Company Law

In the legal sense, a company is an association of both natural and artificial persons (and is incorporated under the existing laws of a country). In terms of section 2(20) of the Act, a “company” means a company incorporated under the Act or under any previous company law. In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving beyond, the lives of its members.

A company incorporated under the Act is vested with a corporate personality and it bears its own name, acts under the name, may have a seal of its own and its assets are separate from those of its members.

Shareholders/ members of a company are often mistakenly believed to be its owners. However, a shareholder cannot be held liable for the acts of the company even if such shareholder holds virtually the entire share capital of a company. It is an ‘artificial’ person which is not dependent on its members to survive. The death, insolvency, or transfer of shares of members does not, in any way, effect the existence of a company. The members of a company can come and go but the Company will survive till perpetuity until wound up operation of law.

Therefore, it is capable of owning property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts and suing or being sued in the same manner as an individual.

The Board of Directors, appointed by the shareholders, is entrusted with the duty of managing the affairs of a company in accordance with applicable laws and the fiduciary responsibility to promote the object of the company and act in the best interest of the company, its employees, the shareholders, the community and protection of the environment. The day-to-day management of the company is vested in the Managing Director and other key management personnel, such as the chief financial officer and the company secretary, under the supervision of the Board.

The general legal duties of board of directors of a company are listed below in “What are the general legal duties and liabilities of the Directors of a Corporate Entity?”.

The Board is required to have an optimum combination of executive directors and Non-Executive Directors. Where the Chairperson is a Non-Executive Director and not a promoter or not related to the promoter or anyone occupying a management position, the law requires the Board to comprise a minimum of one-third Independent Directors. Otherwise, at least half of the Board would have to be independent.

As noted above, certain companies are also required to have Non-Executive Chairperson (unrelated to the MD/CEO/promoter), with effect from April 1, 2022. Further, the Boards are required to constitute an Audit Committee, Nomination and Remuneration Committee and the Stakeholders Relationship Committee. The top 1,000 listed companies are also required to have a Risk Management Committee.

Every company is required to have at least four meetings of the Board in a year, with not more than 120 days intervening between two meetings. The quorum for meetings of the Board of the top 1,000 listed companies, since April 1, 2019, and the top 2,000 listed companies with effect from April 1, 2020, has been set as one-third of the Board or three directors, whichever is higher, including one ID. The Code of Independent Directors under the Companies Act requires the IDs to hold at least one meeting in a year, without the attendance of other directors and members of management.

A prior notice of the Board meeting, along with an agenda (and description of the matters proposed in the agenda along with relevant documents) is required to be provided to every director. The notice should be given at least seven days prior to the meeting, provided that meetings can be held at a shorter notice to transact urgent business, if the same is approved by the requisite number of directors, or at least one ID, if any, is present at such meeting. Where the ID is not present at the meeting, the decision taken will have to be circulated to all directors for ratification and shall become final only after ratification by at least one ID. The details of the meetings, including the resolutions passed and the discussions/dissent, are required to be documented in the minutes book maintained by the Board.

The Companies Act codifies the duties of a director. The positive duties include to act in good faith, and to promote the objects of the company in the best interest of the company, its employees, shareholders, community and the protection of the environment. These duties have to be exercised with due and reasonable care, skill and diligence and after application of independent judgment. The negative covenants prohibit a director from being involved in a conflict of interest situation, assign his/ her office, or achieve an undue gain or advantage for himself/ herself, his/ her relatives, partners or associates.

The Board carries several statutory duties, including the duty to appoint whole time Key Managerial Personnel (“KMP”), devise proper systems to ensure compliance with the provisions of applicable laws, ensure systems are adequate and operating effectively, and ensure that the company is in compliance with CSR obligations. Further, principles laid down under Chapter II of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 prescribe certain additional duties on the Board, which include:

The Board carries

• monitoring the effectiveness of the governance practices and making changes as needed;
• reviewing and guiding corporate strategy, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance;
• selecting, compensating and monitoring KMP, and overseeing succession planning;
• ensuring the integrity of the company’s accounting and financial reporting systems; and
• overseeing the process of disclosure and communications.

If a company commits an offence or is held liable for any non-compliance, liability on its officers, MD, and other directors attaches itself in two ways:

(i) directly on an individual who has perpetrated the commission of an offence on behalf of the company can be made an accused, along with the company, if there is sufficient evidence of her active role coupled with criminal intent; and

(ii) where the statute itself attracts the doctrine of vicarious liability by specifically providing for such liability.

Additionally, the Companies Act also imposes liability on an “officer in default” who is defined to include a director who was aware of a contravention and did not object to the same or where the contravention happened with her consent or connivance, KMP, executive directors, or any person (not acting in a professional capacity) under whose instructions or advice the Board is accustomed to act, etc.

