unit 2 company law - part i

7/30/2019 Unit 2 Company Law - Part I

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Companies Act, 1956

Came into force on 1st April 1956

Consists of 658 sections and 12 schedules and

based largely on the recommendations of the

Company Law Committee (Bhabha

Committee)

It was amended several times since 1956;

latest were effected from 2000, 2001 and

2002


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Company

According to Sec 3 (1) A Company formed

and registered under this Act or an existing

company

Existing company means company formed and

registered under any of the previous

Companies Law


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Company - Definition

A Company may be defined as an

incorporated association, which is an artificial

person, having an independent legal entity,

with a perpetual succession, a common seal, a

common stock capital comprised of

transferable shares and carrying limited

liability in relation to its members


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Characteristics of a company

Separate Legal Entity

Perpetual Succession

Limited Liability Common Seal

Transferability of shares

Capacity to sue and be sued Companys actions are limited

Separate property


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Consequences of the principle of

Separate Corporate Personality

Shareholders shall have no insurable interest in theproperty of the company

The persons who own its capital may also be itscreditors or employees

When shareholder dies, company continues to exist.Shares and not assets vest with legal heir

Property of company is not the joint property of itsshareholders

Nationality of company does not depend onnationality of shareholders

Company for its wrong doings can be fined and not

imprisoned


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Kinds of Companies

Chartered Companies Crown in exercise of royal

prerogative has power to create a corporation by

grant of a charter to persons assenting to be

incorporated; powers and nature of business are

defined by charter; Eg. Bank of England, East IndiaCompany

Statutory Companies Companies incorporated by

means of a special Act of Parliament or any StateLegislature; also known as Public Corporations; Eg.

RBI, LIC, FCI, TNEB, TN Housing Board, TN Water

Supply and Drainage Board (TWAD), NHAI, AAI


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Kinds of Companies

Registered Companies Registered under

Companies Act, 1956 and it may be

Companies limited by shares

Companies limited by guarantee

Unlimited Companies


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Registered Companies

Companies limited by shares most common

type; liability of members limited to amount

fixed by memorandum of company in case of

unpaid shares; no liability in case of fully paid

shares


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Companies limited by Guarantee liability ofmembers is limited to such amounts as they may

undertake as fixed by memorandum to contribute

to assets of company in the event of winding up

Company limited by guarantee may or may not

have share capital

If it has share capital liability is two-fold one to

pay for share amount and two the amount

guaranteed

Eg. Madras Stock Exchange


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Unlimited Companies liability of members is

not limited; liability extends to whole amount

of the companys debts and liabilities; rateable

contribution from all members

May be converted into a limited company

either limited by shares or limited by

guarantee


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Public Company

It is not a private company and has a

minimum paid-up capital of five lakh rupees

or such higher paid-up capital, as may be

prescribed;

Minimum 7 persons to form; no maximum

limit

Shares of public company are dealt in a stock

exchange


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Distinction between Public and

Private Company

Minimum number of members Public : 7;

Private : 2

Maximum number of members Public : no limit;

Private :50

Commencement of Business - Public : not until

certificate of commencement of business is

granted; Private : immediately after incorporation

Invitation to Public Public : by issuing prospectus

invite public to subscribe its shares / debentures;

Private : cannot do


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Private Company

Transferability of Shares Public : Not

restricted; Private : Restricted

Number of Directors Public : Atleast 3; Private

: Atleast 2

Statutory Meeting Public : Must hold and file a

report with the Registrar; Private : no such

obligations

Managerial remuneration Public : cannot

exceed 11% of net profits and minimum 50,000;

