Ceiling on number of audit (Ss. 224 and 233B)
Sub-section (113) and
first proviso thereof to section 224 and sub-section (2) of section 233B
has been amended by the Companies (Amendment) Act, 1988. As a result of the
amendment, any partner of a firm of Chartered Accountants, who is in full time
employment elsewhere is not to be taken into account while computing the
ceiling on number of companies that can be under audit with the firm. A person
in whole-time employment elsewhere will not be eligible to be appointed
as Auditor of a company. The provisions of section 224(l B) applicable to the
statutory auditors in regard to ceiling on audit, now apply to Cost Auditors
also. The provisions of sub-section (IB) have been made inapplicable on
and after the commencement of the Companies (Second Amendment) Act, 1999.
The said Amendment Act has
also inserted new clause (aa) in sub-section (4) of section 224 providing
that in case of an auditor appointed under section 619 by the Comptroller.
Appointment of Auditors (S. 224A and 224)
The relevant date of determining whether the financial institution holds 25% or more shareholding of the company is the date on which the Special Resolution is to be passed, that is, the date of Annual General Meeting. It may so happen that between the date of the notice calling the Annual General Meeting wherein Special Resolution is proposed and the actual date of the Annual General Meeting, the percentage in the shareholdings of the institution falls below 25%. In that case, it will not be necessary to pass the Special Resolution and an Ordinary Resolution will suffice. However, if during the intervening period any financial institution mentioned in section 224A(l) acquires 25% or more of the share capital of the company, the Annual General Meeting may be adjourned and a fresh notice proposing appointment of the Auditors by passing a Special Resolution may be given. (Department's Circular No. 2/76(inn6-CL. V) dated 5-6-1976).
Auditors of a company are
appointed by the Central Government if at an annual general meeting no auditors
are appointed. Such a company is required to give notice to the Central
Government within 7 days of such a power of the Central Government becoming
exercisable. It such a notice is not given to the Central Government, the
company and every officer of the company who is in default will be punishable
with fine of up to Rs. 5,000/-.
Where appointment by the
Central Government becomes necessary the application has to be made to the
Regional Director to whom powers of the Central Government under sub-sections
(3), (4) and (8)(a) of section 224 have been delegated. (Notification GSR No.
506(E), dated 24-6-1985). This is no prescribed form of this
application".
Under section 224A
appointment of auditors in certain cases must be made with the approval of the
company by passing a special resolution. The Department of Company Affairs has
issued a clarification in connection therewith by General Circular No. 14/2001,
dated 16th July, 2001 stating that the three sub-clause (a), (b) and (c)
of subsection (1) of section 224A are not mutually exclusive and therefore the
provisions of sub-section (1) would apply to all cases of shareholdings
in any combination by any of the institutions mentioned in these three clauses.
Appointment of new Auditors/Removal of
existing Auditors.
(S.225)
Failure to forward a copy of the notice of a resolution to be moved under sub-section (1) of section 225 to a retiring Auditor whom it is proposed to remove would make the resolution illegal and ineffective. (Department's Circular No. 35/6/68-CL. III, dated 18-11-1969). The Central Government is empowered under section 408(6) of the Act as amended by the Companies (Amendment) Act, 1988, to direct a company to remove its Auditor and appoint another in his place.
Information given in Board's report instead of in the accounts
WHEREAS the company is
required to give detailed information of value of imports, expenditure in
foreign currency and earnings in foreign exchange as per paragraph 4-D of
Part II of Schedule VI;
AND WHEREAS the said
information is allowed to be given in a form of a statement annexed to the
accounts of the company;
AND WHEREAS under proviso to
section 222 of the Companies Act, 1956 the said information can be given in the
Board's report instead of in the accounts.
NOW, THEREFORE, IT IS
RESOLVED that the said information be given in the Board's report of the
company for the financial year 2001-2002.
1. Directors' report outside the purview of audit.-It may be noted that the
directors' report by itself does not come within the purview of the audit under
section 227. But if it includes any information properly required to be given
in the balance sheet or profit and loss account, the audit must extend to the
information so included.
2. Documents annexed and attached-The auditors' report is
required to be attached and the profit and loss account is required to be
annexed to the balance-sheet of a company. The term 'annex' apparently
means that it is to be treated as forming a part of the document and the term
'attach' signifies a separate document fastened to it. The distinction between
documents 'annexed' and documents 'attached' to the balance-sheet, which
is made in sections 216 and 222 of the Act, is imported and should be fully
appreciated. The documents 'annexed' to the balance-sheet include the
list of investments and particulars required by section 372A, and any information
given in a schedule where permitted to be so done. The documents and statements
relating to subsidiary companies specified in section 212 are required to be
'attached' to the balance sheet. Again the directors' report and auditors'
report are 'attached' to the balance-sheet. It should be noted that the
auditors' report covers all documents which are 'attached' to the balance
sheet. (Compendium of Statements & Standard Auditing, 4th Edn. 1995, p.a.
46, paras 15.)
S.
224-Appointment of First Auditors-Board Resolution
"RESOLVED that the consent of the Board of Directors be and is hereby given to the appointment of M/s. S.B. Gupta and Co., Chartered Accountants, as first Auditors of the Company to hold office from the date of its incorporation to the conclusion of the first Annual General Meeting of the Company on a consolidated remuneration of Rs. 1,80,000/- for auditing the accounts of the company.
RESOLVED FURTHER that the
Secretary of the company be and is hereby directed to give intimation of this
appointment to the Auditors so appointed within seven days of the date of the
resolution."
OR
"RESOLVED that M/s. ABC
& Co., Chartered Accountants, be and are hereby appointed as the Auditors
of the Company until the conclusion of the next Annual General Meeting and that
intimation of this appointment be sent to the Auditors so appointed within
seven days of the date of the resolution."
OR
"RESOLVED that M/s. ABC
& Co., Chartered Accountants, the Auditors of the Company be paid a fee of
Rs. 1,00,000/- for audit of the accounts of the Company for the year
ending 31st March, 2002, plus out-of-pocket expenses."
OR
"RESOLVED that M/s.
S.B. Gupta & Co., Chartered Accountants shall not be reappointed as
Auditors of the Company after their present term expires at the next Annual
General Meeting of the Company.
OR
"RESOLVED that M/s. ABC
& Co., Chartered Accountants, be and are hereby appointed Auditors of the
Company to fill the vacancy caused by the resignation of M/s. S.B. Gupta and
Co., Chartered Accountants, to hold office until the conclusion of the next
Annual General Meeting and that their remuneration be determined by the Board
of Directors."
OR
"RESOLVED that M/s.
A.B. Gupta & Co., Chartered Accountants, who are the retiring Auditors of
the Company and who have offered themselves for re-appointment as such
and who are not disqualified to act, within the provisions of section 224(1B)
of the Companies Act, 1956, be and, are hereby re-appointed as Auditors
of the Company to hold office until the conclusion of the next Annual General
Meeting of the Company and that they may be paid a fee of Rs. 90,000/-
for auditing the accounts of the company plus actual out-of-pocket
expenses incurred by them."
OR
"RESOLVED that M/s. S.P.
Chopra & Co., Chartered Accountants, the retiring Auditors, having offered
themselves for reappointment, be and are hereby reappointed as Auditors of the
Company to hold office from the conclusion of this Annual General Meeting and
up to the conclusion of the next Annual General Meeting of the Company.
RESOLVED FURTHER that M/s.
S.P. Chopra & Co., be paid by way of remuneration a fee of Rs. 60,000/-
in addition to reimbursement of actual out-of-pocket expenses and
that the Board of Directors of the company be and are hereby also authorised to
appoint Branch Auditor of the company in consultation with M/s. S.P. Chopra
& Co. and also to fix their remuneration."
OR
"RESOLVED that the
consent of the Company be and is hereby given to the Board of Directors to have
the accounts of the branches/department of the Company for the financial year
ending 31st March, 2002, audited by a person or persons qualified for
appointment as Auditors of the company in consultation with M/s. S.P. Chopra
& Co., the statutory Auditors of the Company and to fix their
remuneration."
1. Special notice required for appointing different auditors.-If it is proposed not to
appoint the existing Auditors again, a resolution as required pursuant to sub-section
(2) of section 224 has to be passed. It will also be necessary to intimate the
retiring Auditors also that they are not being re-appointed.
2. Right of representation of retiring auditors.-The retiring Auditors have a
right of representation to the shareholders in writing as well as by addressing
them orally at the General Meeting.
3. Provisions of section 224(2) mandatory.-The provisions of section
224(2) are mandatory and have to be complied with.
4. Obtaining certificate as to limits of audit from auditors.-Before proposing
appointment/reappointment of Auditors, it is advisable to obtain a certificate
from them pursuant to section 224(l) and to ensure that they are not
disqualified from accepting the appointment.
5. Intimation to Central Government if no auditor appointed.-If no appointment is made at
the General Meeting, intimation has to be given to the Central Government
within seven days who shall then appoint the Auditors of the company. If any
default is made in doing so, the company and every officer of the company who
is in default will be punishable with fine of up to Rs. 5,000/-.
6. Casual vacancy be filled in by Board.-However, if there is a
casual vacancy occurring during the year by way of resignation of Statutory
Auditors of the company, the Board can fill in the casual vacancy and the
person appointed in the vacancy shall hold office until the conclusion of the
next Annual General Meeting of the company.
7. Special notice required for removal of first auditor.-The company may remove at
the first General Meeting the first Auditors appointed by the Board and appoint
in their place any other person who has been nominated for appointment by any
member of the company and notice of whose nomination has been given by the
company to the members not less than 14 days before the date of the meeting.
8. Approval of general meeting required for removal of Auditor
appointed at General Meeting.-An Auditor duly appointed at the General Meeting can
be removed before the expiry of his term in the General Meeting only after
obtaining the approval of the General Meeting for his removal.
9. Fixation of remuneration of auditor appointed by Central Government
of CAG.-If
the appointment of an Auditor is made by the Central Government, his
remuneration shall also be fixed by that Government and if an auditor is
appointed under section 619 by the Comptroller and Auditor-General of
India then his remuneration shall be fixed by the company in general meeting or
in such manner as the company in general meeting may determine. [Section
224(8)(aa)]
10. Contingencies in which retiring auditor not re-appointed.-Norm ally the retiring
Auditors are reappointed as Auditors of the company unless they are
disqualified for appointment (Section 224(1B)) or they have given a notice in
writing to the company indicating their unwillingness for such appointment. The
other contingencies in which the retiring auditors are not reappointed are (1)
when a resolution has been passed at the Annual General Meeting appointing
somebody else instead of the retiring Auditors or the General Meeting has
expressly resolved not to appoint the retiring Auditors (ii) when a notice has
been given by a member that someone else instead of the retiring Auditors be
appointed as Auditors of the company and the notice has been circulated in
advance amongst members that the retiring Auditors may not be reappointed.
11. Special Resolution required etc.-In companies where not less
than 25% of the subscribed share capital of the company is held by any public
financial institutions, the nationalised banks, insurance company, a Government
company whether Central Government or State Government or any other financial
or other institutions in which the State Government holds not less than 51% of
the subscribed capital, the appointment of the Auditors shall be by passing a
Special Resolution. All these three provisions are not mutually exclusive and
would apply to all cases of shareholding in any combination by any of the
institutions mentioned above. [General Circular No. 14 of 2001, dated 16-7-2001
of the Department of Company Affairs]. In other words, without the approval of
that financial institution, no Auditor can be appointed. If this is not done,
that is, no Special Resolution is passed, the company shall be deemed to have not
appointed any Auditors and pursuant to sub-section (3) of section 224,
the Auditors shall be appointed by the Central Government who will also fix
their remuneration.
12. Date of determining holding of 25% of subscribed capital by
financial institutions etc.-The relevant date of determining whether the
financial institution holds 25% or more shareholding of the company is the date
on which the Special Resolution is to be passed, that is, the date of Annual
General Meeting. It may so happen that between the date of the notice calling
the Annual General Meeting wherein Special Resolution is proposed and the
actual date of the Annual General Meeting the percentage in the shareholdings
of the institution falls below 25%. In that case, it will not be necessary to
pass the Special Resolution and an Ordinary Resolution will suffice. However,
if during the intervening period any financial institution mentioned in section
224A(l) acquires 25% or more of the share capital of the company, the Annual
General Meeting may be adjourned and a fresh notice proposing appointment of
the auditors by passing a Special Resolution may be given. (Department's
Circular No. 2/76[1/1/76-CL.V], dated 5-6-1976).
13. Filing of form with Registrar of Companies.-The special resolution in
Form No. 23 should be filed within thirty days with the Registrar of Companies
concerned along with the filing fee.
14. Power of Central Government delegated to Regional Director.-Where appointment by the
Central Government becomes necessary, the application has to be made to the
Regional Director to whom powers of the Central Government under subsections
(3), (4) and (8)(a) of section 224 have been delegated. (Notification No. GSR
506(E), dated 24-6-1985).
15. No form prescribed.-No form has been prescribed for the aforesaid
application but it should disclose sufficient details, the circumstances
attending the failure of the company in the Annual General Meeting to appoint
an Auditor.
16. Removal of Auditor.-Any Auditor appointed under any of the sub-sections
of section 224 except the one appointed in pursuance of provisions of section
224(5) can be removed only by the company in General Meeting with the prior
approval of the Central Government.
(Another format)
"RESOLVED that M/s. ABC & Co., the Chartered Accountants, of ____________ Nagpur 440 012, having provided a written certificate as required under proviso to section 224(l) to the effect that their appointment, if made, will be in accordance with the limits specified in sub-section (1B) of section 224 of the Companies Act, 1956, be and are hereby appointed as the first Auditors of the Company to hold office as such until the conclusion of the first General Meeting of the company at a remuneration of Rs. _________ Plus out-of-pocket expenses, if any, in addition to the aforesaid amount."
