kiams -company law ppts

7/30/2019 Kiams -Company Law Ppts

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COMPANY AND ITS FORMATION

What is a company

In general parlance a company means a group of

people who have come together for some commonpurpose eg to carry on business, for social service, etc

Governing Law : In India, company form of

organizations are governed by The Companies Act,1956. It contains provisions for bringing a companyinto existence, working of a company, legal obligationsof a company, stakeholders of a company, management

of a company, dissolution of a company, etc


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Definition of a company: A company means a

company formed and registered under the provisions ofthe Companies Act.

A company is an incorporated association which isartificial, having an independent legal existence, with a

perpetual succession, a common seal, a common stockcapital comprised of transferable shares and carryinglimited liability in relation to its members.


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Characteristics of a company

1. Separate legal entity (independent corporate existence) : A companyformed and registered under the Companies Act is a legal entity. It hasan independent corporate existence. It is a creation of law. Companycomes into existence by law and can be dissolved only by law.

Company is an artificial entity. It has no natural or physicalexistence but has a legal existence. It can do all things that a person cando legally except those which require physical existence.

The principal of separate legal entity was illustrated in cases likeSoloman vs Soloman and Co Ltd, Lee vs Lee Air Farming Ltd, etc

2. Perpetual succession : A company is an artificial legal person andtherefore it does not have death. It can be put an end to only by law. Itsexistence is not affected by the death of its members or stakeholders. Ithas perpetual succession.


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3. Common Seal : Since company is and artificial person, it cannot

sign its name on transactions entered into by it. Common seal isused as a substitute for signature. Every company has a commonseal with its name engraved on it and is put on all documentsconstituting contracts between company and third parties.

4. Limited liability : Members of a limited company have limitedliability. Their liability is limited to the extent of the unpaid valueon the shares held by them. If the shares are fully paid up, theirliability is nil. Irrespective of the liability of the company,members liability is limited. Even if the assets of the company areinsufficient to meet the liabilities, members cannot be called upon

to pay anything more than the unpaid value on their shares.

5. Transferability of shares : The shares of a company are freelytransferable. They can be sold or purchased in the share market.This provides liquidity to the investors but at the same time doesnot result in reduction of the share capital of the company. Sharesof private company are not freely transferable.


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6. Separate property : As a legal person, company can purchase,own, hold, enjoy, sell and dispose of property in its own name. Nomember of a company can claim companys property as his own.

7. Capacity to sue and be sued : As a legal person, company cansue and also be sued in its own name. It can file suits againstothers in a court of law and at the same time others can also filesuits against company.

8. Professional management : Companies are managed byprofessionals and experts.

9. Better finances : Since public companies can raise moneythrough public, it can have better finances for its operations.


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Companies can be classified into different kinds based on different criteria as follows

1 On the basis of constitution (as per Companies Act)

A : Private company A private co means a co which by its articles

(i) Restricts the right to transfer its shares

(ii) Limits the number of its members to 50 (excluding members

who are or in the employment of the co)

(iii) Prohibits any invitation to the public to subscribe for the shares

or debentures of the co(iv) prohibits any invitation or acceptance of deposits from persons

other than its members, directors or their relatives

A private co must have a paid-up capital of at least Rs 1 lakh.

A private co must have a minimum of 2 members.

Name of a private co must end with the words pvt ltd.

B : Public company A public co means a co which is not a private co.

A public co must have a minimum capital of at least Rs 5 lakhs.

A public co must have a minimum of 7 members.Name of a public co must end with the words ltd.


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2. On the basis of liability of members

A : Limited company A co where the liability of the members is

Limited. The liability is limited by shares where the liability is limitedto the extent of unpaid value on the shares and it is limited by guarantee

where the liability is limited to the extent of the sum guaranteed by the

member.

B : Unlimited company A co where the liability of the members isUnlimited. Their liability continues till all the debts of the co are paid.


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3. On the basis of control

A : Government company A co in which not less than 51% of the

paid up share capital is held by the central Govt or any State Govt orGovts or partly by central and State Govts. It also includes a co which

is a subsidiary of a Govt Co.

B : Holding and Subsidiary Companies A co which controls another

co is called a holding co and the co that is so controlled is called the

subsidiary co.A co is said to be subsidiary of another co if

(i) that other co controls the composition of board of directors or

(ii) that other co holds more than half of the nominal value of equity

share capital

(iii) that other co controls more than half of the total voting power ofthe co or it is a subsidiary of co which is that others subsidiary


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4. On the basis of incorporation

A : Statutory companies A co incorporated by means of a special

Act of Parliament or State Legislature.Eg Life Insurance Corporation of India, Unit Trust of India

B : Registered companies Cos registered under the Companies Act.

Such cos come into existence on incorporation and registration as per

the provisions of the Act.