Private : No restrictions


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Private Company

Restrictions on appointment of directors -

Public : Registrar has to consent appointment;

shall sign the Memorandum; cannot vote or

take part in discussion on a contract in whichhe is interested; two-thirds of directors must

retire by rotation; Private : No such

restrictions Further issue of capital Public : must offer

them to existing members; Private : Free to

allot new issues to outsiders


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Conversion of Private Company

into Public Company

Conversion by Choice : by passing a special

resolution; within 30 days of becoming a

public company, it shall file a prospectus with

the Registrar

Conversion by Default : when default made in

complying with the provisions (restriction on

transfer of shares, limitation of the number ofmembers to 50 and prohibition of invitation to

public to buy shares and debentures)


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Conversion of Private Company

into Public Company

Conversion by Operation of Law :

Where it invites public deposits through

advertisement

It holds 25% or more of the paid up share capital

of a public company

It has public company as its shareholders holding

in aggregate 25% or more of its paid up sharecapital


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Conversion of Public Company into

Private Company

Can be converted by altering the Articles of

Association;

Alteration will be made by a special resolution

and approval of the Central Government;

Such resolution, approval of the Central

Government and printed copy of altered

articles has to be submitted to Registrar


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Holding Company & Subsidiary

Company

Holding Company : Company which controls

another Company

Controls composition of board of directors of

another company

Holds more than half of nominal value of equity

share capital of another company

Holds more than half of the total voting power ofanother company

Subsidiary Company : Company which is

controlled by another Company


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Government Company

Company in which not less than 51% share

capital is held by the Central Government, or

State Government or partly by Central and

partly by one or more State Governments

Also includes a company which is a subsidiary

of a Government Company


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Government Company

Special provisions laid in the Act regarding a

Government Company Auditor : appointed by Central Govt. on advice of

Comptroller and Auditor General (CAG) of India

Auditor to submit a copy of audit report to CAG; Auditreport and comments or supplementary report given by

CAG on audit report to be placed before Annual General

Meeting

Annual report on working and affairs of the company to

be prepared and laid before houses of Parliament along

with audit report and comments in case of Central Govt

being a member; in case of State Govt being a member

should be laid before State Legislature


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Government Company

Ownership or Capital : Not less that 51% heldby Central or one or more State Governments

Auditing of Accounts : Audited by auditors

appointed by Government and reportscommented by CAG of India

Annual report : Submitted to Parliament

Modification : Central Government withapproval of Parliament may declare certain

provisions as not applicable with certain

modifications, exceptions and adaptations.


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Foreign Company

Company incorporated outside India and having

a place of business in India

Documents :

Within 30 days of establishment of business, foreign

company shall furnish a certified copy of statute,memorandum and articles containing the

constitution of the company if it is not in English a

certified translation

Full address of registered or principal office

List of directors and secretary of the company

Names and address of any person in India authorized

to accept service of legal processes and notices


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Foreign Company

Accounts : File three copies of its Balance

Sheet and P&L account to Registrar

Names : Every foreign company shall exhibit

on the outside of every office or place of

business its name and country of

incorporation in English


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Incorporation of a Company Application for registration + Documents to be

filed for Registration -> Registrar of Companies ofthe State in which the business office of company

is to be located

Documents

Memorandum of Association

Articles of Association

Statement of authorized capital

Notice of address of registered office of company

List of Directors, their consent and undertaking in writing

signed by each of them

Declaration that all requirements of Companies Act is

complied


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Incorporation of Company

If Registrar is satisfied, he shall register

Memorandum and Articles

Provisions of Act have been complied with

Object of the Company is lawful

Number of persons required under the Act have

subscribed and duly signed

Memorandum and Articles comply with theprovisions of the Act

Name of Company is acceptable

Statutory declaration has been properly made


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Certificate of Incorporation

Registrar will issue Certificate of Incorporation

From the date of incorporation, Company is a

legal person

It is the birth certificate of the company

Private company can commence businessimmediately after receiving certificate of

incorporation

Certificate of Commencement of


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Certificate of Commencement ofBusiness