1. Appointment of first Auditor.-The first Auditor or
Auditors of the company shall be appointed by the Board of Directors within one
month from the date of registration of the company, and the Auditor or Auditors
so appointed, shall hold office until the conclusion of the first Annual
General Meeting of the company.
2. Limit of Audit.-The Companies (Amendment) Act, 1974, imposed, for
the first time, ceiling on the number of audits an Auditor may have by
insertion of new subsections (1B) and (1C) in section 224 of the Act. Pursuant
to sub-section (1B), on and from the financial year next following the
commencement of the Companies (Amendment) Act, 1974, no company or its Board of
Directors can appoint or re-appoint any person who is in full-time
employment elsewhere or firm as its Auditor(s) if such person or firm is, at
the date of such appointment or re-appointment, holding appointment as
Auditor of the specified number of companies or more than the specified number
of companies. Specified number shall mean holding appointment individually or
as partner of a firm, in (i) twenty companies having paid-up share
capital of less than rupees twenty-five lakhs; or in (ii) twenty
companies out of which not more than ten shall be companies each of which has a
paid-up share capital of rupees twenty-five lakhs or more.
3. Company to confirm to Auditor as to whether or not provisions of
Section 619B attracted.-The company, in its turn, should confirm to the
Auditors appointed as to whether or not the company attracts the provisions of
section 619B of the Companies Act, 1956.
4. Provisions of section 619 applicable to companies falling within
scope of section 619B.-The companies falling within the scope of section
619B are the companies where provisions of section 619 apply. These are the
companies in the share capital of which not less than fifty-one per cent
is held by one or more of the companies mentioned in S. 619B.
5. Statutory Auditor not to be appointed as Internal Auditor.-A statutory Auditor of a
company cannot be an Internal Auditor of that company because in that case, the
statutory Auditor cannot give an independent and objective report under section
227 and para 4(a) of the Manufacturing and Other Companies (Auditor's Report)
Order, 1975. (Circular No. 29/76(1/1/76-CL.V) dt. 27-8-1976
and 5/77(1/1/76-CL.V.) dated 8-4-1977).
6. Re-appointment of retiring auditor.-Re- appointment of a
retiring Auditor must be made by passing a resolution for that purpose in the
concerned Annual General Meeting and unless such resolution is passed, he
cannot be deemed to be re-appointed or automatically re-appointed
in that meeting. (Circular No.5/72, dated 21-2-1972).
7. Statutory Auditor to hold office till actual date of next Annual
General Meeting.-A statutory Auditor, appointed under section 224 of the Companies Act,
1956, shall hold office till the actual and not constructive conclusion of the
next Annual General Meeting of a company.
8. Auditors signing Form 23B must disclose their identity.-Auditors signing Form No.
23B in the name of the firm must also disclose their identity. (Letter No.
7/26/76-IGC, dated 31-10-1977.)
9. No form prescribed for certificate to be sent by Auditor to
Registrar.-There is no prescribed form for the certificate required to be sent by
Auditors to the Registrar of Companies under section 224(IC) and it is to be in
the form of a letter addressed to the Registrar. It is just an intimation and,
therefore, it is not required to be registered and no filing fee is required to
be paid. (Circular No. 20/75(35/3/75-CL.III) dated 22-9-1975.)
10. Certificate given by auditor under section 224(1C) open to
inspection.-This certificate, pursuant to section 224(1C), is a document under
section 2(15) of the Act and hence open to inspection under section 610(l).
(Letter No. 8/10(224)76-CL.V, dated 1-8-1977.)
11. Companies limited by guarantee to be excluded in determining audit
limit.-In
determining the specified number mentioned in Explanation I to section 224(1B)
and (1C), companies limited by guarantee are to be excluded because they have
no share capital. (Circular No. 8/12(224)74-CL.V, dated 28-9-1974.)
12. Branch audit not to be included in determining audit limit.-Branch audits of Indian
companies made by a Branch Auditor appointed under section 228, should not be
included in determining the specified number of audits under section 224(1B)
and (1C). Audit of the accounts of Indian business of a foreign company also
should not be included in the calculation of the specified number because
foreign companies are outside the scope of section 224 as they fall outside the
definition of 'company' in section 3 of the Companies Act, 1956. (Circular No.
21/75(35/3/75-CL.III) dated 24-9-1975.)
13. Power of Central Government to appoint Auditor.-The Central Government can
appoint Auditors only if no Auditor is appointed in the Annual General Meeting.
If a subsequent Annual General Meeting cannot be held on the date on which it
was convened, then the existing Auditors continue in office till the Annual
General Meeting is held. (Letter No. 35/13/74-CL.III, dated 21-11-1974.)
Disqualifications of an auditor [S.
226(3)(e)]
In section 226, in sub-section (3) for clauses (e) and (f) new clause (e) will be substituted providing that a person holding any security of that company after a period of one year from the date of commencement of the companies (Second Amendment) Act, 1999, will not be qualified for appointment as an auditor of a company.
Auditors Report [S. 227(3)(e)(f)]
The auditors' report must
also state in addition to whatever is provided in clauses (a) to (d) of sub-section
(3) of section 227 in thick type or in italies the observations or comments of
the auditors which have any advance effect on the functioning of the company
and whether any director is disqualified from being appointed as director under
clause (g) of sub-section (1) of section 274. Audit Report should not
only follow the Guidance Notes on matters related to audit by the Institute of
Chartered Accountants of India but should also go by the Statements on Standard
Auditing Practices and the Statements on Auditing issued by the said Institute
from time to time which constitutes the Auditing Standards generally accepted
in India. SEBI by its Press Note dated 25th October, 2001 made "Segment
Reporting" that is mandatory disclosure of segment wise information in the
annual financial statements of the companies a must for listed companies to
enhance the level of corporate governance and financial disclosure.
Appointment of Internal Auditor [S. 227(4)]
A statutory Auditor of a
company cannot also be its Internal Auditor as it will not be possible for him
to give an independent and objective report under section 227 of the Act read
with the Manufacturing and Other Companies (Auditor's Report) Order, 1975,
under sub-section (4A) thereof. (Circular No. 29/76, dated 27th August,
1976).
Appointment of auditor other than a retiring auditor
WHEREAS the company has
received a special notice from the member of the company for a resolution at an
annual general meeting for appointing as an auditor other than M/s ____________________
the retiring auditor
of the company whose term of office expires at the conclusion of the ensuing
annual general meeting of the company;
AND WHEREAS the company has
sent a copy of the notice to the retiring auditor;
AND WHEREAS the company has
received from the retiring auditor representation in writing requesting
notification of the said representation to the members of the company;
AND WHEREAS it is too late
to send the representation to every member of the company or be read at the
ensuing annual general meeting which will amount to needless publicity of
defamatory matter.
NOW, THEREFORE, IT IS
RESOLVED that an application be made to the Company Law Board pursuant to
section ____________ of the Companies Act, 1956 for obtaining an order directing the
company not to send out copies of the representation and not to read out the
representation at the ensuing annual general meeting;
RESOLVED FURTHER that the
Secretary of the company be and is hereby authorised to make an application to
the Company Law Board and to sign all documents and papers in connection
therewith and to take each and every step that may be necessary in connection
therewith and incidental or ancillary thereto including appointing authorised
representative to appear before the Company Law Board from time to time.
1. Application to the Company Law Board-The application to the
concerned bench of the Company Law Board within whose jurisdiction the registered
office of the company is situated should be made by way of a petition in Form
No. 1 given in Annexure II of the Company Law Board Regulations, 1991 along
with a fee of Rs. 500/- by way of Demand Draft. The application should be
accompanied by an affidavit verifying the said petition and memorandum of
appearance with copy of the board resolution or the executed vakalatnama as the
case may be.
2. Time of giving special notice-In terms of section 190(l),
special notice should be given to the company at least 14 clear days before the
meeting. The meeting contemplated in the section is the original meeting.
Therefore, special notice cannot be taken note of and acted upon by the company
if it is received after the adjournment of meeting. [ICAI, Guidance Note No.
LVI, 'Clause 9 of the First Schedule to the Chartered Accountants Act, 1949';
See also ICAI Guidance Note No. LXIII.]
3. Penalty for default.-If default is made by a company in complying with
any of the provisions contained in section 225, the company and every officer
of the company who is in default will be punishable with fine of upto Rs.
5,000/-. [Section 232].
Appointment of Internal Auditor
"RESOLVED that Mr. BPT,
be and is hereby appointed as the 'Internal Auditor' of the Company on a basic
salary of Rs ____________ per month plus dearness allowance and other perquisites as per the
standard terms and conditions adopted by the Company, and that the duty and
assignment of the 'Internal Auditor' be fixed by the Finance Director in
consultation with the 'Statutory Auditors' of the company.
RESOLVED FURTHER that the
service agreement, a copy of which has been tabled and authenticated by the
Chairman of the meeting between the Company on one part and the said Mr. BPT on
the other part, be and is hereby approved and that it be executed under the
common seal of the Company in the presence of Mr. ________________________and Mr.
________________________ the
Directors of the Company, and the Secretary of the company."
1. Appointment of Internal Auditor a statutory compulsion.-Rule 4(A)(xv) of the
Manufacturing and Other Companies (Auditor's Report) Order, 1988, framed under
subsection (4A) of section 227 of the Companies Act, 1956, requires every
Auditor of a manufacturing, mining company or a company rendering services or a
trading or finance company covered by such order to report in relation to a
company having paid-up capital exceeding rupees twenty-five lakhs,
or having an average annual turnover exceeding Rs. 2 crores for a period of 3
consecutive financial years whether the company has internal audit system
commensurate with its size and the nature of its business. Thus the appointment
of 'Internal Auditor' to carry the internal audit functions of a company having
more than rupees twenty-five lakhs paid-up capital or having an
average annual turnover exceeding Rs. 2 crores for a period of 3 consecutive
financial years is now a statutory compulsion. This order is also applicable to
companies licensed under section 25 of the Act.
2. Internal audit by an employee of company.-Internal audit can be
conducted by a qualified and experienced employee of the company. An Internal
Auditor need not necessarily be qualified accountant and holding degrees,
although a qualified accountant is preferred for such a position.
3. Statutory Auditor cannot be an Internal Auditor.-A Statutory Auditor cannot
be appointed as an Internal Auditor of the company.
Appointment of Internal Auditor
(Another format)
"RESOLVED that Messrs KLM & Co., Chartered Accountants, be and are hereby appointed as Internal Auditors of the Company to introduce adequate internal control procedure as required by Manufacturing and Other Companies (Auditor's Report) Order, 1988, and shall report to the Managing Director of the company directly.
RESOLVED FURTHER that the
Internal Auditors be paid a remuneration of Rs. 80,000/- per annum plus
out-of-pocket expenses of Rs. 22,000/-."
1. Statutory auditor to be appointed as Internal Auditor.-A statutory Auditor of a
company cannot also be its Internal Auditor as it will not be possible for him
to give an independent and objective report under section 227 of the Act read
with Manufacturing and Other Companies (Auditor's Report) Order, 1988, under
sub-section (4A) thereof. (Circular No. 29/76, dated 27-8-1976).
2. Internal Auditor to report to Managing Director.-The Internal Auditors should
report to the Managing Director and their duties should be clearly defined.
3. Penalty for default.-If default is made by a company in complying with
any of the provisions contained in section 227, the company and every officer
of the company who is in default will be punishable with fine of up to Rs.
5,000/-. [Section 232]
Audit of accounts of branch office (S. 228)
In case the audit of branch
office is exempt under the Companies (Branch Audit Exemption) Rules, 1961, then
no branch Auditors need be appointed. An establishment which is not branch
office of a company will form part of the head office for audit purposes.
(Letter No. 8/16(1)/61-PR, dated 9-5-1961).
Appointment of Branch Auditor
"RESOLVED that M/s. MDC
& Co., Chartered Accountants, ____________, Bombay, be and are hereby appointed as the
Auditors, as authorised by the members of the Company in Annual General
Meeting held on the ____________, 2002 ____________ in that behalf, for auditing Bombay branch
accounts of the Company for the financial year ____________ at a remuneration of Rs. ____________
plus reimbursement of
any out-of-pocket expenses incurred in connection with such
auditing by the said Auditors."
1. Branch Auditor to be appointed by company in Annual General Meeting.-The appointment of an
Auditor to audit the branch accounts of a company, should be made by the
members of the company at the Annual General Meeting including fixing of
remuneration payable therefor. The General Meeting may, however, authorise the
Board of Directors to appoint suitable Auditor(s) for the branch office and
also fix the remuneration in consultation with the company's statutory Auditor.
For the appointment of a branch Auditor, procedure" laid down under
section 225 has to be followed. (Extract from the minutes of the meetings of
the Bombay Chambers' Company Law Sub Committee with the Secretary, Department
of Company Law Administration, held on 26-1961).
2. Qualification of Branch Auditor.-Pursuant to the provisions
of section 228, the Branch Auditor should be qualified for appointment as
Auditor of the company under section 226, or where the branch office is
situated in a country outside India, the branch audit may either be conducted
by the company's Auditors or a person qualified as aforesaid, or by an
accountant duly qualified to act as an Auditor of the accounts of the branch
office in accordance with the laws of that country.
3. Rights and Duties of company's Auditor with regard to Branch Audit. -Notwithstanding appointment
of a Branch Auditor, the company's Auditor may exercise all his rights and
powers of visiting such branch including access to the books and accounts and
vouchers of the company maintained at the branch office.
4. Power of Central Government to declare an establishment not a branch
office. -Under the power vested in it under section 8, the Central Government
may declare an establishment as not a branch office. 'Me provision of branch
audit by a separate Auditor will not then apply and the company's Auditor would
assume the responsibility of branch audit as well.
