COMPANY LAW – INTRODUCTION AND COMPANY LAW – INTRODUCTION AND DEFINITIONSDEFINITIONS•Earliest understanding of the word company was

probably dated in the early 13th century, the merchant guilds of that period were loosely structured institutions and groups of the merchants.

•16th and 17th centuries - process of incorporation was introduced and the government granted trade monopolies through royal charters. Later through specific charters regulation was brought in with regard to the subscribed fund and stock holdings in the company.

Introduction…..Introduction…..• Incorporation of each such business unit with a fresh

charter each time was a cumbersome procedure, the first legislative activity on company regulation was in 1720. – Bubble Act – companies prohibited from functioning unless th incorporated as a legally recognized entity.

•1834 – Trading Companies Act replaced Bubble Act. Limited personal liability of members based upon their share in the company.

•1844 – Joint Stock Companies Act. Registrar of Companies established . Shares become transferable.

Company law in IndiaCompany law in India•Company laws in India closely followed the English law and

regulations.• 1850 – first companies Act was enacted.- Registration of companies and transferability of shares.• 1857- amendment legislation – registration with or without

limited liability- Later this right was also extended to the banking and insurance

companies• 1956 – Companies Act, a consolidated version for the

regulation of company affairs.• 2000 – amended to include measures for good governance –

minimum paid-up capital requirement, protecting small depositors, director’s responsibility statements etc.

Company law history in India…..Company law history in India…..- Introduction of shelf-prospectus with regard to the book-

building activities of financial companies.• 2001 – amendment with regard to buy-back of shares upto

10% of the paid-up capital of the company by its board of directors.

• 2002 – amendments with regard to the constitution of the company law tribunal and company law appellate tribunal, and an appeal from there shall be preferred in the Supreme Court.

- Rehabilitation and revival fund.- Failure to file balance-sheet, acting against the interests of the

security of the country and a sick industry beyond any viable revival in future, shall be grounds for winding-up.

CHARACTERISTIC FEATURES OF A CHARACTERISTIC FEATURES OF A COMPANYCOMPANY•A voluntary association of persons come together for

carrying on business and sharing the profits therefrom.

•Companies act, 1956 defines a company as an entity registered according to the legislation.

•An association of many persons who contribute money to a common stock utilized for trade or business and who share the profit from such trade or business. Such common stock is called the capital and the contributors to it are members. (Lord Lindley)

FEATURES….FEATURES….•An artificial person created by law, having separate

entity with a perpetual succession and common seal. (Prof.Hanes)

•The derivations from this definition are:- It is a separate legal entity,- Limited or specified liability of its members,- Incorporation or registration, - Separate property,- Transferability of shares,- Perpetual succession, and- Common seal.

Features ……Features ……•A company differs from partnership in the following

ways:- A company is a separate legal entity, so it can be

sued and sue in its own name.- A shareholder’s liability is not the same as that of a

partner, who has to individually take the entire liability.- Being a separate entity, it has its own rights and

duties, distinct from its members,- The company is not an agent of the subscribers nor is

it their trustee.

Legal entity of the corporationLegal entity of the corporation•The concept of artificial person has been adopted to

position the company as a separate entity.•Artificial person is any such instrumentality created by

law for a specific purpose.•To bring in a difference from partnership and show a

much better structured institution, company as a separate legal entity was visualized.

•Also a separate legal entity would entail a better definition of the rights and liabilities of the company as well as its members.

Corporate personalityCorporate personality•A company is to be registered or incorporated under

the legislation with a minimum of seven members and two if it’s a private company.

• If an association of ten persons, and 20 in case of banking companies, is not registered, then its an illegal association.(Section 11)

• Its called an artificial person, because it’s a creation of law, and a person because it is vested with rights and obligations.

•Sec.34(2) says that on registration it becomes a body corporate by the name contained in the memorandum of association.

Corporate personalityCorporate personality•“a company is at law a different person altogether

from the subscribers….; even if the business remains the same after incorporation with the same people managing the show on the same lines, still it is not an agent of the subscribers or the promoters, or is it a trustee for them. Nor are the subscribers liable in any manner or form, except to the extent and in the manner provided by the Act” – Lord Macnaughten in Solomon Vs.Solomon&Co. Ltd.(1877)AC 22.

