricted.
Instrument obtained by unlawful means /for unlawful consideration [section 58]

 When a NI has been lost, or
 has been obtained from any maker, acceptor or holder thereof by means of an offence or fraud, or
for an unlawful consideration
 no possessor or indorsee, who claims through the person who found or so obtained the instrument, is
entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party
prior to such holder, unless:
 such possessor or indorsee is HDC, or
 some person through whom he claims was HDC.
Instrument acquired after dishonour or when overdue [sec 59]

The holder of a NI, who has acquired it:
 after dishonour, whether by non-acceptance or non-payment, with notice thereof, or
 after maturity,
has only, as against other parties, the rights thereon of his transferor (same rights as transferor).
Accommodation notes or bill: Provided that any person who, in good faith and for consideration,
becomes holder, after maturity, of a PN or BOE made, drawn or accepted without consideration, for
enabling some party thereto to raise money thereon, may recover such amount from any prior party
(i.e., banks can recover from prior parties)
Instrument negotiable till payment or satisfaction [Section 60]

NI may be negotiated (except by the maker, drawee or acceptor after maturity) until payment or
satisfaction thereof at or after maturity, but not after such payment or satisfaction.
Discharge of indorser’s liability (Sec 40)

Where the holder of a NI, without the consent of the indorser, destroys or impairs the indorser’s
remedy against a prior party, the indorser is discharged from liability to the holder to the same
extent as if the instrument had been paid at maturity.
Negotiation Back (“taking up of a bill”)

o In the course of negotiation, if a NI is circulated/negotiated back by an indorser to any of the
prior party on the NI, it is termed as negotiation back.
o Person who becomes HDC under this negotiation back cannot make any intermediate indorsers liable.
o But where an indorser had excluded his liability, by the use of the words ‘sans recourse’ or ‘without
recourse to me’ and after that becomes holder of the instrument in his own right under the
‘negotiation back’, all intermediate indorsers are liable to him and in case of dishonour, he can
recover the amount from all or any one of them.
Discharge from liability on NI (Section 82 to 90):

a. Introduction:
 When a party who is liable of a NI, ceases to be liable, he is said to be discharged from liab.
 Discharge of liability of party to an instrument is different from discharge of NI itself
 When the rights against all the parties on a NI come to an end, the NI is discharged.
 After NI is discharged, no person (even HDC) can claim amount of NI from any party thereto.
 When the maker of PN or acceptor of BOE is discharged – All other parties and NI itself is
deemed discharged.
b. Modes of discharge from liability:

Holder allowing drawee holder agreeing to a qualified
Cancellation Release Payment
> 48 hours to accept or limited acceptance of BOE
Drawee not duly presenting cheque Bill coming to acceptor's hand Discharge by material
for acceptance after maturity alteration
By cancellation [Section 82 (a)]
 When holder of NI or his agent cancels the name of a party (Mr. X) on NI,
 with an intention to discharge him,
 such party (Mr. X) and all subsequent parties, who have right of recourse against Mr. X, are
discharged from liability to the holder.
By release [Section 82 (b)]

 Where the holder of NI, releases any party to the NI by any method other than cancellation,
 the party so released (and all subsequent parties) are discharged from liability.
 For instance – discharge by agreement, waiver, release, accord and satisfaction.
By payment [Section 78]

 When payment on an instrument is made in due course, both the instrument and the parties to
it are discharged subject to provision of Sec. 82(c)
 Such payment may be made by any party to NI or stranger (on account of party liable to pay).
By the holder allowing the drawee of a bill more than 48 hours to accept [Section 83]

If holder of a BOE allows the drawee > 48 hours, exclusive of public holidays, to consider whether
he will accept the same, all previous parties not consenting to such allowance are thereby discharged
from liability to such holder.
By the Holder agreeing to a qualified or limited acceptance of bill of exchange [Section 86]
If holder of a BOE agrees to a qualified acceptance, all prior parties whose consent is not obtained
to such an acceptance are discharged from liability.
Examples of qualified acceptance – Altering the sum ordered to be paid or accepting to pay at
specified place only and not elsewhere. [Refer QB 20]
By the Drawer not duly presenting a cheque for payment [Section 84] [Refer QB 18]
 If holder does not present a cheque within reasonable time after its issue, and
 the bank fails to make the payment
 causing damage to the drawer,
 the drawer is discharged as against the holder to extent of actual damage suffered by him.
Note
1. In determining what is a reasonable time, regard shall be had to
(a) the nature of the instrument
(b) the usage of trade and of bankers, and
(c) facts of the particular case.
2. The drawer will get discharge, but the holder of the cheque will be treated as creditor of the
bank, in place of drawer. He will be entitled to recover the amount from Bank
Example - A draws a cheque for Rs. 1,000, and, when cheque ought to be presented, has funds at
the bank to meet it. The bank fails before the cheque is presented. The drawer is discharged, but
the holder can prove against the bank for the amount of the cheque
By the bill coming to the acceptor’s hands after maturity (Section 90)
If a negotiated BOE, at or after maturity, held by the acceptor in his own right, all rights of action
thereon are extinguished. (i.e., rights and liabilities of the same person cancel each other)
Discharge by material alteration

 Any material alteration of NI renders the same void as against anyone who is a party thereto
at the time of making such alteration and does not consent thereto, unless it was made in order
to carry out the common intention of the original parties.
 In case of material alteration by an indorsee, the indorser will be discharged from his liability
even in respect of the consideration thereof
 The parties who consent to such alterations and those who make such alterations are
disentitled to complain against such alteration.
 Alteration must be material - which in any way alters the operation of the instrument and
affects the liability of parties thereto.

Any alteration is material which:
 alters the business effect of the instrument.
 causes it to speak a different language in legal effect form which it originally spoke,
or which changes the legal identity or character
Following alteration are specifically declared to be material – Any alteration of:
date sum payable time of pay place of payment or addition of place
Consider reading examples of material alteration - g. 2.39 of ICAI Mat (Not before exam)
 The following alterations do not affect the liability of parties thereto:

unitentional and correcting clerical consent of parties
before issue of NI
pure accident error liable
to carry out made by stranger parties who not material (e.g. -

commmon intention w/o holder's become liable full name instead
of original parties consent after alteration of first name)
 Alterations permitted (Exceptions to Section 87)

Section 20: Sec 29:
Incomplete NI can be filled up by holder NI indorsed in blank can be converted to
(inchoate instruments) indorsement in full by holder
Sec 125: Alteration should be apparent on face of

Crossing of uncrossed cheque (by holder) it. Else, valid in hand of HDC
Relevant case laws:

 By material alteration, identity of original NI is destroyed and those parties who had agreed to be
liable on original NI cannot be made liable on new contract contained in the altered instrument to
which they never consented (Gour Chandra vs Prasanna Kumar)
 By material alteration, the liability of the parties is avoided, whether the change be prejudicial or
beneficial to the parties [Loonkaran sethiya v Ivan E. John]

A PN was given to Mr. X without mentioning time for payment. Mr. X added payable on demand. Is
that material alteration? – No, it does not alter business effect of the instrument.

Dishonour of Negotiable Instruments
Dishonour by:
Non-acceptance Non-payment
Dishonour by non-acceptance
When is bill said to be dishonoured by non-acceptance?
A BOE is said to be dishonoured by non-acceptance in any one of the following ways (Sec 91):
[48 Excuses why Qualified Acceptance IS Fictitious]
a) when BOE is duly presented for acceptance, and drawee, does not accept or refuse acceptance
within 48 hrs from the time of presentment
b) where presentment is excused, and the bill is not accepted.
c) where the drawee is incompetent to contract (e.g., minor)
d) where the drawee is a fictitious person.
e) where the drawee could not be found even after reasonable search
f) when a drawee gives a qualified acceptance
Effect of non-acceptance - Holder can start an action against the drawer and indorsers and need not
wait for maturity of the bill.
Dishonour by non-payment
A note, bill and cheque is said to be dishonoured by non-payment when:
 the maker, acceptor or drawee of the cheque makes default in payment.
 upon being duly required to pay the same (Sec. 92).
Moreover, a NI is dishonoured by non-payment when presentment for payment is excused and the
instrument when overdue remains unpaid (Sec. 76).
Case Law - Where a promissory note was sent by registered post and the party liable refused to receive
the post, the bill was held to be dishonoured [K. Venkatasubbayya v. P.R. Rao Tobacco Co.]
Notice of Dishonour (NOD):

