D.N.R.

COLLEGE, (AUTONOMOUS): BHIMAVARAM

DEPARTMENT OF MANAGEMENT STUDIES

CORPORATE LEGAL FRAMEWORK

III SEMESTER

Presented By
N. DINESH
Dept of Management Studies
D.N.R.College Bhimavaram- 534202
Phone: 08816-224119
E mail: [email protected]
Website: https://dnrcollege.org/en/
 CP - 303, CORPORATE LEGAL FRAMEWORK
(Effective from the admitted batch of 2019 -21)
MBA III SEMESTER eNOTES

UNIT-V: The Companies Act, 2013: Nature and Registration—Kinds of Companies—

Memorandum of Association—Article of Association—Kinds of Shares—Powers and duties
of Directors—winding up.

Introduction:
A company, is a legal entity made up of an association of people, be they natural, legal, or a
mixture of both, for carrying on a commercial or industrial enterprise. Company members
share a common purpose and unite in order to focus their various talents and organize their
collectively available skills or resources to achieve specific, declared goals. Companies take
various forms such as:

RIGHTS OF DIRECTORS

Rights can be categorized into individual and collective rights. Individual rights are such as
right to inspect books of accounts {Section 209(4)}, Right to receive notices of board
meetings (Section 285), right to participate in proceedings and cast vote in favour or against
resolutions (Section 300), right to receive circular resolutions proposed to be passed. (Section
289), right to inspect minutes of board meetings.

Right to refuse to transfer shares: According to Section 111 of the Act, directors of
private companies and deemed public companies are entitled to refuse registration of transfer
of shares to a person whom they do not approve.

Right to elect a Chairman: Regulation 76(1) of Table-A provides that the directors are
entitled to elect a chairman for the board meetings.

Right to appoint a Managing director: The Board has the right to appoint the
managing director/ manager (as defined in the Act) of the company.

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Right to recommend dividend: The Board is entitled to decide whether dividend is to
be paid or not. Shareholders cannot compel the directors to pay dividend. However, they can
reduce the rate of recommended dividend. Payment of dividend is the prerogative of the
board.

DUTIES OF DIRECTORS

Directors as individuals have a duty to attend board meetings and contribute to the
deliberations of the board and ultimately to the decision making leading to formulation of
policies. Directors are under obligation to disclose their interest whether directly or indirectly
in contracts or arrangements with the company (Section299). They are also duty bound to
disclose their directorships in other companies within 20 days of appointment or
relinquishment of his office in other companies (Section 305). As per Section 308, directors
are also required to disclose their shareholding in the company.

The following are some of those duties exercised collectively:

Approval of annual accounts and authentication of annual accounts

Directors report to shareholders highlighting performance of the company, transfers to

reserves, investment of surplus funds, borrowings.

Issuance of Notice and Holding of Board meetings and shareholders meetings Passing of
resolutions at board meetings or by circulation.

Directors are paid remuneration for their efforts in formulating policies and for devoting their
valuable time for the company. Directors remuneration consists of sitting fees as per
provisions in Articles of association, and Commission as a fixed percentage of net profits or
as a fixed monthly sum as decided by the shareholders in the general meeting. As per the
provisions in the new companies bill,2009 independent directors cannot receive any
remuneration other than sitting fees, expenses for attending board meetings and commission
linked to profit.

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KINDS OF SHARES

1.Ordinary shares

These carry no special rights or restrictions. They rank after preference shares as regards
dividends and return of capital but carry voting rights (usually one vote per share) not
normally given to holders of preference shares (unless their preferential dividend is in
arrears).

Some companies create more than one class of ordinary shares – E.g. “A Ordinary Shares”,
“B Ordinary shares” etc. This gives flexibility for different dividends to be paid to different
shareholders or, for example, for pre-emption rights to apply to some shares but not others.

2.Deferred ordinary shares

A company can issue shares which will not pay a dividend until all other classes of shares
have received a minimum dividend. Thereafter they will usual fully participating. On winding
up they will only receive something once every other entitlement has been met.

3.Non-voting ordinary shares

Voting rights on ordinary shares may be restricted in some way – e.g. they only carry voting
rights if certain conditions are met. Alternatively, they may carry no voting rights at all. They
may also preclude the shareholder even attending a General Meeting. In all other respects
they will have the same rights as ordinary shares.

