11

Lecture-19Lecture-19Company Law: Company Law: IntroductionIntroduction

- Objectives, Definition & Concepts - Objectives, Definition & Concepts - Corporate Personality- Corporate Personality

- Separate legal personality- Separate legal personality- Veil of incorporation- Veil of incorporation- Lifting/piercing the Veil- Lifting/piercing the Veil- Doctrine of ‘alter ego’- Doctrine of ‘alter ego’

- Essential features of a Company- Essential features of a Company- Types of Company- Types of Company- Other types of Business Orgns- Other types of Business Orgns- Difference; Private Vs. Public Company- Difference; Private Vs. Public Company- Conversion; Private-Public-Private - Conversion; Private-Public-Private - Principles:- Principles:

i. Falling below the Membershipi. Falling below the Membershipii. An illegal Associationii. An illegal Association

Objective && PurposesThe main objective && purposes of statutes relating to companies are as follows~

i. Encourage investments in companies by providing certain facilities, i.e.. Limitation of liability,

transferability of shares etc.ii. Ensure due and proper administration of the funds and assets of companies in the interest of the

investing public.iii. Identify malpractices by directors and managers.iv. Arrange for investigation into the affairs of

companies and provide for effective audit in dealing with cases of dishonesty and fraud in the corporate sector.

Definition ; CompanyThe term Company is used to describe an association of a number of persons, formed for some common purpose and registered according to the law relating to companies.

Sec 3 (1) (i) of the Company Act, 1994 states that a Company means “ a company formed and registered under this Act or an existing company”

Concepts ; CompanyA company, formed and registered under the Company Law is regarded by law as a single person, having specified rights and obligations. The law confers on a company a distinct legal personality, with perpetual succession and a common seal. Therefore ; a company is different from its members and the individuals composing it.

Example: Suppose that, A, B, C and 50 other persons form a company called XYZ Co. The company XYZ Co. is a legal person quite separate from A, B, C and others. Therefore A, B, C can enter into contracts with XYZ Co.

Corporate PersonalitySeparate legal personality~

A company, formed and registered under the Company Law is regarded by law as a single person, having specified rights and obligations. The law confers on a company a distinct legal personality, with perpetual succession and a common seal. Therefore ; a company is different from its members and the individuals composing it.

Salomon Vs. Salomon [1897]

Contd…

Salomon Vs. Salomon [1897]Salomon had a business in boot manufacture. He formed a company called Salomon ..Co. with himself, his wife, daughter and 4 sons as shareholders; transferred to it his business. As consideration for the transfer he received the major portion of the shares of the company and debentures for 10,000. Later on the company went into liquidation. Salomon, as a debenture-holder, claimed to be secured creditor and demanded priority in the payment of 10,000, out of the assets of the company. The unsecured creditors of the company objected on the ground that the business really belonged to Salomon and he should not be allowed to claim as a secured creditor.

Decision~It was held that Salomon as an individual, was quite distinct from Salomon..Co; and he could therefore be a secured creditor of the company, even though he happened to hold the majority of the shares.

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Although a company is treated as a legal person upon incorporation, there are limits to treating a company in this way and the terms of a contract may negate such a construction.[Deutsche Genossenschaft Bank Vs. Burnhope.. Others (1995)] ;Here the bank’s insurance policy covered ‘burglary, robbery of hold-up, or theft…. committed by persons present on the premises of the assured….? The House of Lords held that the policy only covered theft by a natural person who was physically present on the bank’s premises. The bank was therefore unable to claim under the policy when a company committed the theft through its chairman who did not physically enter the bank. The definition of person in s-61 of the Law of Property Act, 1925 includes a corporation unless the context provides otherwise. Their lordship felt that the context did provide otherwise, as the clause ‘referring to burglary, robbery or hold-up, can only relate to crimes committed by natural persons on the bank’s premises.

Veil of incorporation ;A company, formed and registered under the Company Law is regarded by law as a single person, having specified rights and obligations. The law confers on a company a distinct legal personality, with perpetual succession and a common seal. Therefore ; a company is different from its members and the individuals composing it. This is called the ‘veil of incorporation’.

Lifting/Piercing the veil ;It is sometimes necessary to find out the ownership of the shares. It is also necessary to find the persons who control the company. This is called ‘Lifting or Piercing the veil. It can be done by Statute or Court.

Criminal & civil responsibility Doctrine ; ‘alter ego’

In certain cases the acts of a company’s agents can render a company criminally liable. The crucial question is whether the person behind the company is in sufficient control of it as to make it liable for any criminal act. This principle of corporate liability is sometimes referred to as the ‘alter ego’ doctrine.This allows the law to attribute the mental state of those who in fact control the company and manage the company, to the company as being its ‘directing mind and will’.