Corporate personalityCorporate personality•Lee V. Lee Air Farming Ltd. (1960) 3 All ER 429 PC –

held there was a valid contract of service between Lee and the company and Lee, was therefore a worker of the company. So his wife was entitled to compensation under the WC Act.

•Bacha F.Guzdar V. The CIT, Bombay (AIR 1955 SC 74)

-though the income in the hands of the company was partly agricultural, yet the same income was received by the plaintiff as dividend and hence could not be treated in the same manner as company.

Corporate personality…..Corporate personality…..•Separate property – shareholders are not part owners

of the undertaking (Bacha Guzdar’s case) – only have a right to vote, attend meetings, and receive dividends.

- No member can claim ownership of company’s property, during existence or winding up. (RF Perumal V. John)

- No insurable interest in the company's property, even if he held almost the entire share capital. (Macaure V. Northern Assurance Co. Ltd.)

- shares are transferable (Sec.82 – Companies Act)- company can be sued and sue in its own name, as it

has a common seal which is its official signature.

Liability of the companyLiability of the company•Company having seperate existence, members are

not liable for the company’s debts.- Where the company is limited by shares, the liability of

the members is limited to the nominal value of shares held by them.

- If the liability is unlimited, members’ liability extends beyond their shares’ nominal or face value and continues till the debt is completely paid off.

- personal liability, in case the company operates without the statutory minimum, with knowledge of such fact

- Personal liability also exists when during winding up, it comes to notice that there was an intent to defraud creditors while carrying on company’s business.

Lifting the corporate veil•Advantages of incorporation allowed only when used for

honest and lawful purposes, otherwise the corporate personality is set aside to look at the identity of persons responsible for misuse and fraud on company's name and personality.

• Instances when seperate entity is overlooked:- where a company has been started for the purpose of tax-

evasion or circumvention of tax obligations.- where the company is acting as an agent of its members,

then the members become liable for its acts, whether there is an express agreement to this effect or if its implied from the facts of a particular case.

Corporate veil......- the company was formed by the members to avoid

their contractual obligations.- where the company's existed for a fraudulent purpose,(DDA v.Skipper construction co.ltd.(1996)- incorporation is against public interest or public policy,- where incorporation was used to further an illegal or

improper purpose,- membership falls below the statutory minimum,- prospectus includes a fraudulent misrepresentation, - personal liability if the negotiable instrument does not

carry company's name.- seperate accounts not filed by subsidiaries.- for investigation of accounts and during winding-up.

Classification of companies•Registered company – brought into existence by

registration of documents of formation.• companies limited by liability– may be limited

either by shares or by guarantee or by both.- limited by shares, where the liability of the

members is limited by the amount of unpaid shares held by them, such company is known as share company; and

- limited by guarantee, where members guarantee for a specified amount payable at the time of winding up, such company is known as a guarantee company.

Classification.....•Unlimited companies – not having any limit on the liability

of its members. Personal fortune of members can be called by the liquidator at the time of winding up, to meet the debt needs of the company.

•A limited and an unlimited company, can be either private or public company.

- private company -minimum membership is two and minimum paid-up capital is one lakh rupees.

-limited rights to members and no prospectus issued for calling public deposits.

- public company minimum paid-up capital of 5 lakh rupees

- it can invite public subscription to its shares via the prospectus – and also arrange capital through private sources, then no prospectus issued.

- free transfer of shares

Classification.......•Private companies – no statutory meetings, but the

public companies must hold statutory meetings and also file reports with the Registrar of Companies.

•Difference with regard to appointment and functioning of directors.

•A private company has a privilege to issue any kind of shares and allow disproportionate voting rights.

•A private company can commence business immediately after incorporation.

•A private company need not maintain an index of members.

•No restrictions with regard to managerial remuneration.

