mb0050 summer drive assignment 2012

Legal Aspects of Business Unit 12

Sikkim Manipal University Page No. 210

Unit 12 Companies Act, 1956

Structure:

12.1 Introduction

Objectives

12.2 Formation of a Company

Promotion

Registration (Secs.12 and 33)

Availability of name

Floatation

12.3 Memorandum of Association

Meaning and purpose

Form and contents

Alteration of memorandum

12.4 Articles of Association

Meaning and purpose

Registration of articles

Subject matter of articles

12.5 Prospectus

Contents of a prospectus

Stock Exchange Board of India guidelines relating to disclosure

on prospectus

12.6 Shares

Classes of shares

Preference share

Equity share

Cumulative Convertible Preference Shares (CCPs)

Deferred or founder‟s shares

Non-voting shares

Sweat equity shares

12.7 Directors

12.8 General Meetings and Proceedings

Need for meetings

Statutory meeting (Sec.165)

Annual General Meeting (AGM) (Secs.166-168)

Extra-ordinary Meeting (EGM) Sec.169

12.9 Auditor



12.10 Winding up of Companies

Modes of winding up

Winding up by the court

12.11 Summary

12.12 Terminal Questions

12.13 Answers

12.1 Introduction

In the earlier units, you came to know about the Foreign Exchange

Management Act. In this unit you will study about the Companies Act, 1956.

The Companies Act, 1956 defines the word „company‟ as a company

formed and registered under the Act or an existing company formed and

registered under any of the previous company laws (Sec.3). This definition

does not bring out the meaning and nature of the company into a clear

perspective. Also Sec.12 permits the formation of different types of

companies. These may be (i) companies limited by shares, (ii) companies

limited by guarantee and (iii) unlimited companies. The vast majority of

companies in India are with limited liability by shares.

Objectives

After studying this unit, you should be able to:

Describe formation of company

Define shares and directors

Explain meetings and resolutions

Define auditor

Describe how to winding-up a company

12.2 Formation of a Company

The whole process of formation of a company may be roughly divided, for

convenience, into three parts. These are: (i) Promotion; (ii) Registration and

(iii) Floatation.

12.2.1 Promotion

Promotion is a term of wide import denoting the preliminary steps taken for

the purpose of registration and floatation of the company. The persons who

assume the task of promotion are called promoters. The promoter may be

an individual, syndicate, association, partnership or company.



Who is a promoter? This term has not been defined under the Act,

although the term is used expressly in Secs.62, 69, 76, 478 and 519.

12.2.2 Registration (Secs.12 and 33)

Secs.12 states that, “any seven or more persons or where the company to

be formed will be a private company, two or more persons, associated for

any lawful purpose may, by subscribing their names to a memorandum of

association and otherwise complying with the requirements of this Act in

respect of registration form an incorporated company, with or without limited

liability.”

12.2.3 Availability of name

Sec.20 states that a company cannot be registered by a name, which in the

opinion of the Central Government is undesirable. Therefore, it is advisable

that promoters find out the availability of the proposed name of the company

from the Registrar of Companies. For the purpose, three names in order of

priority should be filed.

The following two documents, though not required to be filed for the purpose

of registration, are usually delivered along with the aforesaid documents.

(i) The address of the registered office of the company (Sec.146).

(ii) Particulars regarding directors, manager and secretary, if any (Sec.303).

These two documents are required to be submitted within thirty days of

registration of the company.

12.2.4 Floatation

When a company has been registered and has received its certificate of

incorporation, it is ready for „floatation‟, that is to say, it can go ahead with

raising capital sufficient to commence business and to carry it on

satisfactorily.

Sec.70 makes it obligatory for every public company to take either of the

following two steps: (i) Issue a prospectus in case public is to be invited to

subscribe to its capital, or (ii) Submit a „statement in lieu of prospectus‟ in

case capital has been arranged privately. It must be done at least 3 days

before allotment.



Self Assessment Questions

1. The persons who assume the task of promotion is known as

__________

(a) Acceptors

(b) Motivators

(c) Promoters

(d) None

2. How may partners involved in the case of private company?

(a) 2

(b) 4

(c) 5

(d) 7

12.3 Memorandum of Association

12.3.1 Meaning and purpose

The Memorandum of Association of a company is its charter which contains

the fundamental conditions upon which alone the company can be

incorporated. It tells us the objects of the company‟s formation and the

utmost possible scope of its operations beyond which its actions cannot go.