Essential Features ;The essential features of a Company are as follows~

i. Registrationii. Voluntary Associationiii. Legal Personalityiv. Contractual capacityv. Managementvi. Capitalvii. Permanente existenceviii. Registered officeix. Common sealx. Limited liability

Contd..

xi. Transferabilityxii. Statutory obligationsxiii. Not a citizenxiv. Residencexv. Fundamental rightsxvi. Corporate/Separate legal personality

. .xx. Others (if any)

Note: Note: [More details’, please see at Page ; 540-42, Sen & [More details’, please see at Page ; 540-42, Sen & Mitra, 25th Edition (2006)]Mitra, 25th Edition (2006)]

Types of CompanyThere are basically 2 types of Company-

a. Private Companyb. Public Company

i. Company limited by Sharesii. Company limited by Guaranteeiii. Unlimited Company

Others;- Statutory Public Company- Government Company- Foreign Company

Other Types of Business Orgns~- Sole Trader/Proprietorship- Partnership- Unincorporated association

Difference between~Company Vs. Partnership

i. Registration: A company comes into existence only after A company comes into existence only after registration under the Company Act. In the case of partnership, registration under the Company Act. In the case of partnership, registration is not mandatory.registration is not mandatory.ii. Min Members; ii. Min Members; Company-2/7 ;Company-2/7 ; Partnership-2Partnership-2iii. Max Members; iii. Max Members; Company-50/unlimited ;Company-50/unlimited ; Partnership:10-20Partnership:10-20iv. Legal status; iv. Legal status; Company- a single person/legal personality. Company- a single person/legal personality. Partnership- Collection of individual, not a single person.Partnership- Collection of individual, not a single person.

v. Length of existence; v. Length of existence; Company- perpetual succession; the Company- perpetual succession; the death or insolvency of a Member does not affect its existence. death or insolvency of a Member does not affect its existence. Partnership-dissolves once a partner dies or become insolvent.Partnership-dissolves once a partner dies or become insolvent.

Note: Note: [More details, please see at Page ; 543-44, Sen & [More details, please see at Page ; 543-44, Sen & Mitra, 25th Edition (2006)]Mitra, 25th Edition (2006)]

Private Vs. Public Companyi. Members: Members: Private;2-50, Public;7-unlimitedPrivate;2-50, Public;7-unlimited

ii. Transfer of Shares: ii. Transfer of Shares: Private-yes (with restriction), Private-yes (with restriction), Public-yes (no restriction)Public-yes (no restriction)

iii. Invitation to public: iii. Invitation to public: Private-no, Public-yesPrivate-no, Public-yes

iv. Min Directors:iv. Min Directors: Private-2 & Public-3 Private-2 & Public-3

v. Commencement of Business:v. Commencement of Business: A private company A private company can commence business immediately on incorporation; can commence business immediately on incorporation; whereas a public company has to wait until it obtains a whereas a public company has to wait until it obtains a certificate for the Commencement of Business.certificate for the Commencement of Business.

Note: Note: [More details, please see at Page ; 549-51, Sen & [More details, please see at Page ; 549-51, Sen & Mitra, 25th Edition (2006)]Mitra, 25th Edition (2006)]

Conversion ;Private Company into a Public Company~

- By resolution- By default- Creating a Statutory Public Company

Note: Note: [More details; please see at Page ; 551-52, Sen [More details; please see at Page ; 551-52, Sen & Mitra, 25th Edition (2006)]& Mitra, 25th Edition (2006)]

Public Company into a Private Company~

- By special resolutionNote:Note: [More details; please see at Page ; 554-55, Sen [More details; please see at Page ; 554-55, Sen & Mitra, 25th Edition (2006)]& Mitra, 25th Edition (2006)]

PrinciplesFalling below the minimum Membership~If the number of Members of a public company is reduced to below 7 and that of a private company to below 2 and the company carries on business for more than six months while the number is so reduced, every person who remains a member after six months and is aware of the fact of shortage of members, shall be perpetually liable for all the debts of the company contracted during that time.

Example: 1. In a public limited company there were 7 Members. The shares of 1 Member were sold by the Court auction and were purchased by another Member of the same Company. The minimum number of Membership is reduced to 6.

2. A private company was formed with 2 persons, the father and his son. The son was the only heir of the father. The father died and all his shares devolved to his son. Here the minimum number of Membership is reduced to 1.

PrinciplesCompany & Illegal Association~An association of more than 10 persons carrying on business or an association of more than 20 persons carrying on any other type of business must be registered under the Company Act, 1994. If it is not so registered it is deemed to be an illegal association.