Memorandum of association• A charter containing the fundamental conditions for

registration of the company• It defines and confines the powers of the company• It explains the objects of formation of the company.- explains the rights and powers of the shareholders, and- anyone dealing with the company, can know the viability

of their transaction from the memorandum.Contains details of the shareholdings of the members and the basic details of the company, with the word limited added at the end of the name,to mention shareholders' limited liability

- clarifies the objects of the company - main objects and other objects,

- Declaration as to the authorized share capital divided into fixed accounts.

Memorandum... ultra vires clauseA company exists only for the objects which are

expressly stated in the memorandum or are incidental to the specified objects, and

Anything done outside the express or implied objects is ultra vires, such acts are null and void ab initio.

Where a company embarks upon an ultra vires act, any member can apply for an injunction against the company

Acts of directors in excess of authority can be ratified by a general body meeting, provided there is such a provision in the memorandum.

Lendors of ultra vires loan are secured as creditors.Memorandum can be altered only in the prescribed method.

(Sec-17)

Alteration of the memorandum NAME - special resolution of the General meeting and approved by the central government, copy of the resolution sent to the Registrar of the company within 30 days. Change has no effect on the rights and liabilities of the company.(S.23)CHANGE OF OFFICE – within the same city, a board of directors resolution submitted to the registrar of companies. Change of city, a special resolution of the shareholders at a general meeting, approved by the Government and reported to the Registrar.OBJECTS CLAUSE – special resolution confirmed by Government. to carry on its business more economically and efficiently, board of directors are best positioned to decide the business economics( SC in Dalmia cements case)- to attain its main purpose by new or improved means- to enlarge or change the local area of its operation- to carry on some business which under existing circumstances may be combined with existing businessto restrict or abandon any of the objects specified in the memorandum.

Alteration.......- to sell or dispose of the whole or any part of the

undertaking- to amalgamate with any other company or body of personsA certified copy of the central government order together

with a printed copy of the altered memorandum to be filed with the registrar within three months of the passing thereof.

- Sec.38 - members' liability can be increased with written approval. Increase in the liability can be made by way of subscribing for more shares or by any other method

Sec.94 capital clause can be altered by a resolution passed in the general meeting:

- to increase its authorised share capital by such amount as it thinks expedient by issuing fresh shares, and

- to consolidate its share structure.

Articles of associationRegulations that govern the management of its internal affairs and the conduct of its businessDefine the duties, rights, powers and authority of the shareholders and the directors in their respective capacities and the conduct of business affairs.Subordinate to and are controlled by the memorandum, and cannot supersede the memorandum and its objects.Registered by a public limited company, signed by the subscribers to the memorandum.Articles shall contain:- the business of the company,-the capital, and the classes of the shares - the rights of the shareholders,- rules regarding allotment, forfeiture and transfer and transmission of shares, company's lien on shares,Not to exceed the powers given by the memorandum or be in conflict with the memorandum

Limitations on alterationNot in conflict with the Companies Act or any other law. Nothing illegal, unlawful or against public policyMust be for the benefit of the company as a whole, even if it

adversely affects a single member(Sidebottom Vs. Keeshaw Leese &Co. 1920 Ch.154 C.A.)

A registered memorandum and articles bind the member as if each of them has signed individual covenants, original and also as altered periodically.

The articles bind the members to each other, and even the trustees of the members are bound by the articles in their dealings with the company. (Borland Trustees V.Steel Bros. Co. Ltd 1901 1 Ch.279)

Directors to act within the confines of powers given in Articles, but contraventions may be ratified by members at a later date.

Loss resulting from such contraventions to be made good from their personal fortune and directors can be made liable for it.

Doctrine of constructive noticeWhen registered, the Memorandum and the Articles of

Association become public documents, and can be inspected by any person.

Any person contemplating to do business with the company is presumed and has means to ascertain information about the company.

In other words, every person dealing with the company is presumed to have read these two documents and hence, has notice of the company's affairs. Actual notice is not necessary, he has constructive notice.