Also known as Trading Certificate Issued by Registrar after

Shares payable in cash has been allotted to extent of

minimum subscription

Every director has paid in cash the application and

allotment money for shares taken by him

Statutory declaration duly verified by one of the

directors or secretary in prescribed form

Conclusive evidence that the company is entitled

Company is bound to commence business within

a year of its incorporation


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Promoter

One who undertakes to form a company with

reference to a given object and to set it goingand who takes the necessary steps to accomplish

that purpose

Work of Promoters Decide scope of business

Instruct solicitors to prepare necessary documents

and secure the services of directors

Provide registration fees and carry out other duties

involved in formation of a company

Make arrangements for advertising and circulating

prospectus and placing the capital


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Promoter

He is not an agent for the company because

the company is not in existence at that time

Liability of Promoters

Hand over any secret profit

For Untrue statement in prospectus to a person

who has subscribed for shares on faith of it

Remuneration of Promoters

No right against the company for his remuneration

unless there is a contract to that effect


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Preliminary or Pre-Incorporation

Contracts

Contracts made on behalf of a company

before its incorporation

Not binding on the company since a person

(legal or artificial) cannot enter into contract

before his/her existence

Provisional Contracts : Contracts entered after

incorporation but before entitlement to

commence business is also provisional and are

not binding until trading certificate is issued


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Document which sets out the constitution of

the company

Foundation on which the structure of the

company is based

Purpose : To enable the shareholders,

creditors and those who deal with the

company to know what is the permitted range

of activities of the enterprise


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Contents of Memorandum

Name of the Company (with Limited in case

of public company; with Private Limited in

case of private company)

State in which the registered office of the

company is to be situated

Objects of the company classified as main

objects (to be pursued by the company and

objects incidental to attainment of main

objects) and other objects not included in

main


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Contents of Memorandum

Liability of members is limited if company is

limited by shares or by guarantee

Amount of share capital


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Name Clause

A company may be registered with any name

it likes

Central Govt. should approve

Cannot be identical to or resemble the name of

existing company

Must not violate provisions of Emblems and

Names Act 1950. Should contain Limited or Private Limited at

the end of its name


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Name Clause

Company should display its name outside its

registered office and every place where its

carries on business

Engrave it on a seal

Have its name on all business letters, bill

heads, notices and other official publications

of the company


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Registered Office Clause

States the name of the State where the

registered office of the company is situated

Ascertains the domicile and nationality of a

company

Is the place where various registers relating to

the company must be kept and to which all

communications and notice must be sent

Obj t Cl


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Objects Clause

Purpose :

Gives an idea to prospective shareholders the

purposes for which their money will be utilized

Enables the persons dealing with the company to

ascertain its powers Main Objects

Main objects to be pursued by the company on its

incorporation and objects incidental to attainment ofthe main objects

Other Objects

Objects not included in main objects clause


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Liability Clause

States the liability of the members of thecompany

Limited by shares : liable only to the amount

unpaid on the shares taken by him Limited by guarantee : liable to the amount

undertaken to be contributed by them to the

assets of the company in the event of its beingwound up

This Clause is omitted in case of unlimited

companies


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Capital Clause

Company limited by shares must state the

Authorized share capital,

Different kinds of shares and

Nominal value of each share


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Association or Subscription Clause

This clause provides that those who have agreed

to subscribe to the memorandum, must signify

their willingness to associate and form a

company

Atleast 7 persons in case of Public company and

atleast 2 persons in case of Private company are

required to sign the Memorandum in the

presence of atleast one witness who must attestthe signatures

Number of shares taken by the person must be

written against his name


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Alteration of Memorandum

Company shall not alter its memorandum

except in certain cases


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Alteration in Memorandum

Company doesnt have right to alter the

contents

Change of Name

Pass a special resolution

Obtain approval of Central Government in writing

No such approval is required for deleting or

including the word Private in converting a publiccompany to a private company and vice versa.


