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CORPORATE LAW

Unit 6 – Company Meetings and Secretary

5.1 Company Meeting

A company meeting is an official gathering of concerned persons who come together in required number, to discuss and arrive at decisions essential for the functioning of the company. Prerequisites:

1. Proper authority

2. Notice of Meeting (21 days)

3. Quorum of Meeting

4. Chairman of Meeting

5. Minutes of Meeting

Essentials for a meeting:

1. Notice

2. Agenda

3. Quorum (Public – 5, Private - 2)

4. Proxy

5. Chairman

6. Voting and demand for poll

7. Amendment

8. Adjournment

5.2 Minutes

Summarized written record of what occurs and what is said at a meeting

Made by a typist or court recorder Contents:

1. Date of the meeting

2. List of attendees

3. Purpose of meeting

4. Administrative issues discussed

6. Closure

5.3 Quorum

A. Public company

5 members (members > 1000)

15 members (1000 > members < 5000)

30 members (5000 > members)

B. Private company

2 members

5.4 Types of meetings

A. Shareholders’ meeting

i) Statutory meeting

First meeting of the shareholders

Held once in the life of public company

Public limited companies should hold the meeting not less than one month and not more than 6 months of commencement of business

Private, unlimited, and government companies are exempted

Objectives

To discuss success of formation of company

Approve/ modify contracts specified in prospectus

Providing information regarding shares, preliminary expenses, underwriting agreement, and contracts Contents of notice of a statutory meeting

Notice – 21 days before meeting Contents

i. Total shares allotted

ii. Cash received while allotting shares

iii. Abstracts of receipts and payments

iv. Information about directors, auditors, managers, secretary

v. Contracts

vii.

Arrears of calls

viii. Commission and brokerage

B. Annual General Meeting

Gathering of directors and shareholders of every incorporated firm, required by law to be held each calendar year

Only one-person companies are exempted

Should be organized within every 15 months

Should not be held later than 6 months from date of balance sheet

First AGM should be held no later than 9 months after closing of financial year

Extension can be approved (extension not more than 3 months) by Registrar’s approval

Notice should be issued 21 days before AGM

Main Purpose of AGM

To comply with legal requirements, such as:

i. Approval of audited documents

ii. Appointment of new auditors

iii. Compensation of officers

iv. Election of Directors

v. Confirmation of proposed dividend

vi. Deal with issues raised by shareholders

C. Extraordinary General Meeting

All general meetings other than the AGM are called EGM

Meeting of directors, shareholders, and maybe even employees of the organization which occurs at an irregular time

It is called for by the Board of Directors for urgent business

Purpose of EGM

Purpose of EGM is as follows:

ii.

Declaration of dividends

iii. Appointment of directors in the place of retired ones

iv. Appointment and fixing remuneration of auditors

D.

Class Meetings

Held by holders of a particular type of shares

Resolutions passed will apply only to holders of that particular type of shares

E.

Meeting of Board of Directors

Formal meeting of board held at definite intervals to discuss policy issues

F.

Meetings of Committee of Directors

Meetings of directors of various committees (nomination, remuneration, audit), as per CSR at least 2 times annually, or more frequently

5.5 Resolutions

Decisions of a meeting take form of resolutions carried by majority of votes

A question on which a vote is to be taken is called a motion

Once a motion is put forward and favored by the members, it becomes a resolution

It is the formal decision of a meeting on a particular proposal before it

Types of resolutions

1. Ordinary resolutions

Passed at a general meeting by simple majority (for and against will be considered, with neutral being ignored)

Sufficient to affect any transaction within powers of the company

Examples:

i. Rectification of name

ii. Approve remuneration of directors

iii. Alteration of share capital

iv. Declaration of dividend

2.

