Company Law

Contents

Definition of company. Characteristics of company Company limited by liability and guarantee. Lifting of corporate Veil Memorandum of Articles Capital Borrowing powers Directors Winding up Of companies

Definition of company

As per section 3(1)(i) of the Companies Act,1956a company means a company formed and registered under this Act or an existing company as defined in section 3(1)(ii).Section 3(1)(ii) lays down that an existing company means a company formed under any of the previous Company Law An association of many persons who contribute money or moneys 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.-By Lord Justice Lindley

Characteristics of a company

Incorporated association.
Legal entity distinct from its member. Artificial person.

Limited liability.
Separate property Transferability of shares.

Perpetual succession.
Common seal.

A company having the liability of its members limited by the memorandum, to the amount if any unpaid on the shares respectively held by them is termed A company limited by shares[Sec 12(2)(a)]

A company limited by guarantee may be define as a company having liability of its members limited by the memorandum to such amount as the member may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up.[Sec 12(2)(b)]

Lifting of corporate veil

Under Statutory Provisions

Reduction of membership Misrepresentation in Prospectus Failure to return application money Misdescription of name. Holding and Subsidiary company. Fraudulent conduct Liability under other statute Protection of revenue Prevention of fraud or improper conduct Determination of the enemy character of a company Formation of subsidiaries to act as an agent Where company is used to avoid welfare legislation Illegality

Under Judicial Interpretations

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, Charted Account, 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. this connection the Memorandum and Articles of Association (MA & AA) are crucial documents to be prepared.

In

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. As per section 14 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.

Contents of Memorandum
a) Name clause[Sec. 13(1)(a)] b) Registered office clause[Sec. 13(1)(b)] c) The association or subscription clause[Sec. 4(c)] d) Objects clause[Sec. 13(1)(c)&(d)] e) Liability clause[Sec. 13(2)] f) Capital Clause[Sec. 13(4)(a)]

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 . [Sec. 13(1)(a)]

Registered office 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 [Sec. 13(1)(b)]

The association or subscription clause

This refers to declaration made by the association of person signing the MOA and subscription of shares is also mentioned in it along with the witness signature who must attest the signature.[Sec.(4)(c)]

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 MOA. 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. [Sec. 13(1)(c)&(d)]

Liability clause

Section 13(2) states that the nature of liability of the members. In the case of a company with limited liability, it must state that liability of member, In the case of a company with limited liability, it much state that liability of member is limited , a member can be called upon at any time to pay to the company the amount unpaid on the shares.

Capital Clause

This Clause states the amount of share capital with wich the company is registered and the mode of its division into shares of fixed value, i.e the number of shares into which the capital is divided and the amount of each share.[sec. 13(4)(a)]

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 ultravires the company and therefore void. 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.

No

Consequences of an ultravires transaction

Void

ab initio Injunction Personal liability of Directors Acquisition of property that is ultra vires Director personally liable to third parties

Articles of Association
The

Articles of Association (AA) contain the rules and regulations of the internal management of the company. 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.

The

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

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 its articles 2. Limits the number of members to 50 not including its employee members (present or past), minimum number of members are 2 3. Restricts the right to transfer its 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 its 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.

Relation between Memorandum and Articles

Articles

are subordinate to memorandum.

The

memorandum is to be read in conjunction with articles.

terms of the memorandum cannot be modified or controlled by the articles.

The

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.

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.

Directors report

Sec 217. Boards 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 to(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 year(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,(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 its 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 whole-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 paid-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 conditions 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 officer 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 sub-section, 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 was beyond its capacity to engage a whole-time secretary.

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

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 any 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 reappointment, if made, will be in accordance with the limits specified in sub-section (1B).

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 voluntarily. 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)