Notice of When NI is dishonoured (by non-acceptance/non-payment), the holder must give a
Dishonour NOD to drawer or his previous holder in order to make them liable.
(NOD)
If he fails to do so (except when NOD maybe excused), he will forfeit his right of
action against prior parties entitled to NOD
Object of  The object of NOD is to inform (or warn) the party or person liable on
NOD instrument about dishonour of the instrument.
 NOD is necessary in order to make drawer liable, on the dishonour by the drawee
or the acceptor
By and to
By Whom?  NOD must be given by holder, or by a person liable thereon.
whom notice
 NOD by stranger is of no effect.
should be
 Even NOD by a party to the instrument is not valid, if, he is
given
not liable thereon. (Ex. Sans recourse party)

(Sec 93) To Whom?  NOD must be given to all parties whom holder seeks to make
liable (other than maker/ acceptor/ drawee as they are
parties primarily liable) on the due date and at proper place
Modes of  NOD may be given to duly authorized agent of person to whom it is required to
giving Notice be given, or, if dead, to his LR or, if insolvent, to his assignee;
(Section 94).  It may be oral or written (if written, sent by post); and
 NOD must inform the party, either in express term or by reasonable in
intendment, that NI has been dishonoured, and in what way, and that he will be
held liable thereon
 Within reasonable time after dishonour,
 At place of business or in case such party has no place of business, at the
residence of the party for whom it is intended.
 If the notice is duly directed and sent by post and miscarries, such miscarriage
does not render the notice invalid
Party  Any party receiving NOD must, in order to render any prior party liable to
receiving himself, give NOD to such party within reasonable time, unless such party
must otherwise receives NOD directly from holder u/s 93
transmit  Thus, a person receiving notice must transmit it to prior parties whom he wishes
NOD to make liable to himself because holder may have omitted giving NOD to some
(Sec 95) prior parties.
Agent of  When NI is deposited with an agent for presentment,

presentment  the agent is entitled to the same time to give notice to his principal as if he were
(Sec 96) the holder giving NOD, and
 principal is entitled to a further like period to give notice of dishonour.
When party to When the party to whom NOD is dispatched is dead, but party dispatching the
whom notice given
is dead (sec 97) notice is ignorant of his death, the notice is sufficient
When NOD is No NOD is necessary:
unnecessary i. waiver i.e., party entitled thereto has dispensed such right (facultative indorse)
(Sec 98) j. in order to charge the drawer, when he has cancelled payment (e.g., cheque)
k. to charge the drawers, when acceptor is also drawer
l. when the party charged could not suffer damages for want of notice
m. parties entitled to notice cannot after due search be found or
n. party bound to give notice is unable to, without any fault of his own
o. in the case of PN which is not negotiable
p. when parties entitled to notice, knowing the fact of dishonour, promises
unconditionally to pay the amount due

Dishonour of cheques for insufficiency of funds in the accounts [Sec 138 to 142]
Sec 138: Dishonour of cheque for insufficiency, etc., of funds in the accounts
Where any cheque drawn by a person on an account maintained by him with a banker
o for payment of any amount of money
o to another person from that account
o for the discharge, in whole or in part, of any debt or other liability
o is returned by the bank unpaid,
o either because of the
o amount of money to credit of account is insufficient to honor cheque, or
o that it exceeds amt arranged to be paid from that account by an agreement made with bank,
such person shall be deemed to have committed an offence (criminal) and shall be punished with
o imprisonment for a term which may extend to 2 years, or
o with fine which may extend to 2x amount of the cheque, or both
Provided that this section shall not apply, unless:

 Cheque presented within validity period: The cheque has been presented to bank within 3 months
from date on which it is drawn or within period of its validity, whichever is earlier.
 Demand for payment through notice: the payee or the HDC of cheque, as the case may be, makes a
demand for the payment of the said amount of money by giving a notice, in writing, to the drawer
of the cheque, within 30 days of the receipt of information by him from the bank regarding the
return of the cheque as unpaid, and
 Failure of drawer to make payment: the drawer of such cheque fails to make payment of said amount
of money to payee or HDC of the cheque, within 15 days of the receipt of the said notice.
Note – A cheque dishonoured on account of stop payment request by drawer due to unavailability of
funds shall also be considered as dishonor of cheque and shall attract penalty on drawer. Refer Q 25
Section 139: Presumption in favor of holder

Unless the contrary is proved, when a cheque is dishonoured, it shall be presumed that the holder
thereof received the cheque for discharge, in whole or in part, or any debt or other liability.
Note – Above presumption prescribed here is a “rebuttable presumption”
Section 140: Defence which may not be allowed in any prosecution u/s 138
It shall not be a defence in a prosecution of an offence u/s 138 that drawer had no RGTB when he
issued cheque that cheque may be dishonoured on presentment for reasons stated in that section.
Section 141: Offences by Companies

1. Where person committing contravention is a company:
 Every person who, at time of contravention, was responsible to co. for conduct of biz, and
 Company itself
Shall be deemed to be guilty and liable to be proceeded against and punished accordingly
Person shall not be liable to punishment if he proves that contravention took place:
 without his knowledge or
 that he exercised all due diligence to prevent such contravention.

2. Where person is nominated as director of a co. by virtue of his holding any office or employment
in the CG/SG or a financial corporation owned or controlled by the CG/SG, as the case may be, he
shall not be liable for prosecution under this chapter i.e., Nominee director shall not be liable.
3. Where it is proved that contravention has taken place with:

 the consent or connivance of, or
 is attributable to any neglect on part of Dir/Mgr/CS/Other officer
Such Dir/Mgr/CS/Other officer shall also be deemed guilty and

liable to be proceeded against and punished
Section 142: Cognizance of offence u/s 138:

 A written complaint to be filed to Metropolitan Magistrate or first class Judicial Magistrate by
Payee/HDC
 within 1m from date of cause of action (i.e., failure of drawer to make payment despite notice)
 No court inferior to metropolitan or judicial magistrate can try for such offence
Offence u/s 138 shall be inquired into and tried only by court within whose local jurisdiction:
 If cheque is delivered for collection through (bank) account – Branch of the bank where payee or
HDC maintains the account is situated
 Otherwise, branch of the drawee bank where drawer maintains account is situated.
Power of court to try cases summarily (Section 143)

Trial of Offence: Notwithstanding anything contained in the CCP, 1973, all offences under this Chapter
shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate.
In case of summary trial: It shall be lawful for the Magistrate to pass a sentence of imprisonment for
a term not > 1 year and an amount of fine not > Rs. 5,000.
Summary trial not allowed: If it appears to Magistrate that the nature of the case is such that:
 a sentence of imprisonment for a term > 1 year may have to be passed or
 that it is, for any other reason, undesirable to try the case summarily,
the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall
any witness who may have been examined and proceed to hear or rehear the case in the manner provided
by the said Code.
Speedy Trial: The trial of a case shall, so far as practicable, consistently with the interests of justice,
be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial
beyond the following day to be necessary for reasons to be recorded in writing.
Speedy and efficient Disposal: Every trial shall be conducted as expeditiously as possible, and an
endeavour shall be made to conclude the trial within 6 months from date of filing of complaint.

Section 143A: Power to direct interim compensation
 Court trying offence u/s 138 may order drawer to pay interim compensation to the complainant.
 Such interim compensation shall not exceed 20% of amount of cheque.
 Such compensation shall be paid within 60 days from date of order (+ upto 30 days on sufficient
cause shown by drawer)
 If drawer is acquitted, the Court shall direct the complainant to repay to the drawer such interim
comp., with interest at bank rate within 60 days from date of order (+ upto 30 days on sufficient
cause shown by complainant)
 Interim compensation may be recovered as if it were a fine
Section 147: Offences to be Compoundable

Notwithstanding CCrP, 1973, every offence punishable under this Act shall be compoundable
Section 148: Power of Appellate court to order payment pending appeal against conviction
 Notwithstanding CCrP, 1973, in an appeal by drawer against conviction u/s 138, Appellate Court may
order appellant to deposit such sum (min 20% of fine or compensation awarded by trial Court)
Provided that amount payable here shall be in addition to any interim compensation paid u/s 143A.
 Above amount shall be deposited within 60 days from date of order (+ Upto 30 days if sufficient
cause shown by appellant)
 Appellate Court may direct release of amount deposited by the appellant to the complainant at any
time during the pendency of the appeal.
Provided that if appellant is acquitted, Court shall direct complainant to repay to appellant the
amount so released, with interest at bank rate within 60 days from date of order (+ Upto 30 days
if sufficient cause shown by complainant)
The End