- Kotla Venkataswamy V. Ramamurthy(AIR 1934)

Doctrine of indoor managementThis doctrine allows the people dealing with the company to presume that the officers of the company are acting under their authorized powers. It is the other side of the constructive notice doctrine. Outsiders dealing with the company need not inquire into the regularity of the internal proceedings.(Royal British Bank V.Tourquand 1856 6 E&B 327)The doctrine does not apply where the outsider has knowledge of the irregularity and still acts upon it, or has not consulted the documents at all.No application to matters void ab initio – fraud, forgery.For acts ordinarily outside his powers, the person dealing with him must do a proper check and then act. He cannot claim benefit of the doctrine otherwise.(A.L.Underwood V.Bank of Liverpool(1924 1 KB 775)

SharesSec.2(46) – a share in the capital of the company- an interest of a member in the company; the right to

receive dividend, vote at meetings, and have a share in the surplus assets of the company, in the event of winding up of the company,

- the liability of the member in the company to pay calls on shares until fully paid up;

- the right to transfer the shares according to the procedure laid down in the articles.

A share in the hands of the shareholder actually signifies a bundle of rights and liabilities, but it is not a negotiable instrument, numbered properly and distinctly.

A share has a nominal value with a distinctive number, the stock doesn't.

Shares.......A share is different from a share certificate, a share being a

percentage of a holding in the capital of the company, and a certificate being the documentary evidence of the specified number of shares issued under the common seal.

A share is also different from the stock, share being the individual unit and stock being the aggregate volume of such individual units.

Share cannot be transferred in fractions, a stock can be transferred in any kind of fractions

Shares can be issued by any company, public or private, while the public limited company, which is limited by shares, can issue only stock.

Shares are of equal denomination, stocks can be in different denominations.

Classes of shares• Different types of shares carry different rights and liabilities.- preference shares- equity shares- cumulative convertible preference shares• Company law 2000 amendment limited the shares to two

classes only, equity share capital and preference share capital, each having different voting rights and rights as to dividend

PREFERENCE SHARES - A share which carries a preferential right in respect of dividends at a fixed rate or a fixed amount, and

- a preferential right in regard to repayment of capital at the time of winding up.

Preference shareholders get priority over the equity shareholders. It can be a participating share in the profits and surplus at the time of winding up, or if it does neither it is a non-participatting share.

Preference shares

• If the share carries a right to payment of arrears in dividend from future profits, its a cumulative preference share, the accumulated arrears get paid out whenever profits are available. If it doesn't have this right then its non-cumulative preference share.

• A share issued as redeemable preference share, can be redeemed on the resolution of the board of directors, complying to the Articles. If not then it is a irredeemable preference share.

• Preference shareholders vote only on matters relating to preference shares.

Equity shares• No fixed rate of dividend. It is decided at the AGM upon the

recommenation of the BofD after accounting for the depreciation and transfer of a minimum amount to the reserves.

• Equity shareholders' voting rights are decided upon the proportion of the paid-up capital held by them.

• Members holding equity shares with differential rights to dividend, voting or otherwise, shall be entitled to bonus and rights issue of the same class.

CCPs- added by the 1985 Min. Of Fin. Notification – to be issued for setting up new projects, diversification of existing projects, working capital requirements, capital exp.for modernization.

- quantum of CCPs not to exceed equity shares,- face value of Rs.100 each,- listed on the stock exchs.- provision for CCPs must be there in the Articles of association,

copy of resolution submitted to SEBI.

Other classes.....• Deferred or founders' shares – issued only by a private

company, normally held by the promoters and directors.• Non-voting shares – they carry no voting rights. Included by

the 1999 Company Law Amendment,• Sweat-equity shares – equity shares issued to employees,

directors at a discount or for a consideration other than cash for providing know-how or making available IPRs or value additions etc. They are issued after a special resolution passed by the company in a general meeting, and issued in accordance with SEBI regulations.

• Issue at par – issued at face value• Issue at premium – issued at rate above face value • Issue at discount – issued at a discount of not more than

10% and only after one year of commencement of business.

Bonus Shares & Rights SharesBonus shares - Capitalize profits by issuing fully paid-up

shares to the members, thereby transferring the capital from the profit and loss account to the share capital; subject to SEBI guidelines.

Rights shares - Existing members have a right to be offered shares, when the company wants to increase its subscribed capital; can be issued two years after incorporation or one year after initial allotment of shares.