According to Section 2(55) of the Companies Act, 2013:

• The subscribers to the memorandum of a company who shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members.
  
  
• Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members shall, be a member of the company;
  
  
• Every person holding shares of a company and whose name is entered as a beneficial owner in the records of a depository shall be deemed to be a member of the concerned company.
  
  

The right of attending shareholders’ meetings and voting thereat is the most important right of a member of a company, as shareholders’ meetings play a very important role in the company’s life.

S. 47 of the Companies Act, 2013 (“Act”) provides that every member of a company limited by shares and holding equity share capital therein, shall have right to vote on every resolution placed before the company and his voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company.

S. 43 of the Companies Act, 2013 provides that a company limited by shares shall be entitled to issue (i) equity share capital with voting rights or (ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed by the Central Government.

Preference shareholders ordinarily vote only on matters directly affecting the rights attached to preference share capital and on any resolution for winding-up of the company or for the repayment or reduction of the equity or preference share capital.

In respect of a resolution on a matter affecting both equity shareholders and preference shareholders, the proportion of the voting rights of equity shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares.

However, where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.

The Companies Act prescribes three kinds of shareholders’ meetings: AGMs; EGMs; and meetings convened by the National Company Law Tribunal. The law also provides that shareholders’ approval may be solicited through postal ballot (mandatory in certain cases).

Every company is required to hold an AGM for conducting mandatory items of business, including adoption of financial statements, rotation of directors, approval of (re)appointment of auditors, and declaration of dividend. For the top 100 listed companies, such AGMs are required to be held within a period of five months from the date of closing of the financial year, and they are required to live webcast the proceedings of the AGM.

The Board may, whenever it deems fit, call an EGM to seek shareholders’ approval on corporate actions. The Board is also required to convene an EGM on the requisition of shareholders holding not less 10% of the share capital. If the Board does not convene the meeting within a certain period, the requisitionists can convene the meeting themselves. This provision has been used in the recent past by certain shareholders for the removal of directors of listed companies.

A company is required to give 21 days’ notice (30 days in case of postal ballot) in writing for a shareholders’ meeting (unless the written consent of the shareholders holding at least 95% of the share capital is received for a shorter notice). Further, the company is required to, inter alia: provide sufficient and timely information concerning the date, location and agenda of the meeting; ensure equitable treatment vis-à-vis other shareholders; protect and facilitate the exercise of right of shareholders to be informed of the rules, including voting procedures that govern the meetings; and make disclosures of the proceedings to the stock exchanges. Shareholders of the company, as on the record date, are entitled to attend meetings in person or through a duly authorised proxy, to ask questions, and to exercise their vote.

A company is typically seen as a distinct legal entity from the shareholders, and shareholders cannot be held liable for acts or omissions of the company or any other shareholder. However, as in many jurisdictions, courts in India have also lifted the “corporate veil” and imposed liability on shareholders where elements of fraud are found.

There are no statutory duties of shareholders with respect to the corporate entities, except in relation to certain disclosures (e.g. on acquisition of shares, and when such shareholder is a “related party”). However, shareholders who are “promoters” may be subject to certain distinct duties that emanate either from practices developed over time (for instance, promoter guarantees) or under law, such as “lock-in” requirements after a capital issue or exit offer in the event of change in objects for which a company has raised money by way of public issuance, or from certain specific industry-/sector-driven requirements (for instance, the RBI has prescribed limits of promoter or promoter group shareholding in private sector banks in the interest of promoting diversified ownership of banks to enhance corporate governance).

Any shareholder can request the Registrar of Companies or the Ministry of Corporate Affairs to initiate an investigation into the affairs of the company for sufficient cause. The shareholder body (pursuant to a special resolution) can also require the company to intimate the Central Government for investigating the company. Shareholders may file complaints with SEBI, which complaints are typically captured by SEBI’s Complaints Redress System and shared with the companies, and such companies are required to take actions to resolve the issue within 30 days and upload the actions taken on their website.

Additionally, the prescribed number of shareholders can file an application before the National Company Law Tribunal (“NCLT”) with evidence showing that they have good reason to believe that the affairs of the company ought to be investigated. Where the prescribed number of shareholders believe that the affairs of the company have been or are being conducted in a manner prejudicial to public interest, oppressive to such member or any other member(s) or prejudicial to the interest of the company, they may seek relief from the NCLT. Shareholders meeting the prescribed thresholds also have the remedy of filing a class action suit seeking damages/compensation against the company, its directors, auditors (firm and partners) or experts, consultants, advisors, etc. for fraud, unlawful or wrongful acts and for omissions. The rules enabling class actions suits have only been notified recently and the jurisprudence around shareholder class actions is yet to evolve in India.