Special Resolutions

A resolution is considered to be special if:

Intention to propose it has been duly specified in the notice

Notice required has been duly given

Votes in favor are three times of the votes against

Examples:

i. Alter memorandum

ii. Alter articles of association

iii. Pay interest to members out of capital

3. Resolutions requiring special notice

Ordinary resolution where mover of the resolution should give a notice 14 days before to the company, which will then be transferred by the company to the required members in the same manner

Examples:

i. Appointment of auditors other than retiring one

ii. Removing a director

iii. Appointment of director other than retired one

5.6 Principle of Majority Rule

Majority rule is a decision rule that selects alternatives which have a majority, that is, more than half the votes

It is the binary decision rule used most often in influential decision-making bodies, including all the legislatures of democratic nations

5.7 Protection of Minority Interest

Rights enjoyed by minority shareholders

i. Fiduciary Duty majority shareholders must deal with minority shareholders with candour, honesty, good faith, loyalty, and fairness

ii. Access to Company’s financial records

discount on minority shares reflects the fact that minority shares are not as valuable because they do not provide as much company ownership as other shares

5.8 Company secretary Any individual possessing the required qualifications and appointed to perform the duties of the secretary, or any other ministerial or administrative duties

1. Appointment

Appointment of company secretary is a statutory obligation in the case of public limited companies

Appointment is done through written agreement

Contents of written agreement – term, conditions, salary, rules for termination

2. Required qualifications

i. Membership of ICSI

ii. Pass in intermediate examination of ICSI

iii. Degree in law

iv. Membership of ICAI

v. Membership of ICWAI

3. Duties

a. Statutory duties

i. Maintenance of books and registers

ii. Filing of returns with Registrar of companies

iii. Timely payment of sales tax

iv. Safe custody and use of company seal

b. General duties

i. Preparation of minutes

ii. Execute orders passed by Board

iii. Convene Board meetings

iv. Confidential advisory to the Board

c.

Shareholder Relation duties

i. Calls of shares

ii. Application of shares

iii. Allotment of shares

iv. Forfeiture of shares

d. Organization duties

i. Ensure efficiency

ii. Supervising activities

iii. Coordination activities

e. Public relation duties

i. Communication between directors and general public

ii. Liaison officer between shareholders and directors

iii. Provide information

Unit 4 – Membership of a company

4.1 Members & Shareholders

The term members and shareholders are used interchangeably and are considered synonymous as there can be no membership except through the provision of shareholding

A member can be defined as a subscriber to the memorandum of the company who have agreed to become members of the company, and on its registration will be entered as member in the company’s register

Every other person who agrees in writing to become a member of the company and whose name is entered

Every person holding shares and whose name is entered as a beneficiary in the records of the company is a member of that respective company

Any person who desires to become a member of a company should have the legal capacity to do so under the Indian Contract Act of 1972. The conditions are as follows;

i. Is of age of majority

ii. Is of sound mind

iii. Is not disqualified from signing a contract by any law that he is subject to

4.2 Modes of acquiring membership

A person may acquire membership of a company

a. By subscribing to the Memorandum of Association

b. By agreeing in writing to become a member

i. By making an application for allotment of shares

ii. By executing transfer of shares

iii. By consenting to transfer of someone else’s share in his/her

name

c. By holding shares of the company and whose name is entered as beneficial owner in the records of depository (Depository Act, 1996)

1.

Subscribers to the Memorandum

In the case of a subscriber, no allotment is necessary for him to become a member

By virtue of subscribing to the Memorandum, he becomes ipso facto member of the company and is liable for the shares he has subscribed to

Money payable by any member to the company under the Memorandum or Articles shall become debt due from him to the company

A subscriber to the Memorandum has to pay for his shares in cash, even if promotors have promised him the shares in return for services rendered in promotion of the company

When a person signs the Memorandum, he becomes absolutely bound to take those shares and his liability remains right up to the time the company goes into liquidation

2.

