Company Law

HARDIK GUPTA
(B COM, ACA, LL B) Advocate, High Court of Gujarat www.guptaandgupta.com hardikbgupta@gmail.com 98989 45900

w.e.f. 1.4.1956

Introduction: THE COMPANIES ACT, 1956

12 MEMBER BHABHBA COMMITTEE A voluntary association of persons which is an artificial person created by law with limited liability, having a perpetual succession and a common seal.

Statutory Definition:-

s. 3

A Company Means A Company Formed And Registered Under This Act Or An Existing Company.

Characteristics of a Company:1. INCORPORATION 2. ARTIFICIAL PERSON - (CITIZEN) 3. SEPARATE LEGAL ENTITY

-SALOMON vs SALOMON & Co. Ltd. -LEE vs LEE AIR FARMING Ltd.

4. LIMITED LIABILITY 5. PERPETUAL SUCCESSION

-EVEN A HYDROGEN BOMB CANNOT PUT AN END TO A COMPANY -A COMPANY IS CREATED BY LAW AND PUT TO AN END BY LAW

6. COMMON SEAL 7. TRANSFERABILITY OF SHARES 8. SEPARATE PROPERTY

LIFTING THE CORPORATE VEIL TO INVESTIGATE Object Clause of MOA legal/lawful Character of a Company enemy (India-Pakistan/England-Germany) Oppression & Mis-Management Fraud to circumvent legal obligation tax evasion to defraud creditors sham/hoax/bogus

Formation of Company: MOA AOA Authorized Capital Registered Office (Domicile) of the Company List of Promoters/Directors Undertaking/Declaration Certificate of Incorporation Certificate of Commencement of Business Promoter
Agent/Employee/Trustee Fiduciary Position of a Promoter

Preliminary or Pre-Incorporation contracts Provisional contracts

Classification of Companies on the basis of Incorporation:1. Chartered Companies The royal prerogative has power to create a corporation by the grant of a charter to persons assenting to be incorporated. e.g. East India Company 2. Statutory Companies These are companies created by a special act of the Legislature. e.g. Reserve Bank of India, State Bank of India, Life Insurance Corporation 3. Registered Companies These are companies which are formed and registered under the Companies Act, 1956.

Classification of Companies on the basis of Membership: s.3(1)(iii) Private Company means a company which has a minimum paid up capital of 1 lakh rupees or such higher paid up capital as may be prescribed and by its articles (i) restricts the right to transfer its shares, if any; (ii) limits the number of its members to 50, not including:(a) persons who are in the employment of the company; and (b) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and (iii) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; (iv) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

Classification of Companies on the basis of Membership: s.3(1)(iv) A public company shall mean a company, which (a) is not a private company; (b) has a minimum paid up capital of 5 lakh rupees or such higher paid up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company.

Classification of Companies on the basis of Liability: Company limited by SHARES A company in which the liability of the members is limited to the extent of the outstanding amount on the shares held by such members. Company limited by GUARENTEE A company in which the liability of the members is limited to a fixed amount, which the members undertake to contribute to the assets of the company, in case of its winding up. UNLIMITED Company A company in which the members are liable for the debts of the company, jointly and severally, irrespective of their interest in the company.

Classification of Companies on the basis of Control: Holding Company

composition of BOD more than half of the total voting power more than half of the nominal value of ESC subsidiary of subsidiary

Subsidiary Company Govt. Company e.g. ONGC any company in which not less than 51% of the paid up share capital is held by the Central Govt. or by any State Govt. or Govts. or partly by the Central Govt. and partly by one or more State Govts. is called a Govt. Company Foreign Company e.g. MICROSOFT a company incorporated outside India is a Foreign Company

Section 25 Company:-

art, science, religion, charity or any other useful object

prohibits payment members

of

dividend

to

its

Public Company vs Private Company

Number of Members
Transferability of Shares Invitation to Public Restrictions vis--vis Privileges

MEMORANDUM OF ASSOCIATION

MOA is one of the core documents which has to be filed with the registrar of companies at the time of incorporation. It sets out the constitution of the company. A company cannot depart from the provisions contained in its memoradum, if it does, it would be considered ultra vires and therefore void. MOA is a public document and can be inspected by everybody.