5. Conducting of Audit of Branch Office. -The Auditors of a company
must decide whether they are to conduct the branch audit at the head office or
at the branch office. (Letter No. 8/ 16(1)/61, dated 9-5-1961.)
6. Place of manufacture treated as branch office unless exempted. -Place of manufacture should
be deemed to be a branch office with reference to its definition given under
section 2(9) of the Act and must be audited in accordance with the provisions
of section 228 unless it is exempted from such audit under the Companies
(Branch Audit Exemption) Rules, 1961. (Letter No. 8/16(1)/61 -PR, dated 9-5-1961.)
7. Disclosure to be made in Branch Audit report. -The report to be submitted
by the Branch Auditor under section 228(3)(c) must state whether proper books
of account have been kept at the branch office or not and whether such accounts
show a true and fair view of the working of the branch. (Extract from the Fiftieth
Annual Report on the Working and Administration of the Companies Act, 1956-for
the year ending 31-3-1961).
8. Penalty for default.-If default is made by a company in complying with
any of the provisions contained in section 228, the company and every officer
of the company who is in default will be punishable with fine of up to Rs.
5,000/-
"WHEREAS section 231
entitles the auditor of the company to have notice of any general meeting of
the company;
AND WHEREAS the auditor of
the company has also expressed the desire to attend the extraordinary general
meeting scheduled to be held on ____________ 2002 ____________ and also to be heard on the
question of modification of balance-sheet and profit and loss account in
the said meeting;
NOW, THEREFORE, IT IS
RESOLVED that a notice of the said extra-ordinary general meeting be also
served to the auditor of the company.
1. Auditors' entitlement to attend general meeting. -An auditor of a company is
entitled to attend any general meeting of the company and is also entitled to
be heard at any general meeting of the company which he attends on any part of
the business which concerns him as auditor of the company.
2. Provisions of section 172(2)(iii). -Service of notice of general meeting
is required to be made to the auditors for the time being of the company in any
manner authorised by section 53 of the Act in the case of any member or members
of the company.
3. Non-receipt of notice. -Non-receipt of notice
by accidental omission to give notice, by the auditor will not invalidate the
proceedings at the general meeting under section 172(3) of the Act.
4. Penalty for default. -If default is made by a company in complying with
any of the provisions contained in section 231, the company and every officer
of the company who is in default will be punishable with fine of up to Rs.
5,000/-.
Application to Central Government for special audit
"WHEREAS this company, ABC Ltd., is a shareholder holding more than ten per cent of paid-up share capital of XYZ Ltd.;
AND WHEREAS the affairs of
ZYX Ltd. are not being managed in accordance with sound business principles or
prudent commercial practices inasmuch as huge amount is being spent on contract
labour and the cold storage plant is being operated and factory is being run
without any business;
AND WHEREAS huge amount has
been spent on developing ponds for fish culture which has been banned by the
State Government in the area of operation;
AND WHEREAS huge amount of
loan has been obtained by the company endangering the solvency of the company;
NOW, THEREFORE, IT IS
RESOLVED that a complaint be made to the Central Government under section 233-A
of the Companies Act, 1956 detailing the aforesaid facts and praying for
appointment of a special auditor to investigate the affairs of the
Company."
1. Where special audit can be ordered.-Special audit is ordered by
the Central Government under the following three circumstances-
(a) The affairs of any
company are not being managed in accordance with sound business principles or
prudent commercial practices;
(b) the company is being
managed in a manner likely to cause serious injury or damage to the interests
of the trade, industry or business in which it deals;
(c) financial position of
the company is such as to endanger its solvency.
The special audit so ordered
may be for such period or periods as may be specified in the order itself.
2. Duties of special auditor.-The special auditor appointed will have the
same powers and duties in relation to the special audit as auditor of a company
has under section 227 of the Act. The only difference between special auditor
and the statutory auditor is that instead of presenting his report to the
members of a company the special auditor will present the report to the Central
Government. The special auditor can be the company's auditor or he may be any
chartered accountant as defined in clause (b) of sub-section (1) of
section 2 of the Chartered Accountants Act, 1949.
3. Furnishing of information. -The Central Government may direct by way of an order
any person to furnish to the special auditor within a specified time such
information or such additional information that may be required by the special
auditor from time to time while conducting the special audit. If any such
person fails to com-ply with such order, such person will be punishable
with fine which may extend to rupees five hundred.
4. Action by Central Government.-On receipt of the report of the special auditor,
the Central Government will take such action as it deems fit and proper under
the provisions of the Act or any other law for the time being in force. If any
action is taken by the Central Government within a period of four months from
the date of the receipt of the report from the special auditor it will send a
copy of the report or a copy of the relevant portion of the report with its own
comments to the company and may ask the company to circulate those copies to
the members or may ask the company to read the contents of those copies before
the general meeting of the company held immediately thereafter.
5. Expenses of special audit.-The expenses of special audit including the
remuneration of the special auditor is determined by the Central Government and
should be paid by the concerned company. In case the company fails to pay such
expenses, the said payment is recoverable from the company as an arrear of land
revenue.
6. Penalty for default.-The Central Government may by order direct any
person specified in the order to furnish to the special auditor within such
time as may be specified therein such information or additional information as
may be required by the special auditor in connection with the special audit and
on failure to comply with such order such person will be punishable with fine of
up to Rs. 5,000/-. [Section 233A(5)]
Appointment of Cost Auditor (S. 233B)
Cost Auditor cannot be
appointed in the name of the firm. Such an appointment will be illegal and the
report submitted will be invalid. (Letter No. 52/9/69-CL-H, dated
30-3-1971.
In all cases previous
approval of the Central Government is required. The provisions of section 233B
provide that pursuant to the directions of the Central Government when issued
in this behalf, a cost auditor is to be appointed by the Board of Directors of
the company with the prior approval of the Central Government. This power of
Central Government simply does not envisage a power of approval but it also
envisages in appropriate cases the power to disapprove. When a proposal is sent
to the Central Government for appointment of a cost accountant under section
233B the provisions of section 224 are neither attracted nor the Central
Government is statutorily bound to accord its approval to any and every
proposal. A discretion is vested in the Central Government to examine the
records and to satisfy itself whether the said proposal satisfies all the
requirements and meets the norms and in case there is any impediment in
appointing the proposed person as a cost accountant, the Central Government has
the power to reject or disapprove the appointment of the cost account. Rakesh
Singh v. Union of India, (2002) 110 Com Cases 624 (Del).
"RESOLVED that subject
to the approval of the Central Government pursuant to the provisions of sub-section
(2) of section 233B read with section 224(1B), Shri XYZ, a Cost Accountant be
and is hereby appointed as Cost Auditor to conduct the audit of the cost accounts
of the company in respect of its Fan Unit situated at Okhla Industrial Estate
for the financial year 2002 at a remuneration of Rs. 80,000/- plus actual
out-of-pocket expenses."
1. Appointment of a person as Cost Auditor required Central Government
approval. -Previous
approval of the Central Government is required for appointment of a person as
Cost Auditor of the company. The application is to be made in Form No. 23C.
2. Person appointed as Cost Auditor to be qualified Cost Accountant. -The person appointed as Cost
Auditor of the company should be qualified Cost Accountant within the meaning
of the Cost and Works Accountants Act, 1959.
3. Obtaining of Certificate from person to be appointed to the effect
that appointment if made to be in accordance with section 224(1B). -Before the appointment of
any person is made by the Board as Cost Auditor, a written certificate shall be
obtained from him to the effect that his appointment if made will be in
accordance with provisions of sub-section (1B) of section 224.
4. Statutory Auditor not to be appointed as Cost Auditor. -The statutory Auditor cannot
be appointed as the Cost Auditors of the company.
5. Cost Auditor not to be appointed in name of firm. -Cost Auditor cannot be
appointed in the name of the firm. Such an appointment will be illegal and the
report submitted will be invalid. (Letter No. 52/9/69-CL.II, dated 30-3-1971).
6. Relative not to be appointed Cost Auditor without previous Central
Government approval. -No relative of a Director of firm or partner of such relative can be
appointed Cost Auditor of the company except with the previous approval of the
Central Government when the company has a paid-up capital of rupees one
crore or more. (Proviso to section 297(l) of the Act).
Appointment of Cost Auditor on Central Government’s Order
"WHEREAS under section
209(l)(d) of the Companies Act, 1956, the Central Government has prescribed
necessary cost records to be maintained by the industry to which the company
belongs;
AND WHEREAS the Central
Government has, by an order, directed that an audit of cost accounts of the
Company should be conducted in the manner specified in the said order, by an
Auditor who shall be a Cost Accountant within the meaning of the Cost and Works
Accountants Act, 1959;
AND WHEREAS, on an
application made to it, the Central Government has accorded approval vide their
Letter No. ____________ dt. ____________ to the appointment of Mr. MMD, a Cost Accountant, to conduct such cost
audit of the Company;
NOW THEREFORE, IT IS
RESOLVED that the said Mr. MMD be and is hereby appointed as the Cost Auditor
of the Company under, section 233B of the Companies Act, 1956, to carry out
audit of cost accounts of the Company for the financial year ending on ____________,
2002 ____________,
within the terms
approved by the Central Government vide its order No. ____________ dated the ____________, 2002 ____________, referred to hereinabove at a consolidated
remuneration of Rs. ____________ (Rupees ____________ only)."
1. Procedure for appointing Cost Auditor. -The following procedure for
appointing a Cost Auditor should be adhered to:
(a) The name of the Cost
Auditor should be approved at a Board Meeting.
(b) Approval of the Central
Government for appointing the Cost Auditor, should be obtained by making an
application in Form No. 23
(c) The application should
be signed by any Director, Managing or Whole time Director, Manager or the
Secretary of the company.
(d) Along with the
application should be sent a receipted treasury challan in token of the payment
of the prescribed fees.
(e) Another Board Meeting should be held to appoint the Cost Auditor.
(f) Intimation to the Auditor
as to the appointment should be given.
(Another format)
"RESOLVED that subject
to the approval of the Central Government Shri SKM, Cost Accountant be and is
hereby appointed as Cost Auditor for auditing cost accounts of the Company for
the year ending on 31st March, 2002, as per directions issued by the Central
Government vide their Letter No. 52/87/76, dated 10th May, 2001.
RESOLVED FURTHER that Shri
SKM, Managing Director of the Company be and is hereby authorised to fix such
remuneration and payment of out-of-pocket expenses as he may deem
fit."
1. Power of Central Government to direct audit of cost accounts. -The Central Government, in
its discretion, may direct the audit of cost accounts of a company by a cost
accountant. The audit of cost accounts is to be in addition to the audit of
financial accounts by the statutory auditor appointed under section 224 or 224A,
as the case may be. The cost audit can be ordered only in relation to a company
engaged in the production, processing, manufacturing or mining activities as
referred to in section 209(l)(d).
2. Appointment and fixation of remuneration of cost auditor.-Pursuant to the directions
of the Government when issued in this behalf, the cost auditor is to be
appointed by the Board of Directors of the company, with the previous approval
of the Government. His remuneration is fixed by the Board of Directors. The
cost auditor has the same powers and duties in relation to the audit of cost
accounts, as are provided for the statutory auditor under section 227.
3. Report by cost auditor. -To enable the cost auditor to discharge his
functions the company is obliged to give all facilities and assistance to the
auditor. Further the company, within 30 days from the date of receipt of the
cost audit report, is required to furnish full information and explanations on
every reservation or qualification, if any, contained in the report to the
Central Government. On receipt of the cost audit report and further information
and explanations, if any sought, the Central Government may take such action as
it may deem necessary, including issue of directions to the company to circulate
the report, in whole or in part to its members along with the notice of the
annual general meeting.
4. Cost Auditor cannot be Internal Auditor. -The cost auditor should not
also be the internal auditor of a company for the period for which he is conducting
the cost audit.
5. Requisites of appointing a Cost Auditor-The person to be appointed
as Cost Auditor should be qualified Cost Accountant within the meaning of the
Cost and Works Accountants Act, 1959. The company before appointing any person
as Cost Auditor should obtain a written certificate from him to the effect that
his appointment if made will be in accordance with the provisions of sub-section
(1B) of section 224 of the Act. Cost Auditor cannot be appointed in the name of
the firm.
6. Penalty.- For default in complying with the provisions of the section, the
company is liable to be punished with fine which may extend to fifty thousand
rupees, and every officer of the company who is in default is liable to be
punished with imprisonment for a term which may extend to three years, or with
fine which may extend to five thousand rupees or with both. The offence is
compoundable by the Company Law Board under section 621A.
Report on audit of cost accounts
"WHEREAS Mr. MMD, a
Cost Accountant, who was appointed as Cost Auditor, to conduct the cost audit
of the Company, vide Board resolution
dated the ____________, 2002 ____________ has submitted his report in respect thereto which is hereby tabled and
perused, and the comments and reservations made therein noted;
NOW THEREFORE, IT IS
RESOLVED that pursuant to subsection (7) of section 233B, a full report be
prepared incorporating necessary information and explanations on every
reservation or qualifications made in the said report and forward the same to
the Central Government along with the copy of such report."
1. Submission of report by Cost Auditor.- Since the Cost audit
reports are not required to be placed before the General Meeting and as the
cost audit is likely to reveal certain information which may be regarded as
confidential by the company, it is statutorily laid down that the cost audit
report should be submitted to the Central Government and not to the Registrar
of Companies, thus making the report inaccessible to the shareholders of the
company or to the public. The report of the Cost Auditor is required to be sent
to the Central Government and to the company within 180 days from the end of the
company's financial year to which the cost audit report relates.
2. Cost Audit (Report) Rules, 1996. - The Central Government have
framed detailed rules as to the audit of cost accounts under the Cost Audit
(Report) Rules, 1996. These Rules have been superceded by the Cost Audit
(Report) Rules, 2001 promulgated by the Department of Company Affairs with
immediate effect. The Cost Audit Report submitted on or after 1- 10-2002
irrespective of the financial year of the company to which it relates should be
in the form prescribed under these rules.