Agreement in writing

i. By an application for allotment

A person who applies for shares becomes a member when the shares are allotted and notice of allotment is issued to him, along with his name being added to the register of members

General law of contract applies to this transaction, where there is an offer to take shares and shares are allotted on acceptance of the offer

Application for shares may be absolute or conditional:

a) Absolute application - allotment and its notice will be sufficient acceptance

b) Conditional application – allotment must be made according to the condition

c) Conditional application but unconditional allotment – no contract

Shares are moveable property and are transferable according to the procedure in the Articles of Association and the Indian Companies Act, 2013

A person can become a member by acquiring shares from an existing member, having the transfer of shares registered in the book of the company, and getting his name registered in the company’s register of members

iii. By transmission of shares

person may become a member if he is the legal successor to

A

a

member who passed away

Membership by this method is a legal consequence

On the death of a member, the person who is legally entitled to succeed his estate gets the right to have the shares transmitted and have his name entered in the company’s register of members

The new member can either choose to be registered as a member in place of the deceased, or may request the company to transmit the shares in the name of another person

iv. By acquiescence or estoppels

A person is deemed to be a member if his name, without sufficient cause, is on the register of members and holds himself out

In such a case, he is estopped from denying his liability

He can only escape his liability by taking prompt action for having his name removed on permissible grounds

v. By holding shares as a beneficiary

Any person holding shares and whose name is entered as a beneficiary in the company’s register of members is said to be a member of that company

4.3 Who can become a member?

a. Company as a member of another company

A company is a legal person and is competent to contract, if authorized by its Memorandum of Association

In most cases, a subsidiary company cannot become a member of its holding company, except when:

1) the subsidiary company holds shares as the legal representative of a deceased member of the holding company 2) subsidiary company is a trustee of the holding company 3) subsidiary company is a shareholder before it become a subsidiary to the holding company

b. Partnership firm

Partnership firm is not a legal person and cannot become a member of another company, except of companies registered under Section 8 of the Indian Companies Act, 2013

c. Limited Liability Partnership

LLP, being an incorporate body under the statute, can become

a member

d. Section 8 Company

A non-profit making company registered under Section 8 of the

Indian Companies Act can become a member of another company, if authorized by its Memorandum of Association

e. Foreigner

A foreigner may become a member subject to the Foreign Exchange Management Act, 1999

In the event of war with the foreigner’s country, he becomes an enemy, and his voting power and rights to receive notices are suspended

f. Minor

A minor cannot become a member, and an agreement by him to

take shares is void ab-initio

g. Insolvent

An insolvent may be a member

Entitled to vote

Loses beneficial interest in the shares

h. Pawnee

Has no right of foreclosure since he never had the absolute ownership

i. Receiver

If his name is not entered in register of members, he cannot exercise any of the rights attached to a share

j. Fraudster

A person who takes shares in the name of a fictitious person, is deemed a member besides incurring criminal liability under Section 38

k. Trade Union

Trade Unions are allowed to register as members under their own corporate name

4.4 Termination of membership

A person ceases to be a member of the company when his name is removed from the company’s register of members, which can occur if:

i. He transfers his share to another person; the company records this transfer and removes the original member’s name from the register

ii. His shares are forfeited

iii. He dies

iv. He is judged insolvent; the official assignee removes his name from the register of members

v. His redeemable shares are redeemed

vi. He goes against the terms of the contract of membership on grounds of fraud, misrepresentation, or a genuine mistake

vii.

His shares are purchased by another member or by the company on orders of the Tribunal

viii.

The member is a company being wound up, and disclaims its shares

ix.

Company is wound up

4.5 Rights of shareholders

i. Right to elect directors

ii. Right to transfer shares

iii. Right to know facts

iv. Right to make a proposal / inquiry

v. Right to draw dividend

vi. Right to vote

vii. Right to convene and preside shareholder meetings

4.6 Duties of shareholders

i. Attend the annual meeting and other important shareholder meetings

ii. Vote competent representatives to the Board

iii. Serve the Board, if elected

iv. Determine the organization’s mission and purpose

v. Enhance the organization’s public image

vi. Manage resources effectively

Unit 8 – Limited Liability Partnerships

8.1 Limited Liability Partnerships – definition

Alternative form of business organization

Combines features of partnership and company

8.2 Nature

a)

LLP is a

1.