Introduction:
 The General Clauses Act, 1897 (GCA) contains ‘definitions’ of certain terms and general principles
of interpretation.
 The GCA also comes for a rescue in the absence of clear definition in the specific enactments
 Objects of the Act are:
o to shorten the language of Central Acts;
o to provide for uniformity of expression by giving definitions for common terms;
o to state explicitly certain convenient rules for construction and interpretation of central acts;
o to guard against slips and oversights by importing certain common clauses.
Application Of the General Clauses Act
Act does not define any “territorial extent” clause. It applies to the Central Acts.
The Central Acts to which this Act apply are:

(a) Acts of Indian Parliament (Central Act) along with rules and regulations made thereunder;
(b) Acts of Dominion Legislature passed between 15th August 1947 and the 26th of January 1950;
(c) Acts passed before commencement of the Constitution by the Governor-General in Council or the
Governor-General acting in a legislative capacity.
Article 367 of the Constitution of India authorises use of General Clauses Act for the interpretation
of constitution.
Some Basic Understand of Legislature:

“Preamble”: Every Act has a preamble which expresses the scope, object and purpose of the Act. It is
the main source for understanding the intention of lawmaker behind the Act. Whenever there is
ambiguity in understanding any provision of Act, Preamble is accepted as an aid to construction of the
Act.
Note - The Preamble to an Act discloses the primary intention of the legislature but can only be
brought in as an aid to construction if the language of the statute is not clear. However, it cannot
override the provisions of the enactment.
Definitions - Words are defined in the respective Act. Sometimes, definitions are referred in other
statutes. If words are not defined in the respective Acts, such words are to be taken from General
Clauses Act.
Section 1: Preliminary – Short Title – General Clause Act, 1897

Section 2: - Repealed.
Chapter 3 – General Clause Act

Section 3: Definitions:
Act 'Act', used with reference to an offence or a civil wrong, shall include a series of
acts, and words which refer to acts done extend also to illegal omissions;
Affidavit 'Affidavit' shall include affirmation and declaration in the case of persons by law
allowed to affirm or declare instead of swearing.
Note: The terms “Affidavit”, “Oath” & “Swear” have same definitions in the Act.
Central Govt  In relation to anything done before the commencement of the Constitution,
mean the Governor General in Council
 In relation to anything done or to be done after the commencement of the
Constitution, mean the President
Commencement The day on which the Act or Regulation comes into force;
Coming into force or entry into force refers to the process by which legislation;
regulations, etc. comes to have legal force and effect.
State of Orissa Vs. Chandrasekhar Singh Bhoi

A Law cannot be said to be in force unless it is brought into operation by legislative
enactment, or by the exercise of authority by a delegate empowered to bring it
into operation. The theory of a statute being “in operation in a constitutional sense”
though it is not in fact in operation has no validity.
Document Document shall include

 any matter written, expressed or described upon any substance
 by means of letters, figures or marks or by more than one of those means
 which is intended to be used or which may be used,
 for the purpose or recording that matter.
For example, book, file, painting, inscription and even computer files are all
documents. However, it does not include Indian currency notes.
Enactment Shall include a Regulation (as hereinafter defined) and any Regulation of Bengal,
Madras or Bombay Code, and shall also include any provision contained in any Act or
in any such Regulation as aforesaid;
It has been held that an “enactment” would include any Act (or a provision
contained therein) made by the Union Parliament or the State Legislature.
Financial year FY shall mean the year commencing on the first day of April.
Year Means - A year reckoned according to the British calendar (Jan to Dec)

Good Faith  A thing shall be deemed to be done in “good faith” where it is in fact done
honestly, whether it is done negligently or not;
 The question of good faith under GCA is one of fact. It is to be determined
w.r.t. the facts and circumstances of each case.
 The term “good faith” has been defined differently in different enactments.
 This definition of the good faith does not apply to that enactment which
contains a special definition of the term “good faith” and the definition given in
that particular enactment has to be followed.
 Definition may be applied only if there is nothing repugnant in context.
In Maung Aung Pu Vs. Maung Si Maung, it was pointed out that:

 the expression “good faith” is not defined in the Indian Contract Act, 1872 and
definition given here in GCA, 1897 does not expressly apply the term on ICA.
 The definition of good faith as is generally understood in the civil law, and
which may be taken as a practical guide in understanding the expression in ICA
 The definition is that - Nothing is said to be done in good faith which is done
without due care and attention as is expected with a man of ordinary prudence.
 An honest purchase made carelessly without making proper enquiries cannot be
said to have been made in good faith so as to convey good title.
Government shall include both the Central Government and State Government.
Immovable shall include:
Property  Land,
 Benefits to arise out of land, and
 Things attached to the earth, or
 Permanently fastened to anything attached to the earth.
Where, in any enactment, the definition of immovable property is in the negative

and not exhaustive, the definition as given in GCA will apply.
Example:
1. In Shantabai v. State of Bombay, the Supreme Court pointed out that trees
must be regarded as immovable property (IP) because they are attached to or
rooted in the earth.
2. An agreement to convey forest produce like tendu leaves, timber, bamboos etc.,
the soil for making bricks, the right to build on and occupy the land for business
purposes and the right to grow new trees and to get leaves from trees that
grow in further are all included in the term IP.
3. Right of way to access from one place to another, may be considered as IP
4. Right to drain of water is NOT IP.
5. Any machinery fixed to the soil, standing crops can be held as IP
6. Insurance Policies covering immovable property – Not covered under IP
Example:

Ananda Behera v. State of Orissa. “Right to catch or carry fish‟ as an IP.
Imprisonment shall mean imprisonment of either description as defined in the Indian Penal Code;
i.e., Rigorous or Simple imprisonment
Movable Prop mean property of every description, except immovable property.
Section 4 is transition provision and hence intentionally not covered here
Section 5: Coming into operation of enactment.

 Where, if any specific date of enforcement is prescribed in the Official Gazette, Act shall into
enforcement from such date.
 Where any Central Act has not specifically mentioned a particular date to come into force, it shall
be implemented on the day on which it receives the assent of:
o Governor General (for Acts made before commencement of Indian Constitution)
o the President in case of an Act of Parliament.
Example:
SEBI (ICDR) (5th Amendment) Regulations, 2015 was issued by SEBI vide Notification dated 14th
August 2015 w.e.f. 1 January 2016. Here, this regulation shall come into force on 1st January 2016
rather than the date of its notification in the gazette.
Notes:
1. Where an Act empowers the government to bring any of the provisions into operation on any day
which it deems fit, no Court can issue a mandamus with a view to compel the Government to bring
the same into operation on particular day.
2. If a sufficient time has elapsed since an Act or any of its provisions has been passed and it has not
been brought into force (operation) by the Government, the Court through a writ can direct the
Government to consider the question as to when the same should begin to operate.
3. Effective date of Rules:
Supreme Court held that effective date of Rules would be when the Rules are published vide
Gazette notification and not from date when the Rules were under preparation.
4. Law takes no cognizance of fraction of day. It comes into force from midnight.
Example – Law which comes into force on 1st Jan shall apply from midnight of 31st December.
5. All laws are applicable prospectively unless otherwise mentioned specifically.
Section 6: Effect of Repeal:

Where any Central legislation or regulation repeals any Act made or yet to be made, unless another
purpose exists, the repeal shall not: [Revive Right Penalty Litigation]
 Revive anything not enforced or prevailed during the period at which repeal is effected or;
 Affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment
so repealed; or
 Affect any penalty, forfeiture or punishment incurred in respect of any offence committed against
any enactment so repealed; or
 Affect any inquiry, litigation or remedy w.r.t. such claim, privilege, debt or responsibility or any
inquiry, litigation or remedy may be initiated, continued or insisted.
Important Case Laws:

Kolhapur Canesugar Supreme Court held that Sec 6 only applies to repeal and not to omissions
Works Ltd. V, Union and applies when repeal is of a Central Act or Regulation and not of a Rule.
of India
Navrangpura Gam  ‘Repeal’ of provision is in distinction from ‘deletion’ of provision.
Dharmada Milkat  ‘Repeal’ ordinarily brings about complete obliteration of the provision as
Trust v. Ramtuji if it never existed, thereby affecting all incoherent rights and all causes
Ramaji of action related to the ‘repealed’ provision.
 ‘Deletion’ ordinarily takes effect from date of legislature effecting the
said deletion, never to effect total wiping out of the provision as if it
never existed.
Example:
The 3 farm laws were repealed after 1 year of protest by the farmers.
Section 6A: Repeal of Act making textual amendment in Act or Regulation