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Change of Registered Office

Notice of change to be given to Registrar within 30

days of such change (If change is within the same

city or town) Pass a special resolution and only after

confirmation from Company Law Board on

petition. Notice of such change to be given to

Registrar within 30 days of the change

These 2 changes does not involve alteration of

Memorandum


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Change in Objects Clause

Change is possible only if it enables

To carry on business more economically and efficiently

Attain main object by new or improved means

Enlarge or change local area of operation

Restrict or abandon any of the objects specified in the

memorandum

Sell or dispose the whole or any part of the undertaking

of the company

Amalgamate with any other company

Al i i M d


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Change in Objects Clause

Pass a special resolution, sanctioning the alteration

Copy shall be filed with the Registrar within 30 days of

passing

But it takes effect only after confirmation by theCompany Law Board (CLB) on petition

Before confirming CLB sees that notice has been given

to all interested persons; It may confirm either wholly

or in part or with some terms and conditions

A certified copy of the order of CLB together with

printed copy of altered memorandum must be filed to

Registrar within 3 months of order


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Change in Liability Clause

Cannot be altered to make the liability unlimited

But enhancing of liability if agreed by members in

writing can be changed

A company, if authorized by its articles can by

special memorandum to make liability of directors

or managers unlimited, but it holds good forfuture appointed directors or managers only


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Change of Capital Clause

Can alter subject to provisions of the Articles by a

resolution in general meeting.

Confirmation from court is not required if Change is to increase share capital

Consolidate shares into larger amount

Subdivide shares to smaller amount

Cancel its shares


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Doctrine of Ultra Vires

An act is said to be ultra-vires (beyond the

powers) when it is performed but not

authorized by the Objects Clause in


Such an act is void and cannot be ratifiedeven

by an unanimous resolution of all the share

holders.


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Effects of Ultra-Vires Acts

Company is not bound by and cannot enforce anultra-vires contract

Injunction : Company maybe restrained to do anact if it is ultra-vires of its objects

Subrogation : If the borrowed money is applied inpaying off lawful debts of the company, thelender can claim a right of subrogation andconsequently, he will stand in the shoes of the

creditor who has paid off with his money and cansue the company to the extent the moneyadvanced by him has been so applied


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Effects of Ultra-Vires Acts

Tracing Order : Lender can identify his money orother property purchased with it, he is entitled towhat is known as a tracing order and can recover.

Personal Liability of Directors : Lender can hold the

directors personally liable for an ultra-vires loan ofthe company

Ultra-vires contract cannot become intra-vires byreason of estoppel, lapse of time, ratification ordelay.

Company will be liable for torts or crimescommitted in the pursuit of its stated objectives.


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The Articles of Association are the rules andregulations of a Company framed for thepurpose of internal management of its affairs

and for carrying out the aims and objects of theMemorandum of Association.

It deals with the rights of the members of theCompany

Articles of Association of a Company aresubordinate to and are controlled by theMemorandum of Association.


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Not Obligatory to register Articles in case of aPublic Company Limited by Shares (Model Articlescontained in Table A of Schedule 1 of the Act willapply)

Unlimited Company, Limited by Guarantee andPrivate Company must register along withMemorandum

Unlimited Company : Number of Members, Share

Capital, amount with which it is to be registered Company Limited by Guarantee : Number of

members with which the company is to beregistered


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Articles of Association (Contents)

Exclusion wholly or in partof Table A

Adoption of preliminarycontracts

Number and value ofshares

Calls on shares

Lien on shares

Transfer and Transmissionof shares

Forfeiture of shares

Alteration of share capital

Share certificates

Conversion of share intostock

Voting rights and proxies

Rules of conductingMeetings

Directors, their

appointment, etc. Borrowing powers

Accounts and Audit

Dividends and Reserves

Winding up


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Difference between share and stock

A share in a company in one of the units into which thecapital is divided. On the other hand, a stock is anaggregate of fully paid shares of a member merged intoone fund of equal value. This fund can be divided intofractions of any amount and can be transferred. Only acompany limited by shares may, if authorized by Articlesby resolution passed in general meeting, convert all or anyof its fully paid up shares into stock.

