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What is a company
A company is an artificial person created by law. A company means a group of persons associated together for the attainment of a common end, social or economic.
Definition of a company
According to Sec (1), A company formed and registered under the act. According to Sec (3) of the act, on incorporation a company becomes a body corporate or a corporation with a perpetual succession and a common seal. According to N.D.Kapoor, It is a voluntary association of persons formed for some common purpose, with capital divisible into parts, known as shares, and with a limited liability. It is a creation of the law and is sometimes known as an artificial person with a perpetual succession and a common seal. It exists only in the eyes of the law, I.e., it is regarded by the law as person, just as a human being. But it has no physical existence.
CHARACTERSTICS OF A COMPNAY
Separate legal entity Limited liability Perpetual succession Common seal Transferability of shares Separate property Capacity to sue
Limited liability
The priniciple of limited liability is a feature as well as a priviliege of the corporate form of enterprise. The liability of the members is limited A shareholder cannot be called upon to pay anything more than the unpaid value of the share. Creditor cannot demand a shareholder to settle his claim from the company out of the private funds of the shareholder
Perpetual succession
A company never Dies Members may come and go but the company can go on forever. If all the members die, it shall not affect the privileges and possessions of the company
Common seal
Being an artificial person, a company cannot sign in the documents and issue certificates. It can act only through an agent or representative known as director. The common seal is considered as the official signature of the company All the acts must be authenticated by its common seal
Transferability of shares
The capital of the company is divided into several small parts known as shares. The law also considers the share of a company as movable property and hence like any other movable asset. The shareholder can transfer his share to some other person. The transfer can be effected only in the manner specified in the Articles of the company and in the Companies Act.
Separate Property
A company, being a legal person to acquire, possess and dispose of property in its own name. The property of the company will not be considered as the joint property of the members constituting the company, although the capital and assets of the company are contributed by members
Advantages of Companies
Limited liability Easy Mobilisation of resources Possibilities for Expansion Easy transferability of shares Democractic Management Capital formation
Limitation of Companies
Long drawn process Expensive Separation of ownership and control Rigid government control Erosion of limited liability Administrative Delays
TYPES OF COMPANIES
I . Unincorporated companies II. Incorporated Companies
I. Unincorporated Companies
The companies which are not incorporated under the companies Act, Special Act or Charter are called Unincorporated Companies Sec. 11 of the companies Act, 1956 if the number of members exceeds 10 in the case of banking companies and 20 in case of other business companies
2.
Statutory companies
Companies which are established by a special Act of the central legislature or any state legislature. Companies are established not for profit but for service Ex. The life insurance corporation of India, The Unit Trust of India etc.,
3.
Registered Companies
Companies which are established under the companies Act, 1956 Companies established before the commencement of the companies Act, 1956 are also called Registered companies Indian companies Act, 1866, or 1882 or 1913 etc
Unlimited companies
The liability of the members is unlimited are known as unlimited companies. Rarely established
2. Public Companies
A public company which means a company which
Is not a private company The articles does not restrict the right of the members to transfer their shares, does not limit the number of its members and does not prohibit any invitation to the public for its shares and debentures
Consent of the Directors Directors elect need not file with registrar Resolution for appointment of the Directors single resolution for appointment of 2 Direct. statutory meeting need not conduct and file with registrar Rights Issue need not issue right shares to the existing shareholders
Multiple Directorship : Director of a private company can be director of more than 15 companies at the same time No limit for managerial remuneration The directors need not retire every year Private company can lend loan to its directors Quorum: Two members personally present is enough There is no restriction for the duration of Directoship
A. Holding company
When one company has control over another, it is called holding company A company has control over another company
If it controls the composition of the Board of Directors of another If the company holds majority of the equity share capital of another company If another company is subsidiary of the companys subsidiary
B. Subsidiary company
The company which is controlled by another company A company has control led by another company
If another company controls the composition of the Board of Directors. If another company holds majority of the equity share capital If another company is a holding company of the holding company
C. Government company
A Company in which not less than 51% of the paid-up share capital is held by the central Government or by any state Government and partly by one or more state Governments is called Government company Special provisions
Exempted from using the words private ltd Provisions of the companies Act applicable Auditor appointed by the Government If central Government is a member of the company
D. Foreign Company
A company which is incorporated outside India and has a place of business in India Not less than 50% of the paid up share capital of a foreign company is held by citizens of India or Indian companies or by both
MEMORANDUM OF ASSOCIATION
Preparation of the Memorandum is the first step in the formation of company. Every company must have its own memorandum of Association According to Sec. 2(28)
The memorandum means, the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act
1. Name clause
Name clause contains the name of the company It must have a name to establish its corporate existence Principles for selecting the Name
The selected Name should not be identical The company should not also adopt name in the opinion of the Central Government is undesirable Objectionable Names
The Names and emblems of W.H.O and U.N.O
Official seal and emblems of the central and state Governments The name of Mahatma Gandhi and Prime Minister of India . Last word of the Name : ltd in case of public companies and in case of private companies it should be private limited
2. Situation clause
Name of the state in which the companys Registered office is to be situated. It is also important for determining the jurisdiction of the court
3. Objects clause
1. Main objects
The main objects to be pursued by the company and objects incidental or ancillary to the attainment of the main object
2. other objects
The objects which are not included in the above clause
4. Liability Clause
The liability of the members shall be limited to the face value of the shares held by them If the liability of the company is unlimited, this clause need not be included in the Memorandum If it is ltd by guarantee, it should specify the amount It should specify the liability of the Directors, the Manager or the Managing Director
5. Capital Clause
It should specify the nominal capital and its divisions.