 Where any Central Act or Regulation repeal any enactment
 then such repeal shall not affect continuance of any amendment or insertion made by the
enactment so repealed.
Section 7: Revival of repealed enactments:

 In any Central Act or Regulation made after commencement of this Act,
 for the purpose of reviving, either wholly or partially, any enactment wholly or partially repealed,
 it shall be necessary to expressly state that purpose.
Section 8: Construction of references to repealed enactments

 Where this Act or Central Act or Regulation made after the commencement of this Act,
 repeals and re-enacts, with or without modification, any provision of a former enactment,
 then references in any other enactment or in any instrument to the provision so repealed shall,
 unless a different intention appears, be construed as references to the provision so re-enacted.
Example:
1. Companies Act 1956 was repealed and re-enacted as Companies Act, 2013. In such case, every
other Act which had reference to Companies Act 1956 will be construed as reference to 2013
unless different intention appears.
2. In section 115 JB of the Income Tax Act, 1961, for calculation of book profits, the Co. Act, 1956
are required to be referred. With the advent of Co. Act, 2013, the corresponding change has not
been made in section 115 JB of the Income Tax Act, 1961. On referring of Sec. 8 of the GCA, book
profits to be calculated u/s 115 JB of the Income Tax Act will be as per the Co. Act, 2013.
Section 9: Commencement and termination of Time:

 In any legislation or regulation, it shall be sufficient,
 for purpose of excluding the first in a series of days to use the word “from” &
 for the purpose of including the last in a series of days to use the word “to”.
 In simple words – Where the word “from” is used, exclude that particular date and where the word
“to” is written, “include” that date.
Example:

A company declares dividend for its shareholder in its AGM held on 30/09/2016. Under the provisions
of the Companies Act, 2013, company is required to pay declared dividend within 30 days from the
date of declaration i.e., from 01/10/2016 to 30/10/2016. In this series of 30 days, 30/09/2016 will be
excluded and last 30th day i.e., 30/10/2016 will be included.
Section 10: Computation of time:

 Whereby any legislation or regulation,
 any act is directed to be done in any court or office on a certain day or within prescribed period
 then, if the Court or office is closed on that day or last day of the prescribed period,
 the act shall be considered as done in due time if it is done on the next day afterwards on which
the Court or office is open.
Note – Even if the offices or Court are closed because of some random holiday or Sunday or Saturday
or any reason, this provision will still apply.
Section 11: Measurement of Distances

Unless a different intention appears – Measure in a straight line on a horizontal plane.
Example:. Distance between two cities by roadways is 100 kms and by water ways 80 kms. For purpose
of any Central Act under GCA, distance shall be measured in a straight line on a horizontal plane.
Section 12: Duty to be taken pro rata in enactments

 Whereby any enactment, any duty of customs or excise or in the nature thereof, is leviable on any
given quantity, by weight, measure or value of any goods or merchandise,
 then a like duty is leviable according to the same rate on any greater or less quantity.
Section 13: Gender and number

In all legislations and regulations, unless there is anything repugnant in the subject or context-
 Words importing the masculine gender shall be taken to include females, (i.e., he includes she) and
 Words in singular shall include the plural and vice versa.
Exception: Where word used conveys a specific gender, there is a presumption that provisions of GCA
do not apply. For example:
1. the word ‘bullocks’ could not be interpreted to include ‘cows’.
2. The word ‘male descendants’ cannot be interpreted to include females
Section 14: Power and Functionaries:

Powers conferred by Central Acts may be exercised from time to time as occasion requires.
Section 15:
 a power to appoint any person to fill any office is conferred, then unless otherwise provided,
 any such appointment, may be made either by name or by virtue of office.
Section 16: Power to appoint to include power to suspend or dismiss:

 The authority having for the time being power to make the appointment

 shall also have power to suspend or dismiss any person so appointed
Example - Wherever the law provides that court will have the power to appoint, suspend or remove a
receiver, the legislature simply enacted that wherever convenient the court may appoint receiver and
it was implied within that language that it may also remove or suspend him
Section 17: Substitution of Functionaries:

 For indicating the application of a law to every person executing the functions of an office,
 it shall be sufficient, to mention the official title of the officer at present executing the
functions, or that of the officer by whom the functions are commonly executed.
Section 18: Successor

 For indicating the relation of a law to successors of any functionaries,
 it shall be sufficient to express its relation to the functionaries.
Section 19: Official Chiefs and subordinates

A law relative to the chief or superior of an office shall apply to the deputies or subordinates lawfully
performing the duties of that office in the place of their superior.
Section 20: Construction of orders, etc., issued under enactments

 a power to issue any notification, order, scheme, rule, form, or by-law is conferred,
 then expression used in such notification, etc., shall, unless otherwise specified, have the same
respective meaning as in the Act or regulation conferring power.
Section 21:
 Where any legislation or regular confers the power to issue notifications, etc.,
 it shall be deemed to include power to add, to amend, vary or rescind such notifications, etc.
Section 22:
 Where, by any Central Act or Regulation (which is not in force), on the passing thereof, a power is
conferred to make rules or bye-laws, or to issue orders thereunder,
 then that power may be exercised at any time after passing of Act /Regulation (even before
commencement thereof);
 but such rules, bye-laws or orders shall not take effect till commencement of Act or Regulation.
For example: If Companies Act, 2013 was passed on 29th Aug 2013. It authorised CG to make rules
related to NCLT. CG made rules related to NCLT in 2014. However, NCLT provisions were not
implemented till 2016. In such cases, the NCLT Rules will also apply only from 2016.
Section 23: Publication for public comments:

Where power to makes Rules, etc. is subject to the condition of rules or bye-laws being made after
previous publication, then:
Publish draft Specify date Consider objection Publish in OG
1. Publish a draft of the proposed rules or bye-laws for the information of persons likely to be
affected thereby (in manner prescribed)

2. It shall be published with the draft notice specifying a date on or after which the draft will be
taken into consideration.
3. Consider any objection or suggestion which may be received from any person w.r.t. draft before
the date so specified;
4. Publication in the Official Gazette of such rule or bye-law after previous publication shall be
conclusive proof that the rule or bye-laws has been duly made
Conclusive presumption - After the publication of the rules in the Official Gazette, it is to be inferred
that the procedure for making the rules has been followed. Any irregularities in the publication of the
draft cannot therefore be questioned.
Note - It is also open to the authority to make suitable changes in the draft before finally publishing
them. It is not necessary for that authority to re-publish in the amended form before their final issue
so long as the changes made are ancillary to the earlier draft and cannot be regarded as foreign to the
subject matter thereof.
Section 24: Continuation of orders etc., issued under enactments repealed and re- enacted
 If a statute is repealed and re-enacted in the same or substantially the same terms, the re-
enactment neutralizes the previous repeal and the provisions of the repealed Act which are re-
enacted, continue in force without interruption.
 If, however, the statute is repealed and re-enacted in somewhat different terms, the amendments
and modifications operate as a repeal of provisions of repealed Act which are changed by and are
repugnant to the repealing Act.
Example - The Mines Act of 1923 was repealed and replaced by the Mines Act of 1952. Rules made
under the repealed Act must be deemed to continue in force by virtue of this section until superseded.
Section 25: Recovery of fines (to be done as per IPC and CCrP):
 Sec 63 to 70 of the Indian Penal Code (IPC) and
 provisions of Code of Criminal Procedure w.r.t issue and execution of warrants for levy of fines
 shall apply to all fines imposed under any Act, Regulation, etc.,
 unless otherwise specified.
Section 26: Provision as to offence punishable under two or more enactments

 Where an act or omission constitutes an offence under 2 or more enactments,
 then offender shall be liable to be prosecuted & punished under either or any of those enactments,
 but shall not be punished twice for the same offence.
Note – As per Supreme Court, a plain reading of sec 26 shows that there is no bar to trial or conviction
of an offender under 2 enactments, but there is only a bar to punishment twice for the same offence.
Additional Points:
1. When there are 2 alternative charges in same trial, e.g., sec 409 of IPC and sec 5(2) of Prevention
of Corruption Act, the fact that accused is acquitted of one of the charges will not bar his
conviction on the other. [M.P. v. V.R. Agnihotri]
2. This provision apply only when 2 offences which form the subject of prosecution is the same, i.e.,
the ingredients which constitute the two offences are the same. If the offences under the two
enactments are distinct and not identical, none of these provisions will apply.