MEMORANDUM OF ASSOCIATION NAME CLAUSE Public Company should mention Limited after its name whereas Private Company should mention Private Limited after its name. REGISTERED OFFICE (DOMICILE) CLAUSE Jurisdiction. OBJECTS CLAUSE Most important clause. Defines limit and scope of the activities of a company. Main Objects. Ancillary or Incidental or Other Objects.

MEMORANDUM OF ASSOCIATION LIABILITY CLAUSE Liability of members of a company is limited to the extent of shares held or guarantee given. CAPITAL CLAUSE Authorised or nominal share capital, kinds of shares and nominal value of each share is to be mentioned. SUBSCRIPTION CLAUSE Those who have agreed to subscribe to the memorandum, must signify their willingness to associate and form a company.

ALTERATION OF MOA

CHANGE OF NAME
CHANGE OF REGISTERED OFFICE CHANGE OF THE OBJECTS CLAUSE CHANGE OF LIABILITY CLAUSE CHANGE OF CAPITAL CLAUSE

ARTICLES OF ASSOCIATION
The AOA are the rules and regulations of a company framed for the purpose of the day-to-day affairs and/or the internal management of the company. AOA of a company is subordinate to the MOA.

AOA must be signed by each subscriber to the MOA in the presence of at least one witness each.

CONTENTS OF AOA
Table-A CONTENTS Adoption of preliminary contracts Number and face value of shares Allotment of shares Calls on shares Transfer and transmission of shares Forfeiture of shares Alteration of share capital Conversion of shares into stock Voting rights and proxies Rules of conducting meetings Directors, their appointment, retirement, etc. Borrowing power Accounts and audit Dividends and reserves Winding up

Alteration Of AOA
Articles can be altered by passing a special resolution.

Such resolution has to be filed with the

ROC within one month.

DOCTRINE OF ULTRA-VIRES
ULTRA means beyond & VIRES means legal powers. Hence, an act beyond the legal powers of a company. ULTRA-VIRES act does not create any legal obligations and is absolutely void-abinitio. Ashbury Railway Carriage & Iron Company Ltd. vs Riche (if an act is Ultra-Vires the company, even the whole body of shareholders cannot ratify it)

DOCTRINE OF ULTRA-VIRES
An act which is Ultra-Vires the powers of the directors but not Ultra-Vires the company can be ratified by the shareholders.
An act which is Ultra-Vires the AOA but not Ultra-Vires the MOA can be ratified by the shareholders.

Doctrine of Constructive Notice

Exception to the Doctrine of Ultra-Vires. Office of ROC is a public office.

MOA & AOA are public documents.

Anyone dealing with the company is deemed/presumed to have knowledge of MOA & AOA.

Doctrine of Indoor Management

Exception of Doctrine of Constructive Notice. The doors of management are closed to outsiders. Outsiders need not inquire about the internal irregularities.

They can presume that the company has followed requisite practice & procedure.

Royal British Bank v/s Turquand

Directors of Royal British Bank issued bonds to Turquand without a resolution passed by shareholders. On maturity company refused to redeem on ground that the act was ULTRA-VIRES & therefore not liable. It was held that Turquand was not required to inquire into internal irregularities and was entitled to recover the amount.

Exceptions to Doctrine of Indoor Management

Knowledge of Irregularity
Negligence Forgery Acts Beyond Ostensible Authority

MOA & AOA-RELATIONSHIP

1. The AOA are subordinate to MOA. 2. The AOA must be read in conjunction with MOA:a) To explain any ambiguity in the terms of MOA

b) To supplement the MOA upon any matter about which it is silent.

PROSPECTUS
s.2(36) Prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate.

PROSPECTUS
It is mandatory to issue a prospectus with requisite particulars, except:-

(i)

when the shares or debentures are not offered to the public; (ii) when the shares are offered to the existing shareholders or debenture holders as rights issue; (iii) when the issue relates to shares or debentures which are in all respects uniform with the shares or debentures previously issued and quoted in a stock exchange; (iv) where a person is bonafide invited to enter into an underwriting agreement.

PROSPECTUS
MINIMUM SUBSCRIPTION The minimum amount (90%) which shall be raised is called Minimum Subscription. BOD decide Minimum Subscription taking into consideration, the following:(i) (ii) (iii) (iv) (v) investment in fixed assets/WC; preliminary expenses; underwriting commission; repayment of borrowed capital; any other expenditure.