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Lecture-20Lecture-20Company Law: Company Law: Constitution & LawsConstitution & Laws• Memorandum of AssociationMemorandum of Association

-Definition, -Definition, - The Form and Contents of the Memorandum- The Form and Contents of the Memorandum- Rules regarding the name of the Company- Rules regarding the name of the Company- Alteration of the Memorandum- Alteration of the Memorandum

• Article of AssociationArticle of Association- Definition- Definition- Alteration of the Article- Alteration of the Article

• OthersOthers- Relationship, Difference Memo Vs. Article- Relationship, Difference Memo Vs. Article- Doctrine of indoor management- Doctrine of indoor management- Doctrine of ultravires & intravires- Doctrine of ultravires & intravires

Def: Memorandum of Association….?The memorandum of association is a document which contains the fundamental rules regarding the constitution and activities of a company. It is the basic document which lays down how the company is to be constituted and what work it shall undertake.The memorandum contains rules regarding the capital structure, the liability of the members, the objects of the company, and all other important matters relating to the company. The memorandum is altered only after certain formalities are observed.

Def: Articles of Association….?The Article of Association is a document which contains rules, regulations and bye-laws regarding the internal management of the company. Articles must not violate any provisions of the memorandum or any provision of the Company Act.

Relationship: Memo & Articlei. The Articles are subordinate to Memorandum.

ii. The Memorandum must be read in conjunction with the Articles.iii. The terms of the Memorandum can not be modified or controlled by the Articles.

Difference: Memo & ArticleThe distinction between the Memorandum & the Articles of Associations are as follows~i. The Memorandum is the fundamental charter of the company determining its constitution and objectives; the Articles are rules regarding internal management.ii. Any rule in the Articles contrary to the Memorandum is invalid.iii. Articles can be altered easily, the Memorandum can be altered only after the adoption of certain formalities.iv. Acts beyond the powers of Memorandum (ultra vires) are void. Acts done by a company beyond the Articles can be ratified by the shareholders provided they are with in (intra vires) the powers of Memorandum.

Note: Note: [More details; please see at Page ; 566-67, Sen & [More details; please see at Page ; 566-67, Sen & Mitra, 25th Edition (2006)]Mitra, 25th Edition (2006)]

Form and Contents of the Form and Contents of the Memorandum~Memorandum~The Memorandum of Association of every company shall The Memorandum of Association of every company shall contain the following particulars-contain the following particulars-

i. Name Clausei. Name Clauseii. Situation Clauseii. Situation Clauseiii. Object Clauseiii. Object Clauseiv. Area of Operation Clauseiv. Area of Operation Clausev. Liability Clausev. Liability Clausevi. Capital Clausevi. Capital Clausevii. The Association .. Subscription Clausevii. The Association .. Subscription Clause

Note: Note: [More details; please see at Page ; 567-68, Sen & [More details; please see at Page ; 567-68, Sen & Mitra, 25th Edition (2006)]Mitra, 25th Edition (2006)]

Rules regarding the name of the Rules regarding the name of the Company~Company~A company can not adopt a name by which another A company can not adopt a name by which another company is registered. If by inadvertence, mistake or company is registered. If by inadvertence, mistake or otherwise, a name is selected which the same as that of an otherwise, a name is selected which the same as that of an existing company or closely resembles it, the name must existing company or closely resembles it, the name must be changed.be changed.

If the name of company closely resembles the name of a If the name of company closely resembles the name of a previous company, the public may be misled and may be previous company, the public may be misled and may be defrauded. In such a case the Court will direct the change defrauded. In such a case the Court will direct the change of the name of the company.of the name of the company.

Alteration;Alteration; Memorandum & ArticlesMemorandum & ArticlesMemorandum of Association;Memorandum of Association;The Memorandum of Association of a company can be The Memorandum of Association of a company can be altered by following the procedure laid down in the altered by following the procedure laid down in the Company Act, 1994. The procedure is different for different Company Act, 1994. The procedure is different for different clauses of the Memorandum.clauses of the Memorandum.

Article of Association;Article of Association;Alteration of Articles is a statutory rights as specified in the Alteration of Articles is a statutory rights as specified in the Company Act, 1994. This rights can not be taken away by Company Act, 1994. This rights can not be taken away by any provision in the existing Articles or the Memorandum.any provision in the existing Articles or the Memorandum.

Contd..Contd..

Alteration;Alteration; Article of Association;Article of Association;Although alteration of Articles is permitted, there are certain Although alteration of Articles is permitted, there are certain restrictions on the nature and extent of the alterations that can be restrictions on the nature and extent of the alterations that can be made-made-

i. Articles can be altered always by special resolution only. If the Articles of the company prescribed a different

procedure, e.g.. an ordinary resolution, it will not be followed.

ii. No change is permitted which violates the provisions of the Company Act, 1994.

iii. No change is permitted which violates the provisions of the Memorandum of Association.

iv. The alteration must not constitute a fraud on the minority [Foss Vs. Harbottle].