3. Company to give explanation to Central Government. - Under sub-sections (7)
and (8) of S. 233B, the company is required and may be called upon to give
explanation to Central Government on qualifications contained in the cost audit
report.
4. Penalty.-Under Rule 8 of the Cost
Audit (Report) Rules, 2001, Cost Auditor is subjected to penalty of Rs. 5,000/-
in case of default.
Furnishing information to Registrar
"WHEREAS the Registrar
of Companies has asked for information and explanation with respect to
documents filed with the Registrar;
NOW THEREFORE IT IS RESOLVED
that all officers of the Company do furnish the requisite information and
explanation to the Managing Director who will file the necessary reply to the
Registrar."
1. Power of Registrar. -The Registrar of Companies has the power to ask for
any information or explanation which is considered necessary while perusing any
document filed with him and with respect to any matter to which such document
purports to relate. Such information will be asked by the Registrar by a
written order and such information shall be furnished to him in writing. The
Registrar will also mention specific time within which such information or
explanation is to be furnished to him by the company.
2. Duties of the company.-On receipt of a copy of the order of the Registrar
of Companies asking for further information or explanation, it is the duty of
the company and all its officers to furnish the said information asked for to
the best of their knowledge and power.
3. Inadequate information.-If the company furnishes the information
which is inadequate, the Registrar of Companies will call on the officers of
the company by a written order to produce before him for inspection such books
and papers as the Registrar considers necessary within the specified time
mentioned in the written order and the company and all the officers of the
company are duty bound to produce such books and papers before the Registrar
within the specified time.
4. Representation from contributory/creditor.-On the representation of any
contributory or creditor of a company, the Registrar may call the company for
furnishing information in writing on certain matters which is specified in the
written order of the Registrar and such information should be given within the
specified time mentioned in the said written order. Such representation by the
contributory or creditor is usually made when the business of the company is
said to be carried on in fraud of its creditors or of persons dealing with the
company or otherwise for a fraudulent or unlawful purpose. In this case the
Registrar will also give opportunity to the company to be heard before giving
any written order. Usually the identity of the contributory or creditors is
kept secret by the Registrar and is disclosed only where it is found by the
Registrar that such representation was frivolous or vexatious.
5. Penalty.-For non-compliance of the requirements of section 234 of the Act,
the company and every officer of the company who is in default will be
punishable with fine which may extend to rupees five thousand and in the case
of continuing offence an additional fine which may extend to rupees five
hundred" per day.
6. Compounding of offence. -If the fine is not more than rupees fifty
thousand for contravention of the provisions of section 234(4)(a) the
application for compounding of offence will lie before the concerned Regional
Director under section 621-A (l)(b) and if the fine is more than rupees
fifty thousand, then the application will lie before the concerned Regional
Bench of the Company Law Board under section 621-A(l)(a).
"WHEREAS the Registrar
of Companies has called upon the company to furnish necessary information and
explanation about a complaint received by the Registrar alleging that the
activities of the Company are being carried out in fraud of its creditors;
NOW, THEREFORE, IT IS
RESOLVED to give a suitable reply to the Registrar making it clear that the
allegation received by the Registrar is totally false and frivolous and for
this purpose necessary documentary evidence may be furnished to the
Registrar."
1. Representation by the contributory/creditor.-Registrar of Companies can
also call for further information or explanation on the basis of materials
placed before him by any contributory or creditor or any other person
interested. The materials placed before him in connection with a company should
show that the company is being carried on in fraud of its creditors or persons
dealing with the company or otherwise for a fraudulent or unlawful purpose. On
receipt of such representation the Registrar will first give the company an
opportunity of being heard and then by a written order, ask the company to furnish
in writing the required information or explanation within a specified time as
is mentioned in the written order. Usually the identity of the contributory or
creditor is kept secret by the Registrar and is disclosed only where it is
found by the Registrar that such representation was frivolous or vexatious.
2. Disclosure of identity.-The identity of the person who has
represented before the Registrar of Companies may be disclosed to the company
by the Registrar of Companies if the Registrar is satisfied that such
representation was frivolous or vexatious. But if the Registrar thinks that the
representation is bona fide, the Registrar will take action and will also keep
the identity of his informant secret.
3. Inadequate information.-If the company furnishes the information
which is inadequate, the Registrar of Companies will call on the officers of
the company by a written order to produce before him for inspection such books
and papers as the Registrar considers necessary within the specified time mentioned
in the written order and the company and all the officers of the company are
duty bound to produce such books and papers before the Registrar within the
specified time.
Request to Registrar for disclosing identity of complainant
"WHEREAS the Registrar
had called upon the Company to furnish information and explanation on a
complaint received by him;
AND WHEREAS the Company had
furnished necessary documentary evidence to prove that the allegations made
against the company are frivolous and vexatious;
NOW, THEREFORE, IT IS
RESOLVED that the Registrar be requested to disclose the identity of the person
who had made complaint to the Registrar, this being the statutory right of the
company."
1. Complaint made by contributory/creditor. -Registrar of Companies can
also call for further information or explanation on the basis of materials
placed before him by any contributory or creditor or any other person
interested. The materials placed before him in connection with a company should
show that the company is being carried on in fraud of its creditors or persons
dealing with the company or otherwise for a fraudulent or unlawful purpose. On
receipt of such representation the Registrar will first give the company an
opportunity of being heard and then by a written order ask the company to
furnish in writing the required information or explanation within a specified
time as is mentioned in the written order.
2. Enquiry by Registrar.-On receipt of the representation, the Registrar of
Companies will enquire about the matters complained in the representation and
if he finds it to be frivolous or vexatious, he will disclose the identity of
the informant to the company on a request made by the company.
"WHEREAS Mr. A, the
Managing Director of the Company is suspected to have destroyed, mutilated,
altered, falsified or secreted the books and papers of the Company and had even
handed over the possession of the rented premises of the office of the Company
to the landlord and had thereupon gone into hiding;
NOW, THEREFORE, IT IS
RESOLVED that an application be made to the Registrar of Companies alleging the
aforesaid facts to enable the Registrar to make an application to the
Magistrate for seizure of books and papers and for consequential orders under
subsections (2) and (3) of section 234-A of the Act."
1. Reasonable ground to believe.-The Registrar of Companies
will make an application to the Magistrate of the first class or the Presidency
Magistrate having Jurisdiction for an order to seize the books and papers of a
company only if the Registrar has reasonable ground to believe and is convinced
that the books and papers of the company may be destroyed, altered, mutilated,
falsified or secreted.
2. Magistrate's order.-On receipt of the application from the Registrar of
Companies, the Magistrate may by order authorise the Registrar to enter the
place where such books and papers of the company are kept and to search any
place or places where the books and papers of the company have to be kept and
also to seize such books and papers.
3. Returning the papers seized. -The Registrar of Companies
will return the books and papers seized by him within thirty days from the date
of such seizure and will inform the Magistrate as such. Before returning the
books and papers to the company the Magistrate can keep copies of them or take
extract from any one of them and can also place identification marks on any
part of the books and papers so seized.
4. Applicability of code of criminal procedure.-The search and seizure made
by the Registrar of Companies of the books and papers of any company should be
followed in accordance with the provisions of the Code of Criminal Procedure,
1973 relating to searches or seizures made under that Code.
Investigation of the affairs of XYZ Ltd.
"WHEREAS this Company,
ABC Ltd., is holding 11% of the paid-up share capital of XYZ Ltd.,
AND WHEREAS it is reliably
learnt that the Managing Director of the company, pursuant to a conspiracy to
take over the company, has allowed the shareholding of the non-resident
shareholder, being 24% of the paid-up share capital of the company, to be
acquired by Mr. X, a non-resident Indian, with a view to handover the
management and control of the company in the hands of the said non-resident
shareholder;
NOW, THEREFORE, IT IS
RESOLVED that an application be made to the Company Law Board under sub-section
(2) of section 235 to order an investigation into the affairs of XYZ Ltd. and
for orders incidental thereto."
FURTHER RESOLVED that the
Secretary of the Company be and is hereby authorised to make the application to
the Company Law Board and sign documents and papers in connection therewith and
to appoint authorised representative to appear before the Company Law Board.
1. Requisite number of members.-The application is to be
made to the Company Law Board for investigation of the affairs of the company
by not less than two hundred members or by members holding not less than one-tenth
of the total voting power of the company in case the company has a share
capital and by not less than one-fifth of the members of the company
mentioned in the company's register of members in case the company is having no
share capital.
2. Procedure.-An application should be made before the Principal
Bench of the Company Law Board at New Delhi by way of a petition in Form No. 1
of the Company Law Board Regulations, 1991 along with a fee of rupees two
thousand five hundred.
3. Exercise of discretion. -An investigation into the affairs of a
company by the Central Government under section 235 or 237 may seriously damage
a company and should not lightly be ordered without proper material gathered
and considered by experts in a reasonable manner as provided in the Companies
Act, 1956. Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy, (1999)
25 CLA 177 (SC). A government corporation having majority in the Board of
Directors of a company making an application for an order for investigation of
affairs was held by the court to be not necessary. Punjab Agro Industries Corp.
Ltd. v. Superior Genetics India Ltd., (2002) 108 Com Cases 349.
Application to CLB for ordering investigation
“WHEREAS there are the
following circumstances which suggest that the business of XYZ Ltd. is being
conducted with intent to defraud its creditors, members or other persons or
otherwise for a fraudulent or unlawful purpose or in a manner oppressive of its
members or that the company was formed for any fraudulent or unlawful purpose,
namely, that-
(a) ________________
(b) ________________
(c) ________________
(d) ________________
(here set out the circumstances)
OR
"WHEREAS there are the
following circumstances suggesting that persons concerned in the formation of
the company or the management of its affairs have in connection therewith been
guilty of fraud, misfeasance and other misconduct towards the company or
towards its members, namely,-
(a) ________________
(b) ________________
(c) ________________
(d) ________________”
(here set out the
circumstances)
OR
"WHEREAS there are the
following circumstances suggesting that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably except, including information relating to the calculation of the
commission payable to a managing or other director of the company, namely: -
(a)
(b)
(c)
(d)
(here set out the
circumstances)
NOW THEREFORE this company,
ABC Ltd., a shareholder of XYZ Ltd., holding 8% of the paid-up share
capital hereby RESOLVES to make an application to the Company Law Board for
ordering an investigation into the affairs of XYZ Ltd., an investigation which,
in the light of the aforesaid circumstances, the Company Law Board is even
entitled to do on its own motion."
1. Circumstances suggestive of -For making an application to
the Company Law Board for investigation of company's affairs there should be
circumstances which should suggest the following:
(a) that the business of the
company is being conducted with intent to defraud its creditors, members or any
other persons, or otherwise for a fraudulent or unlawful purpose, or in a
manner oppressive of any of its members, or that the company was formed for any
fraudulent or unlawful purpose;
(b) that persons concerned
in the formation of the company or the management of its affairs have in
connection therewith been guilty of fraud, misfeasance or other misconduct
towards the company or towards any of its members;
(c) that the members of the
company have not been given all the information with respect to its affairs
which they might reasonably except, including information relating to
calculation of the commission payable to a managing or other director or the
manager of the company.
2. Procedure.-An application should be made before the Principal
Bench of the Company Law Board at New Delhi by way of a petition in Form No. 1
of the Company Law Board Regulations, 1991 alongwith a fee of rupees two
thousand five hundred.
3. No direction to the Central Government by High Court.-Under sub-clause (ii)
of clause (a) of section 237, a High Court cannot direct the Central Government
to conduct an investigation into the affairs of a company. If can only declare
the affairs of a company ought to be investigated by an inspector appointed by
the Central Government. Since Company Law Board is an authority specially
constituted to go into certain company matters and the remedy vested in the
High Court is only discretionary one, it is appropriate that the petitioner
should move the CLB first for redressal of its grievance. Safia Usman v. Union
of India, 2001 Vol. I CLJ 121 (Ker).
4. Applicability of Civil Procedure Code.-Company Law Board ordered to
dispose of the petition for investigation as an agreement was reached and
recorded before it to purchase the shares of the petitioner and the said
settlement was not signed by the parties as required by the Civil Procedure
Code and the Court said that this was only a technicality and the said code was
not applicable with all its technicalities. The compromise was therefore
executable. Kuki Leather P. Ltd. v. TNK Govindaraju Chettiar & Co., (2002)
110 Com Cases 474 (Mad).
5. Investigation of Government Company.-A government company instead
of filing an application with the Company Law Board for investigation could
have a special audit carried out and could resort to necessary corrective
measure. Punjab Agro, Industries Corpn. Ltd. v. Superior Genetics India Ltd.,
(2002) 108 Com Cases 349 (CLB).
6. Authority to order investigation.-In a case where the company
was registered for the development of a colony, the Deputy Commissioner of the
District Court ordered an inquiry in public interest into certain
irregularities in the functioning of the company, it was held that the said
Commissioner does not have power to order a probe into the working of the
company and it can be only ordered under the provisions of the Act. Edward Ganj
Public Welfare Assn. v. State of Punjab, (2002) 109 Com Cases 5 (P&H).
"WHEREAS the affairs of
the Company had been inspected by the Central Government under section 235 of
the Act on the basis of the Registrar's report under section 234 of the Act;
AND WHEREAS an application
was made to the Registrar for disclosure of the name of the complainant which
disclosure the Registrar has not yet made;
AND WHEREAS a copy of the
investigation report of the inspector appointed under section 235 of the Act
has been made available to the company;
AND WHEREAS it is evident
from the said report of the inspector that nothing adverse has been found
against the company;
NOW, THEREFORE, IT IS RESOLVED that an application be made to the Court for recovery of damages as also the cost and expenses suffered or incurred by the company;
RESOLVED FURTHER that copy
of the report of the inspector be authenticated by the seat of the company for
purpose of filing a copy of the said report with the court, as required by rule
10 of the Company's (Central Government's) General Rules and Forms, 1956."