Thus, it defines as well as confines the powers of the company. If anything

is done beyond these powers, that will be ultra vires (beyond powers of) the

company and so void.

The memorandum serves a two-fold purpose. It enables shareholders,

creditors and all those who deal with the company to know what its powers

are and what is the range of its activities. Thus, the intending shareholder

can find out the field in, or the purpose for which his money is going to be

used by the company and what risk he is taking in making the investment.

Also, any one dealing with the company, say, a supplier of goods or money,

will know whether the transaction he intends to make with the company is

within the objects of the company and not ultra virus its objects.

12.3.2 Form and contents

Sec.14 requires that the memorandum of a company shall be in such one of

the Forms in Tables B, C, D and E in Schedule I to the Act, as may be

applicable in the case of the company, or in Forms as near thereto as

circumstances admit. Sec.15 requires the memorandum to be printed,



divided into paragraphs, numbered consecutively and signed by at least

seven persons (two in the case of a private company) in the presence of at

least one witness, who will attest the signature. Each of the members must

take at least one share and write opposite his name the number of shares

he takes. Sec.13 requires the memorandum of a limited company to contain:

(i) the name of the company, with „limited‟ as the last word of the name in

the case of a public company and „private limited‟ as the last words in the

case of a private company; (ii) the name of the State, in which the registered

officer of the company is to be situated; (iii) the objects of the company,

stating separately „Main objects‟ and „other objects‟; (iv) the declaration that

the liability of the members is limited; and (v) the amount of the authorised

share capital, divided into shares of fixed amounts. These contents of the

memorandum are called compulsory clauses and are explained below:

The name clause. The promoters are free to choose any suitable name for

the company provided:

(a) the last word in the name of the company, if limited by shares or

guarantee is „limited‟ unless the company is registered under Sec.25 as

an „association not for profit‟ [Sec.13(1) (a) & Sec.25].

(b) In the opinion of the Central Government, the name chosen is not

undesirable [Sec.20(1)].

Too similar name. In case of too similar names, the resemblance between

the two names must be such as to be calculated to deceive. A name shall

be said to be calculated to deceive where it suggests some connection or

association with the existing company.

Publication of name (Sec.147). Every company shall: (a) paint or affix its

name and the address of its registered office and keep the same painted or

affixed, on the outside of every office or place of business in a conspicuous

position in letters easily legible and in the language in general use in the

locality.

12.3.3 Alteration of memorandum

Sec.16 provides that the company cannot alter the conditions contained in

memorandum except in the cases and in the mode and to the extent

express provision has been made in the Act. These provisions are explained

herein below:



Change of name. Sec.21 provides that the name of a company may be

changed at any time by passing a special resolution at a general meeting of

the company and with the written approval of the Central Government.

However, no approval of the Central Government is necessary if the change

of the name involves only the addition or deletion of the word „private‟ (i.e.,

when public company is converted into a private company or vice versa).

The change of name must be communicated to the Registrar of Companies

within 30 days of the change. The Registrar shall then enter the new name

on the register in the place of the old name and shall issue a fresh certificate

of incorporation with necessary alterations [Sec.23(1)]. The change of name

becomes effective on the issue of fresh certificate of incorporation.

Change of registered office. The procedure depends on whether the

change is within the jurisdiction of same registrar of companies (Sec.146) or

whether the shifting is to the jurisdiction of another registrar of companies in

the same state (Sec.146 and Sec.17A). This may include:

(a) Change of registered office from one premises to another premises

in the same city, town or village. The company may do so anytime. A

resolution passed by the Board of directors shall be sufficient. However,

notice of the change should, within 30 days after the date of the change,

be given to the Registrar who shall record the same (Sec.146).

(b) Change of registered office from one town or city or village to

another town or city or village in the same State (Sec.146). In this

case, the procedure is:

(i) a special resolution is required to be passed at a general meeting

of the shareholders;

(ii) a copy of it is to be filed with the Registrar within 30 days.

