What are the provisions of the Companies Act, 1956 with regard to defraying the expenses of investigation

According to Section 245, the expenses of investigation are to be defrayed in the first instance by the Central Government. But the Central Government is entitled to be reimbursed by any person, who has been convicted on a prosecution instituted in pursuance of the report or required to pay damages as a result of the report. The company in whose name proceedings are brought is bound to reimburse the Central Government. Similarly, reimbursement can be recovered from any managerial personnel dealt with by the report and from the applicants.

Q 10. What are the provisions available in the Companies Act, 1956 for protection of employees during investigation?

.9Lns. Section 635-B of the Companies Act, 1956 protects gainst dismissal, discharge, removal, etc., of the employees of the company under investigation, who make disclosure during the course of investigation. The Section provides that if during the course of investigation under Sections 235, 237, 239, 247, 248 and 249, the company proposes to discharge any employee from service or punish him by way of dismissal, removal or reduction in rank, then the company must send to the Company Law Board (CLB) a previous intimation in writing of the action proposed to be taken against the employee. If the CLB has any objection to the action proposed to be taken, it must send a notice thereof to the employer. The CLB is not bound to hear the company or any other person before issuing the notice [Ashoka Marketing Ltd. Vs. Company Law Board. (1968)]. If the company does not receive any notice of objection from the CLB within 30 days of sending of the previous intimation of the action proposed against the employee, then the company may proceed to take the proposed action against the employee.

When no public offer is made (Section 70).

In such a case. the restriction imposed is that no allotment shall be made unless at least 3 days before the allotment the cdmpany has filed with the

Registrar a statement in lieu of IJroSIJectus duly signed by every person named in the statement as a director or proposed director.

If default is made in complying with this provision, the allotment shall be considered to be ‘irre”rular allotment’, voidable at the option of the allottee and the

company and every director in default shall be subject to a fine up to Rs. 10.000.

When an offer to IJUblic is made. In such a case, all the provisicns applicable to the’ allotment of shares’ are not applicable to the’ allotment of

debentures’. Moreover, provisions applicable to first allotment of shares’

are not exactly similar to those applicable to subsequent allotment of

shares. Hence we shall discuss these provisions under appropriate heads:

First Allotment of Shares. Before a public company whiCh offered shares to the public for subscription proceeds to initial allotment o.fshares. the following

statutory restrictions must be complied with:

t. Prospectus. A copy of the prospectus duly signed by all directors must be duly filed with the Registrar for registration. (Section (0). The prospectus must

be issued within a maximum period of 90 days of its filing with the Registrar.

2 Application Money. The company must receive at least five per cent castl, of the nominal value of shares, as applica!ion money along with the

appplication for shares [Sec. 69(3»)

3. Minimum SuhscrilJtion. The minimum subscription as disclosed in

the prospectus must be received within 120 days of the issue of the prospectus.

The minimum subscription is the minimum amount stated in the prospectus which in the .opinion of the directors must be raised in order to provide for:

(i) the price of any property purchased or to be purchased;

(ii) the preliminary expenses, and any underwriting commission:

(iii) the repayment of any money’s borrowed by the company in respect of any of the foregoin’g matters;

The ‘non-cumulath’f preference shares’

The ‘non-cumulath’f preference shares’ are those which do not get any dividend if in a particular year there are no profits to pay their preferential

dividends. Their dividends do not accumulate and they cannot claim the unpaid dividends in the subsequent ye.1rs when there are sufficient profits i.e. the

unpaid dividend on ‘non-cumulative preference shares’ is not carried forward. Thus, when there are no profits in a particular year these shares go without

any dividend.

2. P’rticipating md Non-Particip,ting Preference Shares. The ‘participating preference shares’ are those which, in addition to their

preferential dividend, are also entitled to participate in the surpius profits or surplus assets. The tenn ‘surplus profit’ means the balance of profit left after

paying the fixed amount of dividend to tlle preference shareholders and a fixed percentage of dividend to the equity shareholders. And the term ‘surplus

assets’ means the balance of assets which is left after paying back

both the preference and equity shareh.olders. The ‘participating preference shareholders’ participate in such surplus alongwith the equity shareholders.