Corporate body formed under the LLP act

2.

Legal entity separate from its partners

3.

Has perpetual succession

4.

Partners in an LLP is not responsible for another partner’s misconduct or negligence

5.

Partners have right to manage the business

8.3 Number of partners

a) 2 or more partners are required to form an LLP

b) Any individual or corporate body can be a partner in LLP

8.4 Features of LLP

Hybrid form of organization having both features of:

a. Partnership, under the Partnership Act, 1932

b. Company, under the Companies Act, 2013

Administered by Registrar

Liability is limited except when an Act is carried out to defraud creditors or any person for fraudulent purposes

LLP is capable of acquiring, owning, holding, disposing of property,

whether it is movable, immovable, tangible, or intangible

It can sue and be sued

Capable of doing and suffering other acts

No limit on number of partners

Partners are agents of LLP but not agents of other partners

At least one of the designated partners must be a resident of India

Must maintain proper books of account

Accounts of LLP are required to be audited

1. LLP with turnover <= 40L or capital <=25L are exempt from provision of audit

2. Any LLP with turnover > 40L and capital > 25 have to be compulsorily

audited

8.5 Advantages of LLP

1.

Convenient

easy to start and manage a business, like entrepreneurs

LLP agreements are customized to meet the need of partners concerned

Fewer formalities in areas of legal compilation, annual meeting, and resolution as compared to other Private Limited Companies

2.

No minimum capital requirement

No mandatory capital requirement specified under LLP

3.

No limit on owner of business

Minimum – 2

Maximum – Unlimited

4.

Lower registration cost

Low compared to other companies (Public or Private)

5.

Taxation Aspect on LLP

Not liable to pay income tax of its partner

No dividend distribution tax

Provision of ‘Deemed Dividend’ is not applicable to LLP

8.6 Who can be a partner in LLP?

1. Persons who subscribe to the Incorporation Document are the first partners of the LLP. Any other person may become partner according to LLP agreement

2. Only individual bodies and corporate bodies

8.7

Who can’t be a partner in LLP?

1.

Person of unsound mind

2.

Undischarged insolvent

3.

Minor

4.

Partnership firm

5.

Artificial judiciary

8.8 Designated Partners

Every LLP should have at least two designated partners; one must be a resident of India

LLP may appoint a designated partner within 30 days of vacancy of the post

If there is no designated partner, or if there is only one, each partner is deemed to be a designated partner

Designated partners are responsible for doing all acts, matters, and things that are required to be done for complying with the provisions of the LLP Act

Liable to all penalties subject to LLP

8.8.1 Who can’t be a designated partner?

Undischarged insolvent

Person who has withheld payments to creditors at any point of time

Person who has been imprisoned for immoral acts, where the period of sentence <= 6 months

Minors

8.9 Duties of designated partners

File documents, returns, statements etc.

Authorized to affix his signature on the Statement of Account & Solvency

Extend his cooperation to inspector on inquiry of inspection, by supporting the authority with necessary documents, information, signing notes for examination

Liable to reimburse expenses on an investigation conducted by the Inspector

Must file annual returns within 60 days from date of closure of financial year

8.9 Liabilities of designated partners

Responsible for all acts, matters, things that are required to be done by LLP to comply with the provisions of the LLP Act

Liable to all penalties imposed on the LLP for any violations of those provisions

8.10 Whistleblowing

Court or tribunal may reduce or waive off penalty leviable against any partner or employee of an LLP, if:

a. Such a person has provided useful information during investigation of an LLP b. When any information given by any partner or employee (during investigation or any other time) leads to the LLP or any partner or employee of the LLP being convicted under the LLP Act or any other Act

