3-indian companies act1956
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8/10/2019 3-Indian Companies Act1956
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Social & Legal Issues
Indian Companies Act
1956
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Social & Legal Issues
Companies Act, 1956
A company implies an association of persons for
some common object(s). According to the act :A
company formed and registered under the companiesact 1956 or under any previous company law. A
company is a contractual entity created by the
members.
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Social & Legal Issues
Characteristics of a Company
1. Incorporated Association2. Artificial legal Person
3. Separate legal Entity
4. Perpetual Succession
5. Limited Liability
6. Transferable Shares
7. Common Seal
8. Separate Property9. Capacity to Sue and Being Sued
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Kinds Of Companies
A) On the basis of mode of Incorporation:
Chartered Companies
Statutory Companies
Registered Companies
B) On the basis of Liability of Members
Limited by Shares
Limited by Guarantee
Unlimited
C) On the basis on the number of members
Private
Public
D) Others: Govt. Companies, Foreign company, Holding andsubsidiary company
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Social & Legal Issues
Distinction between private and Public
CompanyPvt. Company Public Company
Minimum number of members
to form a company is 2
Minimum number of members to
form a company is 7
Max. number of membersshould not exceed 50 No restriction
Right to transfer share is
restricted
Freely transferable
Prospectus can not be issued Prospectus is issued
Commence business
immediately after getting the
certificate of incorporation
Can start only after receiving the
certificate to commence business
from registrar of companies
Numbers of Directors must beat least 2 Must have at least 3
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Distinction between private and Public Company
Directors consent to work as aDirector with Registrar is not
necessary
Necessary
Number of Directors can be
increased to any number
Not more than 12 without the
approval of the central govt.
Directors are required to retire byrotation
At least 2/3rdof Directors mustretire by rotation
Managerial RemunerationNo
restriction
Not more than 11% of net profit.(
not mere than 5% to a sgl.Director)
Can be registered with a paid up
capital of Rs. 1 lakh
Rs 5 Lakh
Can not accepts deposits from
public
Can accept deposits from public
Need not hold statutory meeting or
file a statutory report
Must do so
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Social & Legal Issues
Lifting The Corporate Veil The circumstances under which the courts may lift the corporate
veil are:
1. Under Statutory Provisions
Reduction of Membership
Misrepresentation of Prospectus
Fraudulent Conduct of Business Failure to return application money
Mis-description of name
Non-payment of tax
Liability of ultra -Vires acts
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Lifting of the Corporate Veil
2) Under Judicial Interpretations:
For determining the enemy of the company: Daimler
Company vs Continental Tyre rubber company
For the Benefit of revenue-Sir Dinshaw Maneckjee Petil,Re
For prevention of Fraud and Improper conduct
Others
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Social & Legal Issues
Formation and Incorporation of a Company
Promotion Registration/Incorporation
Flotation/Raising of Capital
Commencement of Business
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Promotion
Promotion refers to the entire process through which a
company is brought into existence.
It starts with the conceptualization of the birth of thecompany
with an objective for which it is to be formed.
The persons who conceive the company and invest the initial
funds, are known as promoters.
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Registration/Incorporation of Company
The Promoters of the company will submit the following
documents with the Registrar of Companies for the
registration of company:
Memorandum of Association
The article of association
A list of persons who have consented to act as directors
of the proposed company
A statutory declaration of compliance.
Any agreement with the relevant persons of the proposed
company.
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Registration/Incorporation of Company
The Registrar of the Companies is to allot a Corporate Identity Number to each company registered on or after
November 1, 2000.
After scrutiny of all the documents a certificate of
incorporation is issued
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Social & Legal Issues
Flotation and Raising of Capital
A public company can take either of the followingsteps:
a) Issue a prospectus to invite public for
subscription
b) Deliver a statement in lieu of prospectus where
the
company has either not issued the prospectus or it has issued the prospectus , has not proceeded to allot any
shares offered to the public for subscription
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Commencement of Business
Every private company and a company not limited by shares can
commence business immediately on receipt of certificate of
incorporation. But a public company limited by shares is debarred
from commencing business on borrowing money without the
certificate of commencement of business
Where a company has issued Prospectus The minimum subscription in cash has been raised
Every director of the company has paid in cash his qualification
shares , a proportion payable on application and allotment on the
shares offered for public subscription.
No money is liable to be repaid to applicants for any shares or debentures which have been offered for public subscription by
reason for any failure to apply for, or to obtain permission for the
shares of debentures to be dealt in any recognized stock exchange
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Commencement of Business
A statutory declaration duly verified by one of the directors or the
secretary in the prescribed form that the above conditions have
been complied with, is filed with the registrar
Where the company has not issued prospectusit has to satisfy the
following conditions:
A statement in lieu of the prospectus if filed with the Registrar Every director of the company has paid in cash his qualification
shares , a proportion payable on application and allotment on the
shares.