(iii) Within 30 days of the removal of the registered office, notice of the

new location has to be given to the Registrar who shall record the

same.

(c) Shifting of the registered office from one place to another within

the same state (Sec.17A): The shifting of the registered office by a

company from the jurisdiction of one registrar of companies to the

jurisdiction of another registrar of companies within the same state shall

(in addition to requirements under Sec.146) also require confirmation by

the Regional Director. For this purpose, an application is to be made in



the prescribed form and the confirmation shall be communicated within

four weeks. Such confirmation is required to be field within two months

with the registrar of companies who shall register and certify the same

within one month. Such certificate shall be conclusive evidence of the

compliance of all requirements under the Act.

Activity 1:

The Board of Directors of a public company met on three times in

the previous year, the fourth meeting though called, but not held for

want of quorum on two occasions successively. Discuss whether

any provisions of the Companies Act have been contravened.


3. _________ tells us the objects of the company‟s formation and the

utmost possible scope of its operations beyond which its actions

cannot go.

(a) Memorandum of understanding

(b) Memorandum of association

(c) Memorandum of unions

(d) None

4. _____________ provides that the company cannot alter the conditions

contained in memorandum except in the cases and in the mode and to

the extent express provision has been made in the Act.

12.4 Articles of Association

12.4.1 Meaning and purpose

The articles of association of a company and its bye laws are regulations

which govern the management of its internal affairs and the conduct of its

business. They define the duties, rights, powers and authority of the

shareholders and the directors in their respective capacities and of the

company and the mode and form in which the business of the company is to

be carried out. The Articles of association of a company have a contractual

force between company and its members as also between the members

inter se in relation to their rights as such members. They are subordinate to

and are controlled by memorandum. Articles cannot supersede the objects



as set out in the memorandum of association [Birds Investments Ltd.

v. C.I.T. (1965) 35 Comp. Cas. 147 Cal.]

12.4.2 Registration of articles

Sec.26 states that a public company limited by shares may register articles

of association signed by the subscribers to the memorandum. If, however, it

does not register its own articles, then the articles given in Table A of

Schedule I automatically becomes applicable. Further, even if it does

register articles of its own, Table A will still apply automatically unless it has

been excluded or modified. There are actually three possible alternatives in

which such company may adopt articles: (i) it may adopt Table A in full or,

(ii) it may wholly exclude Table A and set out its own regulations in full, or

(iii) it may set out is own articles and adopt part of Table A. The alternatives

(ii) and (iii) are often employed; and partial adoption of Table A has

particular advantage for small companies, because of economy in printing

and also because any provision of Table A is legally beyond any doubt.

12.4.3 Subject matter of articles

The articles of a company usually deal with the following matters:

1. the business of the company;

2. the amount of capital issued and the classes of shares into which the

capital is divided; the increase and reduction of share capital;

3. the rights of each class of shareholders and the procedure for variation

of their rights;

4. the execution or adoption of a preliminary agreement, if any;

5. the allotment of shares; calls and forfeiture of shares for non-payment

of calls;

6. transfer and transmission of shares;

7. company‟s lien on shares;

8. exercise of borrowing powers including issue of debentures;

9. general meetings, notices, quorum, proxy, poll, voting, resolution,

minutes;

10. number, appointment and powers of directors;




5. Change of name must be communicated to the Registrar Companies

within ________________ of the change.

(a) 20 days

(b) 15 days

(c) 10 days

(d) 30 days

6. Article of association of a company have a contractual force between

(a) Company and government

(b) Company and its owners

(c) Company and its members

(d) None

12.5 Prospectus

A prospectus, as per Sec.2(36), means any document described or issued

as prospectus and includes any notice, circular, advertisement or other

document inviting deposits from the public or inviting offers from the public

for the subscription or purchase of any shares in or debentures of a body

corporate. Thus, a prospectus is not merely an advertisement; it may be a

circular or even a notice. A document shall be called a prospectus if it

satisfies two things: (1) It invites subscriptions to share or debentures or

invites deposits. (2) The aforesaid invitation is made to the public.

12.5.1 Contents of a prospectus

Sec.56 lays down that the matters and reports stated in Schedule II to the

Act must be included in a prospectus. The format of a prospectus is divided

into three parts. In the first part brief particulars are to be given about

matters mentioned below:

1. General information. Under this head information is given about

(i) Name and address of registered office of the company.