No partner or employee of any limited liability partnership can be demoted, harassed, suspended, threatened or in any manner discriminated against the terms of his LLP merely because of providing information or causing information to be pursuant to sub-section

8.11 Process of registering an LLP

Step 1: Obtain Digital Signature Certificate (DSC)

All documents for LLP are filed online and require a digital signature

Step 2: Apply for Director Identification Number (DIN)

All the designated partners or those intending to be one should apply for a DIN

Application for DIN has to be made in Form – 3

Form should be signed by Company Secretary/MD/CEO/CFO Step 3: Name approval

Registrar will approve only a. if the name chosen is not undesirable in the name of the Central Government b. if the name chosen does not resemble any existing LLP or partnership firm Step 4: Incorporation of LLP

Form used is FiLLiP (Form for incorporation of Limited Liability Partnership), to be filed with the Registrar

Fees has to be paid according to Annexure A

Application for reservation may be made through FiLLiP

Step 5: File LLP Agreement

Must be filed in Form 3 online on MCA portal

Form 3 has to be filed within 30 days of date of incorporation

LLP Agreement has to printed on stamp paper

8.12 Conversion of partnership to LLP

Get DSC

Get DPIN

Name approval

File LLP Form 17, Form 2, Form 3 for conversion Documents necessary will be

§ Address proof of registered office

§ Details of partnership

§ Consent of all members

§ No objection certificate from Tax Authorities

§ List of creditors

§ List of assets and liabilities

8.13 Winding up of LLP

Can be voluntary or called for by a Tribunal

If voluntary

§ LLP must pass a resolution to wind up

§ Approval of 75% of total members is required

§ Approval of both secured and unsecured lenders

If called for by a Tribunal, it is because

§ Less than 2 partners for a period of more than 6 months

§ LLP is not in a position pay its debts

§ LLP has acted against sovereignty and integrity of India

§ Tribunal thinks it is just for the LLP to be wound up

§ LLP has not filed Statement of Account and Solvency for 5 consecutive financial years

1. Pass and file a resolution with the Registrar

2. Make a declaration verified by an Affidavit to the effect that LLP has no debt or can pay its debts in full within a period (not more than one year from date of commencement of winding up)

3. File the following documents

§ Statement of assets and liabilities

§ Report of valuation of assets of LLP, if any

8.14 Appointment of LLP Liquidator

Must be appointed within 30 days of passing of resolution

In case LLP has creditors, LLP Liquidator has to be chosen if it is approved by two thirds of the creditors

He performs functions and duties for winding up

§ Settle creditors

§ Adjust rights of partners

§ Maintain proper books of accounts pertaining to winding up of LLP

§ File a report (Winding Up report) stating how winding up has been carried out and how property was disposed

o If two thirds of partners and creditors are satisfied with the report, resolution of winding up of accounts and explanation for dissolution must be passed

Finally, LLP Liquidator must

a. Send LLP Winding up report and resolution of winding up of

accounts and explanation for dissolution to the Registrar

b. File an application with the Tribunal

8.15 Dissolution of LLP

If Tribunal is satisfied with the way winding up has been carried out, they will pass an order that LLP stands dissolved

LLP Liquidator is required to file the copy of the Tribunal’s order with the Registrar for winding up of LLP

The Registrar will then publish a notice in the gazette that LLP stands dissolved

Unit 5: Company Management

8.1 Key Managerial Personnel

According to the Indian Companies Act of 2013, key managerial personnel, in relation to a company, means

i. The Chief Executive Officer (CEO) / MD / Manager

ii. Company secretary

iii. Whole-time director

iv. Chief Financial Officer (CFO)

v. Any such other officer, as prescribed

8.2 Meaning of BOD

Collective body of directors of that company that

§ Controls, manages, superintends affairs of the company

§ Formulates general policy of the company

§ Can exercise control and act collectively

§ No individual director can act on behalf of the company unless authorized by:

o

Indian Companies Act, 2013

o

Articles of Association

o

Resolution of the Board of Directors

o

Resolution of the shareholders

8.3 Types of directors

1. Ordinary directors – neither whole time, nor managing

2. Managing directors – appointed by virtue of a) AOA

b) Agreement with the company

c) Resolution passed in general meeting

3. Whole time directors – whole time employees of the company

5.