C : Foreign Company A co which is registered in a country other

than India but has a place of business in India.

5. Non-profit Organisations Co formed for the purpose of promotion ofarts, science, commerce, religion, education, etc


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INCORPORATION OF A COMPANY

A company can be brought into existence as perthe provisions of the Companies Act, 1956. Theregistering authority is the Registrar of Companies(every state in India has an office of the ROC).

The proposed company has to take nameavailability from the ROC by filing e-form 1A and thenproceed to incorporate the company.


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The following is the procedure to get a co incorporated. Application it has to be made to the ROC of the State in which the business

office of the co is to be situated by filing form No 1 and Forms 18, 32 and 29through e-filing.

Documents The application has to be accompanied by the following

documents Memorandum of Association -3copies Articles of Association -3 copies Name approval letter

Relevant Forms viz form No 18, 32, 29 A declaration that the provisions of the Act have been complied with Registration fees Stamp duty

Certificate of Incorporation On verifying that the documents are in order, the ROC issues this certificate. The date mentioned in this certificate is the date of birth for the co. Certificate of commencement of business Public Cos are required to obtain this additional certificate from ROC to commence business. Private cos can commence business immediately on incorporation.


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MEMORANDUM OF ASSOCIATION MOA is one of the basic documents of the co. It is the

charter of the co and sets out the constitution of the co. It definesthe powers and limits of the co. It defines its relation with theoutside world and the scope of its activities.

MOA contains the following clauses Name clause Every co must be registered with a name and this

clause contains the name of the co. The persons who constitutethe co can choose any name they desire for the co but the CentralGovt should not opine that the name is undesirable.

Name of public limited co must end with the wordslimited

and name of private limited co must end with the words pvtltd.

Registered office clause This clause specifies the name of the State where the registered office of the co is situated.


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Objects clause It specifies the objectives and purposes of the co. It gives an idea to the prospective investors about the purpose of the co and it also enables outsiders dealing with the co to ascertain its powers. It separately specifies the main objects, incidental objects and other objects. Liability clause It states whether the liability of the members is limited or unlimited. Capital clause It states the authorized or nominal capital of the co, the different kinds of shares and the nominal value of each share. Subscription clause this clause provides that those who have agreed to subscribe to MOA, signify their willingness to associate and form a co. At least seven subscribers are needed for a public co and two for a private co.


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Doctrine of ultra-vires (beyond the powers) - Theobjects clause of the MOA defines the scope ofactivities of the company. It authorizes the company todo certain things and carry on certain business. Thecompany cannot do anything which is beyond theobjects clause i.e it cannot take up any activity which isnot defined in the MOA. Any act done or activityundertaken beyond the MOA is called ultra-vires andis not binding on the company.


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Doctrine of constructive notice Every person whodeals with the company is deemed to have constructivenotice of the MOA and AOA of the company. He is notprotected against ultr-vires acts. He takes the risk forall such acts of the company. Hence outsiders need tobe very careful while dealing with companies.


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ARTICLES OF ASSOCIATION

AOA contain the internal rules and regulations of the co. Theydefine as to how the management of the internal affairs of the coshould be done. Following are some of the contents of AOA

Shares and share capital Allotment of shares Calls on shares Transfer and transmission of shares General and board meetings Directors and their appointment Borrowing powers

Accounts and audit Dividends Winding up


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OFFER DOCUMENTS

A public co may raise its capital by issuing shares ordebentures or deposits or other securities to thepublic. Public is invited to subscribe for the securitiesthrough the offer documents viz Prospectus,Advertisement.

A private company cannot issue offer documentsto the public since it cannot raise money from public.


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Prospectus

Any document described or issued as a prospectus and includes anynotice, circular, advertisement or other document inviting deposits from thepublic or inviting offer from the public for the subscription or purchase of anyshares in or debentures of a body corporate

Every prospectus must meet the following requirements 1. It must be in writing 2. It should be issued by or on behalf of the co 3. It should contain an invitation to the public 4. The invitation should be for making subscription to shares or debentures in the co. Every prospectus must be dated. A copy of prospectus signed by every

director or proposed director must be delivered to the ROC on or before thedate of publication. Prospectus must contain the particulars specified inSchedule II to the Act.


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Contents of Prospectus General information

Name and address of co. Stock Exchange where application for listing is made Declaration of refund of issue if min subscription not received Date of opening and closing of the issue Names and address of auditors, lead managers and under writers Capital structure of the company and present issue Authorized, issued, subscribed and paid-up Size of present issue Details of the issue Terms of payment How to apply - Forms


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Details about company management History, main objects and present business of the co Subsidiaries, if any

Promoters and their background Name and address of manager, managing directors and other directors Particulars of the issue Objects Project cost Means of financing Details about the project Location of project Plant, machinery, technology, etc Collaborations Raw materials and infrastructure facilities - The products Schedule of implementation Future prospects


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Other information Outstanding litigations

Particulars of defaults Management perception of risk factors Financial information - Profits and losses for the preceding 5 years (by auditors)

- Rates of dividend for the said years Assets charged as security Statutory and other information

Min subscription Expenses of the issue Underwriting comm.. Details of present issue Material contracts


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Untrue statements For any statement contained in the prospectus which is

misleading in form and content, there is both criminalliability on the directors, promoters and every person whohas authorized the issue prospectus.