1. Prescribed authentication. -The copy of the report of the inspector
should be authenticated either by the seat of the company whose affairs have
been investigated or by a certificate of a public officer having the custody of
the report under and in accordance with the provisions of section 76 of the
Indian Evidence Act, 1872.
2. Evidentiary value of the report.-The inspector's report is
admissible in any legal proceedings and is an evidence of the opinion of the
inspector in relation to any matter contained in such report.
Expenses of Investigation
"WHEREAS an
investigation of the company was undertaken by the Central Government under
section 237 through an Inspector appointed by it;
AND WHEREAS the said
Inspector has concluded his investigation of the company;
AND WHERE AS an amount of Rs. _________ has been the expenses of such investigation conducted under the direction of the Central Government;
NOW THEREFORE IT IS RESOLVED
that the amount of Rs. _________ being the total expenses of the said investigation
be and is hereby sanctioned to be paid to the Central Government towards
reimbursement of the expenses of the investigation.
1. Company's liability to reimburse expenses.-The expenses of and
incidental to an investigation by an inspector appointed by the Central
Government should be defrayed in the first instance by the Central Government
but the company or body corporate in where name proceeding are brought should
be liable to the extent of the amount or value of any sums or property
recovered by it as a result of the proceedings and should be liable to
reimburse the Central Government in respect of the whole of the expenses unless
and except in so far as the Central Government otherwise directs.
2. First charge on the property.-Any amount for which a
company or body corporate is liable as aforesaid will be a first charge on the
sums or property and the amount of expenses in respect of which any company or
body corporate is liable to reimburse the Central Government should be
recoverable from that company or body corporate as an arrear of land revenue.
Investigation of ownership of Company
S.
247-Investigation of ownership of Company-Board Resolution
"WHEREAS the company is
a Private Ltd. Co. and about 50% of the share capital of the company is in the
hands of a few individuals who are or have been in the employment of Mr. D.K.
Chowdhury;
AND WHEREAS the said Mr.
Chowdhury has been instrumental in putting these shareholders on the job of
causing unnecessary harassment to the company and its officials by making
frivolous complaints to various authorities including the Registrar of
Companies;
NOW THEREFORE IT IS RESOLVED
that an application be made to the Central Government with a request to appoint
inspector to investigate and report on the membership of the company for the
purpose of determining the true person who is or has been financially
interested in the success or failure, whether real or apparent, of the company
or who is or has been able to control or materially to influence the policy of
the company."
1. Application to the Central Government.-An application is made to
the Central Government for investigation of ownership of any company and also
for appointment of an inspector to investigate and report on the membership of
any company. The purpose for making this application should be to find out the
true persons
(a) who are or have been
financially interested in the success or failure, whether real or apparent, of
the company; or
(b) who are or have been
able to control or materially to influence the policy of the company.
2. Procedure.-There is no prescribed form for making the
application". The application should be made on a plain piece of paper
addressed to the Additional Secretary, Department of Company Affairs, giving
therein the details of the company and the grounds for making the application
and also the prayer along with an application fee as per "Companies (Fees
on Applications) Rules, 1999."
Imposition of restriction on acquisition of shares
"WHEREAS 24% of the share capital of the
company is held by Switchair AB;
AND WHEREAS it has come to
the notice of the Company that the entire equity share capital of Switchair AB
has been acquired by a foreign national known as Ramejas;
AND WHEREAS this acquisition
is likely to result in change in management of the company which change is
likely to be prejudicial not only to the interest of the company but also to
public interest;
NOW THEREFORE IT IS RESOLVED
that an application be made before the Company Law Board for imposition of
restriction on these shares under sub-section (2) of section 250 and also
for imposition of restrictions under sub-section (3) & sub-section
(4) of section 250, depending on investigation of facts as may be ordered by
the Company Law Board."
1. Grounds of application.-An application is usually made to the Company
Law Board for imposing of restrictions upon shares and debentures and also for
prohibition of transfer of shares or debentures in connection with
investigation of ownership of company or for finding out information regarding
persons having an interest in a company of an investigating into the associateship
with managing agent or secretaries or treasurers of a company. Such imposition
of restrictions upon shares and debentures can also be made by the Company Law
Board on a request made by the Central Government in connection with any
investigation under sections 247, 248 or 2491. Such imposition of restrictions
upon shares and debentures will be made only when the Company Law Board is of
the opinion that there is good reason to find out the relevant facts about any
shares and such facts cannot be found out unless the aforesaid restrictions are
imposed on the company. Such restriction is usually imposed for a period of
three years.
2. Procedure.-An application should be made before the Principal
Bench of the Company Law Board at New Delhi by way of a petition in Form No. 1
of the Company Law Board Regulations, 1991 along with a fee of rupees two
thousand five hundred.
3. Penalty for default.-Any person contravenes the provisions of sub-section
(9) will be punishable with imprisonment for 6 months or with fine of Rs.
50,000/-. Where shares in any company are issued in contravention of such
of the restrictions as may be applicable to the case under sub-section
(2) of section 250, the company and every officer of the company who is in
default will be punishable with fine of up to Rs. 50,000/-.
4. Power to conduct general meeting. -In a proceeding under
section 250 the Company Law Board does not have power to regulate the conduct
of a general body meeting of a company. (2002) 49 CLA 70 (CLB).
Director from small shareholders (s.
252(l) proviso)
Proviso to sub-section
(1) to section 252 has been inserted by the Companies (Second Amendment) Act,
1999 requiring public companies having paid-up share capital of Rs. 5
crores or more and having one thousand or more small shareholders to have at
least one director elected by such small shareholders in the manner as may be
prescribed. Small shareholder means a shareholder holding shares of nominal
value of Rs. 20,000/- or less in an aforesaid public company.
The words 'in default of and
subject to any regulations in the articles' in the section means that the
subscribers to the memorandum will act as Directors until the appointment of
Directors in a General Meeting. (Department's letter No. 8/25 (254)/64-PR,
dated 195-1964). Companies having a paid-up share 'Capital of less
than Rs. 2 crores but having paid-up share capital of Rs. 10 lakhs or
more are required to obtain a Compliance Certificate from a secretary in whole-time
practice to be filed with the Registrar of Companies mentioning therein inter
alia that the Board of Directors of the Company is duly constituted and the
appointment of directors, additional directors, alternate directors and
directors to fill casual vacancies have been duly made as per paragraph 14 of
the Form of Compliance Certificate appended to the Companies (Compliance
Certificate) Rules, 2001.
Directors elected by small shareholders
WHEREAS the Company has small shareholders holding shares of nominal value as per the list tabled and initialed by the Chairman of the meeting;
AND WHEREAS pursuant to
proviso to sub-section (1) of section 252 the company may have at least
one shareholder elected by such small shareholders where the number of such
small shareholder is 1000 or more.
AND WHEREAS the number of
small shareholders as per the aforesaid list is 4500.
NOW THEREFORE IT IS RESOLVED
that two directors be and are hereby elected in the Board of Directors of the
Company in the manner as may be prescribed.
1. Director as nominee of small shareholders.-The Companies (Amendment)
Act, 2000 has inserted a new proviso to sub-section (1) of section 252
giving power to small shareholders of every public company having paid up share
capital of Rs. 5 crores and above to elect at least one person to be their own
Director in the Board of Directors of that company. The effective date of such
power to be exercised by the small shareholders is specified which will be
subject to such other conditions as mentioned in the Companies (Appointment of
Small Shareholders' Director) Rules, 2001. Rule 4 of the said Rules provides
for the manner of election of small shareholders' director, Rule 5 provides for
such director's share qualification, Rule 6 provides vacation of office of such
a director so appointed and Rule 7 provides for restrictive on number of
directorship of such a director.
2. Small shareholders.-Small shareholders will mean
shareholders having shares of nominal value of Rs. 20,000/- or less in a
public company whose paid-up share capital is Rs. 5 crores or more.
Appointment of First Directors
"RESOLVED that it be
noted that Sarvashri XYZ, IMN and PBS, whose names are mentioned in article 110
of the Articles of Association of the Company are the first Directors of the
Company."
OR
"RESOLVED that
Sarvashri RSM, ABC and RAB, who have subscribed their names to the Memorandum
of Association of the Company shall be deemed to be the Directors of the
Company".
1. Section applicable where articles do not contain provision regarding
first director. -This section applies only where the articles do not contain any
provision as regards the first Directors.
2. Subscribers to memorandum who are individuals deemed to be
Directors. -Only
those subscribers to the memorandum who are individuals can be deemed to be
Directors by reason of section 253. The articles may, however, provide as to
who shall be Directors until two-thirds or more of the Directors are
elected in a General Meeting in accordance with section 255.
3. Words "in default of and subject to any regulations in the
articles"-Meaning. -The words 'in default of and subject to any
regulations in the articles' in the section means that the subscribers to the
memorandum will act as Directors until the appointment of Directors in a
General Meeting. (Department's letter No. 8/25(254)/64-PR, dated 19-5-1964).
Appointment of Director (S. 255)
It is not always necessary
for all the first Directors to retire at the first Annual General Meeting held
after the formation of a company. Except those persons named in the articles as
first Directors who under a specific provision in the articles in accordance
with section 255(2) need not retire at the first Annual General Meeting. Other
first Directors (including the subscribers of the Memorandum of Association)
should retire at the first Annual General Meeting. (Company News and Notes,
dated 1st July, 1963).
Appointment of director in the case of a Private Company
"RESOLVED that Shri AKM, General Manager
(Production) be and is hereby appointed as a director on the Board of the
Company."
1. Board Resolution. -Hold a Board Meeting and pass a resolution to this
effect.
2. Provisions in Articles to apply. -In the case of a private company
which is not a subsidiary of a public company the articles may provide for the
appointment of all or any of its directors in such manner as may be provided
therein. It is not necessary that any of them should be appointed by the
company in general meeting. But where the articles do not provide otherwise the
directors are to be appointed in general meeting.
3. Provisions of sub-section (1) of section 255 not applicable. -In the case of a private
company which is not a subsidiary of a public company, the provisions of sub-section
(1) relating to retirement of directions have no application and none of its
directors need retire by rotation in the proportion of one-third or in
any other proportion. Such company may make its own provision as regards
retirement of its directors.
4. Directors not to retire by rotation. -In the case of a private
company which is not a subsidiary of a public company it is provided that the
directors have to be appointed in a general meeting. There is no provision for
retirement of any director periodically. Retirement therefore depends entirely
on the provisions contained in the Articles of Association of the company and
in the absence of any such provision the directors are entitled to continue
until removed under section 284 of the Act.
5. Filing with Registrar. -File Form No. 32 in duplicate within thirty
days of appointment with the Registrar of Companies concerned. Penalty for
default in complying with this requirement is fine of up to Rs. 500/- for
every day during which the default continues.
Alterations of articles for appointment of directors
S. 255-Alterations of articles for appointment of
directors-Board Resolution
"RESOLVED that subject
to the approval of members of the Company at a general meeting article 45A as
worded herein below, be inserted after article 45 of the Articles of
Association of the company:
"45A: All the directors of the company shall
retire at every annual general meeting and directors of the company shall be
appointed at every annual general meeting."
RESOLVED FURTHER that an
Extraordinary General Meeting be held for this purpose and the Secretary of the
Company be directed to issue notices of the said general meeting along with the
explanatory statement as per drafts placed before this meeting and
approved".
1. Specific provisions in the articles. -To make all the directors retired on every annual general meeting, specific provisions to that effect must be there in the articles of association of the company. If no such provision is there in the articles, two-third of the total number of directors of the company should be retiring directors and one-third non-retiring directors. This provision is not applicable to a private company which is not a subsidiary of a public company.
2. Appointment by general meeting.-All the directors of the
company should be appointed in a general meeting.
3. Board appointed directors. -Only in three cases board of directors can
appoint directors of the company and they are additional directors, alternate
directors and directors in casual vacancy under sections 260, 313 and 262 of
the Act. Director to be appointed in a casual vacancy has to be filled by the
Board of Directors only at a meeting of the Board and not by a board resolution
by circulation.
Re-appointment of Director retiring
by rotation (S. 256)
A Director who is to retire
by rotation at an Annual General Meeting as also an additional Director
appointed by the Board of Directors under section 260, cannot continue in.
office after the last day on which the Annual General Meeting in each year
should have been held as required by section 166(l) of the Act. B.R. Kundra v.
Motion Pictures Association, (1976) 46 Comp Cases 339. If a meeting is
adjourned for want of quorum and no decision is taken at the adjourned meeting
on re-appointment of a Director, the Director is not deemed to be re-appointed
by virtue of clause (b) of sub-section (5) of section 256 of the Act.
Cardamom Marketing Co. Ltd. v. Krishna Iyer, (N) (1982) 52 Comp Cases 299 (Ker-DB).
Non-election of a Director retiring
by rotation (S. 256)
A Director who is to retire by rotation at an Annual General Meeting as also an additional Director appointed by the Board of Directors under section 260 cannot continue in office after the last day on which the Annual General Meeting in each year should have been held as required by section 166(l), Re, Consolidated Nickel Mines Ltd., (1914) 1 Ch 883. Where annual general for considering reappointment of director was adjourned and that adjourned meeting was not held deliberately, retiring director claiming oppression on that ground could be deemed to have been re-appointed by operation of subsection (4) of section 256. Euro India Investments v. Cement Corpn. of Gujarat Ltd., (1992) 8 CLA 130 (GUJ).