Also a share can be transferred only in its entirely or in itsmultiple only. However a stock may be transferred in anyfraction. Shares are issued originally by the co. However aco cannot make an original issue of stock. Only fully paidshares can be converted into stock


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Alteration of Articles

Companies have wide powers to alter their

Articles

Can be altered by passing a special resolution

Is binding on the members the same way as

the original Articles

Must file with the Registrar a copy of special

resolution within 1 month from the date of

passing


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Alteration of Articles

Limitations for alteration of Articles

Must not exceed powers of Memorandum

Must not be inconsistent with any provisions of

Companies Act or Memorandum or an order ofthe Court

Must not be illegal

Any irregular alterations which have been madeand acted upon for many years are binding

Distinction between Memorandum(M)


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and Articles (A)

Contents and Scope : Defines the charter ofthe company and the scope of its activities(M); Regulates the internal management of

the company and rules made for carrying outthe objects set out in Memorandum (A)

Relationship between company, members andoutsiders : M defines relation of company with

outside world; A deals with the rights of themembers of the company and established therelationship of company with the members



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and Articles (A)

Alteration : Cannot be altered except in mannerand extent provided by the Act (M); Can bealtered by a special resolution as these are just

bye-laws (A) Supremacy : Memorandum is supreme

document of the Company; Articles aresubordinate to Memorandum

Adoption : Every Company must have its ownMemorandum; But a company limited by sharesneed not register its Articles. Table A applies

Constructive Notice of Memorandum


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Constructive Notice of Memorandum

and Articles of Association

Registering Memorandum and Articles of

Association with the Registrar of Companies

makes the documents as public documents

and everyone dealing with the companywhether share holder or outsider is presumed

to have read the two documents. This deemed

knowledge of the two documents and theircontents is known as the constructive notice

of Memorandum and Articles of Association.

Doctrine of Indoor Management


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Doctrine of Indoor Management Exception to the rule of Constructive Notice. Also

known as Turquand Rule

Constructive notice protects the company against

Outsiders; Doctrine of Indoor Management protects

the outsiders against the company.

While persons are contracting with the company

are presumed to know the provisions of the

contents of the Memorandum and Articles, they are

entitled to assume that the officers of the company

have observed the provisions of the Articles. It is no

part of duty of outsider to see that the company

carries out its own internal regulations

Exceptions to Doctrine of Indoor


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Exceptions to Doctrine of Indoor

Management

Knowledge of irregularity : A person who deals

with the company and has knowledge in its

internal management cannot claim

Negligence : In circumstances under which hewould have discovered the irregularity had he

made proper inquiries.

In cases of Forgery


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Prospectus - Definition

Any document described or issued as a

Prospectus and includes any notice, circular,

advertisement or other document inviting

deposits from the public or inviting offer fromthe public for the subscription or purchase of

any shares in, or debentures of, a body

corporate. Sec 2 (36)


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Formalities in issuing a Prospectus

Prospectus is issued by or on behalf of a

company; must be dated; that date is the date

of publication

A copy of Prospectus signed by every directoror proposed director or by his agent must be

delivered to the Registrar on or before the

date of publication. Prospectus issued topublic should have mention that a copy has

been filed with the Registrar.


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Formalities in issuing a Prospectus

SEBIs consent or authorization

Every Application form for subscription should

be accompanied by Prospectus

Prospectus must contain the necessary

information for the public to decide whether

to subscribe or not

Contents of Prospectus


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General information

Name and Address of Registered Office

Details of letter of intent or Industrial License

Name of stock exchanges listed for issue

Provisions of Sec 68 A (1) of Companies Act regardingfictitious applications

Declaration regarding minimum subscription and

refund of application money

Dates of opening, closing and earliest closing of the

issue

Names and Addresses of managers, trustees, legal

advisors, auditors, bankers to the issue and secretary


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Capital Structure of the company and issue

details

Authorized, issued, subscribed and paid-up capital

of the company Reservation for preferential allotment to

promoters, financial institutions and mutual funds


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Details of the issue Authority for the issue and details of resolutions

passed for the issue

Terms of payment Rights of Instrument holders

Object of the issue

Tax benefits available to the company and its

shareholders

Justification for the premium on the issue, if any,

disclosure of net asset value on the basis of the last

audited results



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Details about the project Cost of project and means of financing