Doctrine of-

Indoor management~When the Articles of Association of a company prescribes a particular procedure for doing a thing, the duty of carrying out the provisions lies on the person in charge of the management of the company. Outsiders are entitled to assume that the rules have been complied with. This is known as the ‘Doctrine of Indoor Management’.Example:The Articles of a company provided that the directors can give a bond if authorized by a resolution of the company. The directors gave a bond to T although no resolution was passed. Held, T was entitled to assume that the resolution was passed.. because it is a matter of internal procedure.. and the company was bound by the bond.

Contd..

Doctrine of indoor management does not apply in certain cases~

i. Void actsii. Knowledge of irregularityiii. Lack of authority

Note: Note: [More details; please see at Page ; 584-85, Sen & [More details; please see at Page ; 584-85, Sen & Mitra, 25th Edition (2006)]Mitra, 25th Edition (2006)]

Doctrine of-Ultravires & intravires~

Acts beyond the powers of Memorandum (ultravires) are void. Acts done by a company beyond the Articles can be ratified by the shareholders provided they are with in (intravires) the powers of Memorandum.

Example:1. When Army takes power that is ultravires the B’desh Constitution;

2. When care taker Govt. doesn’t conduct the national election with in 90 days that is intravires the B’desh constitution.

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Lecture-21Lecture-21Company Law: Company Law: Company FormationCompany Formation

- Essential steps of Comp. - Essential steps of Comp. formationformation

- Registration & Certificate - Registration & Certificate of-of-

incorporationincorporation- Promoters- Promoters

- Definition- Definition- Duties & liabilities of - Duties & liabilities of

PromotersPromoters- Pre-incorporation - Pre-incorporation

contractcontract

Formation of a CompanyBefore a company can be formed; the following steps must be followed~

1. The Memo and Articles must be prepared. These two documents must be filed when application is made for the registration and incorporation.2. It must have a proposed paid up capital as approved by the Government.3. The company must be registered in accordance with the provisions of the Company Act, 1994.4. The Certificate of Incorporation must be obtained.

In case of a Public Company; the following further steps are required to be taken before it commences business-

Contd..

In case of a Public Company; the following further steps are required to be taken before it commences business-

5. The prospectus or the Statement in lieu of Prospectus must be issued and registered with the Registrar.

6. The minimum subscription must be raised and thereafter the allotment of shares must be made.

7. The Certificate for the Commencement of Business must be obtained from the Registrar.

Registration &Certificate of IncorporationIf the Registrar is satisfied that all the requirements of the Act have been complied with, he will Register the company and issue a certificate called the ‘Certificate of Incorporation’.

Def; Promoter…?Promoter is a word which is used to describe the persons who initially plan the formation of a company and bring it into existence.

In other words~ A person who originates a scheme for the formation of the company, has the Memo and the Articles prepared, executed and registered, and finds the first directors, settles the terms of the preliminary contracts and prospectus.. if any.. and makes necessary arrangements for advertising and circulating the prospectus and placing the capital is a Promoter.

Who are the ‘Promoter’…?In seeking to find out who are the promoters of a company; it is helpful to and ask the following questions~

1. Who had the idea to form the company for the purpose in question?

2. Who drafted the memorandum and articles or gave instructions to lawyers to prepare them?

3. Who paid for the registration of the company and cost of preparing the documents?

4. Who arranged for persons to become the first directors?

Note: [This is only a guide and is by no means decisive; a person may have done none of these things and yet be a Promoter].

Duties & Liabilities of Promoters~

Note: Note: [For details; please see at Page ; 591, Sen [For details; please see at Page ; 591, Sen & Mitra, 25th Edition (2006)]& Mitra, 25th Edition (2006)]

Pre-incorporation Contract…?Before a company is formed and registered; the promoters of the company have to enter into contracts for drafting the necessary documents, transfer of goods and property etc. Such contracts may be called Preliminary or Pre-incorporation contracts. They are entered into before a company comes into existence. The questions arises whether contract by the promoters with a non-existing company are enforceable or not..?The rules regarding the subject are summarized below~

Note: Note: [More details; please see at Page ; 592-[More details; please see at Page ; 592-93, Sen & Mitra, 25th Edition (2006)]93, Sen & Mitra, 25th Edition (2006)]

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Lecture-22Lecture-22Company Law:Company Law:((Capital & ShareCapital & Share) ;) ;

- Types of Capital- Types of Capital- Share ; Definition, Features & Classifications- Share ; Definition, Features & Classifications- Increase of Share Capital- Increase of Share Capital- Transfer & Transmission of Shares- Transfer & Transmission of Shares- Rights of Shareholders including Voting Rights- Rights of Shareholders including Voting Rights- Others- Others- Share Warrant Vs Share Certificate- Share Warrant Vs Share Certificate- Share Vs Stock- Share Vs Stock

((DebentureDebenture) ; ) ; - Definition ; including Charges- Definition ; including Charges- Shareholders Vs Debenture holders - Shareholders Vs Debenture holders

((Insider DealingsInsider Dealings););

What is ‘Capital’…?