Alternate directors – appointed when original director is absent for a period not more than 3 months

6. Professional directors – directors with professional qualification with no pecuniary interest in the company

7. Nominee directors – directors appointed while borrowing money from banks and financial institutions

8. Independent directors – Independent judgement in management deliberations

9. Small shareholder directors – According to Section 152, small shareholder director is one who holds nominal value of Rs. 20000 or less in a public company

8.4 Executive (inside) vs Non-Executive (outside)

Executive (Inside)

Non-Executive (Outside)

Whole time employee of the company

Not in employment

Associated with day to day working

Serve boards of more than one company

Receive remuneration

No remuneration

Example:

Example:

1. Managing Director

1. Nominee Director

2. Whole Time Director

2. Professional Director

3. Executive Director

8.5 Appointment of Directors

By promoters

By Act

By Articles of Association

By company at Annual General Meeting

By third parties

By Tribunal

8.6

Qualifications of Director

No educational qualifications

No prescribed age limits

Only individuals can become directors

Qualification shares’ nominal value < 5000

8.7 Position of Directors

Directors as Agent

Directors as Trustees

Directors as Officers in the Company

Directors as Employees

Directors as Managing Partners

8.8 Power of Director

Subject to:

a) Provisions of Indian Companies Act of 2013

b) Memorandum of Association

c) Articles of Association

Powers exercised:

a) Make calls, issue debentures, forfeit shares, invest funds

b) Appoint a secretary, manager, etc.

c) Appoint alternate directors

d) Appoint auditors

e) Make a contribution to the NDF (non-deliverable forward) without any limit

8.9 Duties of Directors

Determine the amount of minimum subscription

Confirm that application money is received and deposited until returned to the applicants

To call an EGM

To manage affairs of company efficiently

To approve balance sheet & P/L account before it is sent to the auditors

8.10

Directors’ Liability to

1. Company

Negligence

Commit an act that ultra vires their powers

Illegal activities

Breach of trust

2.

Shareholders

Directors negligence

3.

Statutory penalties

Due to non-compliance with Companies Act

4.

Criminal Liability

False statement in the prospectus

Fraudulent credit taken from company

8.11

Disqualification of a director

unsound mind

uncharged insolvent

person applied to be judged insolvent

convict

disqualified by court on order of the court

failed to pay calls for 6 months from date of calls

8.12

Removal of directors

1. Removal by shareholders

Special notice of 14 days is to be given to the company to move a resolution to remove the director and appoint another

Once company gets the notice, it should circulate it among all the members and the concerned director

If director wishes to make a representation, he may send it to the company and the company will circulate it among all the members

If there is no representation from his side, other directors can speak against his removal

At the meeting:

i. One resolution is for removing the director

ii. Another is for filling up the vacancy

2. Removal by Central Government

In case of adverse findings by Company Law Board (CLB)

Fraud, persistent negligence, default, damage to business, defraud creditors

Company may fill the vacancy after approval of the Government

3. Removal by Company Law Board

Prevention of oppression of management, frauds, mismanagement enables a Company Law Board to remove the director

8.13 Managing Directors

Attend everyday

Person appointed among directors

Carries out policy decision taken at Board Meeting

Has special powers given by AOA

Also called whole time director or manager

Appointed by

1. Agreement with the company

2. Resolution passed in the AGM

3. Resolution passed by BOD

Director

Managing Director (MD)