If Minimum Subscription is not received within 120 days after the first issue of the prospectus, entire sum received in the ESCROW A/C. shall be refunded forthwith. If such sum is not refunded within 130 days after the first issue of the prospectus, BOD shall be personally liable to repay the money along with interest @ 6% p.a.

PROSPECTUS
Shelf Prospectus Information Memorandum Red-Herring Prospectus Abridged Prospectus Offer Document/Draft Offer Document Offer for Sale Deemed Prospectus Statement In Lieu Of Prospectus

LIABILITY for MIS-STATEMENT in ROSPECTUS

Civil Liability -Compensation -Damages -Recission of Contract Defences Against Civil Liability -Reasonable Belief -Statement by Expert/Official Person -No Consent/Withdrawal of Consent Criminal Liability Defences Against Criminal Liability -Reasonable Belief -Immateriality Derry vs Peek

s.68A
s.68A Any person who (a) makes in a fictitious name an application to a company for acquiring or subscribing for any shares therein; or (b) otherwise induces a company to allot or register any transfer of shares therein to him or to any other person in a fictitious name; shall be punishable with imprisonment for a term which may extend to 5 years.

SHARE CAPITAL
Share Capital
Authorized or Nominal Capital Issued and/or Subscribed Capital Called-up and/or Paid-up Capital Reserve Capital

Kinds Of Share Capital

ESC PSC Share/Stock Share Certificate/Share Warrant Bonus Shares Sweat Equity Shares Buy-Back of Equity Shares

MEETINGS
Meetings of SHs:(i) General Meetings -Statutory Meeting -Annual General Meeting -Extra-Ordinary General Meeting Class Meetings

(ii)

Meetings of BOD
Meetings of Creditors & Debenture-Holders

STATUTORY MEETING (S.165)

Statutory meeting is the first meeting of the shareholders of a company. This meeting is held only once in the life time of the company. Objectives: -To approve the preliminary contracts specified in the prospectus of the company with modification, if any. -To discuss the success of floating the project of the company.

STATUTORY MEETING (S.165)

1. Time: Every company, shall, within a period of not less than ONE month and not more than SIX months from the date on which the company is entitled to commence the business, hold the Statutory meeting. 2. Notice: At least 21 clear days before holding the statutory meeting stating the time, date and place of meeting. 3. Statutory Report: At least 21 days before the date of the meeting. 4. Certification of Statutory Report: The Statutory Report shall be certified by the directors. The Auditor of the company shall certify the particulars regarding the issue of shares, receipts and payment, etc. A copy of certified Statutory Report must be sent to the ROC. 5. Penalty.

CONTENTS OF STATUTORY REPORT

Allotment of Shares: The total number of share allotted, distinguishing fully paid or partly paid up and the extent to which they are so paid up, shares issued otherwise than for cash, etc. Cash Received: Total amount of cash received by the company in respect of all the shares allotted. Abstract of Receipt and Payment Account Names, addresses and occupations of the companys Directors, Auditors and all other managerial personnel. To approve the preliminary contracts specified in the prospectus of the company with any modification if any. The extent to which the Underwriting Contracts has been carried out and the reasons thereof. The calls in arrears, if any, due from any Director and the Managers of the company. Commission and brokerage paid to any Director or Manager on the issue of shares or debentures of the company.

ANNUAL GENERAL MEETING (s.166) AGM

1. Presentation of Annual Accounts 2. Declaration of Dividend 3. Appointment of Auditors 4. Appointment of Directors 5. Any Other Special Business

ANNUAL GENERAL MEETING (s.166)

1st AGM of the company should be held within a maximum period of 18 Months from the date of its incorporation. Time gap between two AGMs should be less than 15 months. Only BOD of the company has to power to convene AGM of the company. At least 21 days prior notice must be sent to all the member of the company. Date, Time and Place of holding AGM If an AGM is convened for a particular date and notice is issued to the members, the BOD may cancel or postpone an AGM provided that it is being done for bonafide reasons. If a meeting is adjourned, the adjourned meeting shall be held on the same day next week at the same place and at the same time. If a company fails to hold its AGM within the prescribed period of time, CLB/The National Tribunal, on the application of any member, may either call or direct the company to call its AGM. Penalty.