(ii) Name/(s) of stock exchange/(s) where application for listing is made.

(iii) Declaration about refund of the issue if minimum subscription of

90 per cent is not received within 90 days from closure of the issue.

(iv) Declaration about the issue of allotment letters/refunds within a

period of 10 weeks and interest in case of any delay in refund, at the

prescribed rate, under Sec.73. (v) Date of opening of the issue.



(vi) Date of closing of the issue. (vii) Name and address of auditors and

lead managers. (viii) Whether rating from CRISIL or any rating agency

has been obtained for the proposed debentures/preference shares

issue. If no rating has been obtained, this should be answered as „No‟.

(ix) Names and address of the underwriters and the amount underwritten

by them.

2. Capital structure of the company. (i) Authorised, issued, subscribed

and paid-up capital. (ii) Size of the present issue, giving separately

reservation for preferential allotment to promoters and others.

3. Terms of the present issue. (i) Terms of payment. (ii) How to apply.

(iii) Any special tax benefits.

4. Particulars of the issue. (i) objects. (ii) Project cost. (iii) Means of

Financing (including contribution of promoters).

5. Certain prescribed particulars in regard to the company and other

listed companies under the same management which made any capital

issue during the last 3 years.

6. Outstanding litigations relating to financial matters or criminal

proceedings against the company or directors under Schedule XIII.

12.5.2 Stock Exchange Board of India guidelines relating to disclosure

on prospectus

Every prospectus submitted to Stock Exchange Board of India (SEBI) for

vetting shall, in addition to the requirements of Schedule II to the Act,

contain/specify certain particulars as are announced from time to time.


7. ___________ lays down that the matters and reports stated in Schedule

II to the Act must be included in a prospectus.

8. SEBI stands for

(a) Stock Exchange Board of India

(b) State Exchange Board of India

(c) Stock Exchange Bank of India

(d) None



12.6 Shares

Sec.2(46) defines a share “as a share in the share capital of a company and

includes stock except where a distinction between stock and share is

expressed or implied”. This definition does not bring out the meaning of a

share in its true perspective.

A share of a company in the hands of a shareholder signifies a bundle of

rights and obligations [Viswanath v. East India Distilleries (1957) 27 Comp.

Cas. 175]. But a share is not a negotiable instrument [C.I.T. v. Associated

Industrial Dev. Co. (1969) 2 Comp. L.J. 19]

Sec.83 requires that each share in a company having a share capital must

be distinguished by its appropriate number.

The Companies (Amendment) Act, 1999 amended Sec.82 to the effect that

for the word „shares‟, the words „shares and debentures‟ shall be

substituted.

12.6.1 Classes of shares

The most common classes of shares are: (1) Preference; (2) Equity or

Ordinary; and (3) Deferred or Founders‟. A public company and a private

company which is a subsidiary of a public company may not issue shares

other than equity, preference and Cumulative Convertible Preference

Shares (CCPS).

12.6.2 Preference share

A preference share is one which carries the following two rights over holders

of equity shares: (i) a preferential right in respect of dividends at a fixed

amount or at a fixed rate and (ii) a preferential right in regard to repayment

of capital on winding up.

12.6.3 Equity share

„Equity share‟ means a share which is not preference share (Sec.85). The

rate of dividend is not fixed. The Board of Directors recommend the rate of

dividend which is then declared by the members at the Annual General

Meeting. Before recommending dividend on equity shares, the Board of

Directors have to comply with the provisions of law as regards depreciation,

transfer of a minimum amount to reserves, etc.



The holders of equity shares have voting rights in proportion to the paid-up

equity capital of the company [Sec.87(1)].

12.6.4 Cumulative Convertible Preference Shares (CCPs)

The Government vide its guidelines dated 19th August, 1985 permitted

issue of another class of shares by public limited companies, called

cumulative convertible preference shares.

12.6.5 Deferred or founder’s shares

A pure private company can issue shares of a type other than those

discussed above (Sec.90). Thus, it may issue what are known as deferred

shares. As deferred shares are normally held by promoters and directors of

the company, they are usually called founder‟s shares.