A statutory declaration duly verified by one of the directors or the
secretary in the prescribed form that the above conditions have been complied with, is filed with the registrar.
When the company has compiled with the above conditions the
Registrar will issue a certificate to commence business.
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Social & Legal Issues
Memorandum of Association
Meaning and Importance MOA of a company is its charter and defines the
limitations of the
powers of the company
It is not unalterable Content:
i) Name of the Company: with limited and privatelimited as the
last word(s) of the name
ii) Registered Office iii) Objects of the company : main objects , Incidental and
ancillary
objects, other objects not included in first two.
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Memorandum of Association
iv) Liability: A declaration is made that the liability of
the members is limited.
v) Capital-The amount of authorized share capital
divided into shares if fixed amount vi) Association or Subscription: The initial members are
called subscribers, who sign the memorandum in the
presence of one witness
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Articles of Association
Article of Association of a company are its bye laws. It controls the internal management of the company
and defines the powers of its offices.
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Difference of MoA and AoA
Regulations for internalMgt
Rules for carrying out theobjects of Co.
Subordinate to thememorandum
Company limited byshares need to have it.
Act ultra-vires but intra-vires the memorandumcan be ratified
Charter of Company
Defines the scope of
activities
Supreme Document Must for every company
Strict restrictions, some
alterations may require
sanction of central govt. Act ultra-vires is wholly
void and cant be ratified
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Doctrine of Ultra -Vires
Ultra Vires means beyond the powers.
Ashbury Railway Cairrageand Iron Company Ltd vs
Riche
Doctrine of Constructive Notice
The memorandum and articles when registered with the Registrar becomes public document and accessible to
all.
Therefore there is a presumption that any outsider
dealing with the company has read and understood these
documents. This is known as doctring of constructive notice.
Kotla Venkatswamy vs C Ramamurthy.
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Doctrine of Indoor Management
Persons dealing with the company in good faith have
a right to assume that the internal requirements
prescribed in public documents (memorandum and
articles have been observed.
Exceptions:
Where the outsider had knowledge of irregularity.
In case of forgery
Negligence on the part of the outsider
Acts outside the scope of apparent authority
Rayal British Bank v.Turquand
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Registration of the Company
The promoters file the memorandum of association
article of association and a declaration by a lawyer
that the requirements of the act have been followed
with the Registrar of the Companies.
Registrar of the Companies issues the Certificate of
Incorporation of the company.
Distinct Legal Entity
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Prospectus
Prospectus means any document described or
issued as a prospectus and includes any notice,
circular, advertisement or other document
inviting offers from the public for the subscription and purchase of shares in,or
debentures of a body corporate.
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Prospectus
Pre-Requisites of Prospectus
Prospectus must be dated Prospectus must be signed
Prospectus must be registered
Golden rule of the Prospectus
There should be an honest disclosure of all facts. The
true nature of the companys venture to be disclosed.
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Prospectus
Deemed Prospectus- When a company allots shares or
debentures to the public through the medium of Issue Houses,
then the issue houses invite subscription from the public
through their own offer document. This is also called
prospectus by implication. Statement in Lieu of Prospectus- Where a public company
does not invite public to subscribe for its shares, but arranges
to get money from private sources>The promoters here need
not issue a prospectus but are required to draft prospectus
Red Herring Prospectus- is a prospectus ,which does not
have complete particulars on Price of securities offered and
quantum of securities offered. E.g.-Jet Airways, Suzlon
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Member/Shareholder
S.no Shareholder Member
1 Is a member May not be a
shareholder because
the company may not
have a share capital
2 Person who owns a bearer share
warrant is a shareholder
Struck off from the
list
3 A legal representative of a member Applies forregistration
4 No share are allotted to a subscriber
to the memorandum
Subscriber to a
memorandum
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Who can be a member
Minor
Insolvent
Partnership Firm Foreigner
Company
Trade Union or Society President of India
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Modes of acquiring membership/Index of a member
Membership by subscription
Membership by application and registration
A company with more than fifty members shall keep an index
of members
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Rights of member / Register of Member
Statutory Rights
Contractual/otherwise
Name address and occupation
Share held by each member and the amount paid up on those
shares
Date at which each person was entered in the register as amember
Date at which any person ceased to be a member
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Termination of Membership
Transfers his shares
Shares are forfeited by the company
Surrenders his shares
Shares are sold by the company to enforce its lien Dies
Is adjudged insolvent
Shares have been redeemed by the company
Rescind the contract of membership on fraud ormisrepresentation
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Director
A company is an artificial legal person and the directors as a
body endow the artificial legal person with human face than
can act and react.
The person through whom a company acts and does its
business, and termed as director.