Pref. share capital Equity share capital Total value of shares
6. Association Clause
It states that the persons subscribing their signatures to the Memorandum are desirous of forming themselves and agree to take the number of shares in the capital.
C. Addition or Deletion
Conversion of private into public and vice versa the addition or deletion of the word private is to be made
D. Minor Mistakes
Spelling mistakes altered by an ordinary resolution
ARTICLES OF ASSOCIATION
It contains the rules and regulations regarding the internal management of the company. It is to be filed with the registrar of companies The articles enable the management to achieve the objects given in the memorandum
Lien on shares Alteration of capital Borrowing powers Alteration of the Memorandum General Meetings, voting rights of the members Number of Directors, their qualifications and remuneration
Dividend Accounts and audit Issue of Bonus shares Appropriation to various reserves Winding up
ALTERATION OF ARTICLES
A special resolution must be passed Certified copy of the resolution must be filed Alteration is for converting a public company into private company, the approval of the central Government is also necessary The alteration must not be against the provsions of the Memorandum The alteration should not affect the rights of an outsider
The alteration should not cause for breach of contract The alteration should not increase the liability of the members
Formation of a Company
Stages
1. Promotion 2. Registration 3. Commencement of Business
1. Promotion
Promotion is the first stage in which an idea is conceived by an individual or by a few persons and their own resources, influence and skill A promoter is a person who undertakes to form a company with reference to a given object and to set it going and who takes necessary steps to accomplish that purpose
Functions of a promoter
Promotion of an Idea Detailed Investigation Verification Assembling Financing the proposition Presentation of the proposition
Duties of a promoter
Duty to close Not to make any secret profit Duty to Give Benefits of Negotiations to the company Not to Make unfair use of his position
II. INCORPORATION
Approval of the proposed Name Documents to be filed with the Registrar
Memorandum of association Articles of association List of Directors Consent of the Directors Statutory Declaration Address of the Registered Office A letter of Authority for Making Necessary Corrections in Memorandum and Articles Letter of Registrar of Companies about the availability of Name
Certificate of Incorporation
The registrar satisfied with all the requirements of the Act , he issue a certificate known as Certificate of Incorporation Neither court nor the registrar can cancel the certificate When a certificate is issued , the new company is born The date mentioned in the certificate is the date of incorporation of the company.
PROSPECTUS
The promoters of a public company have to issue a prospectus to arouse public interest in the proposed company. any document described or issued as a prospectus and includes any notice, circular,advertisement or other document inviting deposit from the public, inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate
Issued as a prospectus
The prospectus should be issued or described as a prospectus
Objectives of prospectus
To attract the investors To make enough disclosure to the investors to enable them to decide whether or not to purchase shares or Debentures To secure that the Directors of the company accepted responsibility for the statement in the prospectus
Contents of prospectus
General information Capital structure of the company Terms of the present issue Particulars of the issue Company, management and prospect Particulars in regard to the company and other listed companies under the same management
Criminal liability
Meeting
Any gathering, assembly or coming together of two or more persons for the transaction of some lawful business of common concern A concurrence or coming together of atleast a quorum of members by previous notice or mutual agreement for transacting business for common interest is a meeting
Types of meeting
Meeting of shareholders
Statutory meeting Annual General meetings Extraordinary meeting Class meetings
Statutory Meeting
First meeting of the shareholders of a public company It is held only once lifetime of a company 21 days before forward a report called statutory report All necessary information relating to formational aspects of the company
4. Class Meeting
For altering their rights and privileges or for conversion of one into another
Meetings of creditors
All the questions of policy are discussed at board meetings, which are held at regular intervals either once in a fortnight or once in a month
DIRECTOR
Directors have to act as agents of the company which delegates to them most of its powers through memorandum and articles any person occupying the position of Director, by whatever name called
Powers
The power to make calls on shares The power to issue debenures The power to borrow money other than debentures The power to invest the funds of the company The power to make loans
Duties of Directors
To file return of allotments Not to Issue Irredeemable preference shares To disclose Interest (transaction) To disclose the receipt from transferee of property To Disclose Receipt of Compensation from Transferee of shares
Duty of good faith Duty of care Duty to attend Board Meetings Duty not to delegate
Liability of Directors
Liability to outsiders Liability to Company Liability for breach of statutory Duties Liability for Acts of his Co-Directors
Liability to outsiders
So long as they act on bahalf of the company, they are not personally liable to outsiders They act in their own name personally liable Any party suffer a loss on account of fraud Misrepresentation in prospectus Irregular allotment of shares Where they fail to repay application money to be dealt in stock exchange
Liability to company
Breach of Fiduciary Duty (trustee duty fails) Ultra vires Acts Negligence Misfeasance (misconduct )
Co Directors are not his servants or agents who can be their acts impose liability on him
Winding Up of a company
Winding up of a company is the process whereby its life is ended and its property administered of its creditors and members Liquidator collect its assets, pay its debts and finally distributes any surplus among the members.
Modes of winding up
Winding up by the court Voluntary winding up
2. Voluntary winding up
Voluntary winding up of a company means winding-up by the members or creditors without the interference by the court A company wound up voluntarily
Expiry of the duration Special resolution that the company wound-up voluntarily passed at a general meeting.