4.Redeemable shares

The terms of redeemable shares give the company the option to buy them back in the future;
occasionally, the shareholder may (also) have the option to sell them back to the company,
although that’s much less common.

The option may arise at or after a specific date, between two dates or be effective at any time
the shares are in issue. The redemption price is usually the same as the issue price, but can be
set differently. A company can only redeem shares out of profits or the proceeds of a new
share issue, which may restrict its ability to redeem shares even if the directors would like to
exercise the option.

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If a company chooses to have redeemable shares, it must also have non-redeemable shares in
issue. At no point can all of its share capital be made up of redeemable shares.

5.Preference shares

These shares are called preference or preferred since they have a right to receive a fixed
amount of dividend every year. This is received ahead of ordinary shareholders. The amount
of the dividend is usually expressed as a percentage of the nominal value. The full entitlement
will be paid every year unless the distributable reserves are insufficient to pay all or even
some of it. On a winding up, the holders of preference shares are usually entitled to any
arrears of dividends and their capital ahead of ordinary shareholders. Preference shares are
usually non-voting (or only have a vote only when their dividend is in arrears).

6.Cumulative preference shares

If the dividend is missed or not paid in full then the shortfall will be made good when the
company next has sufficient distributable reserves. It follows that ordinary shareholders will
not receive any dividends until all the arrears on cumulative preference shares have been
paid.

By default, preference shares are cumulative but many companies also issue non-cumulative
preference shares.

7.Redeemable preference shares

Redeemable preference shares combine the features of preference shares and redeemable
shares. The shareholder therefore benefits from the preferential right to dividends (which may
be cumulative or non-cumulative) while the company retains the ability to redeem the shares
on pre-agreed terms in the future.

MEMORANDAM OF ASSOCIATION:
The Memorandum of Association of company, often simply called the Memorandum (and
then often capitalised as an abbreviation for the official name, which is a proper noun and
usually includes other words) is one of the most important documents and must be drafted
with care. It has to be filed with the Registrar of Companies during the process of
incorporation of a Company. It contains the fundamental conditions upon which the company
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is allowed to operate. Its purpose is to enable shareholders, creditors, and those who deal with
the company to know what is its permitted range of enterprise.

A Memorandum of Association (MOA) is a legal document prepared in the formation and

registration process of a limited liability company to define its relationship with shareholders.
The MOA is accessible to the public and describes the company's name, physical address of
registered office, names of shareholders and the distribution of shares. The MOA and the
Articles of Association serve as the constitution of the company. The MOA is not applied in
the U.S. but is a legal requirement for limited liability companies in European countries
including the United Kingdom, France and Netherlands, as well as some Commonwealth
nations.

Name Clause
The name clause requires you to state the legal and recognized name of the company. you are
allowed to register a company name only if it does not bear any similarities with the name of
an existing company. your company name must end with the word "limited" because the
preparation of a MOA is a legal requirement for limited liability companies only.

Registered Office Clause

The registered office clause requires you to show the physical location of the registered office
of the company. you are required to keep all the company registers in this office in addition to
using the office in handling all the outgoing and incoming communication correspondence.
you must establish a registered office prior to commencing business activities.

Objective Clause

The objective clause requires you to summarize the main objectives for establishing the
company with reference to the requirements for shareholding and use of financial resources.
you also need to state ancillary objectives; that is, those objectives that are required to
facilitate the achievement of the main objectives. the objectives should be free of any
provisions or declarations that contravene laws or public good.

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Liability Clause

The liability clause requires you to state the extent to which shareholders of the company are
liable to the debt obligations of the company in the event of the company dissolving. you
should show that shareholders are liable only their shareholding and/or to their commitment
to contribute to the dissolution costs upon liquidation of a company limited by guarantee.

Capital Clause

The capital clause requires you to state the company's authorized share capital, the different
categories of shares and the nominal value (the minimum value per share) of the shares. you
are also required to list the company's assets under this clause.

Association Clause

The association clause confirms that shareholders bound by the moa are willingly associating
and forming a company. you require seven members to sign an MOA for a public company
and not less than two people for a moa of a private company. you must conduct the signing in
the presence of witness who must also append his signature.

ARTICLES OF ASSOCIATION (AOA)

In corporate governance, a company's Articles of Association (AOA, called articles of

incorporation in some jurisdictions) is a document which, along with the memorandum of
association (in cases where the memorandum exists) form the company's constitution, defines
the responsibilities of the directors, the kind of business to be undertaken, and the means by
which the shareholders exert control over the board of directors.