Types of CapitalThe term ‘capital’ in connection with company formation may mean any one of the following things~

1. Nominal/or Authorized CapitalNominal or Authorized capital is the total face value of the shares which the company is authorized to issue by its memorandum of association. The total share capital of a company is also called its Registered Capital.The full authorized capital may not be needed by a company at the time it commences business. A company may issue less than the authorized capital, reserving the right to raise further moneys by the sale of the unauthorized shares at a later time.

Contd..

2. Issued CapitalIssued capital is that par of the authorized capital which is actually offered to the public for sale.

3. Subscribed CapitalSubscribed capital is that part of issued capital which is taken up and accepted by the public.

4. Paid up CapitalPaid up capital is the amount of money actually paid by the subscribers or credited as so paid.

5. Uncalled CapitalThe unpaid portion of the subscribed capital is called Uncalled Capital.

What is ‘Share’…?

Share ; DefThe shareholders are the proprietors of the company. Therefore, a ‘Share’ may be defined as an interest in the company entitling the owner thereof to receive proportionate part of the profits, if any and a proportionate part of the assets of the company upon liquidation.

Share ; Features/CharacteristicsThe main features/characteristics of Shares are-as follows~

i. A share is not a sum of money, but is an interest measured in a sum of money and made up of various rights contained in the contract.

Contd..

ii. A share is an interest having a money value and measure up of diverse rights specified udder the Articles of Association.

iii. The holder of a share has certain rights, duties and liabilities, as stated in Company Act, 1994 along with it’s Memo and Articles of Association.

iv. A share is transferable and heritable subject to regulations framed in the Articles of Association.

v. The share or the interest of a member in a company is movable property, transferable in the manner provided by the Articles of the company.

vi. The share must be numbered so as to distinguish them from one another.

Share ; ClassificationShare can be classified broadly 2 ways~

1. Preference Share2. Equity Share

Others~3. IPO (Initial Public Offer)4. Bonus Share5. Right Share

1. Preference Shares ;Preference Shares are those shares which are given, by the articles of the company, two privileges-

i. priority in the payment of dividends over other shares.

ii. priority as regards return of the capital in the event of liquidation.

2. Equity Shares ;All Shares other than preference shares are called Equity Shares. The rights and privileges of equity shareholders are laid down in the articles subject to the provision of the Act.

Contd..

3. IPO (Initial Public Offer) ;

4. Bonus Shares ; Instead of cash, profit is given by share value to the

existing shareholder.

5. Right Shares ;Where at any time after the expiry of 2 years from the Where at any time after the expiry of 2 years from the formation of a company or at any time after 1 year from the formation of a company or at any time after 1 year from the firs allotment of shares; whichever is earlier, it is proposed firs allotment of shares; whichever is earlier, it is proposed to increase the subscribed capital of the company by to increase the subscribed capital of the company by allotment of further shares to the person who at the date of allotment of further shares to the person who at the date of the offer, are holders of the equity shares of the company the offer, are holders of the equity shares of the company in proportion as nearly as circumstances admit, to the in proportion as nearly as circumstances admit, to the capital paid up on those shares at that date. This called as capital paid up on those shares at that date. This called as ‘Right Share’.‘Right Share’.

Increase of Share Capital ;Increase of Share Capital ; There are 2 methods of increasing capital~There are 2 methods of increasing capital~

1. Further issue of capital/Right Shares1. Further issue of capital/Right Shares2. Conversion of Debenture or Government loan2. Conversion of Debenture or Government loan

Further issue of Capital/Right Shares ;Further issue of Capital/Right Shares ; Where at any Where at any time after the expiry of 2 years from the formation of a time after the expiry of 2 years from the formation of a company or at any time after 1 year from the firs allotment company or at any time after 1 year from the firs allotment of shares; whichever is earlier, it is proposed to increase of shares; whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of the subscribed capital of the company by allotment of further shares to the person who at the date of the offer, further shares to the person who at the date of the offer, are holders of the equity shares of the company in are holders of the equity shares of the company in proportion as nearly as circumstances admit, to the capital proportion as nearly as circumstances admit, to the capital paid up on those shares at that date. This called as ‘Right paid up on those shares at that date. This called as ‘Right Share’.Share’.