ALTERATION OF SHARE CAPITAL(S.94) - to increase its authorized share capital

-to consolidate its share capital base- to convert fully paid-up shares into stock and vice versa- to sub-divide shares into smaller amount, but the

proportion of paid and unpaid remains the same

Reduction of share capitalReducing the liability of the members with regard to the

uncalled capitalBy returning excess capital - To pay off paid up capital on

the understanding that it may be called again Write off or cancel capital which has been lost or is not

represented by available assets.Where there is reduction of capital the company has to

apply to the Company Law Appellate TribunalBuy-back of shares by the company - to cancel shares

allotted but not picked up by the members – dimunition of share capital

DIVIDENDS – paid from current year profits only – in cash terms only. Statutory minimum capitalization of profits and depreciation to be accounted for before dividend rate is decided upon.

Meetings and resolutions• Statutory meetings – held only by a public company having

share capital, with a 21 day notice sent to every member along with a statutory report. Such a report is also sent to the registrar.

• Annual General Meeting – to be held by every company. AGM shall not be held on a holiday except under exceptional circumstances.

• Extraordinary GM – all meetings other than AGMs are called EGMs, for transacting special business that may arise in between two AGMs.

- Notice should be given to every member and clear and explicit agenda to be circulated to the members

- Every member entitled to attend and vote shall have a right to appoint a PROXY

- Quorum shall be prescribed - Voting shall be adopted where necessary by voice vote, ballot,

division - In case of a public company with a share capital, a poll can be

demanded by any member or members present in person or by proxy.

- In case of a private company, poll can still be demanded

Motions, resolutions and amendments

Motion indicates a proposition made by any member at a meeting and such a motion shall be put to discussion and approval before the meeting.

A motion when passed with or without any amendments or changes is a resolution

A person proposing a motion shall make it in writing and endorse such motion. He is called the mover of the motion.

Ordinary resolution – approved by a simple majority of the members voting at a general meeting; matters approved through ordinary resolution relate to alteration of authorized share capital, declaration of dividend, election of directors

Resolutions....Special resolution – it needs a 21 day notice and a 3 times

majority; matters relating to alteration of objects clause, change of registered office outside the State, alteration of Articles, change in company name and reduction of share capital.

Resolution requiring special notice – in matters of removal of directors before their term expires.

A point of order deals with the conduct or procedure of the meeting. The chairman has to give his ruling ordecision on a point of order at once. His ruling on such matters is final.

Minutes of the record shall be maintained in a clear manner by the secretary of the company, who shall index the minutes.

Accounts, audit and dividendss.209- statutory regulation of book-keeping, open for

inspection by members, as well as by the Registrar of Companies, or an officer of the central government.

Default with compliance of the above rule will lead to imprisonment of six months and a fine.

Every company shall include a statement of the director's responsibility in the preparation of accounts, and a statement from the director that the rules have been complied with and the statement is fair and true and accompanied by sufficient care and caution.

S.219 – 21 days before the meeting the BS and the P&L account, auditor's and board's reports must be sent to every shareholder, representatives of such shareholders, debentureholders, official receiver or assignee of an insolvent member and the auditor of the company.

Accounts....

s.220 – such BS andP&L account shall be filed with the registrar in triplicate. Where the AGM does not approve the accounts and adjourns, the same should be informed to the Registrar.

AUDIT - Free and complete access to the books of account, vouchers etc.

Right to require information and explanation from any officers of the company.

Entitled to receive notice of the AGM and be heard on any part of the business which concerns him as auditor.

Ensure that the company's accounts are a true reflection of its financial status and the BS and P&L account are in line with the books of account.

Special audit• Central government orders special audit, when,- when the affairs of the company are not being

managed according to good business practices- company is being managed in a manner likely to

cause serious loss to the financial status to the company

- likely to affect the financial solvency of the company

• Special auditor has all the powers of an auditor, and he has to submit the report to the central government. While doing such audit he can order to receive any kind of information, failure to comply with his order will bring in a fine of Rs.500.