Special notice for standing as Director by
individuals (S. 257)
Sub-section (1) of
section 257 has been amended by the Companies (Amendment) Act, 1988, to
discourage frivolous notices to contest for election as Director of a company,
by requiring a member desirous of sending a notice under section 257 to deposit
a sum of Rs. 500/- with the company. This sum shall be refunded to him in
case he succeeds in being elected as a Director. Otherwise it would be
forfeited by the company. The deposit has to be made along with the notice in
writing which may be given to the company by a person signifying his
candidature for the office of Director or by any member proposing him as a
candidate for that office.
This notice should be filed
not less than 14 days before the meeting and the section does not say that such
notice should be before a particular time on the last day and as such rejection
of deposit of the money along with the notice rejected on the ground that it
was tendered one minute later than the closing hour of the company for cash
transactions was erroneous as that time limit was not applicable, inasmuch as
it contravened the provisions of section 257. Oriental Benefit and Deposit
Society Ltd. v. Bharat Kumar K. Shah, (2001) 103 Com Cases 947 (Mad).
Appointment of person other than retiring
Director (S. 257)
Additional Directors
appointed under section 260 and Directors to fill casual vacancies under
section 262 are not retiring Directors within the meaning of the Explanation
below sub-section (5) of section 256. The provisions of sub-section
(1) of section 257 will have to be complied with. (Company News and Notes,
dated 1st July, 1963). If a person who is appointed as an additional Director
wants to be elected as a Director at the next Annual General Meeting, the
provisions of section 257 will have to be complied with since he cannot be
considered to be a Director retiring by rotation at that meeting. (Department's
letter No. 8/3(270)/63-PR, dated 27-7-1963). Section 257 does
not apply to wholly owned Government companies. (Notification GSR 906, dated
30th July, 1981). Appending an explanatory note to the notice to members about
candidature under sub-section (1A) of section 257 is valid compliance
with section 173(2) of the Act. Pazhamalai (S) v. Aruna Sugars Ltd., (1984) 55
Comp Cases 500 (Mad).
"WHEREAS a notice had
been received from Mr. A, with. a deposit of Rs. 500/-, for his
candidature as director in the last annual general meeting;
AND WHEREAS Mr. A has been
duly appointed at the said annual general meeting;
NOW THEREFORE IT IS RESOLVED
that the deposit of Rs. 500/- made by him be returned to him as he has been
elected as director."
1. Fourteen days' notice. -Any person other than retiring director may
stand for directorship in a company provided he or some members intending to
propose him gives not less than fourteen days notice in writing to the company
alongwith deposit of rupees five hundred. In the said notice, the intention of
the member to propose the other person as a candidate for the office of the
directorship in the company should be made clear. The deposit of rupees five
hundred will be refunded to the person if he succeeds in getting elected as a
director.
2. Company's duty.-On receipt of such notice the company should serve
individual notices on the members of the company not less than seven days
before the date of the meeting to inform its members of the candidature of a
person other than the retiring director for the office of director or a
member's intention to propose him as such as the case may be. The company can
also advertise such candidature or intention not less than seven days before
the meeting in atleast two newspapers circulating in the place of registered
office of the company instead of serving individual notices on the members. One
of the newspapers should be an English newspaper and the advertisement should
be in English and the other newspapers should be a regional language newspapers
and the advertisement should be in the regional language of the place where the
registered office of the company is situated. A company cannot refuse to
circulate to its members at their annual general meeting proposal of names for
directorship by one of the member. Gopal Vyas v. Sinclair Hotels and
Transportation Ltd., (1990) 3 CLA 210 (Cal).
3. Private companies exempted. -The provisions of section
257 of the Act are not applicable to a private company unless it is a
subsidiary of a public company.
4. Procedure mandatory.-Non-compliance of the procedure prescribed for
the appointment of new directors in place of the retiring directors such as non-circulation
of notice of proposal required by section 257 would render the appointment
invalid. Namita Gupta v. Cachar Native Joint-Stock Co. Ltd., (1999) 98
Com Cases 655 (CLB-PB).
Individual notices for persons other than retiring directors to
stand for directorship
"WHEREAS a notice had been received from a member proposing the candidature of Mr. A as director of the Company with a deposit of Rs. 500/-;
AND WHEREAS the notice of
the annual general meeting has already been dispatched to the members;
NOW THEREFORE IT IS RESOLVED
that individual notices be served on members about candidature for the office
of directorship received from a member, there being more than 10 days left for
the holding of the annual general meeting."
Same as given under Resolution No. 552.
Advertisement of persons other than retiring directors to
stand for directorship
"WHEREAS a notice had
been received from a member proposing the candidature of Mr. A as director of
the company with a deposit of Rs. 500/-;
AND WHEREAS the notice of
the annual general meeting has already been dispatched to the members;
NOW THEREFORE IT IS RESOLVED
under the proviso of subsection (1-A) of section 257 of the Act that
instead of serving individual notices upon the members the candidature of the
director as aforesaid be advertised in the Statesman and Amrita Bazar Patrika,
who English dailies circulated in Calcutta where the registered office of the
company is situate. Secretary of the company be and is hereby authorised to
have the draft of the advertisement approved by the Managing Director before
issuing the same "
Same as given under
Resolution No. 552.
Increase in the number of Directors (S. 258)
Where the number of
Directors as authorised by the Articles of Association is seven but if there
are only five Directors functioning, appointment by a resolution of the General
Meeting of two more Directors does not require a separate resolution of the
company as it is implicit in the resolution to increase the number. Laljibhai
C. Kapadia v. Lalji B. Desai, (1973) 43 Comp Cases 17 (Bom). Only the Board of Directors
have the power of increasing or reducing the number of directors and make
proposal for the same to the general body. A shareholder case make a proposal
of this kind through a requisition. Ravi Shankar Taneja v. Motherson Triplex
Tools (P) Ltd., (2001) 4 Comp LJ 102 (CLB).
Appointment of additional Director (S.
260)
An additional Director who
is appointed as a Managing Director will continue to be a Managing Director
after his election as Director at the Annual General Meeting. (No.
1/212(160)/76/CL.V, dated 17-3-1977).
A Director appointed as an
additional Director vacates his office on the last day on which the Annual
General Meeting could have been called as required by section 166 and cannot
continue in office thereafter on the -ground that the meeting was not or
could not be called within the time prescribed by that section. Krishna Prasad
Pilani v. Colaba Land & Mill Co., (1959) 29 Comp Cases 273. This is also
followed in Dushyant D. Anjaria v. Wall Street Finance Ltd., (2001) 105 Com Cases
655 (Bom).
Where the articles of a
company provide that additional Directors shall hold office only until the next
following ordinary General Meeting of the company, it has been held that the
moment when such meeting began additional Directors were no longer in office
and their office ceased just before the meeting. Eyre v. Milton Proprietary
Ltd., (1936) 2 Ch 244 (CA). A power given to the Board by the articles did not
take away the inherent power of the company in General Meeting to appoint
Directors. Worcester Corstry Ltd. v. Witting, 1936 Ch 640. Appointment of
additional director in a subsidiary company to marginalise the authority of two
of the five shareholders owning the holding company would be an act of
oppression. S. James Fredrick and another v. Mrs. Minnie R. Fredrick and
others, (2000) 36 CLA 371 (CLB-PB).
Appointment of additional Directors
"RESOLVED that Mr. BNP, be and is hereby appointed an Additional Director of the Company pursuant to article __________ of the Articles of Association of the Company."
1. Procedure
to be followed for appointing Additional Director. -For appointing an additional
Director, the following procedure should be adopted:
(a) Articles of Association should be examined to see whether they authorise the Board to appoint Additional Director (Section 260); if not, the articles should be changed suitably.
(b) In the case of a public company or its
subsidiary, written consent of the person to be appointed as an Additional
Director should be obtained. There is no prescribed form for this. This
formality of obtaining consent is not, however, necessary where the Director
immediately before such appointment, was already a Director of the company, (Section
264(l)). For private companies also written consent from the proposed Director
should be got and filed in the company, even though the same need not be filed
with the Registrars.
(c) A Board Meeting should be called to
appoint the Additional Director to hold office till the next Annual General
Meeting (Section 260).
(d) He has to notify about his appointment to
other companies in which he is a Director, Managing Direct or Manager or
Secretary within twenty days (Section 305).
(e) Form No. 32, in duplicate, should be
filed within thirty days of his appointment with the Registrar (Section
303(2)).
(f) Necessary entries should be made in the
Register of Directors of Directors' shareholdings, etc. (Sections 303(l) and
307).
(g) Care should be taken to see that the
number of Directors and additional Directors together do not exceed the maximum
strength fixed for the Board by the articles.
2. Additional Director holds office up to the date of next Annual
General Meeting.-In terms of the provisions of section 260, (invariably articles of a
company also provide to the same effect), an Additional Director holds office
only up to the date of the next Annual General Meeting of the company or at the
latest up to the last day on which the Annual General Meeting should have been
called, as for the provisions of section 166, and cannot continue thereafter on
the ground that such Annual General Meeting could not be held within the
statutory prescribed time. Krishna Prasad Pilani v. Colaba Land & Mills Co.
Ltd., (1959) 20 Com Cases 273.
3. Words "up to"-Meaning. -The words 'up to' appearing
in the first proviso to section 260, mean the same thing as the word 'until'
means. The word 'until' may be read as both inclusive or exclusive of the date
mentioned but it has been judicially held; Eyres v. Milion Proprietary Ltd.,
(1936) 2 Ch 244 (CA), that 'until' used in the articles of a company with
regard to the holding of office of additional Directors means inclusive of the
date of the Annual General Meeting mentioned and as soon as the Annual General
Meeting started, additional Directors were no longer in office. From this, it
is easy to infer that additional Directors appointed by the Board should hold
office just up to the commencement of the next Annual General Meeting (Letter
No. 8/3(260)/63-PR, dated 5-2-1963).
4. Special Notice required for electing Additional Director as
Director. -If additional Directors appointed by the Board are elected as Directors
in the next Annual General Meeting, provisions of section 257 must be compiled
with because they cannot be regarded as Directors retiring by rotation at that
meeting (Letter No. 8/3(260)/63-PR, dated 27-7-1963).
5. Additional Director appointed as Managing Director ceases to hold
office. -If the Additional Director is also appointed as the Managing Director
of the company, then the latter appointment ceases simultaneously with the
Additional Director's cessor of office at the commencement of the next Annual
General Meeting.
6. Additional Director on re-election continues as Managing
Director. -If such a person is again re-elected as a full-fledged
Director in the Annual General Meeting, then he continues to be the Managing
Director for the period for which he is so elected at that meeting and for the
period for which his appointment is approved by the Central Government. (Letter
No. 8/21(260) 76-CL.V, dated 17-3-1977).
7. Compliance Certificate.-Companies having a paid-up share
capital of less than Rs. 2 crores but equal to or more than Rs. 10 lakhs are
required to obtain a Compliance Certificate from a secretary in whole-time
practice to be filed with the Registrar of Company mentioning therein inter
alia that the appointment of additional director has been duly made as per
paragraph 14 of the Form of Compliance Certificate appended to the Companies
(Compliance Certificate) Rules, 2001.
Appointment of Additional Director
(Another format)
"RESOLVED that Shri
ZYX, be and is hereby appointed as Additional Director of the Company pursuant
to section 260 of the Companies Act, 1956, and article 160 of the Articles of
Association of the company."
1. Articles to empower Board. -Ensure that the Board is empowered by the
Articles of Association to appoint additional Director. Also ensure that the
appointment of additional Director is within the number fixed by the Articles
of Association.
2. Alteration of Articles to empower Board to appoint Additional
Directors.-If there is no power to appoint Additional Directors under the Articles
of Association of the company, it would be advisable to alter the Articles of
Association and provide for a specific article enabling the Board to appoint
additional Director.
3. Additional Director to hold office till next Annual General Meeting.
-The
Additional Director shall hold office till the commencement of the next Annual
General Meeting of the company and will be eligible for re-appointment as
a Director at that meeting.
4. Additional Director ceases if not elected. -If Additional Director is
not elected at that meeting, he will cease to be the Director of the company.
5. No prohibition to his reappointment.-There is, however, no
prohibition to the Board of Directors to again appoint him as Additional
Director at the Board Meeting held after the Annual General Meeting.
6. Additional Director appointed as Managing Director continues to hold
office.-An
Additional Director who is appointed as a Managing Director will continue to be
a Managing Director after his election as Director at the Annual General
Meeting. (No. 8/212 (16on6/CL. V), dated 17-3-1977).
7. Special Notice required for electing Additional Director as
Director. -An Additional Director holds office and does not retire by rotation at
the next Annual General Meeting and he is required to comply with the
provisions of section 257 for seeking election as Director at the said meeting.
The provisions of section 264 and section 303 are also required to be complied
with.
"RESOLVED that Mr. X,
who was appointed as an Additional Director at the meeting of the Board of
Directors of the Company held on 15th December, 2001, and whose term expires at
the Annual General Meeting of the company scheduled to be held on 29th June,
2002, and for the appointment of whom the Company has received a notice under
section 257 of the Act from a member proposing his candidature for the office
of a Director, be and is hereby appointed as a Director of the Company whose
period of office will be liable to determination by retirement by
rotation."
1. Additional Director to vacate office on last day of Annual General
Meeting.-A Director appointed as an Additional Director vacates his office on
the last day on which the Annual General Meeting could have been called as
required by section 166 and cannot continue in office thereafter on the ground
that the meeting was not or could not be called within the time prescribed by
that section. Krishna Prasad Pilani v. Colaba Land & Mills Co., (1959) 29
Comp Cases 273.
2. Additional Director to vacate office before meeting. -Where the articles of a
company provide that additional Directors shall hold office only until the next
following ordinary General Meeting of the company, it has been held that the
moment when such meeting began Additional Directors were no longer in office
and their office ceased just before the meeting. Eyre v. Milton Proprietary
Ltd., (1936) 2 Ch 244 (CA).
3. Inherent power of company to appoint Directors. -A power given to the Board
by the articles did not take away the inherent power of the company in General
Meeting to appoint Directors. Worcester Corstry Ltd. v. Witting, 1936 Ch 640.
