Company Law

Unit II

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

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

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

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

Consequences of the principle of Separate Corporate Personality

Shareholders shall have no insurable interest in the property of the company The persons who own its capital may also be its creditors 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 its shareholders Nationality of company does not depend on nationality of shareholders Company for its wrong doings can be fined and not imprisoned

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 India Company Statutory Companies Companies incorporated by means of a special Act of Parliament or any State Legislature; also known as Public Corporations; Eg. RBI, LIC, FCI, TNEB, TN Housing Board, TN Water Supply and Drainage Board (TWAD), NHAI, AAI

Kinds of Companies
Registered Companies Registered under Companies Act, 1956 and it may be Companies limited by shares Companies limited by guarantee Unlimited Companies

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

Registered Companies
Companies limited by Guarantee liability of members 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

Registered Companies
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

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

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

Distinction between Public and 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

Distinction between Public and 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 which he 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

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 of members to 50 and prohibition of invitation to public to buy shares and debentures)

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 share capital

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

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 of another company

Subsidiary Company : Company which is controlled by another Company

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

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; Audit report 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

Government Company
Ownership or Capital : Not less that 51% held by Central or one or more State Governments Auditing of Accounts : Audited by auditors appointed by Government and reports commented by CAG of India Annual report : Submitted to Parliament Modification : Central Government with approval of Parliament may declare certain provisions as not applicable with certain modifications, exceptions and adaptations.

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

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

Incorporation of a Company
Application for registration + Documents to be filed for Registration -> Registrar of Companies of the 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

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 the provisions of the Act Name of Company is acceptable Statutory declaration has been properly made

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 business immediately after receiving certificate of incorporation

Certificate of Commencement of Business

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

Promoter
One who undertakes to form a company with reference to a given object and to set it going and 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

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

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

Memorandum of Association
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

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

Contents of Memorandum
Liability of members is limited if company is limited by shares or by guarantee Amount of share capital

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

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

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

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 of the main objects

Other Objects
Objects not included in main objects clause

Liability Clause
States the liability of the members of the company 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 being wound up This Clause is omitted in case of unlimited companies

Capital Clause
Company limited by shares must state the Authorized share capital, Different kinds of shares and Nominal value of each share

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 attest the signatures Number of shares taken by the person must be written against his name

Alteration of Memorandum
Company shall not alter its memorandum except in certain cases

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 public company to a private company and vice versa.

Alteration in Memorandum
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

Alteration in Memorandum
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

Alteration in Memorandum
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 the Company 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

Alteration in Memorandum
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 for future appointed directors or managers only

Alteration in Memorandum
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

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 Memorandum of Association Such an act is void and cannot be ratified even by an unanimous resolution of all the share holders.

Effects of Ultra-Vires Acts

Company is not bound by and cannot enforce an ultra-vires contract Injunction : Company maybe restrained to do an act if it is ultra-vires of its objects Subrogation : If the borrowed money is applied in paying off lawful debts of the company, the lender can claim a right of subrogation and consequently, he will stand in the shoes of the creditor who has paid off with his money and can sue the company to the extent the money advanced by him has been so applied

Effects of Ultra-Vires Acts

Tracing Order : Lender can identify his money or other property purchased with it, he is entitled to what 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 of the company Ultra-vires contract cannot become intra-vires by reason of estoppel, lapse of time, ratification or delay. Company will be liable for torts or crimes committed in the pursuit of its stated objectives.

Articles of Association
The Articles of Association are the rules and regulations of a Company framed for the purpose of internal management of its affairs and for carrying out the aims and objects of the Memorandum of Association. It deals with the rights of the members of the Company Articles of Association of a Company are subordinate to and are controlled by the Memorandum of Association.

