LegalCrystal – Blog

This article is based on the citation: 2007(6) AIR Kar R 151-judgement delivered by Hon’ble Justice N.Kumar of High Court of Karnataka wherein the Hon’ble Justice has threadbare the points with regard to distribution of excess profits by the Companies. For further detailed study , kindly refer the above citation.

When a Company prospers and earns profits it may do one of two things with the profits.  It may either distribute the profits by way of dividend among the shareholders or accumulate them. Ordinarily, these undistributed profits are employed in the business either in acquisition of fixed assets or as working capital and really represent an increase in the capital employed in the business. When these increase to a considerable extent, the issued capital of the company ceases to bear a true relation to the real capital employed in the business.  The company may, in such a case, decide to bring its issued capital into a true relationship with the capital actually employed in the business and may for that purpose capitalize its accumulated profits and issue fully paid up shares or debentures of a nominal value equal to the amount capitalize to its shareholders. These new shares or debentures are called as Bonus Shares or Bonus Debentures. They are not a gift from the company.  They are not issued gratuitously.  Their nominal value is paid in full by the capitalized profits or reserves of the company, which could otherwise have been distributed to the shareholders.

The Company may instead of issuing bonus shares, issue bonus debentures by capitalizing its accumulated profits. The accumulated profits which are capitalized remain in the coffers of the Company and no part of them actually goes into the pockets of the shareholders; the only change that takes place is that the accumulated profits which prior to capitalization were employed in the business as accumulated profits are thenceforth employed as part of the issued or loan capital of the Company according as the issue is of bonus shares or bonus debentures. The accumulated profits which might have been divided among the shareholders as dividend are impounded to increase the capital of Company and what the shareholders get is not any payment out of the accumulated profits but bonus shares or bonus debentures credited as fully paid-up. When such bonus shares or bonus debentures are issued, admittedly no money is paid by the shareholders for the bonus shares or bonus debentures issued to them.  There is no payment of the accumulated profits to the shareholders since no part of the accumulated profits is liberated to them.  The Company does not part with any of the accumulated profits nor do the shareholders receive any part of them.  But the accumulated profits are applied in paying up the capital sums which the shareholders would otherwise have had to contribute for the purchase of new shares or new debentures.

ACT NO. 12 OF 2003

[13th January, 2003.]

An Act to provide, keeping in view of the economic development of the country, for  the establishment of a Commission to prevent practices having  adverse  effect  on  competition, to  promote  and   sustain  competition  in markets, to protect the interests of consumers and  to  ensure  freedom of trade carried on by other participants in  markets, in India, and for matters connected therewith or incidental thereto.

BE it enacted by Parliament in the Fifty-third Year of the Republic of India as follows:-

CHAPTER I

PRELIMINARY

1.   Short title, extent and commencement-

1)   This Act may be called the Competition Act, 2002.

2)   It extends to the whole of India except the State of Jammu and       Kashmir.

3)   It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint:

Provided that different dates  may   be  appointed  for   different provisions  of this Act and any reference in any such provision to the commencement  of  this  Act shall be construed as a reference  to  the coming into force of that provision.

2.   Definitions.-In this Act, unless the context otherwise requires -

a) “acquisition” means, directly or indirectly, acquiring or agreeing to acquire-

(i)   shares, voting rights or assets of any enterprise;  or

(ii)   control over management or control over assets of any enterprise;

b) “agreement” includes any arrangement or understanding or action in concert,-

(i)   whether or not, such arrangement, understanding  or  action  is formal or in writing;  or

(ii)   whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

c) “cartel” includes  an   association  of  producers,  sellers, distributors,  traders or service providers who, by agreement amongst  themselves,  limit,  control  or attempt to  control  the  production, distribution,  sale  or price of, or, trade in goods or provision  ofservices;

d) “Chairperson” means the Chairperson of the Commission  appointed under sub-section (1) of section 8;

e) “Commission” means the Competition Commission of India established under sub-section (1) of section 7;

f) “consumer” means any person who-

(i)   buys any goods for a consideration which has been paid or promised  or  partly  paid and partly promised, or under any system of  deferred payment  and includes any user of such goods other than the person who buys  such goods for consideration paid or promised or partly paid  or partly promised, or under any system of deferred payment when such use is  made  with the approval of such person, whether such  purchase  of goods is for resale or for any commercial purpose or for personal use;

(ii)   hires  or avails of any services for a consideration  which  has been paid or promised or partly paid and partly promised, or under any system  of  deferred  payment  and includes any  beneficiary  of  such services  other than the person who hires or avails of the services for  consideration paid or promised, or partly paid and partly promised, or  under  any system of deferred payment, when such services are  availed of with the approval of the first-mentioned person whether such hiring or  availing of services i for any commercial purpose or for  personal use;

g)   ”Director  General” means the Director General  appointed  under sub-section  (1) of section 16 and includes any Additional,  Joint, Deputy or Assistant Directors General appointed under that section;

h) “enterprise” means a person or a department of the Government, who or  which  is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles  or  goods, or the provision of services of any kind,  or  in investment,  or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate,  either  directly  or through one or more of its  units  or is  located at the same place where the enterprise is located or at  a different  place  or  at different places, but does  not  include  any activity of the Government relatable to the sovereign functions of the Government  divisions  or subsidiaries, w ether such unit or division  or subsidiary  nt including all activities carried on by the  departments of  the  Central  Government  dealing with  atomic  energy,  currency, defence and space.

Explanation.-For the purposes of this clause,-

(a)  ”activity” includes profession or occupation;

(b) “article” includes  a new article and “service” includes  a  new service;

(c)  ”unit” or “division”, in relation to an enterprise, includes-

(i)   a  plant  or  factory established for  the  production,  storage, supply, distribution, acquisition or control of any article or goods;

(ii)   any  branch  or  office established for  the  provision  of  any service;

i)    ”goods” means goods as defined in the Sale of Goods Act, 1930  (8 of 1930) and includes-

(A)  products manufactured, processed or mined;

(B)  debentures, stocks and shares after allotment;

(C)  in relation to goods supplied, distributed or controlled in India, goods imported into India;

j) “Member”  means  a  Member  of  the  Commission  appointed  under sub-section (1) of section 8 and includes the Chairperson;

k) “notification“  means  a notification published in  the  Official Gazette;

l)    ”person” includes-

(i)   an individual;

(ii)   a Hindu undivided family;

(iii)  a company;

(iv)  a firm;

(v)   an  association  of  persons or a body  of  individuals,  whether incorporated or not, in India or outside India;

(vi)  any  corporation established by or under any Central,  State  or Provincial  Act  or a Government company as defined in section 617  of the Companies Act, 1956 (1 of 1956);

(vii) any  body  corporate  incorporated by or under the  laws  of  a country outside India;

(viii) a co-operative society registered under any law  relating  to co-operative societies;

(ix)  a local authority;

(x)  every artificial juridical person, not falling within any of  the preceding sub-clauses;

PROVISIONS APPLICABLE TO EVERY MODE OF WINDING UP

CHAPTER V

Proof and ranking of claims

528.      Debts of all descriptions to be admitted to proof.

In every winding up (subject, in the case of insolvent companies, to the application in accordance with the provisions of this Act of the law of insolvency), all debts payable on a contingency, and all claims against  the company,  present or future, certain  or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as  possible, of  the value  of  such debts or claims as  may  be subject  to any contingency, or may sound only in damages, or for some  other reason may not bear a certain value.

529.      Application of insolvency rules in winding up of insolvent companies.

(1)        In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to –

(a)        debts provable;

(b)        the valuation of annuities and future  and  contingent liabilities; and

(c)        the respective  rights of secured  and unsecured creditors; as are in force for the time being under the  law of insolvency with respect to the estates of persons adjudged insolvent:

1[Provided that the security of every secured creditor shall be deemed  to be subject to a pari passu charge in favour of the  workmen  to  the extent of the workmen's portion therein, and, where a  secured creditor, instead of relinquishing his security and proving his  debt, opts to realise his security –

(a)        the liquidator  shall  be entitled to represent the workmen    and enforce such charge;

(b)        any amount realised by the liquidator by way of enforcement  of such charge shall be applied ratably for  the discharge of workmen's dues; and

(c)        so much  of the debt due to such creditor as could  not  be realised by him by virtue  of  the  foregoing provisions  of  this proviso or the amount of  the workmen's portion in his security, whichever is less, shall rank  pari passu  with  the workmen's dues for the purposes  of  section 529A.]

(2)        All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section,

2[Provided  that if a secured creditor instead of relinquishing his  security  and proving  for his  debt  proceeds  to  realise  his security,  he shall be liable to 3[pay his portion of the expenses] incurred by the liquidator(including a provisional liquidator, if any) for the preservation of the security before its realization  by  the secured creditor.]

1[Explanation.-For the purposes of this proviso, the portion of expenses incurred by the liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less amount which bears to such expenses the same proportion as the workmen's portion in relation to the security bears to the value of the security.]