Transfer & Transmission of Shares ;A shareholding is personal property (in the technical sense) and so it is by its nature transferable, subject to-i. It must be in writing.

ii. It must follow relevant provisions of the Company Act, 1994.

iii. It must follow relevant provisions of Articles of Association.

Note ; [‘Transfer’ is the term used when a shareholder by his own act passes the ownership of shares to another person; whereas, ‘Transmission’ by operation of law is the term used when ownership passes as a result of an event such as the death or bankruptcy of a member, as described above].

Rights of ShareholdersRights of ShareholdersThe Company Act gives various rights to the The Company Act gives various rights to the Shareholders of a company. The important rights Shareholders of a company. The important rights are mentioned below~are mentioned below~

Note: Note: [For details; please see at Page ; 617-18, [For details; please see at Page ; 617-18, Sen & Mitra, 25th Edition (2006)]Sen & Mitra, 25th Edition (2006)]

Voting Rights of the Shareholders~Voting Rights of the Shareholders~Equity Shareholders;Equity Shareholders; An equity shareholders is entitled An equity shareholders is entitled to vote on every resolution placed before the company. to vote on every resolution placed before the company. This right can not be curtailed by the Articles. The number This right can not be curtailed by the Articles. The number of votes a shareholders can cast is proportional to his share of votes a shareholders can cast is proportional to his share of the paid up equity capital of the company.of the paid up equity capital of the company.

Preference Shareholders;Preference Shareholders; A preference shareholders is A preference shareholders is entitled to vote only resolution which directly affect the entitled to vote only resolution which directly affect the rights attached to his preference shares and resolutions for rights attached to his preference shares and resolutions for winding up of the company.winding up of the company.

Share ;Share ;The shareholders are the proprietors of the company. Therefore, a ‘Share’ may be defined as an interest in the company entitling the owner thereof to receive proportionate part of the profits, if any and a proportionate part of the assets of the company upon liquidation.

Stock ;Stock ;When all shares of a company have been fully paid up, they When all shares of a company have been fully paid up, they may be converted into stock if so authorized by the articles.may be converted into stock if so authorized by the articles.

Difference:Difference:Share Vs Stock

Note: Note: [For details; please see at Page ; 625, Sen & Mitra, [For details; please see at Page ; 625, Sen & Mitra, 25th Edition (2006)]25th Edition (2006)]

Share Certificate ; Share Certificate ; The share certificate is a certificate issued under the The share certificate is a certificate issued under the common seal of the company specifying the number of common seal of the company specifying the number of shares held by any member. A share certificate must be shares held by any member. A share certificate must be issued and delivered within 3 months from date of issued and delivered within 3 months from date of allotment.allotment.

Share Warrant ; Share Warrant ; The share warrant is a document issued by a company, The share warrant is a document issued by a company, stating that its bearer is entitled to the shares therein stating that its bearer is entitled to the shares therein specified. It is a substitute for the share certificate.specified. It is a substitute for the share certificate.

Difference:Difference:

Share Certificate Vs Share WarrantShare Certificate Vs Share Warrant

Note: Note: [For details; please see at Page ; 624, Sen & Mitra, [For details; please see at Page ; 624, Sen & Mitra, 25th Edition (2006)]25th Edition (2006)]

What is ‘Debenture’…?

Debenture ; DefThe issue of debentures is a particular mode of borrowing money by companies. A debenture is a document which shows on the face of it, that the company has borrowed a certain sum of money from the holder thereof upon certain terms and conditions.

Sec 2(12) Of the Company Act states that “a debenture includes debenture stock , bonds and any other securities of a company whether constituting a charge on the assets of the company or not”.

Debenture ; CharacteristicsThe main features/characteristics of Debentures areas follows~

i. Each debenture is numbered.

ii. A debenture usually creates a floating charge on the assets of the companies.

iii. A debenture may create a fixed charge instead of a floating charge.

iv. Sometimes debenture holders are given the right to appoint a receiver in case of non-fulfillment of the terms of the debentures by the company.

What is ‘Charge’…..?

Charge ; DefA ‘charge’ on a property is created when it is made liable for the payment of money. A charge is 2 types~

1. Fixed charge2. Floating charge

1. Fixed Charge ;A fixed charge is one which creates a legal interest of a specific property of the company or all the properties of the company. Thus a fixed charge is equivalent to mortgage.

2. Floating Charge ;A floating charge is also creates a legal interest of a specific property of the company or all the properties of the company. But a floating charge does not amount to mortgage.

Crystallization…?A floating charge becomes fixed charge when any of the following things occur~

i. a company is wound upii. a Receiver of the properties of the company is

appointed.iii. the company fails to pay the interest and the

installment of the principal.iv. The company ceases carrying on its business.

When the above occurrence or contingencies happen, a floating charge becomes a fixed charge. This is known as ‘crystallization’ of the floating charge. This crystallization occurs on the moment of crystallization.