The ‘non-p’rticipating preference shares’ are those which are not entitled to participate in the ‘surplus profits’ or ‘surplus assets’. They arc entitled only to

a fixed rate of dividend every year. Generally, the preference shares are presumed to be ‘non-participating’.

3. Convertible and Non-convertible Preference Shares. The ‘convertible preference shares’ are those which can be converted into equity shares within a

certain period i.e. the holders of such shares have a right to convert these shares into equity shares. The ‘non-convertible preference shares’ are those

which cannot be converted into equity shares.

All preference shares are non-convertible preference shares unless provided otherwise in the terms of issue.

4. Redeemable Preference and Irredeemable Preference Shares. Redeemable Preference Shares (Section 80). A company limited by shares

fundamental conditions upon which alone the company is allowed to be incorporated

memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated."
Lord Macmillian. '"The purpose of the memorandum is to enable the shareholders, creditors and those ";10 deal with the company, to know what is its
pinnate range of enterprise."
Millrace. The memorandum of association is an extremely important document in relation to the affairs of the company. It may rightly be called a
'Charter' or the 'Constitution' of the company as it regulates the relationship of the company with the outside world. It lays down the powers and objects of
a company. and the scope of the operations of the company beyond which its actions cannot go. The company is bound to act according to the objects
and powers as contained in its memorandum. If the Company's acts go beyond the provisions of the memorandum, its acts will be ultra vies the
company, and without any legal effect. The purpose of the memorandum is to enable shareholders, creditors and those who deal with the company to
know what is the permitted range of the enterprise.
Thus, the Memorandum of Association has a twofold function. First, it defines what company is incorporated for, i.e., in positive tCTJns, it lays down the
activities the company shall engage in. Secony. it. in edict. lays down the boundaries beyond which the action of the company cannot go.
Memorandum of Association is a public document. and anybody dealing with the company is presumed to have a knowledge of the contents of the
Memorandum. As it is open to inspection, anybody may get its copy on payment of a nominal charge. Thus, anybody dealing with the company is bound
by the provisions of the Memorandum and therefore, cannot bind the company for ultra vires Acts.
The Memorandum must be printed, divided into paragraphs, numbered consecutively, and signed by each subscriber in the presence of one witness (not
being a subscriber himself).

Promoter's Liability

For Non-Disclosure. In case a promoter fails to make full disclosure at the time the contract was made, the company may either: .
1. rescind the contract and recover the purchase price where he sold his own property to the company; or
2. recover the profit made with interest, even though recession is not claimed or is impossible, or .
3. claim damages for breach of his fiduciary duty. n. Under Coml.)anies Act. Other liabilities of a promoter as provided
in the Companies Act are listed below:
l. A promoter may be made liable to the original allotted of shares for the miss-statements contained in the prospectus (Section 62). He may also be
imprisoned for a term which may extend to two years or may be punished with the fine up to Rs. 50,0001 for such untrue statements in the prospectus
(Section 63).
2. In the course of the winding up of the company, on an application made by the official liquidator, the court may make a promoter liable for misfeasance
or breach outmost (Section 543). Further, where fraud has been alleged by the liquidator against a promoter, the court may order for his public

examination
(Sections 478 and 519).
Where there are more than one promoter they are jointly and severally liable and if one of them is sued and pays damages, he is entitled to claim
contribution from other co-promoters.
Remuneration of Promoters. It will be interesting to know that the promoters commit claim remunerations from the company as a matter of right. They can

get remunerations for their services in promoting the company only if there is a contract to that effect. In other words, he can recover remuneration for his
services if there is a valid contract between him and the company after incorporation. But, a company before incorporation, cannot enter into a contract.
As such, the promoter is at the mercy of the directors after incorporation of the company, even for his preliminary expenses. registration fee, etc. (Re
English & Colonial Produce Co.). However. the Articles of a company, generally contain a provision to this effect and authorize the directors to
remunerate the promoters. The usual ways of paying remuneration to a promoter for his services, are as under:
l. He may be given shares in the company, as fully or partly paid up, in consideration of his services.
2. He may be given a specified sum under the Articles.
3. He may be given commission on shares' sold in the company.
4. He may receive commission from vendors selling property to the company