Section 27: Meaning of service by post:
Where any legislation or regulation requires any document to be served by post, then unless a
different intention appears, the service shall be deemed to be effected by:
(i) Properly Addressing
(ii) Pre-paying, and
(iii) Posting by registered post.
A letter containing the document to have been effected at the time at which the letter would be
delivered in the ordinary course of post.
Important case laws:

United A notice when required by law to be sent by ‘registered post acknowledgement
Commercial due’ is instead sent by ‘registered post’ only, the protection of presumption
Bank v. Bhim regarding serving of notice under ‘registered post’ under this section of the Act
Sain Makhija is neither tenable nor based upon sound exposition of law.
Jagdish Singh.v Held that - where notice is sent to landlord by registered post, and it is returned
Natthu Singh by tenant with an endorsement of refusal - presumed notice has been served.
Smt. Vandana Held that - where notice sent by registered post to person concerned at proper
Gulati v. address is deemed to be served upon him in due course unless contrary is proved.
Gurmeet Singh Endorsement ‘not claimed/not met’ is sufficient to prove deemed service thereof.
Section 28, 29 and 30 – Intentionally not covered.

The notes for this chapter will be available separately at – www.shubhamsinghal.com >> Free Resources
>> CA Intermediate Section.
Best of Luck, Dear Student.

You Rock!
Please note – This is the first print edition of the Ultimate Solution Summary Notes. If you find any
error, please let me know at [email protected] and I will be happy to correct it in the next
edition. I hope you loved this edition.
Chapter 4 – Interpretation of Statute

CA Shubham Singhal (AIR 4)
Chapter 13
Interpretation Of
Statutes
Chapter Map
Rules For Documents and Deeds

Interpretation and
Construction Internal Aids
Aids
External Aids
Important Definitions
1. Statute
¾ To the common man the term ‘Statute’ generally means laws and regulations of various kinds
irrespective of the source from which they emanate.
¾ In India the constitution provides for the passing of a bill in Lok Sabha and Rajya Sabha
and finally after obtaining the assent of the President of India to it, it becomes an Act of
Parliament or Statute.
2. Document
¾ A document is a paper or other material thing giving information, proof or evidence of
anything.
¾ Section 3 of the Indian Evidence Act, 1872 states that ‘document’ means any matter
expressed or described upon any substance by means of letters, figures or marks or by
more than one of those means, intended to be used, or which may be used, for the purpose
of recording that matter.
¾ Section 3(18) of the General Clauses Act, 1897 states that the term ‘document’ shall include
any matter written, expressed or described upon any substance by means of letters, figures
or marks, or by more than one of those means which is intended to be used, or which may
be used, for the purpose of recording this matter.
Elements of documents
Matter Record Substance Means
3. Elements
¾ Matter: This is the first element. Its usage with the word “any” shows that the definition
of document is comprehensive.
¾ Record: This second element must be certain mutual or mechanical device employed on the
substance. It must be by writing, expression or description.
Interpretation Of Statutes 13.1

¾ Substance: This is the third element on which a mental or intellectual element comes to find
a permanent form
¾ Means: This represents forth element by which such permanent form is acquired and those
can be letters, any figures, marks, symbols which can be used to communicate between two
persons.
4. Instrument:
¾ Formal legal document which creates or confirms a right or records a fact.
¾ Formal writing of any kind, such as an agreement, deed, charter or record, drawn up and
executed in a technical form or a formal legal document having legal effect, either as
creating a right or liability or as affording evidence of it.
¾ Section 2(14) of the Indian Stamp Act, 1899 states that ‘instrument’ includes every
document by which any right or liability is or purports to be created, transferred, extended,
extinguished or recorded.
5. Deed:
¾ An instrument in writing (or other legible representation or words on parchment or paper)
purporting to effect some legal disposition.
¾ All Deeds are instruments but all instruments may not be deeds.
Interpretation/Construction
Interpretation
¾ The process by which the Courts seeks to ascertain the meaning of the legislature through the
medium of the words in which it is expressed.
¾ The process by which the real meaning of an Act (or a document) and the intention of the
legislature in enacting it (or of the parties executing the document) is ascertained.
¾ Interpretation is resorted to in order to resolve any ambiguity in the statute.
Construction
¾ Is applied to a written statute or document
¾ It means to determine from its known elements its true meaning or the intention of its framers.
¾ Involves drawing conclusions beyond the actual expressions used in the text by referring to
other parts of the enactment and the context in which the law was made.
¾ Thus, when you construe a statute you are attempting to ascertain the intention of the
legislature.
Difference between Interpretation and Construction

In practice construction includes interpretation and the terms are frequently used synonymously.
However, these two terms have different connotations.
Interpretation Construction
Ascertaining the meaning of words and the Drawing of conclusions from a statute that lie
true sense in which the author intended that beyond the direct expression of the words used
they should be understood therein
13.2 Interpretation Of Statutes

Where the Court adheres to the plain meaning Where the court decides whether the wording
of the language used by the legislature was meant to cover the situation before the
court
Importance of Interpretation
¾ Interpretation is resorted to in order to resolve any ambiguity in the statute.
¾ It is the art of finding out the true sense of words that is to say the sense in which their author
intended to convey the subject matter.
¾ In relation to statute law, interpretation is of importance because of the inherent nature of
legislation as a source of law.
General Classification of Interpretation
Legal Doctrinal
Authentic Usual Grammatical Logical
Note
¾ Authentic is when rule of interpretation is derived from the legislator himself.
¾ Usual is when rule of interpretation is derived from some other source such as custom or case
law.
¾ Grammatical is when the court applies only the ordinary rules of speech.
¾ Logical when the court goes beyond words and tries to discover intention of the statute in some
other way.
Need of interpretation/ construction?

¾ The words of a statute can be vague, ambiguous or reasonably capable of more than one meaning.
¾ The fundamental rule of interpretation of a statute is that it should be expounded according to
the intent of those that made it.
¾ The purpose of interpretation is to discern the intention which is conveyed either expressly or
impliedly by the language used.
¾ Normally, grammatical interpretation is the only approach to be adopted. This is based
on the principle of absoluta sententia expositore non indiget meaning “clear words need no
explanation.” Where the law is clear and unambiguous the court shall construe it based on the
strict grammatical meaning. The emphasis in grammatical interpretation is on “what the law
says.”
¾ However, where the grammatical interpretation leads to a manifest absurdity or is logically
flawed, the courts can adopt the logical interpretation which seeks to ascertain “what the law
means”.

Rules Of Interpretation/ Construction

Primary Rules
1. Rule of Literal Construction
¾ It is a cardinal rule of construction and it is the primary duty of the court that a statute
must be construed literally and grammatically giving the words their ordinary and natural
meaning.
¾ If the phraseology of a statute is clear and unambiguous and capable of one and only one
interpretation, then it would not be correct to extrapolate these words out of their natural
and ordinary sense. “Absoluta sententia expositore non indiget”
¾ If there is an inconsistency with any express intention or declared purpose of the statute,
or it involves any absurdity, repugnancy, inconsistency, the grammatical sense must then be
modified, extended or abridged only to avoid such an inconvenience, but no further.
¾ Technical words are to be understood in technical sense
2. Rule of Reasonable Construction (Interpretatio fienda est ut res magis valeat quam pereat)
¾ the words of a statute must be construed ‘ut res magis valeat quam pereat’ meaning thereby
that words of statute must be construed so as to lead to a sensible meaning.
¾ When the words of an enactment are capable of two constructions that there is scope for
interpretation or construction. Then, that interpretation, which furthers the object, can be
preferred to that which is likely to defeat or impair the policy or object.
¾ When the grammatical interpretation leads to a manifest absurdity then the courts
shall interpret the statute so as to resolve the inconsistency and make the enactment a
consistent whole, it is permissible to depart therefrom and to interpret the provision of
statutes only to the extent it avoids such absurdity and no further. This is the Golden Rule
of Interpretation
3. Rule of Harmonious Construction

