COMPANY LAW

PRESENTED BY - Ritesh Kumar Patro

SECTION - B

CONTENTS Membership in a Company Share Capital Shares Company Management Meetings and Proceedings Borrowings Powers, Debentures and Charges Accounts and Auditors Prevention of Oppression and Mismanagement Compromises, Arrangements and Reconstructions Winding Up

MEMBERSHIP IN A COMPANY

MEMBERS & SHAREHOLDERS- The members of shareholders of a company are the persons who collectively constitutes the company as a corporate entity.

The terms ‘member’ and ‘shareholder’ and ‘holder of a share’ are used interchangeably.

WHO CAN BECOME A MEMBER

Any person who is competent to contract (sec.11 of the Indian Contract Act, 1872) may become a member of a company . This is subject to the provision of the Memorandum and the Articles of the company.

The articles may provide that following person cannot become members of the company-

1. Minor2. Insolvent3. Partnership firm4. Foreigner5. Company

HOW TO BECOME A MEMBER?

Membership by Subscription

Membership by Application and Registration.

›by application and allotment›by transfer›by succession›agreement to be in writing

Membership by Beneficial Ownership

Membership by Qualification Shares.

SHARE CAPITAL

The amount of share capital a company reports on its balance sheet only accounts for the initial amount for which the original shareholders purchased the shares from the issuing company. Any price differences arising from price appreciation/depreciation as a result of transactions in the secondary market are not included. 

For example, suppose ABC Inc. raised $2 billion from its initial public offering. Over the next year, the total value of its shares increases to $5 billion. In this case, the value of the share capital is still only $2 billion because ABC Inc. had received only $2 billion from the sale of its securities to the investing public.

TYPES OF SHARE CAPITAL Authorized, registered, maximum or normal capital:-

The maximum amount of capital, which a company is authorized to raise from the public by the issue of shares, is known as authorized capital. It is a capital with which a company is registered, therefore it is also known as registered capital.

Issued Capital:-

Generally, a company does not issue its authorized capital to the public for subscription, but issues a part of it. So, issued capital is a part of authorized capital, which is offered to the public for subscription, including shares offered to the vendor for consideration other than cash. The part of authorized capital not offered for subscription to the public is known as 'un-issued capital'. Such capital can be offered to the public at a later date.

Subscribed Capital:-It can not be said that the entire issued capital will be taken up or subscribed by the public. It may be

subscribed in full or in part. The part of issued capital, which is subscribed by the public, is known as subscribed capital

Called Up Capital :-It is that part of subscribed capital, which is called by the company to pay on shares allotted. It is not

necessary for the company to call for the entire amount on shares subscribed for by shareholders. The amount, which is not called on subscribed shares, is called uncalled capital.

Paid-up Capital:-It is that part of called up capital, which actually paid by the shareholders. Therefore it is known as real capital of the company. Whenever a particular amount is called and a shareholder fails to pay the amount fully or partially, it is known an unpaid calls or calls in arrears.Paid-up Capital = Called up capital - calls in arrears

Reserve Capital:-It is that part of uncalled capital which has been reserved by the company by passing a special resolution to be called only in the event of its liquidation. This capital can not be called up during the existence of the company.It would be available only in the event of liquidation as an additional security to the creditors of the company.

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SHARES A unit of ownership that represents an equal proportion of a company's capital. It

entitles its holder (the shareholder) to an equal claim on the company's profits and an equal obligation for the company's debts and losses.

Two major types of shares are :

Ordinary Shares (Common stock), which entitle the shareholder to share in the earnings of the company as and when they occur, and to vote at the company's annual general meetings and other official meetings, and

Preference Shares (Preferred stock) which entitle the shareholder to a fixed periodic income (interest) but generally do not give him or her voting rights.

COMPANY MANAGEMENT

Company Management Hierarchy

Top Management

Chairman

Vice President

Board Of Directors

Chief Executive Officer

Middle Management

General Manager

Regional Manager

First – Line management

Supervisor

Office Manager

Team Leader

COMPANY MANAGEMENT Management involves the manipulation of the human capital of an enterprise to

contribute to the success of the enterprise. This implies effective communication: an enterprise environment (as opposed to a physical or mechanical mechanism), implies human motivation and implies some sort of successful progress or system outcome.