1[(3)      For the purposes of this section, section 529A and section 530 –

(a)        "workmen",  in  relation  to  a  company,   means   the employees of the company, being workmen within the meaning of the Industrial Disputes Act, 1947(14 of 1947);

(b)        "workmen's dues", in relation to a company, means the aggregate  of the following sums due from the company to  its workmen, namely –

(i)         all  wages or salary including wages payable  for time  or piece work and salary earned wholly or in  part by way of commission of any workman, in respect of services  rendered to the company and  any  compensation payable  to any workman under any of the  provisions of the Industrial Disputes Act, 1947 (14 of 1947);

(ii)         all accrued holiday remuneration becoming  payable to any workman, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of the winding up  order or resolution;

(iii)        unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless the company has, at the commencement of the winding up, under such contract with insurers as is mentioned in section 14 the Workmen's Compensation Act, 1923 (8 of 1923), rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of  the  death or disablement of any workman of the company;

(iv)        all sums due to any workman from a provident  fund, a  pension fund, a gratuity fund or any other  fund  for the welfare of the workmen, maintained by the company;

(c)        "workmen's portion", in relation to the security of any secured  creditor of a company, means the amount which  bears to the  value  of the security the same  proportion  as the amount of the workmen's dues bears to the aggregate of –

(i)         the amount of workmen's dues; and

(ii)         the amounts of the  debts  due  to  the secured creditors.

Illustration

The value of the security of a secured creditor of a company is Rs. 1,00,000.  The total amount of the workmen's dues is Rs. 1,00,000 The amount of the  debts due  from  the company to its secured creditors is Rs. 3,00,000.  The aggregate of the amount of workmen's dues and of the amounts of debts due to secured creditors is Rs. 4,00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the security, that is Rs. 25,000.]

Overriding preferential payment

529A.    Overriding preferential payment.

Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force in the winding up of a company –

(a)        workmen’s dues; and

(b)        debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts.

(2)        The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.]

530.      Preferential payments.

(1)        In a winding up, 5[subject to the provisions of section 529A, there shall be paid] in priority to all other debts –

(a)        all revenues, taxes, cesses and rates  due  from  the company  to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8), and having become due and payable  within  the twelve months next before that date;

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1.   Ins.  by Act 35 of 1985, s.4.

2.   Ins. by Act 65 of 1960, s. 183.

3.   Subs. by s.4, ibid.

4.   Ins. by s.5, ibid.

5.   Subs. by s.6, ibid.

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(b)        all wages or salary (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date 1* ** subject to the limit specified in sub-section (2);

(c)        all accrued holiday remuneration becoming  payable to any employee, or in the case of his death to any other person in his right, on the termination of his employment before or by the effect of, the winding up order or resolution;

(d)       unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, all amounts due, in respect of contributions payable during the twelve months next before  the  relevant date,  by the company as the employer of any  persons, under the  Employees’ State Insurance Act, 1948 ( 34 of  1948.)  or any other law for the time being in force;

(e)       unless the company is being wound up voluntarily merely for the purposes of reconstruction or of  amalgamation  with another  company,  or  unless  the  company  has, at the commencement of the winding up, under such a  contract  with insurers as  is  mentioned in section 14  of  the  Workmen’s Compensation Act, 1923, (8 of 1923.) rights capable of  being transferred to and vested in the workman, all amounts due in respect  of  any compensation or liability for compensation under the said Act in respect of the death or disablement  of any employee of the company;

(f)         all sums due to any employee from a  provident  fund, a pension  fund a gratuity fund-or any other  fund  for the welfare of the employees, maintained by the company; and

(g)        the expenses of any investigation held in pursuance  of section  235  or 237, in so far as they are  payable  by  the company.

PART III

PROSPECTUS AND ALLOTMENT, AND OTHER MATTERS RELATING TO ISSUE OF SHARES OR DEBENTURES

Prospectus

55.        Dating of prospectus.

A prospectus issued by or on behalf of a company or in relation to an intended company shall be dated, and that date shall, unless the contrary is proved, be taken as the date of publication of the prospectus.

Matters to be stated and reports to be set out in prospectus

56.        Matters to be stated and reports to be set out in prospectus.

(1)        Every prospectus issued –

(a)        by or on behalf of a company, or

(b)        by or on behalf of any person who is or has been engaged or interested in the formation of a company, shall state the matters specified in Part I of Schedule II and set out the reports specified in Part II of that Schedule; and the said Parts I and II shall have effect subject to the provisions contained in Part III of that Schedule.

(2)        A condition requiring or binding an applicant for shares in or debentures of a company to waive compliance with any of the requirements of this section, or purporting to affect him with notice of any contract, document or matter not specifically referred to in the prospectus, shall be void.

(3)        No one shall issue any form of application for shares in or debentures of a company, unless the form is accompanied 1[by memorandum containing such salient features or a prospectus as may be prescribed] which complies with he requirements of this section:

1[Provided that a copy of the prospectus shall, on a request being made by any person before the closing of the subscription list, be furnished to him:

Provided further that this sub-section shall not apply if it is shown that the form of application was issued either-

(a)        in connection with a bona fide invitation to a person to enter  into  an underwriting agreement with respect to the shares or debentures; or

(b)        in relation to shares or debentures which were not offered to the public.

If any person acts in contravention of the provisions of this sub-section, he shall be punishable with fine which may extend to five thousand rupees.

(4)        A director or other person responsible for the prospectus shall not incur any liability by reason of any non-compliance with, or contravention of, any of the requirements of this section, if –

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1.   Subs. by Act 31 of 1988, s. 8 (w.e.f.31-5-1991).

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(a)        as regards any matter not disclosed, he proves that he had no knowledge thereof; or

(b)        he proves that the non-compliance or contravention  arose from an honest mistake of fact on his part; or

(c)        the non-compliance or contravention was in respect of matters  which, in the opinion of the Court dealing with the case 1[were immaterial], or was otherwise such as ought, in the opinion of that Court, having regard to all the circumstances of the case, reasonably to be excused:

Provided that no director or other person shall incur any liability in respect of the failure to include in a prospectus a statement with respect to the matters specified in clause 18 of Schedule II, unless it is proved that he had knowledge of the matters not disclosed.

(5)        This section shall not apply –

(a)        to the issue to existing members or debenture holders of a company  of a prospectus or form of application  relating  to shares in or debentures of the company, whether an applicant for shares or debentures will or will not have the right  to renounce in favour of other persons; or

(b)        to the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange; but subject as aforesaid, this section shall apply to a prospectus or a form of application, whether issued on or with reference to the formation of a company or subsequently.

(6)        Nothing in this section shall limit or diminish any liability which any person may incur under the general law or under this Act apart from this section.

57.        Expert to be unconnected with formation or management of company.

A prospectus inviting persons to subscribe for shares in or debentures of a company shall not include a statement purporting to be made by an expert, unless the expert is a person who is not, and has not  been, engaged or interested in the formation or promotion, or  in the management, of the company.

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1.   Subs. by Act 52 of 1964 s. 3 and Sch.  II, for “was immaterial”.

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58.        Expert’s consent to issue of prospectus containing statement by him.

A prospectus inviting persons to subscribe for shares in or debentures of a company and including a statement purporting to be made by an expert shall not be issued, unless –

(a)        he has given his written consent to the issue thereof with the statement included in the form and context in which it is included, and has not withdrawn such  consent  before  the delivery of a copy of the prospectus for registration; and

(b)        a statement that he has given and has not withdrawn his consent as aforesaid appears in the prospectus.

Deposits not to be invited without issuing an advertisement

1[58A.   Deposits not to be invited without issuing an advertisement.

(1)        The Central Government may, in consultation with the Reserve Bank of India, prescribe the limits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by a company either from the public or from its members.

(2)        No company shall invite, or allow any other person to invite or cause to be invited on its behalf, any deposit unless –

(a)        such deposit is invited or is caused to be invited in accordance with the rules made under sub-section (1), and

(b)       an advertisement, including therein a statement showing the financial position of the company, has been issued by the company in such form and in such manner as may be prescribed.

(3)        (a)        Every deposit accepted by a company at any time  before the commencement of the Companies (Amendment) Act, 1974, (41 of 1974). in accordance with the directions made by the Reserve Bank of India under Chapter IIIB of the Reserve Bank of India Act, 1934, (2 of 1934) shall, unless  renewed in accordance with clause (b),  be repaid  in accordance with the 2[terms and conditions of such deposit.]

(b)        No deposit referred to in clause (a) shall be renewed by the company after the expiry of the term thereof unless the deposit is such that it could have been accepted if the rules made under  sub-section  (1) were in force at the time when the deposit was  initially accepted by the company.

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1.   Ins. by Act 41 of 1974, s. 7 (w.e.f. 1-2-1975).

2.   Subs. by Act 31 of 1988, s. 9 (w.e.f. 1.9.1989).

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(c)        Where, before the commencement of the Companies (Amendment) Act, 1974 (41 of 1974), any deposit was received by a company in contravention any direction made under Chapter IIIB of the Reserve Bank of India Act, 1934(2 of 1934), repayment of such deposit shall be made in full on or before the 1st day of April, 1975 and such repayment shall be without prejudice to any action that may be taken under the Reserve bank of India Act, 1934 for the acceptance of such deposit in contravention of such direction.

