The internal management of companies is carried on according to the articles of association. The articles define the relationship between members and between members and the company. On this basis, members are bound to each other but neither the company nor the members are bound to outsiders.
Articles may supplement the terms of a special contract between the company and an outsider, but the outsider will not be able to take advantage of the Articles unless he is informed by the company that the company will observe the terms of the Articles.
The memorandum and articles of association constitute a notice to persons dealing with the company, and persons contracting with the company are presumed to know their contents. If a contract is entered into by the company contrary to the terms of the Memorandum or the Articles, the company is not bound by it.
But outsiders are entitled to assume that the provisions of the Articles have been observed. This is known as the doctrine of “indoor management” or the rule in Royal British Bank v. Tarquand. For example, outsiders need not enquire into the validity of the election of directors.
Subject to the provisions of the law and the Memorandum, Articles define the powers of the shareholders, directors, managing director, etc. If directors exceed their powers as laid down in the Articles, the shareholders can ratify the act provided they are entitled to exercise the power themselves.
A public limited company limited by shares need not prepare special articles of association. If it does not, Table A of the First Schedule to the Companies Act will apply. Also, if the special articles are silent on any point, the relevant provisions of Table A will apply.
Powers of Shareholders:
Annually, in general meeting, the shareholders consider the annual accounts and the balance sheet and the directors’ report and adopt them if they think fit. They also declare a dividend (not more than that recommended by the Board of Directors), elect directors in place of those who are due to retire and appoint auditors.
In case of a public company and its subsidiary, the consent of the company in general meeting is necessary to:
(a) Undertake lines of business other than those mentioned in the Memorandum as the main objects including those auxiliary to these;
(b) Sell, lease or otherwise dispose of company’s undertaking or substantial part of the undertaking;
(c) Remit or give time for payment of any debt due by a director;
(d) Invest, otherwise than in trust securities, the amount of compensation received by the company in respect of the compulsory acquisition after the commencement of the Act or of any premises or property used for any such undertaking;
(e) Borrow in excess of the aggregate paid-up capital plus reserves (temporary loans from company’s bankers in the ordinary course: of the business of the company being left out of account for this purpose); and
(f) Contribute to charitable and other funds not relating to the company’s business amounts exceeding Rs. 50,000 or 5% of its average net profits during the three preceding financial years, whichever is greater, in the course of any financial year.
‘In respect of (e) and if) above, the necessary resolution passed by the company in general meeting must specify the total amounts concerned. Temporary loans are defined as loans repayable on demand or within six months from the date of the loan, but not loans raised for the purpose of financing capital expenditure.
If the Board of Directors acts in the above-mentioned matters without the consent of the company, the third parties will be protected.
Further, the following should be kept in mind:
(a) The appointment of the sole selling agents by the Board must be approved by the company in general meeting within 6 months of the appointment; otherwise it will cease to be valid.
(b) Issues of bonus shares or debentures can be made only with the consent of the company in general meeting.
(c) Re-organisation of capital and amendment of the articles or memorandum of association also require the consent of the shareholders.
(d) Winding up, unless ordered by the Court, can be commenced only with the approval of the company in general meeting.
The Board of Directors:
The management of a company is delegated to the Board of Directors. Directors are elected by the shareholders though some may be nominated by special interests like debenture-holders, etc. The Companies Act contains a number of provisions in respect of directors.
Directors must act as a Board, i.e., decisions arrived at only at meetings of the directors will be binding except that, depending upon Articles, and subject to Section 289 of the Act, resolutions may also be adopted by circulation. Individual directors have no powers unless specific powers are delegated at a properly held meeting of the Board of Directors.
The Board also has the power to appoint sub-committees to deal with specific matters. A meeting of the Board of Directors must be held once in every three calendar months. The Central Government has the power to exempt any class of companies from this provision. The quorum is two directors or one-third of the total number whichever is higher (not counting interested directors).
The directors are trustees for the company’s property and it is their duty to apply the property for company’s benefit alone. Any director using it for his personal benefit is guilty of breach of trust.
The Board is also in the position of an agent and hence contracts signed by the directors on behalf of the company are binding on the company as far as third parties are concerned, unless the contracts are beyond the powers of the company itself.
The directors are not responsible for any loss suffered by the company, if they exercise reasonable care and skill in the exercise of their powers and discharge of their duties. But if the directors are guilty of gross negligence or of breach of trust, they must compensate the company for damage suffered by it and any provision in the articles absolving the directors from such liability is invalid.
But if (according to section 633) the Court is satisfied that the director concerned acted honestly and reasonably and that, having regard to all the circumstances of the case, he ought fairly to be excused, the Court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit.
The directors have the duty of general supervision of the affairs of the company even if there is a managing director.
The following powers must be exercised only by the Board at its meetings (section 292):
(i) The power to make calls;
(ii) The power to issue debentures;
(iii) The power to borrow moneys otherwise than on debentures;
(iv) The power to invest company’s funds; and
(v) The power to make loans.
The powers specified in (iii), (iv), and (v) may be delegated by resolution at a Board meeting up to specified limits.
Section 292 does not cover the ordinary transactions with a bank.
The directors may appoint one of themselves as managing director. A managing director is “a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board, or, by virtue of its memorandum or articles of association is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called.”
In the case of a public company and its subsidiary, amendment of any provision relating to the appointment or re-appointment of a managing director, whole-time director, or a director not liable to retirement by rotation will not be effective unless approved by the Central Government.
A new managing director must be appointed only with the approval of the Central Government. Reappointment also requires the sanction of the Central Government (except appointment under schedule XIII of Companies Act). A managing director cannot act as such for more than two companies and in the case of the second company, unanimous approval of the Board of Directors is necessary.
An un-discharged insolvent, one who has at any time been adjudged an insolvent, one who suspends or has suspended payment to his creditors, one who makes or has at any time made a composition with the creditors or one who has been, at any time, convicted of an offence involving moral turpitude, cannot be appointed as managing director of any company.
A manager means “an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not.”
A manager must be an individual. He is usually appointed by the Board of Directors. He cannot be appointed for more than five years at a time. The disqualifications and restrictions attaching to the managing director also attach to the manager.
A company may have only one — either manager or managing director — but it may be permitted to have, say, two managing directors by the Central Government.