Company Law001

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Company Law


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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


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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


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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.


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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)]


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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

Under Judicial Interpretations

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


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Promotion Refers to the entire process by which a company is brought into

existence. It starts with the conceptualization of the birth a acompany and determination of the purpose for which it is to beformed. 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 andmake arrangements for the preparation, advertisement and thecirculation 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 preparesthe figures on behalf of the promoter and who is paid by thepromoter is not a promoter.


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Incorporation by Registration

The promoters must make a decisionregarding the type of company i.e. apublic company or a privatecompany or an unlimited company,etc and accordingly prepare thedocuments for incorporation of thecompany.

In this connection the Memorandumand Articles of Association (MA & AA)are crucial documents to beprepared.


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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 ofassociation. Under Section 2(28) of the Companies Act, 1956 the memorandum means thememorandum of association of the company as originally framed or as altered from time totime 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 formspecified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form inTable B is applicable in case of companies limited by the shares , form in Table C isapplicable to the companies limited by guarantee and not having share capital, form in TableD is applicable to company limited by guarantee and having a share capital whereas form intable 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 subscriptionclause[Sec. 4(c)]

d) Objects clause[Sec. 13(1)(c)&(d)]

e) Liability clause[Sec. 13(2)]f) Capital Clause[Sec. 13(4)(a)]


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Contents of Memorandum Name clauseThe name of the company is mentioned in the name clause. A public limited company mustend with the word 'Limited' and a private limited company must end with the words 'PrivateLimited. 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 orState patronage . [Sec. 13(1)(a)]

Registered office clauseThe state in which the registered office of company is to be situated is mentioned in thisclause. If it is not possible to state the exact location of the registered office, the companymust state it provide the exact address either on the day on which commences to carry on itsbusiness 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 dateof 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 ofthe company is the official address of the company where the statutory books and records mustbe normally be kept [Sec. 13(1)(b)]

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


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Contents of Memorandum

Objects clauseThis clause is the most important clause of the company. It specifies the activities which acompany can carry on and which activities it cannot carry on. The company cannot carry onany activity which is not authorized by its MOA. This clause must specify Main objects ofthe company to be pursued by the company on its incorporation Objects incidental orancillary 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 withlimited liability, it must state that liability of member, In the case of a company with limitedliability, it much state that liability of member is limited , a member can be called upon atany time to pay to the company the amount unpaid on the shares.

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


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Doctrine of the ultra-vires

Any transaction which is outside thescope of the powers specified in theobjects clause of the MA and are notreasonable incidentally or necessaryto the attainment of objects is ultra-vires the company and therefore void.

No rights and liabilities on the part ofthe company arise out of suchtransactions and it is a nullity even ifevery member agrees to it.


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Consequences of an ultravires

transaction

Void ab initio

Injunction

Personal liability of Directors

Acquisition of property that is ultra

viresDirector personally liable to third

parties


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Articles of Association

The Articles of Association (AA) contain

the rules and regulations of the internalmanagement of the company.

The AA is nothing but a contract between

the company and its members and alsobetween the members themselves thatthey shall abide by the rules andregulations of internal management ofthe company specified in the AA. It

specifies the rights and duties of themembers and directors.


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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


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Classification on the basis ofnumber 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 employeemembers (present or past), minimum number of members are 2

3. Restricts the right to transfer its shares ,if any. The restriction is topreserve the private character of the company,

4. Prohibits any invitation to the public to subscribe for any shares in, ordebentures of, the company,

5. Prohibits any invitation or acceptance of deposits from persons otherthan its members, directors or their relatives


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Classification on the basis ofnumber of members

A Public company means a companywhich

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 nota private company.


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Relation between

Memorandum and Articles

Articles are subordinate to memorandum.

The memorandum is to be read inconjunction with articles.

The terms of the memorandum cannot bemodified or controlled by the articles.


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Incorporation of Company

The Company is required to file the followingdocuments with ROC after getting the nameapproved

1. Memorandum of Association

2. Articles of Association

3. Agreement with any individual for appointment asmanager,

managing/whole time director

4. A declaration that all requirements of theCompanies act have

been complied with.


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Company management

Sec 2(13) defines director as director" includes any person occupyingthe 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 asthe "Board of directors" or "Board".

Sec 253. Only individuals to be directors

No body corporate, association or firm shall be appointed director of acompany, and only an individual shall be so appointed.


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Company management

Sec 2 (6) defines "Board of directors" or "Board", in relation to acompany, means the Board of directors of the company.