Difference:Difference:

Shareholder Vs DebentureholderShareholder Vs Debentureholder

Note: Note: [For details; please see at Page ; 738-39, [For details; please see at Page ; 738-39, Sen & Mitra, 25th Edition (2006)]Sen & Mitra, 25th Edition (2006)]

Insider Dealings ;Def ; Insider dealing is understood broadly to cover situation where a person buys or sells securities when he, but not the other party to the transaction, is in possession of confidential information which affects the value to be placed on those securities.

In short it is termed as upsi means- ‘unpublished price sensitive information’. If anyone in charge of ‘upsi’ discloses is liable of criminal offence.

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Lecture-23Lecture-23Company Law:Company Law:DirectorsDirectors

- Definition ; including max number- Definition ; including max number- Types- Types- Director’s duties- Director’s duties- Minority Protection [Foss v Harbottle]- Minority Protection [Foss v Harbottle]

MeetingMeeting- Types - Types - Others Meeting including GM, AGM…- Others Meeting including GM, AGM…- Rules of procedure regarding Meeting- Rules of procedure regarding Meeting- Resolution- Resolution

Director; DefThe director of a Company are selected according to the Articles of Association of the company and provisions of the Company Act, 1994. Directors are in charge of the management of the affairs of the Company. The directors are collectively called the ‘Board of Director’ and the Board is the company’s executive authority.A director is an officer of the company within the meaning of Sec 2(30) of the Company Act, 1994. Sec 2(13) States that a director includes “any person occupying the position of the director by whatever name called”.

Director; Types Paid Director ; Non paid Director ; Shadow Director ; is any person in accordance

with whose directions of the company are accustomed to act.

Director as Employee ; A director who also holds a management post; e.g.. as head of the department in the company is sometimes called a ‘Working Director’ or ‘Executive Director’

Contd..

CEO/Executive Director ; A director who holds a management post; e.g.. as head of the department in the company is called CEO or Executive Director. A CEO/ED may not be from Directors.

MD ; must be from the Directors.

Chairman ; The Board of Directors may appoint one of themselves to be chairman of the Board, usually for an indefinite period to hold office so long as he is a director though he may be removed or replace.

Director’s duties ;The duties of Directors of a company have been elaborately explained by Romer L. J. in Re City Equitable Fire Insurance Co..1925… The important duties are quoted from this case and summed below~

1. Distribution of work2. Good faith3. Reasonable care4. Degree of skill5. To attend meeting6. Duty of disclosure7. Other duties

Comments ; [If a director fails to perform his duties, as explained above, he is guilty of negligence. If on account of such negligence the company suffers any damages, the director must compensate].

Note: Note: [For details; please see at Page ; 694-95, Sen & Mitra, 25th [For details; please see at Page ; 694-95, Sen & Mitra, 25th Edition (2006)]Edition (2006)]

Minority ProtectionA group of ‘wrongdoers’ may gain control of the majority of votes and operate the company for their own benefits. This is more likely to happen in a small private company. Generally, the court has been reluctant to interfere with the exercise by the majority of their voting rights, unless there is clear bad faith.

The rule in [Foss Vs. Harbottle]The rule states that when a wrong is done to a company, the proper plaintiff is the company. Thus the board will usually initiate an action. If the action is against the directors, the majority of shareholders must initiate it on behalf of the company, the minority can not. This is known as rule in [Foss Vs. Harbottle].

‘Meeting’…..?- Types - Types - Meeting including Statutory/GM, AGM, EGM..- Meeting including Statutory/GM, AGM, EGM..- Rules of procedure regarding - Rules of procedure regarding MeetingMeeting- Resolution- Resolution

Meeting; TypesAs per Company Act, 1994 ; Meeting can be classified~

1. Meeting of the Shareholders- Statutory/General Meeting- AGM- EGM- Class Meeting

2. Meeting of the Directors

3. Other Meeting- Meeting of the creditors- Meeting of the Debenture holders

1. Meeting of the Shareholders- Statutory/General Meeting- AGM- EGM- Class Meeting

Statutory/General MeetingEvery public company limited by shares and every company limited by guarantee and having a share capital must within a period of not less than 1 month and more than 6 months from he date at which the company is entitled to commence business, hold a general meeting of members which is to be called, the Statutory Meeting. In this meeting the members are to discuss a report by directors known as the Statutory Report which contains particulars relating to the formation of the Company.

Contd..

AGM ;- The first AGM of a company may be held within a period of not more than 18 months from the date of its incorporation.- Subject to the above mentioned conditions, a company must hold AGM each year. Not more than 15 months shall elapse between the date of one AGM and the next..