Location of the project

Plant and machinery for the project, technology

adopted and process of manufacture

Infra structure facilities for raw materials

Utilities like water, power, etc

Schedule of implementation of project

Expected date of trial production

Expected year when the company would be able to

earn profits


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Additional disclosures made in


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Additional disclosures made in

Prospectus

Deployment of proceeds of issue : Avenues of

investment

Stock market data

Statement in Lieu of Prospectus


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p If a company is able to raise the original capital

without inviting public for subscription, Statement

in Lieu of Prospectus has to be submitted to

Registrar atleast 3 days before first allotment of

shares; If allotment is made then it is voidable.

It has to be signed by every director

Fine upto Rs. 1000 for every director who has

knowledge of it.

If an untrue statement is given then imprisonment

for 2 years and fine of Rs.5000 to every person

authorized to deliver the statement and has

knowledge of it

Offer for Sale


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Offer for Sale

Companies allot the whole issue of shares or

debentures to an Issuing House at a certainprice; because provisions relating to prospectus,

preparing and filing in accordance with law are a

highly time-consuming task Issuing company publishes an ad in the nature of

offer of sale inviting public to buy the share

Issuing House renounces its interest afterreceiving application.

Allotment in made in favor of the applicant by

the Company


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Shelf Prospectus

A Public financial institution or bank whose

object is financing shall file Shelf Prospectus

They need not file prospectus afresh at every

stage of offer within the period of validity

Such company shall file information

memorandum on all material facts on changes

made in company after the first issue


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Abridged form of Prospectus

Application form for issue of shares or

debentures of a company has to be

accompanied by abridged form of Prospectus

Features of Abridged Prospectus as per Form2A according to Rule 4cc, Companies (Central

Government) General Rules and Forms, 1956


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Liability for mis-statement or


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Liability for mis statement or

omission in a prospectus Defenses available to a Director and he can escape

liability if he proves

Prospectus was issued without his knowledge

Withdrew his consent and gave reasonable publicnotice of withdrawal and reasons for it

He had reasonable grounds to believe that the

statement was true

The statement was a correct and true copy of an

official document

Liability for mis-statement or


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Liability for mis statement or

omission in a prospectus

Criminal Liability

Every person who authorized the issue of

prospectus : Imprisonment extendable to 2 years

or fine of Rs.5000 or both Accused person may not be liable if he proves

Statement was immaterial

He had reasonable ground to believe the statement as

true

Punishment for issuing application not

accompanied by prospectus : Fine upto Rs.5000

Minimum Subscription


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Minimum Subscription

Company cannot allot shares until minimum

amount stated in prospectus has been

subscribed

Minimum amount stated which is in the opinion

of directors must be raised in order to provide for Purchase price of any property purchased or to be purchased

Preliminary expenses and any underwriting commission

payable

Repayment of money borrowed by the company

Working capital

Any other expenditure stating nature and purpose and the

estimated amount


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U d i i C i i


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Underwriting Commission

Company wants the whole issue taken up

when it offers its shares to the public and it is

willing to pay commission on all shares offered

to public to anyone who undertakes to take upall the shares which the public do not take

It is in the nature of an insurance against the

possibility of inadequate subscription


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Government prescribed max.


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Go e e t p esc bed a

ceiling rates

U d iti C i i


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Underwriting Commission

Commission will not be paid for securitiestaken up by promoters group, employees,

directors.

Amount paid by way of underwritingcommission shall be shown in the Balance

Sheet under the head Miscellaneous

Expenditure In case of non-compliance, the company and

every officer shall be liable to pay a fine upto