12.6.6 Non-voting shares

„Non-voting shares‟ as the term suggests are shares which carry no voting

rights. These are contemplated as altogether a different class of shares

which may carry additional dividends in lieu of the voting rights. The

Companies (Amendment) Act, 2000 provided for issue of such type of equity

shares under Sec.86.

12.6.7 Sweat equity shares

The Companies (Amendment) Act, 1999, allowed issue of sweat equity

shares subject to fulfillment of certain conditions. A new Sec.– 79A was

inserted for this purpose.


16. Sec.83 requires that each share in a company having a share capital

must be distinguished by its appropriate number. (True/False)

17. CCPS stands for

(a) Constant Convertible Preference Shares

(b) Constant Convertible Permanent Shares

(c) Cumulative Convertible Preference Shares

(d) None

18. The holders of equity shares have voting rights. (True / False)

12.7 Directors

Sec.2(13) defines a director as including "any person occupying the position

of director, by whatever name called." This is a definition based purely on



function; a person is a director if he does whatever a director normally does.

But the Act gives no further guidance on the function, duties and position of

a director. In reality, directors are the persons who direct, conduct, manage

or superintend a company's affairs. Sec.291 has entrusted the management

of the affairs of the company in their hands. They chalk-out the general

policy of the company within the framework of the Memorandum of the

Company. They appoint the company's officers and recommend the rate of

dividend. The directors of company are collectively referred to as the 'Board

of Directors'.

The exact position of 'director' is hard to define, as no formal definition,

either statutory or judicial, of the term has been given. However, judicial

pronouncements have described them as (i) agents, (ii) trustees, or

(iii) managing partners.

The directors have also been described as trustees. But they are not

trustees in the full sense of the term in as much as no proprietary rights of

the company's property are transferred to them and, therefore, they enter

into contracts on behalf of the company and in the name of the company.

Although directors are not trustees in the real sense of the term, they

occupy an office of the trust and are in certain respects in the position of

trustees for the company. Such cases are:

They are trustees of money which comes to their hands or which is

actually under their control. If they misapply company's money, they

have to make good the same as if they were trustees.

They are trustees for exercising powers conferred on them for the

benefit of the company. For instance, powers to allot shares, to make

calls, forfeit shares should be exercised bona fide in the interests of the

company.

They stand in a fiduciary relationship to the company and, therefore,

whenever there is clash of his personal interests with that of the

company, he should keep in mind the company's interests.

A director is in no way a trustee for individual shareholders except when the

former induces the latter by misrepresentation to sell the shares to him.



Activity 2:

Study the memorandum of association of Reliance industries &

suggest the scope of the same to the employees & investors of the

company.


19. _____________ defines a director.

20. The directors act as agents of the company. (True / False)

12.8 General Meetings and Proceedings

12.8.1 Need for meetings

A company is an artificial person and therefore, cannot act itself. It must act

through some human intermediary. The various provisions of law empower

shareholders to do certain things. They are specifically reserved for them to

be done in company‟s general meetings. Sec.291 empowers the Board of

Directors to manage the affairs of the company. In this context meetings of

shareholders and of directors becomes necessary. In this Part meetings of

shareholders are taken up and later in Part 14, meetings of directors are

discussed. The Act has made provisions for following different types of

meetings of shareholders: (i) Statutory Meeting; (ii) Annual General Meeting;

(iii) Extraordinary General Meeting; and (iv) Class Meetings.

12.8.2 Statutory meeting (Sec.165)

Some of the most important legal provisions regarding the statutory meeting

are:

(i) It is required to be held only by a public company having a share

capital. A private company or a public company registered without

share capital is under no obligation to hold such a meeting.

(ii) It must be held within a period of not less than one month and not more

than six months from the date at which the company is entitled to

commence business.

(iii) At least 21 days before the day of meeting, a notice of the meeting is to

be sent to every member stating it to be a Statutory Meeting.

12.8.3 Annual general meeting (AGM) (Secs.166-168)

As the name signifies, this is an annual meeting of a company. The

provisions relating to this meeting are:



1. Every company, whether public or private, having a share capital or not,

limited or unlimited must hold this meeting.