Articles of Association
Not Obligatory to register Articles in case of a Public Company Limited by Shares (Model Articles contained in Table A of Schedule 1 of the Act will apply) Unlimited Company, Limited by Guarantee and Private Company must register along with Memorandum 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 be registered

Articles of Association (Contents)

Exclusion wholly or in part of Table A Adoption of preliminary contracts Number and value of shares Calls on shares Lien on shares Transfer and Transmission of shares Forfeiture of shares Alteration of share capital Share certificates Conversion of share into stock Voting rights and proxies Rules of conducting Meetings Directors, their appointment, etc. Borrowing powers Accounts and Audit Dividends and Reserves Winding up

Difference between share and stock

A share in a company in one of the units into which the capital is divided. On the other hand, a stock is an aggregate of fully paid shares of a member merged into one fund of equal value. This fund can be divided into fractions of any amount and can be transferred. Only a company limited by shares may, if authorized by Articles by resolution passed in general meeting, convert all or any of its fully paid up shares into stock. Also a share can be transferred only in its entirely or in its multiple only. However a stock may be transferred in any fraction. Shares are issued originally by the co. However a co cannot make an original issue of stock. Only fully paid shares can be converted into stock

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

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 of the Court Must not be illegal Any irregular alterations which have been made and acted upon for many years are binding

Distinction between Memorandum(M) and Articles (A)

Contents and Scope : Defines the charter of the company and the scope of its activities (M); Regulates the internal management of the company and rules made for carrying out the objects set out in Memorandum (A) Relationship between company, members and outsiders : M defines relation of company with outside world; A deals with the rights of the members of the company and established the relationship of company with the members

Distinction between Memorandum(M) and Articles (A)

Alteration : Cannot be altered except in manner and extent provided by the Act (M); Can be altered by a special resolution as these are just bye-laws (A) Supremacy : Memorandum is supreme document of the Company; Articles are subordinate to Memorandum Adoption : Every Company must have its own Memorandum; But a company limited by shares need not register its Articles. Table A applies

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 company whether share holder or outsider is presumed to have read the two documents. This deemed knowledge of the two documents and their contents is known as the constructive notice of Memorandum and Articles of Association.

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 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 he would have discovered the irregularity had he made proper inquiries. In cases of Forgery

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 from the public for the subscription or purchase of any shares in, or debentures of, a body corporate. Sec 2 (36)

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 director or proposed director or by his agent must be delivered to the Registrar on or before the date of publication. Prospectus issued to public should have mention that a copy has been filed with the Registrar.

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
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 regarding fictitious 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

Contents of Prospectus
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

Contents of Prospectus
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

Contents of Prospectus
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

Additional disclosures made in Prospectus

Disclaimer Clause : SEBI does not take any responsibility of financial soundness of the company Reservations for NRIs, Overseas Corporate Bodies in Public Issues : Name and address of atleast one source in India where application can be obtained Buy back arrangement for purchase of nonconvertible or partly convertible debentures Performance and promises relating to previous issues

Additional disclosures made in Prospectus

Deployment of proceeds of issue : Avenues of investment Stock market data

Statement in Lieu of Prospectus

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

Companies allot the whole issue of shares or debentures to an Issuing House at a certain price; 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 after receiving application. Allotment in made in favor of the applicant by the Company

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

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 Form 2A according to Rule 4cc, Companies (Central Government) General Rules and Forms, 1956

Liability for mis-statement or omission in a prospectus

Civil Liability
Remedies against the Company
Rescind the contract Claim damages

Remedies against the Directors, Promoters and Experts

May sue every Director, every Promoter, every person authorized to issue prospectus, every person whose name appeared in it Can claim compensation under Sec.62, damages for noncompliance with requirements of Sec.56, damages under general law

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 public notice 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 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
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

Minimum Subscription
All money received from applicant shall be deposited and kept in a scheduled bank until minimum subscription has been received If min. subscription is not received within 120 days from first issue of prospectus, all money should be returned within 130 days of such issue Amount payable on application on each share must not be less than 5% of nominal amount of the shares

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 up all the shares which the public do not take It is in the nature of an insurance against the possibility of inadequate subscription

Underwriting Commission
Conditions
Payment of Commission must be authorized by Articles of Association Commission to be paid only on shares issued to public Payment of commission must be strictly by way of money Rate must not exceed 5% of the price of shares and 2.5% of the price of debentures Amount paid or agreed to be paid must be disclosed in prospectus Copy of contract for payment of commission must be delivered to the Registrar along with the Prospectus

Government prescribed max. ceiling rates

Underwriting Commission
Commission will not be paid for securities taken up by promoters group, employees, directors. Amount paid by way of underwriting commission 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 Rs.500