According to Sec 254, Subscribers of memorandum aredeemed to be directors.

In default of and subject to any regulations in the articles of acompany, subscribers of the memorandum who areindividuals, shall be deemed to be the directors of thecompany, until the directors are duly appointed inaccordance with section 255.

As per 275, No person to be a director of more than twentycompaniesAfter the commencement of this Act, no person shall, save asotherwise provided in section 276, hold office at the same timeas director in more than twenty companies.


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Directors report Sec 217. Boards report

(1) There shall be attached to every balance sheet laid before a company in generalmeeting, 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 thecompany which have occurred between the end of the financial year of the company towhich the balance sheet relates and the date of the report

(e) the conservation of energy, technology absorption, foreign exchange earnings andoutgo, in such manner as may be prescribed.


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Directors report

2) The Board's report shall, so far as is material for theappreciation of the state of the company's affairs byits members and will not in the Board's opinion be

harmful to the business of the company or of any ofits subsidiaries deal with any changes which haveoccurred during the financial year-

(a) in the nature of the company's business;

(b) in the company's subsidiaries or in the nature ofthe business carried on by them; and

(c) generally in the classes of business in which thecompany has an interest.


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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 standardshad been followed along with proper explanation relating to material departures;

(ii) that the directors had selected such accounting policies and applied them consistentlyand made judgments and estimates that are reasonable and prudent so as to give a trueand fair view of the state of affairs of the company at the end of the financial year and ofthe profit or loss of the company for that period;

(iii) that the directors had taken proper and sufficient care for the maintenance ofadequate accounting records in accordance with the provisions of this Act forsafeguarding the assets of the company and for preventing and detecting fraud and otherirregularities;

(iv) that the directors had prepared the annual accounts on a going concern basis.]


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Meetings of the Shareholders

A Statutory meeting to be held within aperiod of not less than one month nor more

than six months from the date which thecompany is entitled to commence businesshold a general meeting of the members.

Annual general meeting to be held everyyear. There shall not be an interval of more

than 15 months between one AGM andanother. The first AGM is to be held with in 18months from date of incorporation.


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Meetings of the Shareholders

Extra ordinary meeting can be held whenconvened by

1.The Board of directors on its own or

on the requisition of the members,

2. By the requisitionists themselves onthe failure of the board of directors to

call the meeting.


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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-timesecretary and where the Board of directors of any such company comprises only two directors, neither ofthem shall be the secretary of the company: 3[Provided that every company not required to employ awhole-time secretary under sub-section (1) and having a paid-up share capital of ten lakh rupees or moreshall file with the Registrar a certificate from a secretary in whole-time practice in such form and within suchtime 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 insection 217.]

1A) If a company fail to comply with the provisions of sub-section (1), the company and every officer ofthe company who is in default, shall be punishable with fine which may extend to five hundred rupees] forevery day during which the default continues:

Provided that in any proceedings against a person in respect of an offence under this sub-section, it shallbe a defense to prove that all reasonable efforts to comply with the provisions of sub-section (1) weretaken or that the financial position of the company was such that it was beyond its capacity to engage awhole-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].


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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 generalmeeting and shall, within seven days of the appointment, giveintimation thereof to every auditor so appointed

Provided that before any appointment or re-appointment ofauditor or auditors is made by any company at any annualgeneral meeting a written certificate shall be obtained by thecompany from the auditor or auditors proposed to be soappointed to the effect that the appointment or re-appointment, if made, will be in accordance with the limitsspecified in sub-section (1B).


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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.


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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 ispassed by members in the general meeting. It is only for some specific reasons, that courtmay supervise the winding up proceedings. The court may put up some special terms andconditions also. However, liberty is granted to creditors, contributories or other to apply tocourt for some relief. (Sec 522)

Sec 522. Power to order winding up subject to supervision. At any time after a company haspassed a resolution for voluntary winding up, the Court may make an order that the voluntarywinding up shall continue, but subject to such supervision of the Court, and with such liberty forcreditors, contributories or others to apply to the Court, and generally on such terms andcondition, as the Court thinks just.

The court may also appoint liquidators, in addition to already appointed, or remove anysuch liquidator. The court may also appoint the official liquidator, as a liquidator to fil l upthe vacancy.

Liquidator is entitled to do all such things and acts, as he thinks best in the interest ofcompany. He shall enjoy the same powers, as if the company is being wound-upvoluntarily.

The court also may exercise powers to enforce calls made by the liquidators, and suchother powers, as if an order has been made for winding up the company altogether bycourt. ( Sec 526)

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