EXTRA-ORDINARY GENERAL MEETING

Any general meeting other than an AGM is called an Extra-Ordinary General Meeting. OBJECTIVE:Meeting is called for transacting some urgent or special business of the company for which it is not advisable to wait till the next AGM of the company. Requisition by:-Board of Directors, OR -Requisition of Members, OR -CLB/The National Tribunal.

QUORUM
Dictionary Meaning minimum number of members required to carry on a meeting or for doing business Quorum means the minimum number of members required in order to consider a meeting to be a valid meeting. Generally, AOA provide for larger quorum. But not smaller than statutory minimum, i.e. five members, personally present, in case of Public Company and two members, personally present, in case of a Private Company.

QUORUM
What happens in absence of Quorum? If within half an hour, a quorum is not present, by requisition of the members, it shall stand adjourned to same day, place and time in the next week. If at the adjourned meeting also, a quorum is not present within half an hour, the members present will be the quorum. When should Quorum be present? Article 49 (1) of Table A requires a quorum to be present at the time when the meeting proceeds to transact business. Therefore, it need not be present throughout the meeting. Hartley Bairld vs London Flats Limited

CAN ONE MEMBER CONSTITUTE A QUORUM? Rule in Sharp vs Dawes A resolution without requisite quorum is void ipso facto. Exceptions:-Where there is a class meeting of shareholders and all shares of that class are held by only one person. -(East vs Bennett Bros Limited) -Article 77 of Table A states that a committee of a person can constitute a quorum. -When a Tribunal orders a meeting, it may direct that even one member present, in person/proxy, shall be deemed to constitute a meeting.

RESOLUTIONS
Questions which generally come for consideration at the general meeting of a company are presented in the form of proposals called Motions. A motion proposed by the Chairman of the meeting/any other member, is put to vote after due discussions and/or deliberations and the final decision taken becomes a Resolution. Kinds of resolutions:-Ordinary resolution (s.189(1)) -Special resolution (s.189(2) -Resolutions requiring special notice

Ordinary Resolution
A Simple Majority It is required for matters concerning with Name Clause, Capital Clause, for appointing auditors and fixing their remuneration, appointing first directors who are liable to retire by rotation, for increasing/decreasing number of directors, appointment of managing director, removal of a director, for winding up of a company voluntarily in certain events, appointing and fixing of remuneration of liquidators, etc.

Special Resolution
3/4th Majority A Special Resolution is required for changing the place of registered office from one state to another, for alteration of Objects Clause, alteration of AOA, conversion of any portion of uncalled capital into reserved capital, for payment of interest out of capital, applying to Central Govt. for an inspector to investigate in company affairs, for applying in a court of law for winding up, for authorizing a liquidator to accept shares as consideration for transfer of its assets, for disposal of books and papers of a company in voluntary winding up after completion of the process, etc.

Passing of Resolutions by Postal Ballot (s.192A)

A listed company may resort to postal ballot. It has to send a notice along with a draft resolution explaining the reasons for the same, which should be returned by the members within a period of 30 days from the date of posting of the ballot.

MANAGEMENT
Director includes any person occupying the position of a director by whatever name called. Only an individual can be appointed as a Director. Qualification Shares Number of Directors Public Company Private Company minimum 3 minimum 2

Maximum 12 (AOA), any increase over and above 12 requires permission of the Central Government.

Appointment of Directors
1st Directors Appointment of Directors at AGM

Appointment of Directors at BOD Meeting

Appointment of Directors by Central Government

Appointment by Proportional Representation

Appointment of Directors at BOD Meeting

-Casual Vacancy A casual vacancy among directors arises by reason of death, resignation, disqualification or any other reason, except retirement of a director by rotation. -Additional Directors Additional Director appointed by the BOD would hold office only upto the date of the next AGM. -Alternate Directors Alternate Director appointed by the BOD to act on behalf of the original director, in case of absence for a period of not less than 3 months from the State in which BOD meetings are ordinarily held, would vacate office if and when the original director returns to the State in which BOD meetings are ordinarily held.

