Company Law

A.S.Velpanur

Contents
      

Types of companies Formation Memorandum of Articles Capital Borrowing powers Directors Winding up Of companies

Definition of company


A company in a broad sense may mean an association of individuals formed for some common purpose. The association is voluntary but the company is an artificial person created by a process of law. It has a perpetual succession and is regarded by the law as a person.

Lindley s definition


An association of may persons who contribute money or money s worth to a common stock , and employ it in some common trade or business and who share the profit or loss ( as the case may be ) arising from thereon. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it ,or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted.

Characteristics of Company


Page 2 & 3

Company distinguished from Partnership



Page 6

Promotion


Refers to the entire process by which a company is brought into existence. It starts with the conceptualization of the birth a a company and determination of the purpose for which it is to be formed. The persons who conceive the company and invest the initial funds are known as the promoters of the company. The promoters enter into preliminary contracts with vendors and make arrangements for the preparation, advertisement and the circulation of prospectus and placement of capital. However, a person who merely acts in his professional capacity on behalf of the promoter (e.g. lawyer, CA, etc) for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and who is paid by the promoter is not a promoter.

Incorporation by Registration


The promoters must make a decision regarding the type of company i.e. a public company or a private company or an unlimited company, etc and accordingly prepare the documents for incorporation of the company. In this connection the Memorandum and Articles of Association (MA & AA) are crucial documents to be prepared.

Memorandum of Association of a company



MOA is the constitution or charter of the company and contains the powers of the company. No company can be registered under the Companies Act, 1956 without the memorandum of association. Under Section 2(28) of the Companies Act, 1956 the memorandum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies law or the Companies Act, 1956. The memorandum of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case of companies limited by the shares , form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital whereas form in table E is applicable to unlimited companies companies.

Contents of Memorandum


Name clause The name of the company is mentioned in the name clause. A public limited company must end with the word 'Limited' and a private limited company must end with the words 'Private Limited . A company cannot use a name which is prohibited under the Names and Emblems (Prevention of Misuse Act, 1950 or use a name suggestive of connection to government or State patronage .(Page 38)

Contents of Memorandum


Domicile clause The state in which the registered office of company is to be situated is mentioned in this clause. If it is not possible to state the exact location of the registered office, the company must state it provide the exact address either on the day on which commences to carry on its business or within 30 days from the date of incorporation of the company, whichever is earlier. Notice in form no 18 must be given to the Registrar of Companies within 30 days of the date of incorporation of the company. Similarly, any change in the registered office must also be intimated in form no 18 to the Registrar of Companies within 30 days. The registered office of the company is the official address of the company where the statutory books and records must be normally be kept

Contents of Memorandum


Objects clause This clause is the most important clause of the company. It specifies the activities which a company can carry on and which activities it cannot carry on. The company cannot carry on any activity which is not authorized by its MA. This clause must specify

Main objects of the company to be pursued by the company on its incorporation Objects incidental or ancillary to the attainment of the main objects Other objects of the company not included in (i) and (ii) above.

Doctrine of the ultra-vires



Any transaction which is outside the scope of the powers specified in the objects clause of the MA and are not reasonable incidentally or necessary to the attainment of objects is ultraultra-vires the company and therefore void. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if every member agrees to it.

Consequences of an ultravires transaction

The company cannot sue any person for enforcement of any of its rights. No person can sue the company for enforcement of its rights. The directors of the company may be held personally liable to outsiders for an ultra vires

Liability clause


A declaration that the liability of the members is limited in case of the company limited by the shares or guarantee must be given. Where the liability of the members of the company is limited to the amount unpaid on the shares, such a company is known as company limited by shares. The liability can be enforced during the existence of the company as also during the winding up of the company. Where the liability of the members of the company is limited to a fixed amount which the members undertake to contribute to the assts of the company in the event of it s being wound up, the company is called a company limited by guarantee. A declaration that the liability of the members is unlimited in case of the unlimited companies must be given.

Capital clause


The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share capital mentioned in this clause without altering the memorandum.

Association clause


A declaration by the persons for subscribing to the Memorandum that they desire to form into a company and agree to take the shares place against their respective name must be given by the promoters.

Articles of Association


The Articles of Association (AA) contain the rules and regulations of the internal management of the company. The AA is nothing but a contract between the company and its members and also between the members themselves that they shall abide by the rules and regulations of internal management of the company specified in the AA. It specifies the rights and duties of the members and directors.