2. The meeting must be held in each calendar year and not more than

fifteen months shall elapse between two meetings. However, the first

AGM may be held within eighteen months from the date of its

incorporation and if such general meeting is held within that period, it

need not hold any such meeting in the year of its incorporation or in the

following year. The maximum gap between two such meetings may be

extended by three months by taking permission of the Registrar, who

may so allow for any special reason.

3. The meeting must be held (i) on a day which is not a public holiday,

(ii) during business hours, (iii) at the registered office of the company or

at some other place within the city, town or village in which the

registered office is situated. [Sec.166(2)].

12.8.4 Extra-ordinary Meeting (EGM) – Sec.169

Clause 47 of Table A (Schedule – I) provides that all general meetings other

than AGMs shall be called the EGMs. The legal provisions as regards such

meetings are:

1. EGM is convened for transacting some special or urgent business that

may arise in between two AGMs, for instance, change in the objects or

shift of registered office or alteration of capital. All business transacted at

such meetings is called special business. Therefore, every item on the

agenda must be accompanied by an „Explanatory Statement‟.

2. An EGM may be called: (i) by the Directors of their own accord;

(ii) by the Directors on requisition; (iii) by the requisitionists themselves;

(iv) by the Tribunal. The Board of Directors may call a general meeting

of the members at any time by giving not less than 21 days notice. A

shorter notice may, however, be held valid if consent is accorded thereto

by members of the company holding 95% or more of the voting rights

(Sec.171).




21. How many days before of statutory meeting a notice to be sent to every

member of the company.

(a) 11 days

(b) 31 days

(c) 41 days

(d) 21 days

22. _____________ empowers the Board of Directors to manage the

affairs of the company.

12.9 Auditor

It is compulsory for every company to appoint qualified auditors to do the

audit of the accounts maintained by the company. The first auditors(s) can

be appointed by the Board of Directors within one month of the date of the

incorporation of the company. The first auditors hold office until the

conclusion of the first AGM of the company. However, they can be removed

by members at their meeting held before the first AGM by giving a special

notice of an intention to remove them. Also, if the Board of Directors do not

appoint the first auditors, then the company in general meeting may do so.

The private companies are not to be taken into account for calculating the

number of companies which an auditor can audit.

A person will not be eligible for appointment as an auditor of a company if

be, after a period of one year from the commencement of the Amendment

Act is holding any security in that company.

Every auditor so appointed, must within thirty days of the receipt from the

company of the intimation of his appointment, inform the registrar in writing

that he has accepted the appointment or has refused the same.

Powers and duties or obligations of auditors

Sec.227 enumerates some of the powers of auditors:

(i) Every auditor of a company has right of free and complete access at all

times to the books, accounts and vouchers of the company whether

kept at the head office or elsewhere.

(ii) He has also the right to require from the officers of the company such

information and explanation as may be necessary for the performance

of his duties as auditor.



(iii) He is entitled to receive notice of and to attend general meetings of the

company and be heard on any part of the business which concerns him

as auditor.


1. Is it compulsory for every company to appoint qualified auditors to do

the audit of the accounts maintained by the company? (True / False)

2. Every auditor of a company has right of free and complete access at all

times to the books, accounts and vouchers of the company whether

kept at the head office or elsewhere. (True / False)

12.10 Winding up of Companies

Winding up of a company is the process whereby its life is ended and its

property administered for the benefit of its creditors and members. An

administrator, called a „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. In simple words

winding up means applying the assets of a company in the discharge of its

liabilities and returning any surplus to those entitled to it, subject to the cost

of doing so. The statutory process by which this is achieved is called

„liquidation‟. Winding up of a company differs from insolvency of an

individual inasmuch as a company cannot be made insolvent under the

insolvency law. Besides, even a solvent company may be wound up.

12.10.1 Modes of winding up

A company may be wound up in any of the following two ways: A.

Compulsory winding up under an order of the Court. B. Voluntary winding

up. C. A voluntary winding up under the supervision of the Court.

12.10.2 Winding up by the court

Winding up by the Court, also called compulsory winding up, may be

ordered in cases mentioned in Sec.433. The Court will make an order for

winding up on an application by any of the persons enlisted in Sec.439.