Appointment of Directors by Central Government

on an application by not less than 100 members of the company;

on an application by members of the company holding not less than 1/10th of the total voting power

Appointment by Proportional Representation

At every AGM, not less than 2/3rd of the total number of directors of a public company or a private company which is a subsidiary of a public company, shall be liable to retire by rotation
Single Transferable Vote System Cumulative Voting System

Number of Directorships
a private company
an unlimited company a section 25 company appointment as alternate director

Removal of Directors

By Shareholders

By Central Government
By CLB/The National Tribunal

Removal of Directors By Shareholders

Exceptions: Director appointed by the Central Government Director holding office for life as on 1.4.1952, in a private company Director appointed by proportional representation

Removal of Directors By Central Government any director who is guilty of fraud, misfeasance, negligence or default any director who is guilty of conduct which is against sound business principles and prudent commercial practices any director who is guilty of conduct which is likely to cause or has caused serious injury or damage to the interest of trade, commerce, industry or business any director who is guilty of conduct which is illegal, with an intent to defraud any member/s, creditor/s or any other person/s

Removal of Directors By CLB/The National Tribunal

oppression mis-management (No director, whose office is terminated by CLB/The National Tribunal, shall not, for a period of 5 years therefrom, be appointed as a director, without the obtaining leave from the CLB/The National Tribunal.)

Vacation of Office of a Director

The office of a director shall become vacant, if

1.
2. 3. 4.

5. 6.
7. 8. 9.

if a director fails to obtain qualification shares within 2 months, or, ceases to hold qualification shares at any time if a director is found to be of unsound mind if a director is adjudged an insolvent if a director is convicted for any offence involving moral turpitude if a director fails to pay any call in respect of shares if a director absents himself from 3 consecutive BOD meetings or from all BOD meetings for a continuous period of 3 months, whichever is longer, without obtaining leave of absence if a director accepts a loan or guarantee or security for a loan from the company if a director fails to make disclosure of interest if a director is guilty of fraud or misfeasance
A private company can provide for additional grounds, in addition to those specified hereinabove, by its AOA.

Disqualification of Directors
1. 2. 3. 4. 5. 6. A director would be disqualified, if if a director is found to be of unsound mind if a director is adjudged an insolvent if a director is convicted for any offence involving moral turpitude if a director fails to pay any call in respect of shares on an order being passed by a Court of competent jurisdiction, disqualifying a director, on account of fraud or misfeasance if a director is a director of a public company, which OR has not filed annual accounts and returns for any continuous three financial years commencing on or after 1.4.1999; has failed to repay any deposit or interest thereon on the due date, or has failed to redeem debentures on the due date, or has failed to pay dividend and such failure continues for one year or more.

A private company can provide for additional grounds, in addition to those specified hereinabove, by its AOA.

Retirement of Directors by Rotation

Unless the AOA provide for retirement of all the directors at every AGM, not less than 2/3rd of the total number of directors of a public company or a private company which is a subsidiary of a public company, shall be liable to retire by rotation at the AGM, including the 1st AGM. At every AGM, 1/3rd of such rotational directors shall retire by rotation. The directors who are to retire by rotation at the AGM shall be those who have been longest in office since last appointment. The company may fill up such vacant post by reappointing the retiring director or some other person. The aforesaid provision does not apply to a private company as well as a government company.

MD / WHOLETIME DIRECTOR / MANAGER

MD means a director who is entrusted with substantial powers of management and administration. A wholetime director includes a director who is in wholetime employment of the company. A Manager is an individual who has the management and administration of the whole or substantially the whole of the affairs of a company. Appointment by MOA, by AOA, by agreement or by resolution. Number of companies in which one person may be appointed as MD (1); However, the aforesaid restriction does not apply to a private company.

Remuneration of Directors
Total Managerial 11% of the net profit of the Remuneration company

MD/WHOLETIME Director 5% of the net profit of the company for one such director and 10% of the net profit of the company for all of them together Any Other Director 1% of the net profit of the company for one such director and 3% of the net profit of the company for all of them together

MISC
OFFICE OF PROFIT DISCLOSURE OF INTEREST

LOANS TO A DIRECTOR OR A RELATIVE OF A DIRECTOR

POWERS, RIGHTS, DUTIES, LIABILITIES & DISABILITIES OF A DIRECTOR POSITION OF A DIRECTOR AGENT/TRUSTEE/EMPLOYEE

THANK YOU!!!
HARDIK GUPTA
(B COM, ACA, LL B) Advocate, High Court of Gujarat www.guptaandgupta.com hardikbgupta@gmail.com 98989 45900