Statement in lieu of prospectus When a company wishes to raise money through private

placements without inviting the public, then the co neednot issue a prospectus. But it has to file with ROC adocument called statement in lieu of prospectus.

The contents of this document are the same as that ofprospectus. The provisions applicable to this document arethe same as are applicable to prospectus.


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Advertisement

When a company invites deposits from thepublic, the offer document through which suchinvitation is made is called advertisement. Theprovisions applicable to advertisement except thecontents are the same as that of prospectus.


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SHARE CAPATIL

Share capital means the total of all payments made to the co by all theshareholders on their shares

The following terms are used to denote different portions of capital

Nominal or authorized stated in the MOA Issued - offered for subscription Subscribed - taken up by purchasers Called-up - called by the co Paid-up -actually paid to the co Uncalled, unpaid Reserve - can be called only in the event of winding up Loan money borrowed


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SHARES, DEBENTURES AND DEPOSITS

A share is a part in the share capital of the company. Generally the nominal

share capital of the co is divided into smaller units called shares. A share also denotes the interest of a shareholder in a definite portion of the

capital.

Kinds of shares Preference shares To be called preference share, a share must satisfy the

following two requirements. it carries a preferential right in respect of dividends to be paid a

fixed amount or an amount calculated at a fixed rate it carries a preferential right to be repaid the amount of paid up

capital in the event of winding up of the co Equity shares shares which are not preference shares


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Kinds of preference shares Cumulative/non-cumulative In case of cumulative shares, the arrears of dividend not declared in the previous years gets accumulated till it is paid. Convertible/non-convertible convertible shares can be

converted into equity shares. Redeemable/irredeemable redeemable shares are those where

the co has a right to take them back after paying to the holders. Participating/non-participating Participating preference shares

are

those who take their part of the preference dividend andparticipate

along with the equity shares for the equity dividend.


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SHARE CERTIFICATE

It is a document issued by a co stating that the personnamed therein is the registered holders of a specified noon shares.

It is prima facie evidence of the title of the member or such

hares

It contains the following Name of the, address Name of shareholder No of shares held, nos.fromto Date if acquisition - Value of the shares Seal of the co, signature


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Shareholder/member Any person who holds the shares of a co is a shareholder

of the co. Any person whose name appears in the Register of

Members of the co is a member of the co.

Shareholders are the true owners of the co. They enjoy

certain rights in the co. They influences the decisions ofthe co by voting at the general meetings.


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WHO CAN BE MEMBER Any person eligible to enter into a contract can be a member. Acquisition of membership Membership of a co can be acquired in the following ways 1. By subscribing to the MOA of the co 2. By applying to the shares in response to prospectus and being allotted the share 3. By purchasing the shares of the co in the open market (transfer of shares)

4. By transmission of shares (in the event of death of shareholder) 5. By estoppels 6. By order of court Termination of membership Transfer of shares Surrender of shares (before forfeiture)

Forfeiture Death, lunacy or insolvency Repudiation of contract ( on account of mis-statement in prosp) Redemption Winding up


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Debentures

Debentures form another category of securities of a co

which the co issues to raise money from investors. Debenture is an instrument issued by the co which

acknowledges a debt due from the co to the person who isnamed therein.

As per the Act, debenture includes debenture stock,bonds and other securities of a co whether constituting acharge on the assets of the co or not.


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Kinds of debentures

Registered and Bearer In registered debentures, the nameof the holder appears on the document as well as in the

documents of the co. In bearer debentures, the name doesnot appear but the holder of the instrument is the owner ofit.

Secured and unsecured Secured debentures are thosewhich are secured by creating a charge on the assets of the

co which can be realized in the event the co fails to repaythe amount.

Convertible and non-convertible Convertible debenturescan be converted into equity shares.

Redeemable and irredeemable redeemable debenturesare those where the co has a right to take back thedebentures after paying to the holders.


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Debenture-holders

Investors who invest in the debentures of the co arecalled debenture-holders. They stand in the positionof creditors of the co. They enjoy the rights of thecreditors.


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Deposits

Deposits is yet another borrowing for a co. Investorswho make deposits in the co are called deposit holders.

The invitation and acceptance of deposits by cos isgoverned by The Companies (Acceptance of Deposits)Rules, 1975.