Important items covered by the AA



Powers, duties, rights and liabilities of Directors Powers, duties, rights and liabilities of members Rules for Meetings of the Company Dividends Borrowing powers of the company Calls on shares Transfer & transmission of shares Forfeiture of shares Voting powers of members, etc

Characteristics of a Company


The company has a separate legal entity. A company may be a company limited by shares or by guarantee. A company will never die as it is created by a process of law and can be put to an end only by a process of law. A company has no physical existence & acts thro it s agents. The contracts are therefore entered by the agents thro the common seal.

Characteristics of a Company


The shares are freely transferable subject to certain conditions A company as a separate legal entity is capable of owning, enjoying and disposing of property in it s own name. A company can sue and be sued in it s corporate name.

Classification on the basis of liability



Companies limited by shares means the liability of the members is limited to the amount unpaid on the shares. Companies limited by guarantee means the liability of the members is limited to the amount which the members undertake to contribute to the assets of the company in the event it is wound up.

Classification on the basis of number of members



A private company means a company which, 1. A minimum paid up capital of Rs 100,000 and by it s articles 2. Limits the number of members to 50 not including it s employee members (present or past), minimum number of members are 2 3. Restricts the right to transfer it s shares ,if any. The restriction is to preserve the private character of the company, 4. Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company, 5. Prohibits any invitation or acceptance of deposits from persons other than it s members, directors or their relatives

Classification on the basis of number of members



A Public company means a company which 1.Has a minimum paid up capital of Rs 500,000 2.Is a private company which is a subsidiary of a company which is not a private company.( Page 16)

Formation of Company


Chapter 3 Page 24

Share Capital & Loan Capital



http://www.legalserviceindia.com/company% 20law/com_2.htm http://legalserviceindia.com/articles/debentur es.htm

Relation between Memorandum and Articles



Articles are subordinate to memorandum. The memorandum is to be read in conjunction with articles. The terms of the memorandum cannot be modified or controlled by the articles.

Incorporation of Company


The Company is required to file the following documents with ROC after getting the name approved 1. Memorandum of Association 2. Articles of Association 3. Agreement with any individual for appointment as manager, managing/whole time director 4. A declaration that all requirements of the Companies act have been complied with.

Company management


Sec 2(13) defines director as director" includes any person occupying the position of director, by whatever name called. Sec 252. Minimum number of directors (1) Every public company shall have at least three directors: (2) Every company shall have at least two directors. (3) The directors of a company collectively are referred to in this Act as the "Board of directors" or "Board".

Sec 253. Only individuals to be directors No body corporate, association or firm shall be appointed director of a company, and only an individual shall be so appointed. Page 123

Company management


Sec 2 (6) defines "Board of directors" or "Board", in relation to a company, means the Board of directors of the company. According to Sec 254, Subscribers of memorandum are deemed to be directors. In default of and subject to any regulations in the articles of a company, subscribers of the memorandum who are individuals, shall be deemed to be the directors of the company, until the directors are duly appointed in accordance with section 255. As per 275, No person to be a director of more than twenty companies After the commencement of this Act, no person shall, save as otherwise provided in section 276, hold office at the same time as director in more than twenty companies. http://www.indiajuris.com/pdf/Directors.pdf

Financial Statements


Form and contents of balance sheet and profit and loss account http://www.vakilno1.com/bareacts/com paniesact/s211.htm

Directors report


Sec 217. Board s report (1) There shall be attached to every balance sheet laid before a company in general meeting, a report by its Board of directors, with respect toto(a) the state of the company's affairs; (b) the amounts, if any which it proposes to carry to any reserves in such balance sheet (c) the amount, if any, which it recommends should be paid by way of dividend; (d) material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report (e) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed.

Directors report


2) The Board's report shall, so far as is material for the appreciation of the state of the company's affairs by its members and will not in the Board's opinion be harmful to the business of the company or of any of its subsidiaries deal with any changes which have occurred during the financial yearyear(a) in the nature of the company's business; (b) in the company's subsidiaries or in the nature of the business carried on by them; and (c) generally in the classes of business in which the company has an interest.

Directors report


(2AA) The Board's report shall also include a Directors' Responsibility, Statement, indicating therein,therein,(i) that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; (ii) that the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period; (iii) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; (iv) that the directors had prepared the annual accounts on a going concern basis.]

Meetings of the Shareholders



A Statutory meeting to be held within a period of not less than one month nor more than six months from the date which the company is entitled to commence business hold a general meeting of the members. Annual general meeting to be held every year. There shall not be an interval of more than 15 months between one AGM and another. The first AGM is to be held with in 18 months from date of incorporation.