As such, management is not the manipulation of a mechanism (machine or automated program), not the herding of animals, and can occur in both a legal as well as illegal enterprise or environment At first, one views management functionally, such as measuring quantity, adjusting plans, meeting goals. This applies even in situations where planning does not take place.

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From this perspective, Henri Fayol (1841–1925) considers management to consist of six functions:› Forecasting› Planning› Organizing› Commanding› Coordinating› Controlling

MEETINGS AND PROCEEDINGS

STATUTORY MEETINGS:

A public company limited by shares or a guarantee company having share capitals required to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the company. Such a meeting must be held within a period of not less than one month or within a period not more than six months from the date on which it is entitled to commence business.

STATUTORY REPORT :

The report forwarded to every member of the company by the board of members atleast 21Days before the actual date of the meeting.

› Procedure of the meeting› List of the members› Discussion of matters relating to formational aspect› Adjournment

ANNUAL GENERAL MEETINGS:Must be held by every type of company, public or private, limited by shares or by

guarantee, with or without share capital or unlimited company, once a year. Every company must in each year hold an annual general meeting. Not more than 15 months must elapse between two annual general meetings.

› Time and place of meeting› 21 days notice.

EXTRAORDINARY MEETINGS: A meeting for transacting some urgent or special business which cannot be

postponed till the next AGM.

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Notice of meeting – should contain the details of place, date, hour & purpose.

Quorum for the meeting – minimum no. of members that must be present to constitute a valid meeting. Minimum 5for public company and 2 for any other company.

Chairman or the presiding officer present in the meeting. Minutes of the meeting.

PROXIES :› An authority who can represent and :-vote for another person at a meeting is

called a proxy.› Proxy to be in writing.› It should be deposited 48 hours before the meeting.

Requisites Of A Valid Meeting :

RESOLUTION:- The questions which generally come for consideration at the general meeting of a company are presented in the form of proposals called ‘motions’ and when this motion is carried, it becomes a ‘resolution’.

BORROWING POWERS

Every trading company has an implied power to borrow, as borrowing is implied in the object for which it is incorporated. A trading company can exercise this power even if it is not included in the Memorandum. However non-trading company has no implied power to borrow and such power can be taken by it implied power to borrow and such power can be taken by it by including a clause to that effect in the Memorandum.

Restrictions on borrowing power : A public company can borrow only after the receipt of Commencement Certificate. [Section 149(1)]. But a private company can borrow immediately after the incorporation

The Board of Directors may borrow moneys by passing a resolution passed at the meetings of the Board. The board may delegate its borrowing powers to a Committee of Directors. Such a resolution should specifically mention the aggregate amount upto which the moneys can be borrowed by the Committee, the Managing Director, Manager or any other principal officer of the company on such conditions as it may prescribe [Section292 (1) (c)]

The moneys borrowed together with the moneys already borrowed by the company (excluding loans obtained from banks i.e. working capital) shall not exceed the aggregate of the paid up capital and the free reserves.[Section 293(1)(d)]

It may be noted that a company may borrow in excess of its paid up capital and free reserves if it is so consented and authorized by the shareholders at a general meeting.

BORROWING POWERS

DEBENTURES

Debenture includes debentures stock, bonds, and any other securities of a company, whether constituting a charge on the assets of the company or not.

FEATURES OF A DEBENTURE SEC 2(12)] :

(i) In the form of a certificate (like a share certificate) issued under the common seal of the company. The certificate is an acknowledgement by the company of indebtedness to a holder.

(ii) Provides for the payment of a specified principal sum at a specified date with contracted rate of interest.

(iv) Issued in series

(v) Secured by a charge on the undertaking of the company, or on some class of its assets or on some part of its profits. [Unsecured debenture is a deposit with the meaning of the Companies (Acceptance of Deposits)Rules 1975].

DEBENTURE STOCK :

Debenture stock is of the same nature as debentures but instead of each lender having separate debenture bond he gets a certificate entitling him to a specified portion one large loan. It is borrowed capital consolidated into one mass for the sake of convenience.