Management of a company

Directors are agents of the company. They shall conform to the defined functions, only then the company's liability arises; cannot contract in their own name.

They are trustees only to the extent of holding the company's money in their hands.

A public company - minimum of three directors, while two are sufficient for a private company. No body corporate can be a director.

They are appointed by the subscribers to the memorandum, or the general meeting of the company of the cental government.

Directors retire at every AGM, one-third retiring every year by rotation - can be reappointed for a fresh term with member voting to order a fresh vote, unless himself withdrawn or otherwise disqualified.

DirectorsDirectors can also be appointed by the B of D,- additional directors,- filling up casual vacancies (s.262)- alternate directorsAppointment by the central government – on the suggestion

of the tribunal, if its necessary to protect the interests of the company or the shareholders or in public interest.

Even third parties like lenders, financial institutions, can appoint directors.

Can be a director in not more than 20 companies at the same time, disregarding the private companies,non-profit organisations etc.

Fails to obtain the prescribed share qualification within the stipulated time, he stands disqualified.

Directors....Conviction in offences bars a person from acting as a director. Central government can remove a director if such person is not acting in

the interests of the company or under good business principles.No other remuneration from the company other than directorial

remuneration, except if he is the managing director. No compensation for loss of office.

MANAGING DIRECTOR – Maximum term of five years. Disqualified if he is an undischarged insolvent or has at any time been adjudged insolvent, any time suspended payments to his creditors, or is convicted by court for the offence of moral turpitude. A whole-time director cannot be in such role in more than one company. The term of the whole-time director is not tenured.

Liability to the company – breach of fiduciary duty, ultra-vires acts, negligence, breach of trust and misfeasance.

Liability to third parties – with regard to false statements in prospectus, allotment, fraudulent trading

Liability for breach of statutory duties – failure to perform a default duty of filing returns, redemption of irredeemable preference shares. No liability for acts of co-directors.

Criminal liability under the general criminal law as well as the Companies Act.

Winding upCompulsory winding upVoluntary winding upwinding up by a tribunal - When there is a special resolution that it be wound up by

tribunal. Tribunal need not act if such winding up is agianst public interest.

- failure to commence business- reduction in membership- inability to pay debts- just and equitableWhere the substratum of the company has gone – the

company has failed its objectsComplete deadlock in the management

Winding up.....Company was formed for fraudulent or illegal purposes.Where the majority has adopted an oppressive attitude

towards the minority.The business of company could not carried further without

loss.Where a private company is in substance a partnership.Where the requirments of an investigation demand winding

up.Default in filing BS with the registrar for five consecutive

years.Company has acted against the sovereignity and interests of

the country.Where the tribunal is of the opinion that the company be

wound up (added by the 2002 Amendment Act).

Winding up......Who may petition- the Company- the creditor's petition- contributors- a combination of creditors and contributors- registrar - any person authorized by the central government- the official liquidatorStatement of affairs to be filed on the winding up of the

companyPetition to be made to the tribunal which will decide and order

a possible winding up, and can make any interim orders also before it makes a winding up order.

Tribunal sends the intimation to the official liquidator and the Registrar with a certified copy.

Winding up......Registrar makes a note in his record and in the official gazetteOrder of winding up is deemed to be a notice of discharge to

the officers and employees of the company.The interests of the creditors and all the contributors.The powers of the directors are exercised by the official

liquidatorLimitation period ceases to run in favour of the companyAny dispositon of property done after the winding up order

stands void - Any sale without tribunal's permission after the order is void

Any floating charge created, with government's permission is void.

Liquidator can order inspection of books - Create a committee of inspection - Adjustment of contributories' payments

Winding up......Power to order public examination of the promoters, directors

and such other officials of the companyPower to summon persons suspected of having the property of

the companyPower to arrest a contributory intending to abscondPower to order dissolution of the companyVoluntary winding up- if the general meeting of the company so approves by an

ordinary resolutionCompany must cease to carry on business except for the

beneficial winding up processAll transfer of shares and alterations in the status of members,

after the winding up resolution stand void.On the appointment of a liquidator, all powers of the BofD are

transferred to him.