1[(3A)   Every deposit accepted by a company after the commencement of the Companies (Amendment) Act, 1988, shall, unless renewed in accordance with the rules made under subsection (1), be repaid in accordance with the terms and conditions of such deposit.]

(4)        Where any deposit is accepted by a company after the commencement of the Companies (Amendment) Act, 1974(41 of 1974), in contravention of the rules made under sub-section (1), repayment of such deposit shall be made by the company within thirty days from the date of acceptance of such deposit or within such further time, not exceeding thirty days, as the Central Government may, on sufficient cause being shown by the company, allow.

(5)        Where a company omits or fails to make repayment of a deposit in accordance with the provisions of clause (c) of sub-section (3), or in the case of a deposit referred to in sub-section (4),  within  the time specified in that sub-section –

(a)  the company shall be punishable with fine which shall not be less than twice the amount in relation to which the repayment of the deposit has not been made, and out of the fine, if realized, an amount equal to the amount in relation to which the repayment of deposit has not been made, shall be paid by the Court, trying the offence, to the person to whom repayment of the deposit was to be made, and on such payment, the liability of the company to make repayment of the deposit shall, to the extent of the amount paid by the Court,  stand discharged;

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

(6)        Where a company accepts or invites, or allows or causes any other person to accept or invite on its behalf, any deposit in excess of the limits prescribed under sub-section (1) or in contravention of the manner or condition prescribed under that sub-section or in contravention of the provisions of subsection (2), as the case may be –

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1    Ins. by Act 31 of 1988, s. 9 (w.e.f. 1.9.1989).

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(a)        the company shall be punishable –

(i)         where such contravention relates to the acceptance of  any deposit,  with  fine which shall not be less than  an  amount equal to the amount of the deposit so accepted,

(ii)         where such  contravention relates to the invitation of any deposit, with fine which may extend to one lakh rupees but shall not be less than five thousand rupees;

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

(7)        (a)        Nothing contained in this section shall apply to –

(i)         a banking company, or

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

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

1[(8)     The Central Government may, if it considers it necessary for avoiding any hardship or for any other just and sufficient reason by order issued either prospectively or retrospectively from a date not earlier than the commencement of the Companies (Amendment) Act, 1974 (41 of 1974), grant extension of time to a company or class of companies to comply with, or exempt any company or class of companies from, all or any of the provisions of this section either generally or for any specified  period  subject to  such  conditions  as  may  be specified in the order:

Provided that no order under this sub-section shall be issued in relation to a class of companies except after consultation with the Reserve Bank of India.]

2[(9)      Where a company has failed to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board may, if it is satisfied, either on its own motion or on the application of the depositor, that it is necessary so to do to safeguard the interests of the company, the depositors or in the public interest, direct, by order, the company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order:

Provided that the Company Law Board may, before making any order under this sub-section, give a reasonable opportunity of being heard to the company and the other persons interested in the matter.

(10)       Whoever fails to comply with any order made by the Company Law Board under sub-section (9) shall be punishable with imprisonment which may extend to three years and shall also be liable to a fine of not less than rupees fifty for every day during which such noncompliance continues.]

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1.   Ins. by Act 46 of 1977, s. 3.

2.   Ins. by Act 31 of 1988, s. 9 (w.e.f. 1.9.1989).

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Explanation.- For the purposes of this section “deposit” means any deposit of money with, and includes any amount borrowed by, a  company but shall not include such categories of amount as may be  prescribed in consultation with the Reserve Bank of India.

58B.     Provisions relating to prospectus to apply to advertisement.

The provisions of this Act relating to a prospectus shall, so far as may be, apply to an advertisement referred to in section 58A.

59.        Penalty and interpretation.

(1)        If any prospectus is issued in’ contravention of section 57 or 58, the company, and every person, who is knowingly a party to the issue thereof, shall be punishable with fine which may extend to five thousand rupees.

(2)        In sections 57 and 58, the expression “expert” includes an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him.

Registration of prospectus

60.        Registration of prospectus.

(1)        No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless, on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his agent authorized in writing, and having endorsed thereon or attached thereto –

(a)        any consent to the issue of the prospectus  required by section 58 from any person as an expert; and

(b)        in the case of a prospectus issued generally, also –

(i)         a copy of every contract required by clause 16 of Schedule II to be specified in the prospectus or in the case of a contract not reduced into writing, a memorandum giving full particulars thereof; and

(ii)         where the persons making any report required by Part II of that Schedule have made therein, or, have, without  giving the reasons, indicated therein, any such adjustments as are mentioned in clause 32 of that Schedule, a written  statement signed by those persons setting out the adjustments and giving the reasons therefore.

(2)        Every prospectus to which sub-section (1) applies shall, on the face of it –

(a)        state that a copy has been delivered for registration as required by this section; and

(b)        specify any documents required by this section to be endorsed on or attached to the copy so delivered, or refer to statements included in the prospectus which  specify those documents,

1[(3)      The Registrar shall not register a prospectus unless the requirements of sections 55, 56, 57 and 58 and sub-sections (1) and (2) of this section have been complied with and the prospectus is accompanied by the consent in writing of the person, if any, named therein as the auditor, legal adviser, attorney, solicitor, banker or broker of the company or intended company, to act in that capacity.]

(4)        No prospectus shall be issued more than ninety days after the date on which a copy thereof is delivered for registration; and if a prospectus is so issued, it shall be deemed to be a prospectus a copy of which has not been delivered under this section to the Registrar.

(5)        If a prospectus is issued without a copy thereof being delivered under this section to the Registrar or without the copy so delivered having endorsed thereon or attached thereto the required consent or documents, the company, and every person who is knowingly a party to the issue of the prospectus, shall be punishable with fine which may extend to five thousand rupees.

61.        Terms of contract mentioned in prospectus or statement in lieu of prospects, not to be varied.

A company shall not, at any time, vary the terms of a contract referred to in the prospectus or statement in lieu of prospectus, except subject to the approval of, or except on authority given by, the company in general meeting.

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1.   Subs. by Act 65 of 1960, s. 17, for sub-section (3).

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62.        Civil liability for misstatements in prospectus.

(1)        Subject to the provisions of this section, where a prospectus invites persons to subscribe for shares in or debentures of a company, the following persons shall be liable to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement included therein, that is to say –

(a)        every person who is a director of the company at the  time of the issue of the prospectus;

(b)        every person who has authorised himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time;

(c)        every person who is a promoter of the company; and

(d)        every person who has authorised the issue of the prospectus:

Provided that where, under section 58, the consent of a person is required to the issue of a prospectus and he has given that consent, or where, under 1* *   *  sub-section (3) of section 60, the consent of a person named in a prospectus is required and he has given that consent, he shall not, by reason of having given such consent, be liable under this sub-section as a person who has authorised the issue of the  prospectus except in respect of an untrue statement, if any, purporting to be made by him as an expert.

(2)        No person shall be liable under sub-section (1), if he proves –

(a)        that, having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent;

(b)        that the prospectus was issued without his knowledge or consent,  and that on becoming aware of its  issue,  he forthwith gave reasonable public notice that it  was issued without his knowledge or consent;

(c)        that, after the issue of the  prospectus and before allotment  there under, he, on becoming aware of any untrue statement therein, withdrew his consent to the prospectus and gave reasonable public notice of the withdrawal and of  the reason therefore; or

(d)        that –

(i)         as regards, every untrue statement not purporting to be made on the authority of an expert or of a public official document or statement, he had reasonable ground to  believe, and did up to the time of the allotment of the shares or debentures, as the case  may be, believe,  that  the statement was true; and

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1.   The words, brackets and letter “clause (b) of ” omitted by Act 65 of 1960, S. 18.

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(ii)         as regards every untrue statement purporting to be a statement by an expert  or contained in what purports to be a copy of or an extract  from  a report or valuation of an expert, it was a correct  and fair representation of the  statement, or a correct copy of, or a correct and fair  extract from, the report or valuation;  and he had  reasonable  ground  to believe, and did up to  the time  of the issue of the prospectus believe, that the person making the statement was competent to make it and that that person had given the consent required by section 58 to the issue of the prospectus and had not withdrawn that consent before delivery of a copy of the  prospectus for registration or, to the defendant’s knowledge, before allotment there under: and

(iii)        as regards every untrue statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the document:

Provided that this sub-section shall not apply in the case of a person liable, by reason of his having given a consent required of him by section 58, as a person who has authorized the issue of the prospectus in respect of an untrue statement purporting to be made by him as an expert.

(3)        A person who, apart from this sub-section, would, under sub-section (1), be liable by reason of his having given a consent required of him by section 58 as a person who has authorized the issue of a prospectus in respect of an untrue statement purporting to be made by him as an expert shall not be so liable, if he proves –

(a)        that, having given his consent under section 58 to the issue  of  the prospectus, he withdrew it in writing  before delivery of a copy of the prospectus for registration;

(b)        that, after delivery of a copy of the prospectus for registration and before allotment thereunder, he on becoming aware of the untrue statement, withdrew his consent in writing and gave reasonable public notice of the withdrawal and of the reason therefore; or

(c)        that he was competent to make the statement and that he had reasonable ground to believe, and did up to the time  of the allotment of the shares or debentures, believe, that  the statement was true.