4. Filing of form with Registrar of Companies. -File Form Nos. 29 and 32
with the Registrar of Companies concerned within thirty days by paying the
requisite filing fee.
5. Board's power to co-opt. -Power of Board of directors
to co-opt directors is not impaired by its strength declining below
minimum required for quorum, in view of subsection (1) of section 252 read with
Regulation 75 of Table A Schedule I. Shailesh Harilal Shah v. Matushree
Textiles Ltd., (1994) 14 CLA 177 (Bom).
Filling up of casual vacancies
S.
262-Appointment of director to Fill up casual vacancies-Board
Resolution
"RESOLVED that Mr. CDK,
be and is hereby appointed as a Director of the Company to fill up the casual
vacancy caused due to Mr. KRN vacating his office as a Director of the Company
before the expiry of his term of office and that Mr. CDK is to hold office till
the date the outgoing Director Mr. KRN would have held office."
1. Articles to empower company to rill in casual vacancy. -There must be provisions in
the Articles of Association of the company for the Board of Directors to fill
the casual vacancy caused due to any Director vacating his office before his
term of office has expired in the normal course. The articles of a company
usually repeat the provisions of section 262. The Board of Directors should
exercise the power of filling a casual vacancy on the Board only at a meeting
of the Board and not by means of a resolution by circulation or otherwise.
2. Duration of office of appointee on casual vacancy.-Pursuant to sub-section
(2) of section 262, if the Board fills up a casual vacancy, the person
appointed would hold office for the entire period for which the person in whose
place he was appointed, would have held office.
3. Filing of written consent with company. -Written consent from the
person who is proposed to be appointed in the casual vacancy should be filed
with the company. There is no prescribed form for this.
Filling up of casual vacancy (S. 262)
The casual vacancy means a
vacancy caused by death, resignation, insolvency etc. and not by efflux of
time. M. K. Srinivasan v. W. S. Ayyar, AIR 1932 Mad 100.
Filling up of casual vacancy
(Another format)
S. 262-Appointment
of director to Fill up of casual vacancy-Board Resolution
"RESOLVED that Mr. XYZ,
be and is hereby appointed as a Director of the Company in the casual vacancy
caused by the resignation of Mr. ABC pursuant to section 262 of the Companies
Act, 1956, and article 161 of the Articles of Association of the Company."
1. Alteration of Articles to empower directors to fill up casual
vacancy.-If there is no provision in the Articles of Association analogous to
section 262, first alter the Articles of Association to empower the Directors
to fill up the casual vacancy.
2. Appointment to be made at Board. -Appointment has to be made
at the meeting of the Board of Directors and not by means of a resolution by
circulation or otherwise.
3. Appointee to hold office for the period for which the Director in
whose vacancy he is appointed. -The appointee shall hold office for the same period
for which the Director in whose vacancy he is appointed, would have held the
office.
4. Casual vacancy does not make Board invalid unless number falls below
prescribed minimum. -A casual vacancy or vacancies in the Board does not make the Board
invalid unless the number of the remaining number falls below the prescribed
minimum.
5. Casual vacancy-Meaning.-The casual vacancy means a
vacancy caused by death, resignation, insolvency etc. and not by efflux of time.
M.K. Srinivasan v. W.S. Ayyar, AIR 1932 Mad. 100.
6. Filing of forms with Registrar of Companies. -Form Nos. 29 and 32 are to
be filed with are Registrar of Companies concerned within thirty days along
with the requisite filing fee. The effect of filing Form No. 32 with the
Registrar of Companies on the resignation of a director of a company will take
effect from the date of resignation. S.B. Sarkar v. Amman Steel Corporation,
(2002) 110 Com Cases 50 (Mad).
7. Compliance Certificate.-Companies having a paid-up share
'Capital of less than Rs. 2 crores but equal to or more than Rs. 10 lakhs are
required to obtain a Compliance Certificate from a secretary in whole-time
practice to be filed with the Registrar of Companies mentioning therein inter
alia that the appointment of director in casual vacancy has been duly made as
per paragraph 14 of the Form of Compliance Certificate appended to the
Companies (Compliance Certificate) Rules, 2001.
Variation of the terms of agreement with Managing Director
"RESOLVED that subject
to the approval of the Company at a General Meeting and the Central
Government, clause _________ of the agreement dated the _________, 2002 _________, between the company and Mr.
OPW, the Managing Director of the Company, which requires unfurnished
accommodation to be provided, be and is hereby amended by substitution of the
word 'furnished' in place of 'unfurnished'."
1. Central Government approval required. -Board's power to fix the
remuneration and terms and conditions of appointment of Managing Director is
subject to the provisions in the articles of the company. In the absence of any
provision in the articles or if the articles so require the members in a
General Meeting may fix the remuneration. Where the remuneration payable
exceeds the percentage specified in S. 309/198, approval of the Central
Government is also called for. The variation of any vital terms/conditions of
appointment including those relating to remunerations of the Managing Director
would also require approval of the Central Government. The prescribed form for
this purpose are Form Nos. 25A, 25B and 25C. The application to be made in this
form to the Central Government must be accompanied by the following documents:
(i) Two copies of the notices to be published under section 640B;
(ii) Certified true copies of both the agreements, revised and original;
(iii) A copy of the receipt
of the treasury challan obtained for payment of prescribed fees.
2. Forms prescribed. -A copy each of the applications, along with all the
documents, should also be sent to the Registrar of Companies.
Amendment of provision relating to Managing/whole-time
or non-rational
Directors (S. 268)
The insertion of a new
provision in the articles relating to the appointment or reappointment of a
Managing or Whole-time Director or a Director not liable to retire by
rotation, as distinct from an amendment of existing provision in this regard in
the Articles of Association of the company etc. does not need approval of the
Company Law Board under this section. The approval of the Company Law Board
would be required under section 268 only when an existing provision in the
Articles of Association is amended. (Department's letter No. 1(120)/CL-1/65,
dated 4-11-1965). Removal of managing director does not amount to
amendment of provisions relating to terms of his contract of appointment
requiring Central Government's approval under this section. Sunil K Alagh v.
Britannia Industries Ltd., (1993) 11 CLA 68 (Bom).
Appointment/re-appointment of Managing/Whole-time
Director
(S.269)
The Central Government's approval is not necessary if the person to be appointed is eligible under Part I of Schedule XIII introduced by the Companies (Amendment) Act, 1988. The Central Government's approval is required only for the appointment of a Managing Director and not for his removal. Pyare Lal Gupta v. Aggarwal, (DP) (1983) 53 Comp Cases 586. Appointment of a Whole-time Company Secretary as a Part-time Director on the Board of Directors of the company does not require approval of the Central Government under section 269(l) of the Act so long as substantial powers of management of the affairs of the company are not vested in the incumbent. (Department's letter No. 16/39-CL VIII/85, dated 26-6-1987). Section 269 does not apply to a Government company. (Notification GSR 23 5, dated 31st October, 1978).
"WHEREAS the Chairman
has placed before the meeting a letter dated _________ from M/s __________________
appointing Shri __________________
as their nominee on
the Board of the Company on and from _________ ;
AND WHEREAS the said Shri __________________
has consented to act
as a director of the company vide his letter dated _________ a copy of which is placed
before the meeting;
NOW THEREFORE IT IS RESOLVED
that the said letter be noted and taken on record, and that the secretary be
directed to file the necessary returns relating to the appointment of Shri __________________ with the Registrar of Companies."
1. Return in Duplicate. -Within thirty days of such appointment a return in
duplicate in Form No. 32 should be filed with the Registrar of Companies along
with requisite filing fee as prescribed under Schedule X of the Act.
2. Private Companies Exempted. -Private Companies which are
not subsidiaries of public companies are exempted to take Central Government's
approval for making amendment in any provision in the appointment of nominee
director.
S. 268-Appointment of director nominated by financial
institution-Board Resolution
"RESOLVED that the
nomination of Mr. SKM, Dy. General Manager, IDBI, as Director on the Board with
effect from 11th April, 2002, in place of Mr. AKM, be and is hereby noted.
RESOLVED FURTHER that
appreciation and gratitude of the Board for unstinted and continued co-operation
and valuable advice tendered by Mr. AKM all through the period of his
Directorship be communicated to him."
1. Articles must contain power. -The Articles of Association
of the company must contain power for the appointment of a nominee Director. If
not, amend the Articles of Association.
2. Approval of Central Government for amendment of Articles when
required. -Approval
of the Central Government for insertion of new provision in the Articles is not
required. However, approval of the Central Government is required only when the
existing provision in the articles of association is to be amended.
3. Nominee director not liable to retire by rotation.-The directors nominated by
the financial institutions shall be non-rotational Directors. They shall
not be liable to retire by rotation.
4. Directorships not to exceed ten in inter-connected
undertakings. -The total number of Directorships should not exceed ten in number in
inter-connected undertakings. In case it is exceeded approval of the
Central Government is required.
5. Removal of nominee Director.-The Director nominated by
the financial institution can be removed by it at any time.
6. Filing of forms with Registrar of Companies. -Ensure to file Forms No. 29
and 32 with the Registrar of Companies concerned within thirty days of
appointment.
Expenses Incurred on Travelling and Transportation of Personal
Effects of
Managing or whole-time Director or manager (S. 269)
With regard to the clarification whether it would be in order for companies to meet the expenses on travel of the managing or whole-time director or manager and his family members and on transportation of his personal effect from the place of his duty to his home town or to a place where he intends to settle, on expiry of his tenure, it is clarified that these expenses are not in the nature of perquisites and are not therefore, covered in Schedule XIII (though Schedule XIII does contain a provision in regard to reimbursement of expenses incurred on joining duty and return to the home country in respect of expatriate managerial personnel). The companies, should therefore, incur expenses on travel of the managing or whole-time director or manager and his family members and on transportation of his personal effects from his place of duty to his home town or to a place where he intends to settle, on expiry of his tenure, provided the relevant travelling rules of the company provide for incurring such expenditure. No approval of Central Government would be required in such cases. [Circular No.9193; F. No. 1/4/92-CL.V, dated 28-7-19931.
"RESOLVED that subject
to the approval of the Central Government under section 269 and other
applicable provisions of the Companies Act, 1956, Mr. ABM, be and is hereby
appointed as the Managing Director of the Company for a period of five years
commencing from the _________, 2002 _________, on the remuneration and on the terms and conditions as embodied in the
draft agreement, a copy of which is tabled and authenticated by the
Chairman."
1. Mode of appointing Managing Director. -Managing Director may be
appointed in any one of the following four ways in terms of section 2(26):
(i) By an agreement with the company;
(ii) By a resolution passed
by the company in General Meeting;
(iii) By a resolution passed
by the Board of Directors;
(iv) By Memorandum/Articles of Association.
2. Filing of resolution of agreement with Registrar of Companies. -A copy of the resolution of
the Board or agreement executed appointing the Managing Director should be
filed with the Registrar in Form No. 23 within thirty days of the passing or
making thereof (Section 192).
3. Obtaining of consent of Director. -Con sent in writing of the
Director should be obtained by the company indicating that he is willing to act
as a Director after appointment (if he was not a Director before his
appointment as Managing/Whole-time Director).
4. Appointment of an executive on Board.-If an executive is taken on
the Board, he becomes a deemed Whole-time Director by virtue of the
Explanation given in section 269 and, thus, he will also have to be appointed
in the same manner.
5. Managing Director on his cessation as Director ceases to be Managing
Director. -The moment a person appointed as Managing Director ceases to be a
Director, he also ceases to be the Managing Director even though his
appointment may have been approved by the Central Government.
6. Additional Director appointed as Managing Director ceases to hold
office on his cessation as Additional Director. -An additional Director, if
appointed as a Managing Director, also ceases to be a Managing Director as soon
as his additional directorship ceases at the commencement of the next Annual
General Meeting. Such is also the case with the Managing Director who is an
Alternate Director so that he too ceases to be the Managing Director as soon as
the original Director comes back.
7. Where Central Government approves appointment for five years but
Annual General Meeting approves for lesser period, appointment ceases on expiry
of lesser period. -Where the appointment of a Managing Director is approved by the Central
Government for a period of five years but the Annual General Meeting of the
company approves him for lesser period than five years, then he ceases to be a
Managing Director on the expiry of the lessor period. Of course, again he may
be appointed without interruption for a further period covered under the
Central Government's approval and in that case no fresh approval is necessary.
8. Managing Director continues to be an employee even on his non-election
as Director. -A Managing Director can continue to be an employee of the company even
after his non-election as a Director in the Annual General Meeting and
such continuance will not require approval of the Central Government. But, if
the articles of the company provide for such continuance of office of a
Managing/Whole-time Director as an employee, then it should be approved
by the Central Government under section 268 on the principle that the office
becomes non-rotational. (Letter No. 8/21(260)/76-CL, V, dated 17-3-1977.
9. Section not applicable to private company becoming deemed public
company until re-appointment due. -The provisions of section
269 do not apply to a person who is a Managing Director or Whole-time
Director of a private company becoming a deemed public company under section
43A until his re-appointment is due. (Letter No. 8/11/43A/61-PR,
dated 25-1-1961).
10. Central Government approval not required where appointment is as
per Schedule XIII. -Central Government's approval is not required in cases where the
appointment is in accordance with the provisions of Schedule XIII introduced in
the Companies Act by the Companies (Amendment) Act, 1988.
Appointment of Managing Director
(Another format)
"RESOLVED that subject
to the sanction of the Central Government, MR. A.B., be and is hereby appointed
as the Managing Director of the Company for a period of five years from _________
2002, on a monthly
remuneration of Rs. 80,000/- per month plus the perquisites set out in
the attached sheet placed before this meeting.