¾ The expressions used therein should ordinarily be understood in a sense in which they best
harmonize with the object of the statute.
¾ This rule is applied when there is a conflict between two provisions of a statute.
¾ Where an expression is susceptible of a narrow or technical meaning, as well as a popular
meaning, the court would be justified in assuming that the legislature used the expression
in the sense, which would carry out its objects and reject that which renders it invalid.
¾ “Generalia specialibus non derogant”. A specific rule will override a general rule.
¾ This rule can be adopted only when there is a real and not merely apparent conflict between
provisions, where the words of a statute, on a reasonable construction thereof, admit of
one meaning only then such natural meaning will prevail.
¾ In some cases, statute may give a clear indication as to which provision is subservient and
which overrides. This is done by the use of the terms “subject to”, “notwithstanding” and
“without prejudice”.
a) Subject to : When the same subject matter is covered by that provision and by another
provision or enactment subject to which it operates and there is a conflict between
them, then the latter will prevail over the former.

b) Notwithstanding : Unlike the “subject to” clause, the notwithstanding clause has the
effect of making the provision prevail over others.
c) Without prejudice : When certain particular provisions follow general provisions and
when it is stated that the particular provisions are without prejudice to those general
provisions the particular provisions would not restrict or circumscribe the operation
and generality of the preceding general provisions.
4. Rule in Heydon's Case or Mischief Rule

¾ What was Heydon’s Case? In Heydon’s case (1584 3 Co Rep 79 P. 637), it was laid down by
the Barons of the Exchequer that “for the true and sure interpretation of all Statutes in
general, four things are to be discerned and considered.
a. What was the law before the making of the act?
b. What was the defect, mischief, hardship caused by the earlier law?
c. How does the act of Parliament seek to resolve or cure the mischief or deficiency?
d. What are the true reasons for the remedy?
¾ The intention of this rule is always to make such construction as shall suppress the mischief
and advance the remedy according to the true intention of the legislation.
¾ Applying Heydon’s case courts will be bound to look at the state of the law at the time of
the passing of the enactment and not only as it then stood, but under previous Statutes too.
¾ The mischief rule can be applied only if there is any ambiguity in the present law.
5. Rule of Beneficial Construction

¾ This is strictly speaking not a rule but a method of interpreting a provision liberally so as to
give effect to the declared intention of the legislation.
¾ Beneficial construction will be given to a statute, which brings into effect provisions for
improving the conditions of certain classes of people who are under privileged or who have
not been treated fairly in the past.
¾ In such cases it is permissible to give an extended meaning to words or clauses in enactments.
¾ But this can only be done when two constructions are reasonably possible and not when the
words in a statute are quite unequivocal.
6. Rule of Exceptional Construction

¾ We have already seen that the words of a statute must be construed so as to give a sensible
meaning to them if possible. They ought to be construed ut res magis valeat quam pereat.
¾ “And” and “Or”
And Or
A particle joining words and sentences and A disjunctive particle that marks an
expressing the relation of connection or addition. alternative, generally corresponding to
The word “and” is normally conjunctive that is used “either”, as “either this or that”.
to conjoin words, clauses or sentences, signifying
that something is to follow in addition to that,
which precedes.

But sometimes “and” is read as “or” and vice versa to give effect to the manifest intention
of the legislature as disclosed from the context.That would depend on the context and
meaning of other provisions in the same statute or document.
¾ “May”, “Must” and “Shall”
a) ‘May’ signifies permission and implies that the authority has been allowed discretion.
“May” though permissive sometimes has compulsory force and is to be read as shall.
Where the word ‘may’ has been used as implying a requisite condition to be fulfilled, the
court will and ought to exercise the powers which it should and in such a case the word
‘may’ will have a compulsory force.
b) ‘Must’ is doubtlessly a word of command.
c) “Shall” though mandatory is to be read as may. It is well – settled that the use of the
word ‘shall’ does not always mean that the enactment is obligatory or mandatory; it
depends upon the context in which the word ‘shall’ occurs and on the purpose for which
the requirement has been enacted, particularly in the context of the other provisions
of the Act and the general scheme thereof.
7. Rule of Ejusdem Generis

¾ The term ‘ejusdem generis’ means ‘of the
Statute
same kind or species’.
¾ “Where specific words pertaining to a
class or category or genus are followed by
general words, the general words shall be Enumeration of specific words
construed as limited to the things of the
Class or Category
same kind as those specified.”
Not Exhaustive
¾ Applicability: General Terms
a) The statute contains an enumeration
of specific words
No Different Intent
b) The subject of enumeration
constitutes a class or category
c) That class or category is not exhausted by the enumeration
d) General terms follow the enumeration; and
e) There is no indication of a different legislative intent.
¾ The rule of ejusdem generis is not an absolute rule of law but only a part of a wider principle
of construction and therefore this rule has no application where the intention of the
legislature is clear.
¾ Exceptions to the Rule:
a) If the preceding term is general and that which follows, this rule cannot be applied.
b) Where the particular words exhaust the whole genus.
c) Where the specific objects enumerated are essentially diverse in character.
d) Where there is an express intention of legislature that the general term shall not be
read ejusdem generis the specific terms.
¾ This rule has to be applied judiciously. This rule may be understood as an attempt to settle
a conflict between specific and general words.

Secondary Rules
1. Doctrine of Noscitur a Sociis
¾ Noscitur a Sociis means that when two or more words that are susceptible of analogous
meaning, are coupled together they are understood to be used in their cognate sense. They
take, as it were, their colour from each other, that is the meaning of the more general word
being restricted to a sense analogous to that of the less general.
¾ Examples of the principal of Noscitur a Sociis are as follows:
a) Fresh orange juice is not a fruit juice. While dealing with a Purchase Tax Act, which
used the expression “manufactured beverages including fruit-juices and bottled waters
and syrups”. It was held that the description ‘fruit juices’ as occurring therein should
be construed in the context of the preceding words and that orange-juice unsweetened
and freshly pressed was not within the description. (Commissioners. v. Savoy Hotel,
(1966) 2 All. E.R. 299)
b) Private Dispensary of a doctor is not a commercial establishment. In dealing with
the definition of commercial establishment in Section 2 (4) of the Bombay Shops
and Establishments Act, 1948, which reads, “commercial establishment means an
establishment which carries on any business, trade or profession”, the word ‘profession’
was construed with the associated words ‘business’ and ‘trade’ and it was held that a
private dispensary of a doctor was not within the definition. (Dr. Devendra M. Surti v.
State of Gujrat, A.I.R. 1969 SC 63)
2. Doctrine of Contemporanea Expositio

¾ This doctrine is based on the concept that a statute or a document is to be interpreted by
referring to the exposition it has received from contemporary authority.
¾ The maxim “Contemporanea Expositio est optima et fortissinia in lege” means
“contemporaneous exposition is the best and strongest in the law.”
¾ A law should be understood in the sense in which it was understood at the time when it was
passed.
¾ The maxim “optima legum interpres est consuetude” simply means, “Custom is the best
interpreter of law”.
¾ This maxim is to be applied for construing ancient statutes, but not to Acts that are
comparatively modern.
INTERNAL AIDS TO INTERPRETATION/ CONSTRUCTION
Long Title Preamble Heading Marginal Notes Definitional Sections
Illustrations Proviso Explanation Schedules Read the Statute as a Whole
1. Long Title
¾ An enactment would have what is known as a ‘Short Title’ and also a ‘Long Title’.
¾ The ‘Short Title’ merely identifies the enactment and is chosen merely for convenience
¾ The ‘Long Title’ describes the enactment and does not merely identify it.