Frames policy

Implements policy

Do not take part in day to day

Takes part in day to day activities

Appointed by shareholders

Appointed by BOD

Person can act as a director for maximum of 15 companies

A company can have only 2 MDs

Appointment of directors is compulsory

Appointment of MD is not compulsory

8.14 Independent directors

Director other than MD or WTD

Person of integrity who possesses relevant expertise and experience

Is not / was not a promoter of the company

Is not related to promoters or directors in the company

No pecuniary relationship with the company

8.14.1 Functions of independent directors

Helps bringing independent judgement in Board’s deliberations

Evaluates performance of Board & Management

Scrutinize performance of management in meeting predetermined goals

Determines remuneration of executive directors, key managerial personnel

Balance interest of shareholders

Make sure that company has an adequate vigil mechanism

8.15

Directors’ Identification Number (DIN)

Created to keep a database of directors

Displays his participation in other companies (past & present)

8.16 Woman Director

Every listed company

Every other company having a paid share capital of 100 crores or more or turnover of 300 crore, or more

8.17 Managerial remuneration

Monthly salary, specified percent of net profits, fee received for going and sitting at meeting of the Board (called sitting fee)

Any expenditure incurred by the company in providing rent free accommodation, or any other benefit free of charge to any of its directors or managers

Should not exceed 11% of net profit of company in that year

1.

Remuneration to MD / WTD / Manager

Cannot exceed 5% of net profits

2.

Remuneration to other directors

Cannot exceed 1% of net profits if there is an MD / WTD/ Manager

3% in other cases

8.14 Effective capital

Aggregate paid up share capital

8.15 Disclosure of remuneration

Ratio of remuneration of each director to median remuneration of employees

Percentage increase in remuneration of each director

Percentage increase in median remuneration of employees

Number of permanent employees

Relationship between remuneration and performance

8.16 Audit Committee

Audit is required for companies having

1. Paid up capital of 10 crore or more

2. Turnover of more than 100 crore or more

3. Aggregate, outstanding loans, borrowings, or debentures exceeding 50 crore

Committee comprises of minimum 3 directors

Majority of them will be independent directors

Chairperson shall have ability to read and understand financial statements

8.16.1 Meetings and Quorum

Shall meet at least 4 times a year

Either 2 members / 1/3 of members of AC

Minimum of 2 IDs

8.16.2 Powers of committee

Investigate any activity

Seek information from any employee

Obtain outside legal advice / professional advice

Secure attendance of outsiders with relevant expertise

Oversee financial reporting procedures

8.17 Nomination & Remuneration Committee

Unit 2 – Formation of a company

2.1 Formation of a company

There are 4 steps to formation of a company

1.

Promotion

2.

Incorporation

3.

Floatation / rising of capital

4.

Commencement of business

Public company can start business after Stages 1, 2, 3, and 4

Private company can start business after Stage 1 and 2

2.1.1 Promotion

Process of organizing and planning finances

Identification of business idea

Discovery of business opportunities

Assess feasibility

Take steps to launch the business

Promoter means a person:

Who has been named in the prospectus or is identified by the company in the Annual return

Who has direct and indirect control over company affairs, shareholder/director or otherwise

Twycross v Grant – Promoter means one who undertakes forming a company, and getting it going, taking necessary steps to accomplish that purpose.

2.1.2 Functions of Promoter

Discovery of idea

Detailed Investigation

Assembling resources

Preparing preliminary documents

Naming of company

2.1.3 Types of promoters

Professional promoters

Financial promoters

Entrepreneurial promoters

Specialized institutions

Government

2.1.4 Legal position of a promoter

Neither an agent, nor a trustee for the company

Occupies fiduciary position in company

No secret profits

Must fully disclose all facts

Prohibited from unfairly/unreasonably using his position

2.1.5 Promoters’ Liabilities

Completion of contracts

No secret profits

Fraud in Prospectus

Misstatement of names of directors

Misrepresentation of facts

2.1.6 Rights of Promoters

Right to receive preliminary expenses

Right to receive proportionate amount from co-promoters

Right to remuneration

2.2

Incorporation

Translation of ideas into reality

Three types of incorporated companies

a. Limited by shares

b. Limited by guarantee

c. Unlimited company

2.3 Steps in incorporation

1. Approval of name

‘Name availability form’