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KINDS OF DEBENTURES

Debenture may be of different kinds as follows:› Perpetual or Irredeemable Debentures› Redeemable Debentures› Registered and Bearer Debentures› Secured and Unsecured or Naked Debentures

CONVERTIBLE DEBENTURES: › A convertible debenture mean, which by the terms of its issue gives the

holder the right of exchange debenture wholly or in part with fully, paid shares.

› Section 81(3)(b) provides that the terms of issue of debentures may provide for an option to convert debentures or loans in the company.

CHARGES Borrowing has become an equally important method along with share capital of

financing projects. Corporate borrowing has its own peculiarities. No single individual may in normal circumstances be in a position to meet the loan requirements of a company.

Loan money has, therefore, to be raised from a large number of individuals very much in the same way as share capital. Loans may have to be obtained in a sequence one after the other.

The problem was solved by the evolution, on the one hand, of debentures and, on the other, of the concept of floating charge, both being reserved only for the corporate sector. The same assets are charged to several lenders and also to several lenders in a series. That raises a question as to who shall have priority. This gave rise to the concept of  pari passu ranking. Since other trade creditors have also to seek payment only out of the company's assets, the problem had to be tackled as to how they should know, before supplying more credit, what assets would be available as security for their payments?

The Act prescribes for registration of charges with the Registrar of Companies, and also gives a list of assets a charge on which must be registered.

Registration of charges : Identifies the assets, which are subject to the charge. It becomes a source of knowledge, and, therefore,

Operates as constructive notice : A protection, to "all classes of persons interested in knowing the assets position of the company. It makes the charge effective against all quarters including the liquidator.

Types of Charges:

FIXED CHARGE:

Charge is fixed when it is made specifically to cover definite an ascertained assets of

permanent nature such as land, building, o heavy machinery. A fixed charge passes legal title

to certain specific assets and the company loses the right to dispose of the property

unencumbered, though the company retains possession of the property.

CHARGES

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FLOATING CHARGE:› It is a charge on the current assets of the company, present or future which

changes from time to time in the ordinary course of business e.g. stock in trade, bills receivable, cash in-hand, work in progress, goods in transit, inventory etc.

When floating charge becomes crystallized :When the company goes into liquidationWhen the company ceases to carry on the businessWhen the creditors or the debenture holders take steps to enforce this security e.g. by appointing receiver to take possession of the property charged.On the happening of the even specified in the deed.

REGISTRATION OF CHARGES [SECTION 125] :

The security created and charged for the following purposes must be registered with the ROC within 30 days(or further period of 30 days with additional fees) after the date of their creation.

Securing any issue of debentures; Uncalled share capital of the company; Any immovable property; Book debts, stock in trade or other current assets of the company; Any movable property (not being a pledge); Calls made but not paid; IPRs of the company.

The ROC shall with respect to each company maintain a Register of charges containing all the specified particulars. Upon registration of charge by the company, ROC shall issue a Certificate of charges, which shall be conclusive evidence.

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ACCOUNTS & AUDITORS Proper and accurate compilation of financial information of a corporate and its disclosure, in a

manner that is standardized and understood by stakeholders, is central to the credibility of the corporates and soundness of investment decisions by the investors. The preparation of financial information and its audit, therefore, needs to be regulated through law with stringent penalties for non-observance. 

The present statute provides for a mechanism for development of Accounting Standards. We understand that Accounting Standards for the use of Indian corporate sector, taking into account International Accounting Standards, are being developed through the instrumentality of the National Advisory.

The Committee took note of the contribution made by the ICAI and the NACAS in development of proposals for Accounting Standards and took the view that the existing institutional mechanism for formulating and notifying Accounting Standards under the Companies Act, 1956 may be retained. Committee on Accounting Standards (NACAS). Holding-Subsidiary Accounts and Consolidation .

The Committee took the view that consolidation of financial statements of subsidiaries with those of holding companies should be mandatory. The Committee discussed the question of the manner of maintenance of accounts of entities other than companies but controlled by companies registered under the Act.