RESOLVED FURTHER that the duties of the Managing Director shall be the overall supervision of the functioning of the company, handling day to day affairs of the Company, appointment and termination of services of employees, operating bank accounts, signing cheques, promissory notes, bills of exchange, regularly reporting to the Board on the activities of the Company and to perform all other duties that the Board may delegate to the Managing Director from time to time."
1. Central Government approval not required when appointment made in
accordance with Schedule XIII. -Approval of Central Government is not required in
case the appointment of Managing Director is made in accordance with the
conditions specified in Schedule XIII to the Act.
2. Filing of return in Form No. 25C. -While filing the return in
Form No. 25-C within 90 days a copy of the resolution passed by the Board
of directors and/or shareholders in the general meeting is required to be
enclosed with the return. If this Form No. 25C is filed belatedly it would not
attract the provisions of section 637B(b), since the said Form is a document
and delay in filing the same with the Registrar of Companies falls within the
ambit of section 611. For such belated filing Registrar of Companies should
charge additional fee at the rate standardised by Press Note No. 2/95 dated 21-3-1995.
[General Circular No. 15 of 2002, dated 15-6-2002.]
3. Minimum Remuneration.-Although minimum monthly remuneration under Schedule
XIII Part II Section II is Rs. 75,000/- or Rs. 1,50,000/- as the
case may be for a company which have no profits or inadequate profits a company
may at its discretion pay remuneration less than this amount per month.
4. Maximum Remuneration.-For companies having no profits or inadequate profits
maximum remuneration under Schedule XIII Part II, Section II (A) and (B) is Rs.
24 lakhs per annum or Rs. 48 lakhs per annum or Rs. 2 lakhs or 4 lakhs per
month respectively provided the companies comply with certain conditions
mentioned therein. A company can also pay remuneration exceeding Rs. 48 lakhs
per annum or Rs. 4 lakhs per month if it complies with the conditioned
mentioned under paragraph (C) therein.
For companies in special
economic zones remuneration of Rs. 20 lakhs per month is allowed.
Re-appointing Managing Director/Whole-time Director
WHEREAS the company had sufficient profits to pay Mr. ABC, the Managing Director of the Company as per Schedule XIII, in his last tenure of appointment;
"AND WHEREAS the
Company does not have sufficient profits and the payment of remuneration to him
on re-appointment will exceed the ceiling given in Schedule XIII;
"NOW THEREFORE it is
RESOLVED that subject to the approval of the Central Government under section
269 and other applicable provisions of the Companies Act, 1956, Mr. ABC, the
Managing Director of the Company, be and is hereby re-appointed as
Managing Director of the Company for a further period of five years from _________
on a remuneration to
be sanctioned in this behalf by the general body and on the terms and
conditions contained in the agreement, a draft of which is placed before the
meeting and initialled by the Chairman."
1. Procedure prescribed for appointment to be followed for every re-appointment.
-For
every re-appointment of the Managing Director, the procedure prescribed
for appointment will have to be followed. The term "appointment"
includes “re-appointment.”
2. Central Government's approval not needed. -If the re-appointment
is within the terms and conditions of Schedule XIII of the Act then Central
Governments' approval is not required. Only requirement is to file a return in
Form No. 25C within ninety days from the date of re-appointment with the
Registrar of Companies.
3. Penalty for default.-If the appointment of a person as a managing or
whole-time director or a manager requiring approval of Central Government
is not approved by the Central Government, the person so appointed shall vacate
his office as such managing or whole-time director or manager on the date
on which the decision of the Central Government is communicated to the company
and if he omits or fails to do so, he shall be punishable with fine of upto Rs.
5,000/- for every day during which he omits or fails to vacate such
office.
4. Compliance Certificate.-Companies having a paid-up share
capital of less than Rs. 2 crores but equal to or more than Rs. 10 lakhs are
required to obtain a Compliance Certificate from a secretary in whole-time
practice to be filed with the Registrar of Companies mentioning therein inter
alia that the appointment of managing director/whole-time director has been
made in compliance with the provisions of section 269 read with Schedule XIII to
the Act and approval of the Central Government has been obtained in respect of
appointment where it is not in terms of Schedule XIII as per paragraph 15 of
the Form of Compliance Certificate appended to the Companies (Compliance
Certificate) Rules, 2001.
Reference to Company Law Board by Central Government for appointment
made without Govt. Approval
WHEREAS the company is a
member of ASBC Co. Ltd. holding 10,000 equity shares of Rs. 10/- each;
AND WHEREAS the company has
got information that the Managing Director of the said company was appointed
without the approval of the Central Government;
AND WHEREAS under section
269(7) of the Company Act, 1956, the Central Government, if on any information
received by it is of the opinion that any appointment of Managing Director has
been made under section 269(2) without the approval of the Central Government
in contravention of the requirement of schedule XIII, can refer the matter to
the Company Law Board for decision.
NOW, THEREFORE, IT IS
RESOLVED that an application be made to the Central Government pursuant to
section 269(7) of the said Act.
RESOLVED FURTHER that the
Secretary of the Company be and is hereby authorised to make an application to
the Central Government and to sign any documents and papers in connection
therewith and to take every step that may be necessary for making the said
application to the Central Government or in connection therewith or incidental
or ancillary thereto.
1. No prescribed form of application-There is no prescribed form
of application to be made to the Central Government under section 269(7) and
such an application may be made in the form of a letter along with certified
true copy of the board's resolution authorising the Secretary to make the
application and other documentary evidence necessary to prove prima facie case
of contravention of Schedule XIII for appointment of a Managing Director of the
company without the necessary approval of Central Government.
2. Company Law Board's order-Once the reference is made to the CLB by the
Central Government under section 269(7) and after hearing the sides of both the
parties including the complainant and the company, the CLB will give its order
by taking a decision whether actually the appointment of a Managing Director
has been made in contravention of the requirements of Schedule XIII. Once such
order is made by the CLB the appointment of the Managing Director or the whole
time Director, as the case may be, will come to an end on and from the date of
the said order and the Managing Director/Whole Time Director, as the case may
be, has to vacate office as such. There is a provision under section 10F by the
concerned company to make an appeal to the High Court within 60 days from the
date of communication of the order of the CLB to the company on any question of
law arising out of such order.
3. Effect of CLB's order.-On the making of an order by the Company Law Board
under sub-section (9) of section 269, the company shall be liable to a
fine of up to Rs. 50,000/-, every officer of the company who is in
default shall be liable to, a fine of up to Rs. 1,00,000/- and the
appointment of the managing or whole-time director or manager, as the
case may be, shall be deemed to have come to an end and the person so appointed
shall in addition to being liable to pay a fine of up to Rs. 1,00,000/-,
refund to the company the entire amount of salaries, commission and perquisites
received or enjoyed by him between the date of his appointment and the passing
of such order.
4. Penalty for default.-If a company contravenes the provisions of sub-section
(10) of section 269 or any direction given by the Company Law Board under that
sub-section, every officer of the company who is in default and the
managing or whole-time director or the manager, as the case may be, shall
be punishable with imprisonment for a term of 3 years and shall also be liable
to a fine of up to Rs. 500/- for every day of default.
WHEREAS Mr. IJ, a Director
of the Company had failed to pay the calls in respect of Shares held by him;
AND WHEREAS more than six
months have elapsed from the last day fixed for the payment of call and Mr. IJ
had thus vacated office as Director of the company;
"NOW THEREFORE IT IS
RESOLVED that it be noted that Mr. IJ had vacated office as Director of the Company
on _________ consequent
on his having failed to pay the calls in respect of shares held by him and more
than six months have elapsed from the last day fixed for the payment of call.
RESOLVED FURTHER that the
Secretary of the Company be directed to inform Mr. IJ accordingly."
1. Grounds of disqualification. -There are six grounds of
disqualification mentioned under section 274(l) of the Act. The
disqualification of conviction by court of any offence involving moral
turpitude and sentenced for that and the disqualification of nonpayment of
calls can be removed by the Central Government.
2. Additional Grounds of disqualification.-A private company which is
not a subsidiary of a public company may provide for additional grounds of disqualification
in its articles of association apart from the disqualifications mentioned under
section 284(l) of the Act.
3. Disqualification of Special Director.-Section 16(5) of the Sick
Industrial Companies (Special Provisions) Act, 1985 (SICA) provides that the
appointment of a Special Director under section 16(4) of the said Act shall be
valid and effective not withstanding anything to the contrary contained in the
Companies Act, 1956 or in any other law for the time being in force and in view
of this over-ridding effect the Special Directors appointed under SICA
should not be liable to be disqualified for appointment as directors by virtue
of section 274(l)(g). [General Circular No. 11/2001, dated 25-5-2001.]
4. Nominee Director not liable for Disqualification -Nominee directors appointed
by the Public Financial Institutions and companies established under the Act of
Parliament having non obstinate provisions over the companies Act, 1956 like
IDBI, LIC, UTI, IDBI etc. in their respective statutes will not be liable to be
disqualified for appointment as directors. [General Circular No. 8/2002, dated
22-3-2002].
S. 274-Application to the Central Government for
removal of disqualifications-Board Resolution
"WHEREAS Mr. A, a director of the Company was caught at Delhi Airport while returning from USA, with a ten dollar note in his pocket which he had not disclosed to the Custom Officials and the Metropolitan Magistrate, Delhi sentenced him to six months' imprisonment;
AND WHEREAS the said
director vacated the office of directorship of the Company, pursuant to the
provisions of clause (d) of subsection (1) of section 274;
AND WHEREAS he had vacated
his office of directorship immediately;
AND WHEREAS the High Court
of Delhi had, on appeal, reduced the sentence to a day's imprisonment;
NOW THEREFORE IT IS RESOLVED
that an application be made to the Central Government for removal of the
disqualification incurred by the said director by making an application under
clause (a) of subsection (2) of section 274."
1. Six specific disqualifications.-There are the following six
disqualifications of a director or a company which will make him incapable of
being appointed as a director:
(a) he has been found to be
of unsound mind by a court of competent jurisdiction and the finding is in
force;
(b) he is an undischarged
insolvent;
(c) he has applied to be
adjudicated as an insolvent and his application is pending;
(d) he has been convicted by
a court of any offence involving moral turpitude and sentenced in respect
thereof to Imprisonment for not less than six months, and a period of five
years has not elapsed from the date of expiry of the sentence;
(e) he has not paid any call
in respect of shares of the company held by him, whether alone or jointly with
others, and six months have elapsed from the last day fixed for the payment of
the call; or
(f) an order disqualifying
him for appointment as director has been passed by a court in pursuance of
section 203 and is in force unless the leave of the court has been obtained for
his appointment in pursuance of that section.
2. Removal of disqualifications.-The Central Government has
been given power to remove disqualifications of a director convicted by a court
of any offence involving moral turpitude and sentenced in respect thereof to
imprisonment for not less than six months and also for a disqualification
incurred by any director for non-payment of any call in respect of any
shares of the company held by him. Such removal of disqualification will be
made by the Central Government by notification in the Official Gazette. There
is no prescribed form for making an application to the Central Government for
removing any disqualification.
3. Additional grounds of disqualifications.-A private company which is
not a subsidiary of a public company can provide for additional
disqualification by its articles of association.
"WHEREAS one thousand
equity shares of Rs. 100/- each, Rs. 50/- being paid-up per share,
had been acquired by Mr. A, a director, along with his brother, Mr. B and the
shares were held in their joint names;
AND WHEREAS the Company had
made a call for payment of the balance amount of Rs. 50/- per share of
the said shares held by him jointly with his brother;
AND WHEREAS more than six
months have elapsed from the last day fixed for the payment of the call money
and the call money has yet not been paid;
AND WHEREAS, by reason of
non-payment of call money, Mr. A had to vacate his office as director in
terms of clause (e) of sub-section (1) of section 274;
AND WHEREAS Mr. A has now
paid the entire amount due on the call;
AND WHEREAS by reason of
technical lapse Mr. A had to vacate his office as director in terms of clause
(e) of sub-section (1) of section 274;
NOW THEREFORE IT IS RESOLVED
that an application be made to the Central Government for removal of his
disqualification in terms of clause (b) of sub-section (2) of the said
section 274."
1. Seven specific disqualifications.-There are the following six
qualifications of a director or a company which will make him incapable of being
appointed as a director:
(a) he has been found to be
of unsound mind by a court of competent jurisdiction and the finding is in
force;
(b) he is an undischarged
insolvent;
(c) he has applied to be
adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence;
(e) he has not paid any call
in respect of shares of the company held by him, whether alone or jointly with
others, and six months have elapsed from the last
day fixed for the payment of the call; or
(f) an order disqualifying
him for appointment as director has been passed by a court in pursuance of
section 203 and is in force unless the leave of the court has been obtained for
his appointment in pursuance of that section.
(g) such person is already a director of a public
company which-
(A) has not filed the annual
accounts and annual returns for any continuous three financial years commencing
on and after the 1st April, 1999; or
(B) has failed to repay its
deposit or interest thereon on due date or redeem its debentures on due date or
pay dividend and such failure continues for one year or more:
Provided that such person
shall not be eligible to be appointed as a director of any other public company
for a period of 5 years from the date on which such public company, in which he
is a director, failed to file annual accounts and annual returns under sub-clause
(a) or has failed to repay its deposit or interest or redeem its debentures on
due date or pay dividend referred to in clause (B).
2. Removal of disqualifications. -The Central Government has
been given power to remove disqualifications of a director being convicted by a
court of any offence involving moral turpitude and sentenced in respect thereof
to imprisonment for not less than six months and also for a disqualification
incurred by any director for non-payment of any call in respect of any
shares of the company held by him. Such removal of disqualification will be
made by the Central Government by notification in the Official Gazette. There
is no prescribed form for making an application to the Central Government for
removing any disqualification.
3. Additional grounds of disqualifications.-A private company which is
not a subsidiary of a public company provide for additional disqualification by
its articles of association.