Activity 3:

A company issued a prospectus advertising that the company has

a great potential with turnover of a million bags of cement in a

year. It is discovered later that while the company has the installed

capacity of one million bags, it had never produced more than 6

lack bags of cement in a year. A buyer of shares seeks remedy

against the misleading statement. Would he succeed? Also,

analyse the penalties which the company may suffer for making

the false statement.


18. An administrator, called a

(a) Liquidator

(b) Advisor

(c) Financer

(d) None

19. The statutory process by which this is achieved is called ___________.

12.11 Summary

A company is an association of many persons who contribute money or

money's worth to a common stock, and employs it in some business, and

who share the profit and loss arising there from. Shares in a company are

transferable. An association of persons, once incorporated under the

Companies Act, 1956 become a legal entity, having its own entity separate

from its members. The company, being a separate person, its members are

not as such liable for its debts. A company limited by shares is a registered

company having the liability of its members limited by its memorandum of

association to the amount, if any, unpaid on the shares respectively held by

them.

Glossary

Company: A company is an association of many persons who contribute

money or monies worth to a common stock and employed in some trade or

business and who share the profit and loss arising there-from.



Private Company: A company where the minimum number of member is

two and maximum fifty.

Memorandum of Association: The memorandum of association of a

company as originally framed or altered from time to time in pursuance of

any previous companies law or of companies act.

Prospectus: Any document described or issued as a prospectus and

includes any notice, circular, advertisement or other document inviting from

the public.

12.12 Terminal Questions

1. What are the characteristics of a company?

2. Distinguish between a public limited company and private limited

company.

3. Who is a promoter? Also explain the duties and liabilities of promoters.

4. What do you mean by memorandum of association? What does it

contain?

5. Write a short note on statement in lieu of prospectus.

6. A company limited by shares intends to buy some of its own shares.

Suggest

7. What are the different kinds of general meetings of a company?

8. How is an auditor appointed? What are the matters to be stated in his

report?

12.13 Answers

Answers to Self Assessment Questions

1. (c)

2. A

3. (b)

4. Sec.16

5. (d)

6. (c)

7. Sec.56

8. (a)

9. True



10. (c)

11. True

12. Sec.2(13)

13. True

14. (d)

15. Sec.291

16. True

17. True

18. (a)

19. Liquidation

Answers to Terminal Questions

1. Refer 12.2 – The whole process of formation of a company may be

roughly divided, for convenience, into three parts. These are:

(i) Promotion; (ii) Registration and (iii) Floatation.

2. Refer 12.2 – Private company at least two members and public at least

7 members.

3. Refer 12.2 – Promoter term is used expressly in Sec.62, 69, 76, 478 and

519.

4. Refer 12.3 – The Memorandum of Association of a company is its

charter which contains the fundamental conditions upon which alone the

company can be incorporated.

5. Refer 12.5 for more detail.

6. Refer 12.6 – Refer Share Section of this unit.

7. Refer 12.8 – The Act has made provisions for following different types of

meetings of shareholders: (i) Statutory Meeting; (ii) Annual General

Meeting; (iii) Extraordinary General Meeting; and (iv) Class Meetings.

8. Refer 12.9 – It is compulsory for every company to appoint qualified

auditors to do the audit of the accounts maintained by the company.

Mini-case

Salomon carried on business as a leather merchant. He sold his business

for a sum of £30,000 to a company formed by him along with his wife, a

daughter and four sons. The purchase consideration was satisfied by

allotment of 20,000 shares of £1 each and issue of debentures worth

£10,000 secured by floating charge on the company's assets in favour of Mr.



Salomon. All the other shareholders subscribed for one share of £1 each.

Mr. Salomon was also the managing director of the company. The company

almost immediately ran into difficulties and eventually became insolvent and

winding up commenced. At the time of winding up, the total assets of the

company amounted to £6,050; its liabilities were £10,000 secured by the

debentures issued to Mr. Salomon and £8,000 owing to unsecured trade

creditors.

The unsecured sundry creditors claimed the whole of the company's assets,

viz. £6,050 on the ground that the company was a mere alias or agent for

Salomon.

Question

Do you agree to the claims of the unsecured trade creditors? Comment.

(Hint: Yes Please follow the case.)

mb0050 summer drive assignment 2012

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