EGM ;The Board of Directors can be compelled or hold a GM upon request or requisition made for it. The AGM is specially called at any time over the year for urgency.

Class Meeting ;The meeting for special class, e.g.. preference shareholders or debenture share holders’ meeting.

Procedure regarding MeetingThe general rules of procedure as regards shareholders meeting can be summarized as follows~

1. Proper authority2. Notice3. The Agenda4. The Quorum5. Chairman6. Proxy7. Method of Voting

Note: Note: [For details; please see at Page ; 656-59, Sen & Mitra, 25th [For details; please see at Page ; 656-59, Sen & Mitra, 25th Edition (2006)]Edition (2006)]

Resolution ; TypesCompany Act, 1994 classifies resolutions into the following types~

1. Special Resolutions2. Ordinary Resolution3. Resolution by special notice

1. Special ResolutionsA special resolution is necessary for deciding important matters. Company Act, 1994 specifies what these matters are. e.g- Reduction of capital; Winding up etc.A special resolution may be passed in a GM of members called in the usual way with the usual notice. But the following 2 conditions must be satisfied-

i. the notice calling the GM must specify that a special resolution will be moved.

ii. The number of votes cast in favor of the resolution whether by show of hands or by poll, must be at least 3times the number cast against it.

2. Ordinary ResolutionsAll matters not required to be decided by a special resolution, may be decided by ordinary resolution. An ordinary resolution is passed when the number of votes cast in favor exceeds those cast against it.

3. Resolution by special noticeWhere by any provision contained in Company Act, 1994 or in the Articles, special notice is required of any resolution, the intention to move the resolution shall be given to the Company not less than 14 days before the date of meeting where the resolution is to be moved, exclusive of the day on which the notice is served or deemed to be served and the day of the meeting.

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Lecture-24Lecture-24Company Law ;Company Law ;Liquidation/Winding upLiquidation/Winding up

- Definition- Definition- Types of liquidation/winding up- Types of liquidation/winding up- Grounds for compulsory liquidation- Grounds for compulsory liquidation- Liquidator/Receiver- Liquidator/Receiver- Mode of distribution assets/Priority of - Mode of distribution assets/Priority of

ChargesCharges

Liquidation/Winding up; DefThe winding up or liquidation of a Company means the termination of the legal existence of a Company by stopping its business, collecting its assets and distributing the assets among creditors and shareholders ; in the manner laid down in Company Act, 1994.

Modes of Winding up ;There are 3 methods of Winding up/Liquidation of a company. They are as follows~

i. Voluntary Winding up by the members themselves or by the creditors.ii. Compulsory Winding up by the Court.iii. Voluntary Winding up under the supervision of

the Court.

Voluntary Winding up ;There are 2 types of voluntary winding up~

1. Members’ voluntary winding up2. Creditors’ voluntary winding up

1. Members’ voluntary winding up ;If the company is, at the time of winding up, a solvent company, i.e.. able pay its debts and the directors make a declaration to that effect, is called Members’ voluntary winding up.

2. Creditors’ voluntary winding up ;If the company is not in a position to pay its debts and the directors make no declaration of solvency, is called a Creditors voluntary winding up.

Compulsory winding up ;Compulsory winding up takes place when a company is directed to be wound up by an order of Court. The grounds of compulsory winding up are as follows~

i. by special resolution of the companyii. By defaultiii. Not commencing or suspending the company.iv. Reduction of membersv. Inability to pay debtsvi. The just and equitable clause

Note: Note: [For example; please see at Page ; 561-62, Sen & [For example; please see at Page ; 561-62, Sen & Mitra, 25th Edition (2006)]Mitra, 25th Edition (2006)]

Liquidator/Receiver ;After a winding up petition is filed, notice is issued on the Company to appear and state its case if any. After hearing both sides, the Court may directs the petition, adjourn the hearing conditionally or unconditionally, make an interim order necessary or pass an order for winding up.

In such a situation a order for winding up is passed, the court appoints a ‘Liquidator/Receiver’ whose function is to take charge of and complete the winding up proceedings.

Duties of Liquidator/Receiver ;

Note: Note: [For details; please see at Page ; 768, Sen & Mitra, [For details; please see at Page ; 768, Sen & Mitra, 25th Edition (2006)]25th Edition (2006)]

Mode of distribution of Assets/Priority of Charges~In case of winding up/liquidation; the mode of distribution of assets are as follows. This is also known as ‘priority of charges’~

1. The cost of the winding up proceedings.2. All revenues, taxes to be paid to the Government.3. Employees salary up to 4 months.4. Employee’s other important benefits like gratuity, provident fund, insurance…etc.5. Debenture holders

a. Fixed chargeb. Floating charge

6. Shareholdersa. Preference shareb. Equity share

7. Deferred Creditors8. Members9. Others..if any..