The article is binding not only to the existing members, but also to the future members who
may join in the future. The hires of members, successors and legal representatives are also
bound by whatever is contained in the Article. The Articles bind the company and its
members as soon as they sign the document. It is a contract between the company and its
members. Members have certain rights and duties towards the company and the company
have certain obligations towards its members. At the same time the company also expects
some duties and obligations which the member has to fulfil for the smooth functioning of the
company.

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The Objectives and the purpose of the Company are determined in advance by the
shareholders and the Memorandum of Association (MOA), if separate, which denotes the
name of the Company, its Head- Office, street address, and (founding) Directors and the main
purposes of the Company – for public access. It cannot be changed except at an AGM or
Extraordinary General Meeting (EGM) and statutory allowance. The MOA is filed with a
Registrar of Companies who is an appointee of the Ministry of Corporate Affairs. For their
assurance, the shareholders are permitted to elect an Auditor at each AGM. There can be
Internal Auditors (employees) as well as an External Auditor.

NATURE OF COMPANIES

1.Voluntary Association:

A company is a voluntary association of two or more persons. A single person cannot

constitute a company. At least two persons must join hands to form a private company. While
a minimum of seven persons are required to form a public company. The maximum
membership of a private company is restricted to fifty, whereas, no upper limit has been laid
down for public companies.

2.Incorporation:

A company comes into existence the day it is incorporated/registered. In other words, a

company cannot come into being unless it is incorporated and recognised by law. This feature
distinguishes a company from partnership which is also a voluntary association of persons
but in whose case registration is optional.

3.Artificial Person:

In the eyes of law there are two types of persons viz:

Natural persons i.e. human beings and

Artificial persons such as companies, firms, institutions etc.

Legally, a company has got a personality of its own. Like human beings it can buy, own or
sell its property. It can sue others for the enforcement of its rights and likewise be sued by
others.

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4.Separate Entity:

The law recognizes the independent status of the company. A company has got an identity of
its own which is quite different from its members. This implies that a company cannot be
held liable for the actions of its members and vice versa. The distinct entity of a company
from its members was upheld in the famous Salomon Vs. Salomon & Co case.

5.Perpetual Existence:

A company enjoys a continuous existence. Retirement, death, insolvency and insanity of its
members do not affect the continuity of the company. The shares of the company may change
millions of hands, but the life of the company remains unaffected. In an accident all the
members of a company died but the company continued its operations.

6.Common Seal:

A company being an artificial person cannot sign for itself. A seal with the name of the
company embossed on it acts as a substitute for the company’s signatures. The company
gives its assent to any contract or document by the common seal. A document which does not
bear the common seal of the company is not binding on it.

7.Transferability of Shares:

The capital of the company is contributed by its members. It is divided into shares of
predetermined value. The members of a public company are free to transfer their shares to
anyone else without any restriction. The private companies, however, do impose some
restrictions on the transfer of shares by their members.

8.Limited Liability:

The liability of the members of a company is invariably limited to the extent of the face value
of shares held by them. This means that if the assets of a company fall short of its liabilities,
the members cannot be asked to contribute anything more than the unpaid amount on the
shares held by them. Unlike the partnership firms, the private property of the members cannot
be utilized to satisfy the claims of company’s creditors.

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9.Diffused Ownership:

The ownership of a company is scattered over a large number of persons. According to the
provisions of the Companies Act, a private company can have a maximum of fifty members.
While, no upper limit is put on the maximum number of members in public companies.

10.Separation of Ownership from Management:

Though shareholders of a company are its owners, yet every shareholder, unlike a partner,
does not have a right to take an active part in the day to day management of the company. A
company is managed by the elected representatives of its members. The elected
representatives are individually known as directors and collectively as ‘Board of Directors’.

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 Model Questions from UNIT -V

I. Short Notes

1. Company
2. Deferred Ordinary Shares
3. Name Clause
4. Limited Liability

II. Essays

1. Briefly explain about Powers and Duties of Directors.

2. Explain in detail about Memorandum of Association.
3. Distinguish between Memorandum and Articles of Association.
4. What do you mean by Articles of Association? Explain the registration of AOA.
5. Discuss the various kinds of Shares.

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