With consolidation of financial statements by holding companies on mandatory basis, the provisions requiring attaching the accounts of subsidiary companies with those of holding companies, for circulation to shareholders in accordance with the provisions of the present Companies Act should be done away with.

Further, the Committee took the view that the holding companies should be required to maintain records relating to consolidation of financial statements for specified periods. Presentation of consolidated financial statements by the holding company should be in addition to the mandatory presentation of individual financial statements of that holding company.

At present, Section 209 (4A) of the Act requires companies to preserve the books of accounts, together with the vouchers relevant to any entry in such books of account, in good order, relating to a period of not less than 8 years immediately preceding the current year. The Committee felt that the rules may provide for preservation of books of account and records of the company for a period of 7 years to bring it in harmony with Income Tax Act. 

In order to bring about more transparency and uniformity in the maintenance of accounts, the Committee felt that the companies should continue to be mandated to maintain their books of accounts on accrual basis and double entry method of book keeping. 

Maintenance of Records Outside the Country : The companies should have an option to keep records outside the country provided financial information in compliance with the Companies Act is available within the country and written notice is given to the Registrar of the place where the records are kept. However, such a Company should be obligated to produce the records that are kept outside the country, if and when required to do so as specified in the Rules. 

Cash Flow Statement To Be Made Mandatory :World over, the importance of Cash Flow Statement is being specifically recognized. At present, the listed companies are mandated to include a Cash Flow Statement in the Annual Report and the Standards of Accounting prescribed by ICAI also requires in specified cases a Cash Flow Statement to be submitted along with the Balance Sheet and Profit & Loss Account with a view to make Cash Flow Statement mandatory. The Committee felt that there was a need to include the definition of the term Financial Statement in the Act, to include Profit & Loss Account, Balance Sheet, Cash Flow Statement and Notes on Accounts. Financial Year

The Companies Act at present does not contain any provision relating to the minimum period of a Financial Year. The Concept Paper has defined the Financial Year with the minimum period of six months. The Committee dwelt on the subject and came to the conclusion that the first financial year should begin from the date of incorporation and end on the immediately succeeding 31st March and the subsequent Financial Years should also end on 31st March every year. 

PREVENTION OF OPPRESSION & MISMANAGEMENT.

A company in a broad sense is a group of persons who have come together or who have contributed money for some common purpose and have incorporated themselves into distinct legal entity. Company is the amalgamation of two distinct words- “com” and “pain”, the former meaning with/together and the later meaning “bread”.  The whole scheme of the Companies Act, 1956 is to ensure proper conduct of the affairs of the company in public interest and preservation of image of country in public interest.

Majority rule is hallmark of democracy. It equally applies to corporate democracy and is not free from pitfalls and abuse. Corporate democracy is more vulnerable to it because it is reckoned with the number of shares and not with number of individuals involved.

The rule of majority  has been made applicable to the management of the affairs of the company. The members pass resolution on various subjects either by simple or three-fourth majority. Once resolution is passed by majority it is binding on all members. As a resultant corollary, court will not ordinarily intervene to protect the minority interest affected by resolution. However there are exceptions to this rule- Prevention of Oppression and mismanagement being one such ground. The requisite number of members to make an application before the Tribunal is :

› In case of Company having share capital: 100 members or 1/10th of total number of its members, whichever is less or member/s holding not less that 1/10th issued capital. The applicants should have paid all calls and other sum due on their shares.

› In case of Company not having a share capital: not less than 1/5th of total number of the members. In case of joint shareholding they will be counted as only one member.

WINDING UP

Winding up or liquidation of a company represents the last stage in its life. It means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realised assets and the surplus if any ,is then distributed among the members in proportion to their holdings in the company.

The two terms winding up and liquidation are used interchangeably.

MODES OF WINDING UP

There are three modes of winding up of a company are a. Winding up by the court i.e. compulsory winding up

(Sections. 433 to 483)

b. Voluntary winding up (Sections. 484 to 521)-1. Members voluntary winding up2. Creditors voluntary winding up

C. Winding up subject to Supervision of Court.

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