An individual can be appointed as director, no corporate
body corporate, association or firm
Cannot hold a office of more than fifteen companies
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Qualifications of a director
No academic, professional or share qualification
Articles may provide for any qualifications
Where share qualification is fixed by articles then the act
provides
a) Qualification shares must be taken within 2 months after
appointment
Nominal value of qualification shares must not exceed Rs.
5000 or one share where its value exceeds Rs. 5000
Share warrants will not count for this purpose
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Appointment of Directors
First director
Appointment of directors by company
Appointment of directors by the board
Appointment of directors by third parties (nominee director) Appointment of directors by proportional representation
Appointment by central government
Appointment by small shareholders
Consent for appointment
Written consent is required to be signed and files with the
registrar and the company
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Removal of Directors
By shareholders
By Central Government By Tribunal
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Powers of Board of Directors
The board of directors of a company shall be entitled toexercise all such powers and to do all such acts and things, asthe company is authorized to exercise and do.
The following powers are:
The power to make calls
The power to issue debentures
The power to borrow money otherwise than on debentures
The power to invest funds
The power to make loans
The power to buy back of shares
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Power to be exercised in the general meetings
Sale, lease or disposal of the undertaking
Showing any concession regarding payment of debts
Make investment of the amount of compensation received
Contribution to charitable
Borrowing monies exceeding the aggregate of the paid upcapital and free reserves of the company
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Duties /Limitations
Good faith
Reasonable care
Disclose interest
Participate in the communities
Attend board meetings
Actions malafide
Incompetent to act
Deadlock in the board
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Company meeting
General meeting
Requisites of valid meeting Notice of meting must be proper and adequate
Chairman of the meeting
Quorum
Voting
Agenda Minutes
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Kinds of MeetingsMeetings
of a Company
Shareholders DirectorsCreditors/
Debenture holders
General Meetings Class meetings
Statutory MeetingsAnnual General
Meetings
Extra Ordinary
Meetings
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S c & L g Iss s
Statutory Meetings
Object
When held
Not required to be held Notice
Statutory report
In case of default
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S & g ss s
Annual general meeting
Which company to hold
When to be held
Gap between two AGM
First AGM
Subsequent AGM
Extension of time maximum 3 months
Business to be transacted
Notice 21 days Default
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& g
Board Meetings
When to hold:Atleast once in every three calendar months and
4 meetings every year
Notice: To be given to every director in writing. No form or
period of notice is laid down. Usually a weeks notice is
sufficient. The notice must state the date, time and place ofmeetings.
Quorum:1/3 of the total strength or two, whichever is higher.
Passing of resolution by circulation is permissible
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g
Motion
A proposal under consideration by members in a meetingbefore it is voted upon
Rules
Should be positive in terms and should always be in writing Within power, scope and relevant to business
Comply with the provisions of the Act, memorandum andarticles
Duly proposed by any member in a meeting Should not be withdrawn before consent
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g
Resolution
Any motion voted upon and agreed to in a meeting and entered
in minutes. A motion passed with or without amendment is
called resolution
Types of Resolution
Ordinary resolution
Special resolutionResolutions requiring special notice
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g
Winding up of a Company
Company dissolved
Winding up a company is a process whereby its life is
ended and its property administered for the benefit of itscreditors and members. An administrator called
liquidator, is appointed and he takes control of the
company, collects its assets, pays its debts and finally
distributes any surplus among the members in
accordance with their rights
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g
Winding up of a Company
Winding up of a company differs from insolvency of an
individual in as much as a company cannot be made insolvent
under the insolvency law. Even a solvent company can be
wound up.
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g
Grounds for winding up by the Tribunal (NCLT)
By the company passing a special resolution.
Default in holding statutory meeting or in delivering statutoryreport to the registrar
Failure to commence business within a year from the date of
incorporation or suspension of business for a whole year Reduction in membership below the minimum required
Inability to pay its debts of Rs 1 lakh
Tribunal is of the opinion that it is just andequitable Default of companys filing its balance sheet and profit and
loss account on annual return for any five consecutivefinancial years
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Grounds for winding up by the Tribunal (NCLT)
If the company has acted against the interests of sovereignty
and integrity of India, the security of the state, friendly
relations with foreign states public order, decency or morality.
If the Tribunal is of the opinion that the company should be
wound up as it had become sick and is unlikely to become
viable in future
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Who may petition for winding up
The company
Any Creditor
Any Contributor
Any combination of creditor, contributory acting jointly or
separately The registrar
Any person authorized by the central government
The official liquidator
The central government and the state government Workers of a company cannot prefer a winding up petition
against the company
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Liquidator
To conduct proceeding in winding up
To make a report
To take custody of companys property
To comply with directions of the creditors or contributories or
the committee of inspection To summon meeting of creditors and contributories
To obtain directions from the tribunal
To keep statutory books
To get accounts audited Central governments control of liquidator
Information as to a pending winding up
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