(4)        Where –

(a)        the prospectus specifies the name of a  person as a director of  the company, or as having agreed  to become a director thereof, and he has not  consented  to become  a director,  or has withdrawn his consent before the  issue  of the  prospectus, and has not authorised or consented  to the issue thereof; or

(b)        the consent of a person is required under section 58 to the issue of the prospectus and he either has not given that consent or has withdrawn it before the issue of the prospectus; the directors of the company excluding those without whose knowledge or consent the prospectus was issued, and every other person who authorised the issue thereof, shall be liable to indemnify the person referred to in clause (a) or clause (b), as the case may be, against all damages, costs and expenses to which he may be  made  liable  by reason  of his name having been inserted in the prospectus or of the inclusion therein of a statement purporting to be made by him  as an expert, as the case may be, or in defending himself against any suit or legal proceeding brought against him in respect thereof:

Provided that a person shall not be deemed for the purposes of this sub-section to have authorized the issue of a prospectus by reason only of his having given the consent required by section 58 to the  inclusion therein of a statement purporting to be made by him as an expert.

(5)        Every person who, becomes liable to make any payment by virtue of this section, may recover contribution, as in cases of contract, from any other person who, if sued separately, would have been liable to make  the same payment, unless the former person  was,  and  the latter person was not, guilty of fraudulent misrepresentation.

(6)        For the purposes of this section –

(a)        the expression “promoter” means a promoter who was a party to the preparation of the prospectus or of the portion thereof containing the untrue statement but does not include any person by reason of his acting in a professional capacity  for persons engaged in procuring the  formation of the company; and

(b)        the expression “expert” has the same meaning as in section 58.

Criminal liability for mis-statements in prospectus

63.        Criminal liability for mis-statements in prospectus.

(1)        Where a prospectus issued after the commencement of this Act includes any untrue statement, every person who authorized the issue of the prospectus shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to five thousand rupees, or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did, up to the time of the issue of the prospectus believe, that the statement was true.

(2)        A person shall not be deemed for the purposes of this section to have authorized the issue of a prospectus by reason only of his having given –

(a)        the consent required by section 58 to the inclusion therein of a statement purporting to be made by him as an expert, or

(b)        the consent required  by 1* * *  sub-section (3) of section 60.

64.        Document containing offer of shares or debentures for also to be deemed prospectus.

(1)        Where a company allots or agrees to allot any shares in or debentures of the company with a view to all or any of those shares or debentures being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectuses and as to liability in respect of statements in and omissions from prospectuses, or otherwise relating to prospectuses, shall apply  with the modifications specified in sub-sections (3), (4) and (5), and have effect accordingly, as if the shares or debentures had been offered to the public for subscription and as if persons accepting the offer in respect of any shares or debentures were subscribers for those shares or debentures, but without prejudice to the liability, if any, of  the persons  by  whom  the  offer is  made  in  respect  of misstatements contained in the document or otherwise in respect thereof.

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1.   The words, brackets and letter ” clause (b) of ” omitted by Act  65 of 1960, S. 19.

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(2)        For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an allotment of, or an agreement to allot, shares or debentures was made with a view to the shares or debentures being offered for sale to the public if it is shown –

(a)        that an offer of the shares or debentures or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or

(b)        that at the date when the offer was made, the whole consideration to be received by the company in respect of the shares or debentures had not been received by it.

(3)        Section 56 as applied by this section shall have effect as if it required a prospectus to state in addition to the matters required by that section to be stated in a prospectus –

(a)        the net amount of the consideration received or to be received  by the company in respect of the shares or debentures to which the offer relates; and

(b)        the place and time at which the contract under which the said shares or debentures have been or are to be allotted may be inspected.

(4)        Section 60 as applied by this section shall have effect as if the persons making the offer were persons named in a prospectus as directors of a company.

(5)        Where a person making an offer to which this section relates is a company or a firm, it shall be sufficient if the document referred to in sub-section (1) is signed on behalf of the company or firm by two directors of the company or by not less than one-half of the partners in the firm, as the case may be; and any such director or partner may sign by his agent authorized in writing.

65.        Interpretation of provisions relating to prospectuses.

(1)        For the purposes of the foregoing provisions of this Part –

(a)        a statement included in a prospectus shall be deemed to be untrue,  if the statement is misleading in the form be untrue and context in which it is included; and

(b)        where the omission from a prospectus of any matter is calculated  to mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus  in which  an untrue statement is included.

(2)        For the purposes of sections 61, 62 and 63 and clause (a) of sub-section (1) of this section, the expression “included” when used with reference to a prospectus, means included in the prospectus itself or contained in any report or memorandum appearing on the face thereof or by reference incorporated therein or issued therewith.

66.        Newspaper advertisements of prospectus.

Where any prospectus is published as a newspaper advertisement, it shall not be necessary in the advertisement to specify the contents of the memorandum or the signatories thereto, or the number of shares subscribed for by them.

67.        Construction of references to offering shares or debentures to the public, etc.

(1)        Any reference in this Act or in the articles of a company to offering shares or debentures to the public shall, subject to any provision to the contrary contained in this Act and subject also to the provisions of sub-sections (3) and (4), be construed as including a reference to offering them to any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner.

(2)        Any reference in this Act or in the articles of a company to invitations to the public to subscribe for shares or debentures shall, subject as aforesaid, be construed as including a reference to invitations to subscribe for them extended to any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner.

(3)        No offer or invitation shall be treated as made to the public by virtue of sub-section (1) or sub-section (2), as the case may be, if the offer or invitation can properly be regarded, in all the circumstances –

(a)        as not being calculated to result, directly or indirectly, in the  shares or debentures becoming available for subscription or purchase by persons other than those  receiving the offer or invitation; or

(b)        otherwise as being a domestic concern of the persons making and receiving the offer or invitation.

(4)        Without prejudice to the generality of sub-section (3), a provision in a company’s articles prohibiting invitations to the public to subscribe for shares or debentures shall not be taken as prohibiting the making to members or debenture holders of an which can properly be regarded in the manner set forth in  that  sub-section.

(5)        The provisions of this Act relating to private companies shall be construed in accordance with the provisions contained in sub-sections (1) to (4).

Penalty for fraudulently inducing persons to invest money

68.        Penalty for fraudulently inducing persons to invest money.

Any person who, either by knowingly or recklessly making any statement, promise or forecast which is false, deceptive or misleading, or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into, or to offer to enter into –

(a)        any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting shares or debentures; or

(b)        any agreement the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of shares or debentures, or by reference to fluctuations in the value of shares or debentures; shall be punishable with imprisonment for a term which may extend to five years, or with fine which may extend to ten thousand rupees, or with both.

1[68A.   Personation for acquisition, etc., of shares.

(1)        Any person who –

(a)        makes in a fictitious name an application to a company for acquiring, or subscribing for, any shares therein, or

(b)        otherwise induces a company to allot, or register any transfer of, shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend to five years.

(2)        The provisions of sub-section (1) shall be prominently reproduced in every prospectus issued by the company and in every form of application for shares which is issued by the company to any person.]

Allotment

69.        Prohibition of allotment unless minimum subscription received.

(1)       No allotment shall be made of any share capital of a company offered to the public for subscription, unless the amount stated in the prospectus as the minimum amount which, in the opinion of the Board of directors, must be raised by the issue of share capital in order to provide for the matters specified in clause 5 of Schedule II has been subscribed, and the sum payable on application for the amount so stated has been paid to and received by the company, whether in cash or by a cheque or other instrument which has been paid.

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1.   Ins. by Act 31 of 1965, s. 8 (w.e.f. 15-10-1965).

(2)        The amount so stated in the prospectus shall be reckoned exclusively of any amount payable otherwise than in money, and is in this Act referred to as “the minimum subscription”.

(3)        The amount payable on application on each share shall not be less than five per cent. of the nominal amount of the share.

1[(4)     All moneys received from applicants for shares shall be deposited and kept deposited in a Scheduled Bank –

(a)        until the certificate to commence business is obtained under section 149; or

(b)        Where such certificate has already been obtained, until the entire amount payable on applications for shares in respect of the minimum subscription has been received by the company, and where such amount has not been received by the company within the time or the expiry of which the moneys received from the applicants for shares are required to be repaid without interest under sub-section (5), all moneys received from applicants for shares shall be returned in accordance with the provisions of that sub-section.

In the event of any contravention of the provisions of this sub-section, every promoter, director or other person who is knowingly responsible for such contravention shall be punishable with fine which may extend to five thousand rupees.]

(5)        If the conditions aforesaid have not been complied with on the expiry of one hundred and twenty days after the first issue of the prospectus, all moneys received from applicants for shares shall be forthwith repaid to them without interest; and if any such money is not so repaid within one hundred and thirty days after the issue of the prospectus, the directors of the company shall be jointly and severally liable to repay that money with interest at the rate of six per cent. per annum from the expiry of the one hundred and thirtieth day:

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1.   Subs. by Act 31 of 1965, s. 9, for sub-section (4)  (w.e.f. 15-10-1965).