Meetings of the Shareholders



Extra ordinary meeting can be held when convened by 1.The Board of directors on it s own or on the requisition of the members, 2. By the requisitionists themselves on the failure of the board of directors to call the meeting.

Company Secretary


383A. Certain companies to have secretaries (1) Every company 2[having such paid-up share capital as may be prescribed*] shall have a paidwholewhole-time secretary and where the Board of directors of any such company comprises only two directors, neither of them shall be the secretary of the company: 3[Provided that every company not required to employ a whole-time secretary under sub-section (1) and having a wholesubpaidpaid-up share capital of ten lakh rupees or more shall file with the Registrar a certificate from a secretary in whole-time practice in such form and within such time and subject to such wholeconditions as may be prescribed, as to whether the company has complied with all provisions of this Act and a copy of such certificate shall be attached with Board's report referred to in section 217.] 1A) If a company fail to comply with the provisions of sub-section (1), the company and every subofficer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees] for every day during which the default continues: Provided that in any proceedings against a person in respect of an offence under this subsubsection, it shall be a defense to prove that all reasonable efforts to comply with the provisions of sub-section (1) were taken or that the financial position of the company was such that it subwas beyond its capacity to engage a whole-time secretary. whole-

1. Ins. by Act 41 of 1974, sec. 30 (w.e.f. 1-2-1975). 12. Subs. by Act 31 of 1988, sec. 53, for "having a paid-up share capital of rupees twenty five paidlakhs or more" (w.e.f. 1-12-1988). 1-12*Every company having paid-up share capital of Rs. 2 crore and above shall have a whole time paidSecretary [Companies (Appointment and Qualifications of Secretary) Rules, 1988].

Duties of Company secretary



Advising on good governance practices and compliance of corporate governance norms as prescribed under the Companies Act, listing agreement with stock exchanges and various other laws, rules and regulations. Promotion, formation and incorporation of companies and other matters related to it Filing, registering documents including forms, returns and applications on behalf of the company as an authorised representative Maintenance of secretarial records, statutory books and registers Arranging board and general meetings and preparing minutes of the meeting All work related to shares and their transfer and transmission Secretarial audit/compliance audit Compliance certificate for companies not required to employ a whole-time secretary Signing of annual reports Advising companies on compliance of legal and procedural aspects, particularly under various acts like SEBI Act, Intellectual Property Rights, Labour and Industrial Laws, setting up of subsidiary boards, drafting of legal documents, etc. Representing the company or other persons before the Company Law Board, National Company Tribunal, etc.

Audits


224. Appointment and remuneration of auditors (1) Every company shall, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall, within seven days of the appointment, give intimation thereof to every auditor so appointed Provided that before any appointment or re-appointment of auditor or auditors is made by reany company at any annual general meeting a written certificate shall be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment or re-appointment, if made, will be in accordance with the limits specified in resubsub-section (1B).

http://www.legalservicesindia.com/articles/auditors.h tm Page 179

Winding up


Winding up means dissolution of the company. There are three modes of winding up 1.Winding up by the court i.e. Compulsory winding up, 2.Voluntary winding up by members or creditors, & 3.Winding up subject to supervision of court.

Winding Subject To Supervision Of Court & Winding up by court.

Winding up subject to supervision of court, is different from "Winding up by court." Here the court only supervises the winding up procedure. Resolution for winding up is passed by members in the general meeting. It is only for some specific reasons, that court may supervise the winding up proceedings. The court may put up some special terms and conditions also. However, liberty is granted to creditors, contributories or other to apply to court for some relief. (Sec 522) Sec 522. Power to order winding up subject to supervision. At any time after a company has passed a resolution for voluntary winding up, the Court may make an order that the voluntary winding up shall continue, but subject to such supervision of the Court, and with such liberty for creditors, contributories or others to apply to the Court, and generally on such terms and condition, as the Court thinks just. The court may also appoint liquidators, in addition to already appointed, or remove any such liquidator. The court may also appoint the official liquidator, as a liquidator to fill up the vacancy. Liquidator is entitled to do all such things and acts, as he thinks best in the interest of company. He shall enjoy the same powers, as if the company is being wound-up woundvoluntarily. The court also may exercise powers to enforce calls made by the liquidators, and such other powers, as if an order has been made for winding up the company altogether by court. ( Sec 526)