Limited or Private Limited

2. Filing of documents

MOA

AOA

Directors’ list

Written consent of proposed directors

Copy of name approval

3. Payment of filing and registration fee

Certificate of Incorporation

Private companies – Certificate of Incorporation

Public companies – Certificate of Trading / Business

2.4 Duties of secretary before incorporation

Help promoter

Secure expert opinion

Draw financial plan

Ensure compliance with SEBI guidelines

Collection of Certificate of Incorporation

2.4.1 Duties of secretary after incorporation

Call for 1 st board meeting

Arrangement for opening bank accounts

Arrangement of necessary forms

Preparation of common seal

File declaration with registrar

2.5 Legal Effect of Incorporation

Company becomes a corporate body

Perpetual succession

Common seal

Company can sue and be sued in its own name

Right to hold and sell its own property

2.6 Lifting corporate veil

Fundamental principle – separate legal entity

Can sue and be sued in its own name

Rule was laid down by House of Lords in the case of Salomon v. Salomon

Separate legal entity – curtain, veil, shield between company and its members

Corporate entity – to encourage and promote trade and commerce

Court lifts the veil in case of any frauds or dishonesty of members

2.6 Memorandum of Association

Sets out the constitution of the company

It is the foundation

Scope of company’s activities & relationship

Purpose: useful to investors, while being contractual to others

2.7 Printing and signing of MOA

At least members <= 7 for public

At least Members <=2 for private

Members <= 1 at least for OPC

2.8 Contents of MOA

1. Name of the company

2. Name of the state

3. Objectives of the company

4. Liability of its members

5. Amount of share capital

2.9 Clauses of MOA

Name clause

Situation Clause

1. State of registered office

2. Registered office should be declared within 15 days of incorporation

3. Information to Registrar:

o

30 days of incorporation

o

15 days of change

Object Clause

o Object of the company

§ Main, ancillary, other objectives

Liability Clause

Capital Clause

o Amount of capital registered

Subscription Clause

Change in Name Clause

1. Pass special resolution

2. Get Central Govt.’s approval

Change in Situation Clause

Change within Local Limits

1. Pass board resolution and special resolution

2. Notice Registrar of change within 15 days

Change of state

1. Get approval of Central Govt

2. Approval

should

be

registered

with

Certificate of Incorporation

Change in jurisdiction of Registrar

Registrar

for

change

in

1. Get confirmation by Regional Director

2. Communicate confirmation to the company within 30 days

Change in Object

1. Pass special resolution

2. Get certification for the same from the Registrar within 30 days

Change in Liability

1. Needs special resolution

2. File the same with registrar

Change in Capital

1. Alteration of capital to be authorized by AOA

2. If voting % is affected, then Tribunal’s confirmation is mandatory

3. Notify alternations made along with the respective resolutions, and file it with the registrar within 30 days

2.10 Doctrine of Ultra Vires

Ultra – beyond

Vires – powers

Any act of the company beyond its object clause, legal powers and authority

Such an act is void and cannot bind the company

Cannot be ratified by shareholders

2.11 Articles of Association

Rules or regulations that govern the management of its internal affairs and business

Establishes a contract between company and its members

2.12 Contents of Articles

1. Adoption of preliminary contracts

2. Number and value of shares

3. Issue of preference shares

4. Allotment of shares

5. Transfer and transmission of shares

6. Forfeiture of shares

7. Alteration of capital

8. Conversion of shares into stock

9. Seal

10. Remuneration of directors