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Provided that a director shall not be so liable if he proves that the default in the repayment of the money was not due to any misconduct or negligence on his part.

(6)        Any condition purporting to require or bind any applicant for shares to waive compliance with any requirement of this section shall be void.

(7)        This section, except sub-section (3) thereof, shall not apply in relation to any allotment of shares subsequent to the first allotment of shares offered to the public for subscription.

70.       Prohibition of allotment in certain cases unless statement in lieu of prospectus delivered to Registrar.

(1)        A company having a share capital, which does not issue a prospectus on or with reference to its formation, or which has issued such a prospectus but has not proceeded to allot any of the shares offered to the public for subscription,  shall not allot any of its shares or debentures unless at  least three days before the first allotment of either  shares or debentures, there has been delivered to the Registrar for registration a statement in lieu of prospectus signed by every person who is  named therein as a director or proposed director of the company or  by his agent authorised  in writing,  in  the  form  and  containing the particulars  set  out  in Part I of Schedule III and, in the cases mentioned in Part II of that Schedule,  setting  out  the  reports specified  therein, and the said Parts I and II  shall have effect subject to the provisions contained in Part III of that Schedule.

(2)        Every statement in lieu of prospectus delivered under sub-section (1), shall, where the persons making any such report as aforesaid have made therein, or have without giving the reasons indicated therein, any such adjustments as are mentioned in clause 5 of Schedule III, have endorsed thereon or attached thereto a written statement signed by those persons, setting out the adjustments and giving the reasons thereof.

(3)        This section shall not apply to a private company.

(4)        If a company acts in contravention of sub-section (1) or (2), the company, and every director of the company who willfully authorises or permits the contravention, shall be punishable with fine which may extend to one thousand rupees.

(5)        Where a statement in lieu of prospectus delivered to the Registrar under sub-section (1) includes any untrue statement, any person who authorised the delivery of the statement in lieu of prospectus for registration shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to five thousand rupees or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did  up to  the time of the delivery  for registration  of the statement in lieu of prospectus believe, that the statement was true.

(6)        For the purposes of this section –

(a)     a statement included in a statement in lieu of prospectus shall be deemed to be untrue if it is misleading in the  form and context in which it is included; and

(b)     where the omission from a statement in lieu of prospectus of any matter is calculated to mislead, the statement in lieu of prospectus shall be deemed, in respect of such omission, to be a statement in lieu of prospectus in which  an  untrue statement is included.

(7)                   For the purposes ‘of sub-section (5) and clause (a) of sub-section (6), the expression “included”, when used with reference to a statement  in lieu of prospectus, means included in the  statement  in lieu of  prospectus itself or contained in any report or memorandum appearing on the face thereof, or by reference incorporated  therein, or issued therewith.

Effect of irregular allotment

71.        Effect of irregular allotment.

(1)        An allotment made by a company to an applicant in contravention of the provisions of section 69 or 70 shall be voidable at the instance of the applicant –

(a)        within two months after the holding of the statutory meeting of the company, and not later, or

(b)        in any case where the company is not required to hold a statutory meeting or where the allotment is made after the holding of the statutory meeting, within two months after the date of the allotment, and not later.

(2)        The allotment shall be voidable as aforesaid, notwithstanding that the company is in course of being wound up.

(3)        If any director of a company knowingly contravenes, or willfully authorises or permits the contravention of, any of the provisions of section 69 or 70 with respect to allotment, he shall be liable to compensate the company and the allottee respectively for any loss,  damages or costs which the company or the allottee may have sustained or incurred thereby :

Provided that proceedings to recover any such loss, damages or costs shall not be commenced after the expiration of two years from the date of the allotment.

72.        Applications for, and allotment of, shares and debentures.

(1)        (a)        No allotment shall be made of any shares in or debentures of a company in pursuance of a prospectus issued generally, and no proceedings shall be taken on applications made in pursuance of a prospectus so issued, until the beginning of the fifth day after that on which the prospectus is first so issued or such later time, if any, as may be specified in the prospectus:

Provided that where, after a prospectus is first issued generally, a public notice is given by some person responsible under section 62 for the prospectus which has the effect of excluding, limiting or diminishing his responsibility, no allotment shall be made until the beginning of the fifth day after that on which such public notice is first given.

(b)        Nothing in the foregoing proviso shall be deemed to exclude, limit or diminish any liability that might be incurred in the case referred to therein under the general law or this Act.

(c)        The beginning of the fifth day or such later time as is mentioned in the first paragraph of clause (a), or the beginning of the fifth day mentioned in the second paragraph of that clause, as the case may be, is hereinafter in this Act referred to as “the time of the opening of the subscription lists”.

(2)        In sub-section (1), the reference to the day on which the prospectus is first issued generally shall, be construed as referring to the day on  which  it is first so issued as a newspaper advertisement:

Provided   that, if it is not so issued as a newspaper advertisement before the fifth day after that on which it is first so issued in any other manner, the said reference shall be construed  as referring to the day on which it is first so issued in any manner.

(3)        The validity of an allotment shall not be affected by any contravention of the foregoing provisions of this section; but, in the event of any such contravention, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees.

(4)        In the application of this section to a prospectus offering shares or debentures for sale, sub-sections (1) to (3) shall have effect with the substitution of references to sale for references to allotment, and with the substitution for the reference to the company and every officer of the company who is in default of a reference to any person by or through whom the offer is made and who is knowingly guilty of, or willfully authorizes or permits, the contravention.

(5)        An application for shares in, or debentures of, a company, which is made in pursuance of a prospectus issued generally shall not be revocable until after the expiration of the fifth day after the time of the opening of the subscription lists, or the giving, before the expiry of the said fifth day by some person responsible under section 62 for the prospectus, of a public notice having the effect under that section of excluding, limiting or diminishing the responsibility of the person giving it.

73.        Allotment of shares and debentures to be dealt in on stock exchange.

[(1)       Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make  an application to one or more recognised stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange  or each  such  stock  exchange.]

2[1A]    Where a prospectus, whether issued generally or not, state that an 3[application under sub-section (1) has been] made for permission for the shares or debentures offered thereby to be dealt in one or more  recognized  stock  exchanges, such prospectus, shall state  the name of the  stock exchange or, as the case may be, each such stock  exchange,  and any allotment made on an application in pursuance of such prospectus  shall,  whenever made,  be void 4*  *  * if  the permission has not been granted by the stock exchange or each such stock  exchange, as the case may be, before the expiry  of  ten weeks from the date of  the closing of the subscription lists:

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1.   Ins. by Act 31 of 1988, s.10(w.e.f.15-6-1988).

2.   Subs. by Act 41 of 1974, s.8  sub-section (1) (w.e.f. 1-2-1975) and renumbered as  sub-section  (1A)  by Act 31 of  1988, s.10 (w.e.f. 15-6-1988).

3.   Subs. by Act 31 of 1988, s.10 (w.e.f. 15-6-1988).

4.   Omitted by s.10, ibid.(w.e.f. 15-6-1988).

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Provided that where an appeal against the decision of any recognized stock exchange refusing permission for the shares or debentures to be dealt in on that stock exchange has been preferred under section 22 of the Securities Contracts (Regulation) Act,1956 (42 of 1956),such allotment shall not be void until the dismissal of the appeal.]

(2)        Where the permission has not been 1[applied under sub-section(1)]  2[or, such permission, having been applied for, has not been granted as aforesaid], the company shall forthwith repay without interest all  moneys  received from applicants in pursuance of the prospectus, and, if any such money is not repaid within  eight days after the company becomes liable to repay it 1[the company and  every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable  to repay that money with interest at such rate, not less than  four  per cent. and not  more than fifteen per cent., as may  be  prescribed, having regard to the length of the period of delay in making the repayment of such money.]

3*  *  *  *   *

4[(2A)   Where permission has been granted by the recognized stock exchange or stock exchanges for dealing in any shares or debentures in such stock exchange or each such stock exchange and the moneys received from applicants for shares or debentures are in excess of the aggregate of the application moneys relating to the shares or debentures in respect of which allotments have been made, the company shall repay the moneys to the extent of such excess forthwith without interest, and if such money is not repaid within eight days, from the day the company becomes liable to pay it, 1[the company and  every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable  to repay that money with interest at such rate, not less than  four  per cent. and not  more than fifteen per cent, as may be  prescribed, having regard  to the length of the period of delay in making  the repayment of such money.]

3*   *  *  *    *

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1.   Subs. by Act 31 of 1988, s.10  (w.e.f. 15-6-1988).

2.   Subs.  by Act 41 of 1974, s. 8, for certain  words  (w.e.f. 1-2-1975).

3.   Omitted by Act 31 of 1988, s.10 (w.e.f. 15-6-1988).

4.   Ins. by Act 41 of 1974, s.8 (w.e.f. 1-2-1975).

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(2B)      If default is made in complying with the provisions of sub-section (2A), the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees, and where repayment is not made within six months from the expiry of the eighth day, also with imprisonment for a term which may extend to one year.]