¾ The title may be referred to for the purpose of ascertaining its general scope and of
throwing light on its construction, although it cannot override the clear meaning of the
enactment.
2. Preamble
¾ The Preamble expresses the scope, object and purpose of the Act more comprehensively
than the Long Title.
¾ The Preamble may recite the ground and the cause of making a statute and the evil which is
sought to be remedied by it.
¾ Like the Long Tile, the Preamble of a Statute is a part of the enactment and can legitimately
be used for construing it.
¾ However, the Preamble does not over-ride the plain provision of the Act but if the wording
of the statute gives rise to doubts as to its proper construction, for example, where the
words or phrase have more than one meaning and a doubt arises as to which of the two
meanings is intended in the Act, the Preamble can and ought to be referred to in order to
arrive at the proper construction.
¾ Preamble to an Act discloses the primary intention of the legislature but can only be brought
in as an aid to construction if the language of the statute is not clear.
3. Heading
¾ In an Act, we would generally find that a number of its sections referring to a particular
subject are grouped together, sometimes in the form of chapters, prefixed by headings
and/or Titles.
¾ These Heading and Titles prefixed to sections or groups of sections can legitimately be
referred to for the purpose of construing the enactment or its parts.
¾ The headings of different portions of a Statute can be referred to determine the sense of
any doubtful expression in a section ranged under any particular heading.
¾ They cannot control the plain meaning of the words of the enactment though, they may, in
some cases be looked at in the light of preamble if there is any ambiguity in the meaning
of the sections on which they can throw light.
¾ It may be noted that headings may sometimes be referred to know the scope of a section
in the same way as the preamble.
¾ But a heading cannot control or override a section.
4. Marginal Notes
¾ Marginal notes are summaries and side notes often found at the side of a section or group
of sections in an Act, purporting to sum up the effect of that section or sections.
¾ They are not a part of the enactment, for they were not present when the Act was passed
in Parliament but inserted after the Act has been so passed.
¾ Hence, they are generally not an aid to construction however reference to marginal notes
may be permissible in exceptional cases for construing a section in a statute.
¾ Marginal notes appended to Articles of the Constitution have been held to be part of
the Constitution as passed by the Constituent Assembly and therefore have been used in
construing the Articles.

5. Definitional Sections
¾ The legislature has the power to embody in a statute itself the definitions of its language
and it is quite common to find in the Statutes ‘definitions’ of certain words and expressions
used in the body of the statute.
¾ When a word or phrase is defined as having a particular meaning in the enactment, it is that
meaning alone which must be given to it in interpreting a Section of the Act unless there be
anything repugnant in the context. This is called an exhaustive definition.
¾ The Court cannot ignore an exhaustive statutory definition and try and extract what it
considers to be the true meaning of the expression independently of it.
¾ The purpose of a definition clause is two-fold:
(i) to provide a key to the proper interpretation of the enactment, and
(ii) to shorten the language of the enacting part by avoiding repetition of the same words
contained in the definition part every time the legislature wants to refer to the
expressions contained in the definition.
¾ Construction of definitions may be understood under the following headings:
Restrictive Definitions
Ambiguous
and extensive subject to a
definitions
definitions contrary context

(i) Restrictive and extensive definitions:
The definition of a word or expression in the definition section may either be restricting
of its ordinary meaning or may be extensive of the same.
When word is What it denotes:
defined as:
‘means’ Restrictive and Exhaustive
We must restrict the meaning of the word to that given in the
definition
‘includes’ Extensive
Here the word defined is not restricted to the meaning assigned to it
but has extensive meaning which also includes the meaning assigned to
it in the definition section.
‘means and Exhaustive
includes’
‘to apply to Extensive
and include’ Where an expression is defined in an Act, it must be taken to have,
throughout the Act, the meaning assigned to it by the definition,
unless by doing so any repugnancy is created in the subject or context.
Example: Section 2(m) of the Consumer Protection Act, 1986 contains
an inclusive definition of ‘person’. It has been held to include a ‘company’
although it is not specifically named therein.
‘is deemed to Inclusive or Extensive
include’ Words are used to bring in by a legal fiction something within the
word defined which according to its ordinary meaning is not included
within it.

(ii) Ambiguous definitions:

Sometime, we may find that the definition section may itself be ambiguous, and so it may
have to be interpreted in the light of the other provisions of the Act and having regard
to the ordinary meaning of the word defined. Such type of definition is not to be read in
isolation. It must be read in the context of the phrase which it defines, realising that
the function of a definition is to give accuracy and certainty to a word or phrase which
would otherwise be vague and uncertain but not to contradict it or depose it altogether.
(iii) Definitions subject to a contrary context:
When a word is defined to bear a number of inclusive meanings, the sense in which the
word is used in a particular provision must be ascertained from the context of the
scheme of the Act, the language of the provision and the object intended to be served
thereby.
6. Illustrations
¾ Many, though not all, sections have illustrations appended to them.
¾ These illustrations follow the text of the Sections and, therefore, do not form a part of
Sections.
¾ However, illustrations do form a part of the statute and are considered to be of relevance
and value in construing the text of the sections.
¾ However, illustrations cannot have the effect of modifying the language of the section and
can neither curtail nor expand the ambit of the section.
7. Proviso
¾ The function of a proviso is to except something out of the enactment or to qualify something
stated in the enactment which would be within its purview if the proviso were not there.
¾ A proviso is embedded in the main body of the section and becomes an integral part of it.
¾ Provisos that are so included begin with the words, “provided that”.
¾ The effect of the proviso is to qualify the preceding enactment which is expressed in terms
which are too general.
¾ Ordinarily a proviso is not interpreted as stating a general rule.
¾ Exception clauses are intended to restrain the enacting clause to particular cases.
¾ Savings clause is used to preserve from destruction certain rights, remedies, or privileges
¾ It is a cardinal rule of interpretation that a proviso or exception to a particular provision of
a statute only embraces the field which is covered by the main provision.
¾ It carves out an exception to the main provision to which it has been enacted as a proviso
and to no other.
8. Explanation
¾ An Explanation is at times appended to a section to explain the meaning of certain words or
phrases used in the section or of the purport of the section.
¾ An Explanation may be added to include something within the section or to exclude something
from it.
¾ An Explanation should normally be so read as to harmonise with and clear up any ambiguity
in the main section.

¾ It should not be so construed as to widen the ambit of the section.

¾ Objects of an explanation to a statutory provision:
(i) Explain the meaning and intendment of the Act itself
(ii) Clarify any obscurity and vagueness (if any) in main enactment to make it consistent
with the object
(iii) Provide an additional support to the object of the Act to make it meaningful and
purposeful
(iv) Fill up the gap which is relevant for the purpose of the explanation to suppress the
mischief and advance the object of the Act
(v) Cannot take away a statutory right
¾ However, it would be wrong to always construe an explanation as limited to the aforesaid
objects. The meaning to be given to an explanation will really depend upon its terms and not
on any theory of its purpose
9. Schedules
¾ The Schedules form part of an Act. Therefore, they must be read together with the Act
for all purposes of construction.
¾ However, the expressions in the Schedule cannot control or prevail over the expression in
the enactment.
¾ If there appears to be any inconsistency between the schedule and the enactment, the
enactment shall always prevail.
¾ They often contain details and forms for working out the policy underlying the sections of
the statute
10. Read the Statute as a Whole

¾ It is the elementary principle that construction of a statute is to be made of all its parts
taken together and not of one part only.
¾ The deed must be read as a whole in order to ascertain the true meaning of its several
clauses, and the words of each clause should be so interpreted as to bring them into harmony
with other provisions – if that interpretation does no violence to the meaning of which they
are naturally susceptible.
¾ And the same approach would apply with equal force with regard to Acts and Rules passed
by the legislature.
¾ One of the safest guides to the construction of sweeping general words is to examine
other words of like import in same enactment or instrument to see what limitations must
be imposed on them.
¾ If we find that a number of such expressions have to be subjected to limitations and
qualifications and that such limitations and qualifications are of the same nature that
circumstance forms a strong argument for subjecting the expression in dispute to a similar
limitation and qualification.
Example: If one section of an Act requires ‘notice’ should be given, then a verbal notice
would generally be sufficient. But, if another section provides that ‘notice’ should be ‘served’
on the person or ‘left’ with him, or in a particular manner or place, then it would obviously
indicate that a written notice was intended

EXTERNAL AIDS TO INTERPRETATION/CONSTRUCTION

Apart from the statute itself there are many matters which may be taken into account when the
statute is ambiguous. These matters are called External aids to Interpretation.
Consolidating Earlier & Use of

Historical Dictionary
Statutes & Usage Later Acts and Foreign
Setting Definitions
Previous Law Analogous Act Decisions
1. Historical Setting
¾ The history of the external circumstances which led to the enactment in question is of
much significance in construing any enactment.
¾ We have to take help from all those external or historical facts which are necessary in the
understanding and comprehension of the subject matter and the scope and object of the
enactment.
¾ History in general and Parliamentary History in particular, ancient statutes, contemporary
or other authentic works and writings all are relevant in interpreting and construing an Act.
¾ We have also to consider whether the statute in question was intended to alter the law or
leave it where it stood before.
2. Consolidating Statutes & Previous Law

¾ The Preambles to Statutes contain expressions such as “An Act to consolidate” the previous
law, etc.
¾ In such a case, the Courts may stick to the presumption that it is not intended to alter the
law.
¾ They may solve doubtful points in the statute with the aid of such presumption in intention,
rejecting the literal construction.
3. Usage
¾ Usage is also sometimes taken into consideration in construing an Act.
¾ The acts done under a statute provide quite often the key to the statute itself.
¾ It is well known that where the meaning of the language in a statute is doubtful, usage – how
that language has been interpreted and acted upon over a long period – may determine its
true meaning.
¾ It has been emphasized that when a legislative measure of doubtful meaning has, for
several years, received an interpretation which has generally been acted upon by the public,
the Courts should be very unwilling to change that interpretation, unless they see cogent
reasons for doing so.
4. Earlier & Later Acts and Analogous Acts

¾ Exposition of One Act by Language of Another:
a) The general principle is that where there are different Statutes in ‘pari materia’
(i.e. in an analogous case), though made at different times, or even expired and not
referring to each other, they shall be taken and construed together as one system and
as explanatory of each other.

b) If two Acts are to be read together then every part of each Act has to be construed
as if contained in one composite Act.
c) But if there is some clear discrepancy then such a discrepancy may render it necessary
to hold the later Act (in point of time) had modified the earlier one.
d) However, this does not mean that every word in the later Act is to be interpreted in the
same way as in the earlier Act.