(3)        All moneys received as aforesaid shall be kept in a separate bank account maintained with a Scheduled Bank 1[until the permission has been granted, or where an appeal has been preferred against the refusal to grant such. permission, until the disposal of the appeal, and the money standing in such separate account shall, where the permission has not been applied for as aforesaid or has not been granted, be repaid within the time and in the manner specified in sub-section (2)]; and if default is made in complying with  this  sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which  may  extend  to five thousand rupees.

2[(3A)   Moneys standing to the credit of the separate bank account referred to in sub-section (3) shall not be utilised for any purpose other than the following purposes, namely –

(a)        adjustment against allotment of shares, where the shares have  been permitted to be dealt in on the stock exchange or each stock exchange specified in the  prospectus; or

(b)        repayment of moneys received from applicants in pursuance of the prospectus, where shares have not been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus, as the case may be, or where the company is for any other reason unable to make  the allotment of share.]

(4)        Any condition purporting to require or bind any applicant for shares or debentures to waive compliance with any of the requirements of this section shall be void.

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1.   Subs. by Act 41 of 1974, s. 8, for certain words (w.e.f. 1-2-1975).

2.   Ins. by s. 8, ibid. (w.e.f. 1-2-1975).

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1[(5)      For the purposes of this section, it shall be deemed that permission has not been granted if the application for permission, where made, has not been disposed of within the time specified in sub-section (1).]

(6)        This section shall have effect –

(a)        in relation to any shares or debentures agreed to be taken by a person underwriting an offer thereof by a prospectus, as if he had applied therefor in pursuance of  the prospectus; and

(b)        in relation to a prospectus offering shares for sale, with the following modifications, namely –

(i)         references to sale shall be substituted for references to allotment;

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1.         Subs. by Act 41 of 1974, s.8, for sub-section (5) (w.e.f.  1-2-1975).

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(ii)         the persons by whom the offer is made, and not the. company, shall be liable under sub-section (2) to ‘repay money received  from  applicants, and  references to the company’s liability under that sub-section shall be construed accordingly; and

(iii)        for the reference in sub-section (3) to the company and every officer of the company who is in default, there shall be substituted a reference to any person by or through  whom the offer is made and who is knowingly guilty of, or willfully authorises or permits, the default.

(7)        No prospectus shall state that application has been made for permission for the shares or debentures offered thereby to be dealt in on any stock exchange, unless it is a recognized stock exchange.

74.        Manner of reckoning fifth, eighth and tenth days in sections 72 and 73.

In reckoning for the purposes of sections 72 and 73, the fifth day 1[or the eighth day] another day, any intervening day which is a public holiday under the Negotiable Instruments Act, 1881 (36 of 1881), shall be disregarded, and if the fifth, or eighth day (as so reckoned) is itself such a public holiday, there shall for the said purposes be substituted the first day thereafter which is not such a holiday.

Return as to allotments

75.        Return as to allotments.

(1)        Whenever a company having a share capital makes any allotment of its shares, the company shall, within 2[thirty days] thereafter –

(a)        file with the Registrar a return of the allotments, stating the number and nominal amount of the shares comprised in the allotment, the names, addresses and occupations of the allottees, and the amount, if any, paid or due and payable on each share:

3[Provided that the company shall not show in such return any shares as having been allotted for cash if cash has not actually been received in respect of such allotment.]

(b)        in the case of shares (not being bonus shares) allotted as fully or partly paid up otherwise than in cash, produce for the inspection and examination of the Registrar a contract in writing constituting the title of the allottee to the allotment together with any contract of sale, or a contract for services or other consideration in respect of which that allotment was made, such contracts being duly stamped, and file with the Registrar copies verified in the prescribed manner of all such contracts and a return stating the number and nominal amount of shares so allotted, the extent  to which they are to be treated as paid up, and the consideration for which they have been allotted; and

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1.   Subs. by Act 31 of 1988, s.11 (w.e.f. 15-6-1988).

2.   Subs. by Act 31 of 1965, s. 62 and Sch., for “one month” (w.e.f. 15-10-1965).

3.   Added by s. 11, ibid. (w.e.f. 15-10-1965).

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1[(c)      file with the Registrar –

(i)         in the case of bonus shares, a return stating the  number and nominal amount of such shares comprised in the  allotment and the names, addresses and occupations of the allottees and a copy of the resolution authorizing the issue of such shares;

(ii)         in the case of issue of shares at a discount a copy of the resolution passed by the company authorizing such issue together with a copy of the order of the Court sanctioning the issue and where the maximum rate of discount exceeds  ten per cent., a copy of the orders of the  Central  Government permitting the issue at the higher percentage.]

(2)        Where a contract such as is mentioned in clause (b) of sub-section (1) is  not reduced to writing, the  company  shall,  within 2[thirty days] after the allotment, file with the Registrar the prescribed particulars of the contract stamped with the same stamp duty as would have been payable if the contract had been reduced to writing; and those particulars shall be deemed to be an instrument within the meaning of the Indian Stamp Act, 1899,(2 of 1899.) and the Registrar may, as a condition of filing the particulars, require that the  duty payable thereon be adjudicated under section 31 of that Act.

(3)        If the Registrar is satisfied that in the circumstances of any particular case the period of 2 [thirty days] specified in subsections (1) and (2) for compliance with the requirements of this section 3[is or was inadequate, he may, on application made in that behalf by the company, whether before or after the expiry of the said period, extend that period as he thinks fit] ; and if he does so, the provisions of sub-sections (1) and (2) shall have effect in that particular case as if  for the said period of 1[thirty days] the extended period allowed by the Registrar were substituted.

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1.         Subs. by Act 65 of 1960, s. 21, for cl. (c).

2.         Subs.  by Act 31 of 1965, s. 62 and Sch., for “one month” (w.e.f. 15-10-1965).

3.         Subs. by s. 11, ibid., for certain words, (w.e.f. 15-10-1965).

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(4)        If default is made in complying with this section, every officer of the company who is in default shall be punishable with fine which may. extend to five hundred rupees for every day during  which the default continues:

2[Provided that in case of contravention of the proviso to clause (a) of sub-section (1), every such officer, and every promoter of the company who is guilty of the contravention shall be  punishable with fine which may extend to five thousand rupees.]

(5)        Nothing in this section shall apply to the issue and allotment by a company of shares which under the provisions of its articles were forfeited for non-payment of calls.

Commissions and Discounts

76.        Power to pay certain commissions and prohibition of payment of all other commissions, discounts, etc.

(1)        A company may pay a commission to any person in consideration of –

(a)        his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares in, or debentures of, the company, or

(b)        his procuring or agreeing to procure subscriptions, whether  absolute or conditional, for any shares in, or debentures of, the company,

if the following conditions are fulfilled, namely –

(i)         the payment of the commission is  authorized by the articles;

(ii)         the commission paid or agreed to be paid does not exceed in the case of shares, five per cent. of the price at which the shares are issued or the amount or rate authorized by the articles,  whichever is less, and in the case of debentures, two and a half per cent. of the price at which the debentures are issued or the amount or rate authorized by the articles, whichever is less;

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1.   Subs.  by Act 31 of 1965, s. 62 and Sch., for “one month” (w.e.f. 15-10-1965).

2.   Subs. by s. 11, ibid., for the proviso (w.e.f. 15-10-1965).

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(iii)        the amount or rate per cent. of the commission paid or agreed to be paid is –

in the case of shares or debentures offered to the public for subscription, disclosed in the prospectus; and in the case of shares or debentures not  offered to the public for subscription, disclosed in the statement in  lieu of prospectus, or in a statement in the prescribed form signed in like manner as a statement in lieu of prospectus and filed before the payment of the commission  with the Registrar and, where a circular or notice, not being a prospectus inviting subscription for the   shares  or debentures,  is  issued, also disclosed in that circular or notice; 1* * *

(iv)       the number of shares or debentures which persons have  agreed for a commission to subscribe absolutely or conditionally is disclosed in the manner aforesaid 2 [and]

2[(V)    a copy of the contract for the payment of the commission is delivered to the Registrar at the time of delivery of the prospectus or the statement in lieu of prospectus for registration.]

(2)        Save as aforesaid and save as provided in section 79, no company shall allot any of its shares or debentures or apply 3[any of its moneys], either directly or indirectly, in payment of any commission, discount or allowance, to any person in consideration of –

(a)        his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares in, or debentures of, the company, or

(b)        his procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in, or debentures of, the company, whether the shares, debentures or money be so allotted or applied by being added to the purchase money of any property acquired by the company or to the contract price of any work to be executed for the company, or the money be paid out of the nominal purchase money or contract price, or otherwise.

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1.   The word “and” omitted by Act 31 of 1965, s. 12 (w.e.f. 15-10-1965).

2.   Ins. by s. 12, ibid. (w.e.f. 15-10-1965).

3.   Subs.  by Act  65 of 1960, s. 22, for  ”any of its capital moneys”.

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(3)        Nothing in this section shall affect the power of any company to pay such brokerage as it has heretofore been lawful for a company to pay.