Where the later of the two Acts Then an enactment in the later statute was held
provides that the earlier Act to be excluded from the earlier statute as well.
should, so far as consistent, be
construed as one with it
Where a single section of one It must be read in the sense which it bore in the
Act is incorporated into another original Act from which it is taken consequently,
statute it would be legitimate to refer to all the rest of
the Original Act to ascertain what that Section
means, though one Section alone is incorporated
in the new Act
¾ Earlier Act Explained by the Later Act:

Not only may the later Act be construed in the light of the earlier Act but it (the later Act)
sometimes furnishes a legislative interpretation of the earlier one, if it is ‘pari materia’ and
if, but only if, the provisions of the earlier Act are ambiguous.
Where the earlier statute contained a negative provision but the later one merely omits
that negative provision, this cannot by itself have the result of substantive affirmation.
In such a situation, it would be necessary to see how the law would have stood without the
original provision and the terms in which the repealed sections are re-enacted.
¾ Reference to Repealed Act:
Where a part of an Act has been repealed, it loses its operative force. Nevertheless, such
a repealed part of the Act may still be taken into account for construing the un-repealed
part. This is so because it is part of the history of the new Act.
5. Dictionary Definitions
¾ First we have to refer to the Act in question to find out if any particular word or expression
is defined in it.
¾ Where we find that a word is not defined in the Act itself, we may refer to dictionaries to
find out the general sense in which that word is commonly understood.
¾ However, in selecting one out of the several meanings of a word, we must always take into
consideration the context in which it is used in the Act.
¾ It is the fundamental rule that the meanings of words and expressions used in an Act must
take their colour from the context in which they appear.
¾ Further, judicial decisions laying down the meaning of words in construing Statutes in ‘pari
materia’ will have greater weight than the meaning furnished by dictionaries.
¾ However, for technical terms reference may be made to technical dictionaries.

6. Use of Foreign Decisions

¾ Foreign decisions of countries following the same system of jurisprudence as ours and given
on laws similar to ours can be legitimately used for construing our own Acts. However, prime
importance is always to be given to the language of the Indian statute. Further, where
guidance can be obtained from Indian decisions, reference to foreign decisions may become
unnecessary.
Rules of Interpretation/ Construction of Deeds and Documents

¾ Find out what a reasonable man, who has taken care to inform himself of the surrounding
circumstances of a deed or a document, and of its scope and intendments, would understand by
the words used in that deed or document.
¾ The principle of construction in case of a document and a deed, as of statute, does not differ
so much except in some minor details.
¾ A deed must be read as a whole in order to ascertain the true meaning of its several clauses
and the words of each clause should be so interpreted as to bring them in harmony with other
provisions if that interpretation does no violence to the meaning of which they are naturally
susceptible.
¾ In all cases endeavor shall be made to find out how a reasonable and well-informed person would
understand by the words used in the deed or document.
The golden rule of construction is to ascertain the intention of the parties to the instrument after
considering all the words in their ordinary, natural sense.
¾ To ascertain this intention the Court has to consider the relevant portion of the document as
a whole and also to take into account the circumstances under which the particular words were
used.
¾ The intention deduced after the document is read as a whole should be the actual term the
parties intended to agree.
¾ It has to be borne in mind that very many words are used in more than one sense and that sense
differs in different circumstances.
¾ Where a particular word has a clear and definite significance and there is surety of the sense
in which such conveyancer would use it, it may not be reasonable and proper to give the same
strict interpretation of that word when used by someone who is not so equally skilled in the art
of conveyancing.
¾ It is inexpedient to construe the terms of one deed by reference to the terms of another.
¾ It is an elementary rule of construction that the same word cannot have two different meanings
in the same document, unless the context compels the adoption of such a course.
¾ It may also happen that there is a conflict between two or more clauses of the same document.
An effort must be made to resolve the conflict by interpreting the clauses so that all the
clauses are given effect to.
• If, however, it is not possible to give effect to all of them, then it is the earlier clause that
will over-ride the latter one.
¾ Similarly, if one part of the document is in conflict with another part, an attempt should always
be made to read the two parts of the document harmoniously, if possible.
• If that is not possible, then the earlier part will prevail over the latter one which should,
therefore, be disregarded.
The End
Notes

The Ultimate Solution Summary Book Nov'23

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Ultimate Solution Summary Book Nov'23

Uploaded by

Copyright:

Available Formats

The Ultimate Solution!

Message from the Author!

Dear Future CA,

(To be filled as and when you find any points)

5 things that you loved about the notes:

(Trust me I will work on it)

SN Name of Chapters Page No. Pages Target Mins

Steps to nail your theory papers – The Ranker’s Way:

Objective of this Act:

Section 1: Short Title, Extent, Commencement and Application:

Section 2: Definitions: (‘Internal aids to construction’)

Rule 7 of Companies (Accounts) Rules, 2014: Accordingly,

Explanation: For the purpose of this clause:

8 Authorised Capital or Nominal Capital

12 “Book and Paper” and “Book or Paper”: Includes: [WARM DVD]

maintained on paper or in electronic form;

13 “Books of account” includes records maintained in respect of:

27 Control shall include:

34 Director means a director appointed to the Board of a company;

40 Financial statement in relation to a company, includes:

Provided that, following shall not be treated as free reserve:

53 Manager means an individual who:

54 Managing Director means a director who

55 Member in relation to a company, means:

57 Net worth means the:

Aggregate value of: After deducting aggregate Does NOT include:

58 Notification means a notification published in OG and expression "notify" to be construed

63 Ordinary or Special Resolution means an OR/SR as referred to in section 114;

64 Paid-up share capital or share capital paid-up means:

65 Postal ballot means voting by post or through any e-mode;

66 Prescribed means prescribed by rules made under this Act;

Provided that in case joint holding – Treat them as single member.

Provided further, following shall not be included in number of members:

69 Promoter means a person:

71 Public company means a company which:

Director and Director, Director, Manager Such director or manager

Body Corporate (N.A to Private Company) Any person Other person

BOD / MD / Manager is accustomed As may be

Daughter (including Brother (including Sister (including

Provided that nothing in this clause shall apply to:

Explanation: For the purposes of this clause:

Note - Shares held by a company or power exercisable by it in another company in a fiduciary

90 Tribunal means the NCLT constituted u/s 408;

Note – Specified IFSC company shall be formed on as company limited by shares.

Section 3 – Formation of Company:

In case of OPC, MoA to specify nominee:

2. Withdrawal: Nominee may withdraw consent any time in prescribed form

Section 3A – Members severally liable in certain cases:

Section 4 – Memorandum of Association: [As defined u/s 2(56)]

In case of company having SC:

2. Name Clause: The name stated in the memorandum shall:

Rule 8B of Companies (Incorporation) Rules, 2014:

General Circular No. 29/2014 dated 11th of July, 2014:

6. MoA shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be

Important Case Laws:

Decision by The House of Lords:

Section 5 – Article of Association: [Defined u/s 2(5)]

2. AoA to include such matters, as may be prescribed.

4. Provisions for entrenchment shall only be made:

6. AoA shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as applicable to

Doctrine of Indoor Management:

Doctrine of Indoor Management (DIM) vs Doctrine of Constructive Notice (DCN)

Basis for Doctrine of Indoor Management