(4)        A vendor to promoter of, or other person who receives payment in shares, debentures or money from, a company shall have and shall be deemed always to have had power to apply any part of the shares, debentures or money so received in payment of any commission the payment of which, if made directly by the company, would have been legal under this section.

1[(4A)   For the removal of doubts it is hereby declared that no commission shall be paid under clause (a) of sub-section (1) to any person on shares or debentures which are not offered to the public for subscription:

Provided that where a person has subscribed or agreed to subscribe under clause (a) of sub-section (1) for any shares in, or debentures of,  the  company and before the issue of the prospectus or statement in lieu thereof any other person or persons has or have subscribed for any or all of those shares or debentures and that  fact together with the aggregate amount of commission payable under this section in respect of such subscription is disclosed in such prospectus or statement, then, the company may pay  commission  to  the first-mentioned person in respect of such subscription.]

(5)        If default is made in complying with the provisions of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees.

77.        Restrictions on purchase by company or loans by company for purchase, of its own or its holding company’s shares.

(1)        No company limited by shares, and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402.

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1.   Ins. by Act 31 of 1965, s. 12 (w.e.f. 15-10-1965).

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(2)        No public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company:

Provided that nothing in this sub-section shall be taken to prohibit –

(a)        the lending of money by a banking company in the  ordinary           course of its business; or

(b)        the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried office or employment in the company; or

(c)        the making by a company of loans, within the limit laid down in sub-section (3), to persons (other than directors, managing agents, secretaries and treasurers or managers) bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership.

(3)        No loan made to any person in pursuance of clause (c) of the foregoing proviso shall exceed in amount his salary or wages at that time for a period of six months.

(4)        If a company acts in contravention of sub-sections (1) to (3), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees.

(5)        Nothing in this section shall affect the right of a company to redeem any shares issued under section 80 or under any corresponding provision in any previous companies law.

Application of premiums received on issue of shares

78.        Application of premiums received on issue of shares.

(1)        Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called “the share premium account”; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the share premium account were paid-up share capital of the company.

(2)        The share premium account may, notwithstanding anything in sub-section (1), be applied by the company –

(a)        in paying up unissued shares of the company to be  issued to members of the company as fully paid bonus shares;

(b)        in writing off the preliminary expenses of the company;

(c)        in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or

(d)        in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.

(3)        Where a company has, before the commencement of this Act, issued any shares at a premium, this section shall apply as if the shares had been issued after the commencement of this Act:

Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company’s reserves within the meaning of Schedule Vl, shall be disregarded in determining the sum to be included in the share premium account.

79.        Power to issue shares at a discount.

(1)        A company shall not issue shares at a discount except as provided in this section.

(2)        A company may issue at a discount shares in the company of a class already issued, if the following conditions are fulfilled, namely –

(i)         the issue of the shares at a discount is authorised by a resolution  passed by the company in general meeting, and sanctioned by the 1 [Company Law Board];

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1.   Subs. by Act 41 of 1974, s. 9, for “Court” (w.e.f. 1-2-1975).

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(ii)         the resolution specifies the maximum, rate of  discount 1*  *  *   at which the shares are to be issued:

2[Provided that no such resolution shall be sanctioned by the Company Law Board if the maximum rate of discount specified in the resolution exceeds ten per cent., unless that Board is of opinion that a higher percentage of discount may be allowed in the special circumstances of the case;]

(iii)        not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business; and

(iv)        the shares to be issued at a discount are issued within two months after the date on which the issue is sanctioned by the 3[Company Law Board] or within such extended time as  the 3[Company Law Board] may allow.

(3)        Where a company has passed a resolution authorizing the issue of shares at a discount, it may apply to the 3[Company Law Board] for an order sanctioning the issue; and on any such application, the 3[Company Law Board], if, having regard to all. the circumstances of the case, it thinks proper so to do, may  make an order sanctioning the issue on such terms and conditions as it thinks fit.

(4)        Every prospectus relating to the issue of the shares shall contain particulars of the discount allowed on the issue of the shares or of so much of that discount as has not been written off at the date of the issue of the prospectus. If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall   be punishable with fine which may extend to fifty rupees.

Issue and Redemption of Preference Shares

80.        Power to issue redeemable preference shares.

(1)        Subject to the provisions of this section, a company limited by shares may, if so authorized by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed:

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1.   Certain  words omitted by Act 41 of 1974, s.  9  (w.e.f.  1-2-1975).

2.   Ins. by s. 9, ibid. (w.e.f. 1-2-1975).

3.   Subs. by s. 9, ibid.. for “Court” (w.e.f. 1-2-1975).

4    Subs. by Act 31 of 1988, s. 12 (w.e.f. 15.6.1988).

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Provided that –

(a)        no such shares shall be redeemed except out of profits of the  company which would otherwise be available for  dividend or out of the proceeds of a fresh issue of shares made or the purposes of the redemption;

(b)        no such shares shall be redeemed unless they are fully paid;

(c)        the premium, if any, payable on redemption shall have been  provided for out of the profits of the company or out of the company’s share premium account, before the shares are redeemed;

(d)       where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall, out of profits which would otherwise have been available for dividend, be transferred to a reserve fund, to be called 1[the capital redemption reserve account], a sum equal to the nominal amount of the shares redeemed; and the provisions of this Act relating to the reduction of the share capital of a company shall,  except as provided in this section, apply as if 1[the capital redemption reserve account]  were  paid-up share capital of the company.

(2)        Subject to the provisions of this section, the redemption of preference shares there under may be effected on such terms and in such manner as may be provided by the articles of the company.

(3)        The redemption of preference shares under this section by a company shall not be taken as reducing the amount of its authorized share capital.

(4)        Where in pursuance of this section, a company has redeemed or is about to redeem any preference shares, it shall have power to issue shares up to the nominal amount of the shares redeemed or to be redeemed as if those shares had never been issued; and accordingly the share capital of the company shall not, for the purpose of calculating the fees payable under 2[section 611], be deemed to be  increased  by the issue of shares in pursuance of this sub-section:

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1.   Subs.  by Act 65 of 1960, s. 23, for “the  capital  redemption reserve fund”.

2.   Subs. by s. 23, ibid., for “section 601″.

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Provided that, where new shares are issued before the redemption of  the  old shares, the new shares shall not, so far  as  relates  to stamp  duty, be deemed to have been issued in pursuance of  this  sub-section unless the old shares are redeemed within one month after  the issue of the new shares.

(5)       1[The capital redemption reserve account] may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

2[(5A)   Notwithstanding  anything contained in this  Act,  no  company limited  by  shares shall, after the commencement  of  the Companies (Amendment)   Act, 1988, issue any preference share which is irredeemable or is redeemable after the expiry of a  period  of  ten years from the date of its issue]

(6)        If a company fails to comply with the provisions of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees.

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1.   Subs. by Act 65 of 1960, s. 23, for  ”The  capital  redemption reserve fund”.

2.   Ins. by Act 31 of of 1988, s. 13 (w.e.f 15.6.1988).

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Redemption of irredeemable preference shares, etc.

4[80A.   Redemption of irredeemable preference shares, etc.

(1)        Notwithstanding anything contained in the terms of issue of any preference shares, every preference share issued before the commencement of the Companies (Amendment) Act, 1988 –

(a)        which is irredeemable, shall be redeemed by the company within a  period  not exceeding five years  from  such  commencement, or

(b)        which is not redeemable before the expiry of ten years from the date of issue there-on in accordance with the terms of its issue and which had not been redeemed before such commencement, shall be redeemed by the company on the date on which such share is due for redemption or within a period not exceeding ten years from such commencement, whichever is earlier:

Provided that where a company is not in a position to redeem any such share within the period aforesaid and to pay the dividend, if any, due thereon (such shares being hereinafter referred to as unredeemed preference shares), it may, with the consent of the Company Law Board, on a petition made by it in this behalf and notwithstanding anything contained in this Act, issue further redeem-able preference shares equal to the amounts due (including the dividend thereon), in respect of the unredeemed preference shares, and on the issue of  such further redeemable preference shares, the unredeemed shares shall  be deemed to have been redeemed.

(2)        Nothing contained in section 106 or any scheme referred to in sections 391 to 395, or in any scheme made under section 396, shall be deemed to confer power on any class of shareholders by resolution or on any court or the Central Government to vary or modify the provisions of this section.

(3)        If any default is made in complying with the provisions of this section –

(a)        the company  making such default shall be  punishable  with fine  which may extend to one thousand rupees for every day during which such default continues; and

(b)        every officer of the company who is in default shall be punishable  with imprisonment for a term which may  extend  to  three years and shall also be liable to fine.]

Further issue of Capital

81.        Further issue of capital.

(1)        2[Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then,]

(a)        such 3[further]  shares shall be offered to the persons who, at  the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those  shares at that date;

(b)        the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being  less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been  declined;

(c)        unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares  offered to him or any of them in favour of any  other person; and the notice referred to in clause (b) shall contain a statement of this right;

(d)       after the expiry of the time specified in the notice aforesaid, or  on  receipt of earlier  intimation from  the person to  whom  such notice is given that he declines to accept the shares offered, the Board of directors may dispose of them in such manner as they think most beneficial to the company.

Explanation.-In this sub-section, “equity share capital” and “equity shares” have the same meaning as in section 85.

4[(1A)  Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons [whether or not those  persons include the persons referred to in clause  (a)  of subsection (1)] in any manner whatsoever –

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1.   Ins. by Act 31 of 1988, s. 14 (w.e.f. 15.6.1988).

2.   Subs. by Act 65 of 1960, s. 24, for certain words.

3.   Subs. by s. 24, ibid., for “new”.

4.   Ins. by s. 24, ibid.

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(a)        if a special resolution to that effect is passed  by the company in general meeting, or

(b)       where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case moved in that general meeting (including the casting vote, if any, of the Chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the Board of directors in this behalf, that the proposal is most beneficial to  the company.]

(2)        Nothing in clause (c) of sub-section (1) shall be deemed –

(a)        to extend the time within which the offer should be accepted, or

(b)        to authorize any  person  to  exercise the right of renunciation for a second time, on the ground that the person in whose favour the renunciation was first made has  declined to take the shares comprised in the renunciation.

(3)        Nothing in this section shall apply –

(a)        to a private company; or

(b)        to the increase of the subscribed capital of a public company caused  by  the exercise of an  option  attached to debentures issued or loans raised by the company –

(i)         to convert such debentures or loans into shares in the company, or

(ii)         to subscribe for shares in the company:

2[Provided that the terms of issue of such debentures or the terms of such loans include a term providing for such option and such term –

(a)        either has been approved by the Central Government before the issue of debentures or the raising of the loans  or is in conformity with the rules, if any, made by that Government in this behalf; and

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1.   Subs. by Act 65 of 1960, s. 24, for sub-section (3).

2.   Subs.  by Act 53 of 1963, s. 5, for the proviso  (w.e.f.  1-1-1964).

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(b)        in the case of debentures or loans other than debentures issued to, or loans obtained from, the Government or any  institution specified by the Central  Government in this behalf, has also been approved by a special resolution passed by the company in general meeting before the issue  of the debentures or the raising of the loans.]

1[(4)     Notwithstanding anything contained in the foregoing provisions of this section, where any debentures have been issued to, or loans have been obtained from, the Government by a company, whether such debentures have been issued or loans have been obtained before or after the commencement of the Companies (Amendment) Act, 1963, the Central Government may, if in its opinion it is necessary in the public interest so to do, by order, direct that such debentures or loans  or  any  part thereof shall be converted  into  shares  in  the company on such terms and conditions as appear to that Government to be reasonable in the circumstances of the case, even if the terms of issue of such debentures or the terms of such loans do not include  a term providing for an option for such conversion.

(5)        In determining the terms and conditions of such conversion, the Central Government shall have due regard to the following circumstances, that is to say, the financial position of the company, the terms of issue of the debentures or the terms of the loans, as the case may be, the rate of interest payable on the debentures or the loans, the capital of the company, its loan liabilities, its reserves, its profits during the preceding five years and the current market price of the shares in the company.

(6)        A copy of every order proposed to be issued by the Central Government under sub-section (4) shall be laid in draft before each House of Parliament  while it is in session for a total period  of thirty days which may be comprised in one session or in two  or  more successive sessions.

(7)        If the terms and conditions of such conversion are not acceptable to the company, the company may, within thirty days from the date of communication to it of such order or within such further time as may be granted by the Court, prefer an appeal to the Court in regard to such terms and conditions and the decision of the Court on such appeal and, subject only to such decision, the order of the Central Government under sub-section (4) shall be final and conclusive.]

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1.   Ins. by Act 53 of 1963, s. 5 (w.e.f. 1-1-1964).

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POWERS OF CENTRAL GOVERNMENT TO REMOVE MANAGERIAL PERSONNEL FROM OFFICE ON THE RECOMMENDATION OF THE COMPANY 4[Company Law Board]

388B. Reference to Company Law Board of cases against managerial personnel.

(1) Where in the opinion of the Central Government there are circumstances suggesting

(a) that any person concerned in the conduct and management of the affairs of a company is or has been in connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law, or breach of trust; or

(b) that the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; or

(c) that a company is or has been conducted and managed by such person in a manner which is likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or

(d) that the business of a company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest, the Central Government may state a case against the person aforesaid and refer the same to the 4[Company Law Board.] with a request that the 1[Company Law Board] may inquire into the case and 2[record a decision] as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

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1. Subs. by Act 65 of 1960, s. 148, for ” 310″

2. Ins. by s. 149, ibid.

3. Ins. by Act 53 of 1963, s. 9 (w.e.f. 1-1-1964).

4. Subs. by Act 31 of 1988, s. 67 (w.e.f. 31.5.1991)

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(2) Every case under sub-section (1) shall be stated in the form of an application which shall be presented to the 1[Company Law Board] or such officer thereof as it may appoint in this behalf.

(3) The person against whom a case is referred to the 1[Company Law Board] under this section shall be joined as a respondent to the application.

(4) Every such application

(a) shall contain a concise statement of such circumstances and materials as the Central Government may consider necessary for the purpose of the inquiry, and

(b) shall be signed and verified in the manner laid down in the Code of Civil Procedure, 1908, (5 of 1908.) for the signature and verification of a plaint in a suit by the Central Government.

(5) The 1[Company Law Board] may at any stage of the proceedings allow the Central Government to alter or amend the application in such manner and no such terms as may be just, and all such alterations or amendments shall be made as may be necessary for the purpose of determining the real questions in the inquiry.

Interim order by Company Law Board

388C. Interim order by Company Law Board.

(1) Where during the pendency of a case before the 1[Company Law Board] it appears necessary to the 1[Company Law Board] so to do in the interest of the members or creditors of the company or in the public interest, the 1[Company Law Board] may on the application of the Central Government or on its own motion by an order

(a) direct that the respondent shall not discharge any of the duties of his office until further orders of the 1[Company Law Board], and

(b) appoint a suitable person in place of the respondent to discharge the duties of the office held by the respondent subject to such terms and conditions as the 1[Company Law Board] may specify in the order.

(2) Every person appointed under clause (b) of sub-section (1) shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code (45 of 1860).

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1. Subs. by Act 31 of 1988, s.67 (w.e.f.31.5.1991).

2. Subs. by Act 17 of 1967), s. 4 and Sch., for record a finding (w.e.f. 1-7-1967).

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388D. Decision of the Company Law Board.

At the conclusion of the hearing of the case, the 7[Company Law Board] shall record its decision] stating therein specifically as to whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

388E. Power of Central Government to remove managerial personnel on the basis of Company Law Board’s decisions.

(1) Notwithstanding any other provision contained in this Act, the 2[Central Government shall], by order, remove from office any director, or any other person concerned in the conduct and management of the affairs, of a company, against whom there is a 3[decision of the 1[Company Law Board under this Chapter]:

Provided that where a firm or a body corporate is concerned in the conduct and management of the affairs of a company as its managing agent or secretaries and treasurers, and the 4[decision of the1[Company Law Board] is against any partner in such firm, or any director of, or any person holding a general power of attorney from, such body corporate, the Central Government may also remove from the office of managing agent or secretaries and treasurers, such firm or body corporate.

5[(2) No order removing a firm or body corporate from the office of managing agents or secretaries and treasurers shall be made in pursuance of the proviso to sub-section (1) unless such firm or body corporate has been given a reasonable opportunity of showing cause against the same:

Provided that no matter shall be raised by such firm or body corporate before the Central Government if such matter has been decided by the 1[Company Law Board].

(3) The person against whom an order of removal from office is made under this section shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company during a period of five years from the date of the order of removal:

Provided that the Central Government may, with the previous concurrence of the 1[Company Law Board] permit such person to hold any such office before the expiry of the said period of five years.

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1. Subs. by Act 31 of 1988, s.67 (w.e.f. 31-5-1991).

2. Subs. by Act 17 of 1967, s. 4 and Sch., for “Central Government may “(w.e.f. 1-71967).

3. Subs. by s. 4 and Sch., ibid., for ” finding of the Tribunal under this Chapter or a decision of a High Court thereon ” (w.e.f 1-7-1967).

4. Subs. S. 4 and Sch., ibid., for “finding of the Tribunal or the decision of a High Court” (w.e.f. 1-7-1967).

5. Subs. by s. 4 and Sch., ibid., for sub-section (2) (w.e.f. 1-7-1967).

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(4) Notwithstanding anything contained in any other provision of this Act or any other law or any contract, memorandum or articles, on the removal of a person from the office of a director or, as the case may be, any other office connected with the conduct and management of the affairs of the company, that person shall not be entitled to, or be paid, any compensation for the loss or termination of office.

(5) On the removal of a person from the office of a director or, as the case may be, any other office connected with the conduct and management of the affairs of the company, the company may, with the previous approval of the Central Government, appoint another person to that office in accordance with the provision of this Act.