Business Environment & Legal

Aspects of Business
KMBN-201

Unit 4
 Company Law
• By a Company is meant an association of
persons who contributes money to a common
stock and employ it for a common purpose
• According to James L.J. the term “Company”
means “an association of persons united for
common object”.
• Sec 3 (1) of Company Act 1956, Co. means a
Co. formed & regd. Under this act or an
existing Co.
• Justice Marshal – “A person”, artificial,
invisible, intangible and existing in eyes of law.

• Co. is a juristic person with perpetual

succession and in which shares are
transferable and liability is limited.
 Characteristics of a Company:
• Independent corporate existence.(Salomon v.
Salomon and Co. Ltd.)
• Perpetual succession.
• Common Seal
• Limited liability.
• Transferability of shares.
• Separate property
• Power to sue and to be sued.
 Characteristics of Company
• Independent Existence- A co. is regarded by
law as a person just as a human being
In Salomon V Salomon Co. Ltd., it was held that
co. is a separate juristic entity distinct from
share holders.
• Perpetual Succession- Law is the creator of Co.
and only law can destroy it and it never dies.
• Limited Liability- Liability of members of ltd.
Co. is Ltd. Their liability is ltd. to the nominal
values of shares held by them
 Characteristics of Company
• Separate Property- A Co. is separate and
distinct person from the members composing
it. The company’s money and property
belongs to co. and not to share Holders.
• Transferability of shares- Sec. 82 of Company
Act 1956 “ shares in the company are movable
property, transferable in the manner provided
by Article of Association
• Capacity to sue & be sued- A Co. can file a
suit (Case) against any person & Vice versa
• Solomon was a leather merchant who converted his business
into a Limited Company as Solomon & Co. Limited (the
‘company’). The company so formed consisted on Solomon,
his wife and five of his children as members. The company
purchased the business of Solomon for £39,000; the purchase
consideration was paid in terms of £10,000 debentures
conferring a charge over the company’s assets, £20,000 in
fully paid, £1 share each and the balance in cash.
• The company in less than one year ran into difficulties and
liquidation proceedings commenced. The assets of the
company were not even sufficient to discharge the
debentures (held entirely by Solomon himself). And nothing
was left for unsecured creditors. The liquidator on behalf of
unsecured creditors alleged that the company was a sham
and mere alias or agent for Salomon.
 Company Vs Partnership
Criteria Company Partnership
/Basis
Mode of Created by registration under Co. Act Formed by agreement, which may
Generation 1956. be written or oral, express or
implied.
Registration of partnership is not
compulsory
Legal Status Co. is an artificial person existing in Association of persons/
the eyes of law. individuals
Minimum Private Co. =2 Minimum numbers of persons=2
Numbers of Public Co. =7
persons
Maximum Private Co. =50 Maximum numbers = 20
Numbers of Public Co. =any number of members If carrying banking business =10
persons
Transfers of A shareholder can transfer his share A partner can’t transfer his share
Shares without the consent of other without consent of other partners
shareholders
 Criteria Company Partnership
/Basis
Liability of Limited to nominal values of share Liability of partners for debts of
Members held by them firm is unlimited

Length of A Co. having legal existence has no Firm can be dissolved at any time
Existence effect by death, insolvency or by agreement between partners.
outgoing members.
It has perpetual existence
Statutory Co. is required to comply with various No statutory obligation are to be
Obligation statutory obligation like filling Balance complied
Sheet, conducting annual meetings,
maintaining various records and
registers etc.
Authority of Management of Co. rests in hand of All partners has a right to actively
Members directors elected by shareholders. participate in management of a
Shareholders has no interference on firm.
day to day management.
Audit Auditing of financing account is Not Compulsory.
compulsory.
 Advantages of Company
• Large financial resources: by issuing shares,
debentures co. can collect large amount of
capital from public
• Limited liability: liabilities of members is limited
to the extent of value of shares held by them
• Professional Management: management of co.
vests in board of directors. These are persons
having sound financial, legal & business
knowledge so that co. can be managed
efficiently.
• Large Scale Production: Due to large financial
resources an technical expertise it is possible
to have large scale production.
• Contribution to Society: Co. offers
employment to large no. of people
• Research & Development: Co. invests
substantial amount on R&D activities which
help co. to adopt new techniques & process of
production, new design, better quality
products etc.
• Enjoys Public Confidence: Co. is regulated by
various Acts like Co.’s Act. SEBI 1992,
Securities Contract Regulation Act. Co. has to
comply with provisions, rules and regulations
of these Acts.
• Effective Management: There is separation of
ownership & management in Co. Co. can
afford expert managers for each deptt. The
shareholders invests money while few eligible,
experienced professional manage the affairs
of the Co.
• Democratic Management: Directors are
elected representative of shareholders. They
are elected in General Meeting of Co.. There
are provisions for retirement & election of
new directors.
 Types of Company

The Company can be classified on

following Basis
• Nationality
• Mode of Incorporation
• Ownership
• Liability
• Transferability of Shares
1.Nationality
• Indian Company: Registered under Company’s Act
1956 and regd. Office in India.
• Foreign Company: Incorporated outside India but
established a place of business in India.

2.Mode of Incorporation
• Statutory Company/Public Corporation:
Established under special Act of Parliament or
state legislature eg. RBI,LIC,UTI etc.
• Registered Company: Company registered under
Company’s Act 1956
3. Ownership
• Govt. Company: Company in which at least
51% paid up share capital is held by Govt. eg.
BSNL
• Holding Company: A Company is deemed to
be holding Company of another if, but only if,
that other is its subsidiary
• Subsidiary Company: A Company is subsidiary
of another Company if other Company holds
more than 50% shares or other Company
controls composition of Board of Directors
4. Liability
• Limited By Shares: Liability of members is ltd.
Up to amount of share held by them.
• Limited By Guarantee: Liability is ltd. To the
extent amount the members agree to
contribute in case of winding up of a
Company .
• Unlimited Company: Do not exist today. There
is no limit on liability of members.
5. Transferability of Shares
• Private Limited Company
• Public Company
• Private Company: A Private Company has bee defined
under sec. 3(1) (iii) to mean a Company which by its
articles-
a) Restricts the right to transfer its shares
b) Limits the no. of its members to 50
c) Prohibits any invitation or acceptance of deposits from
public
• It has minimum paid up capital of Rs. 1 lacs
• Must have its own Article of Association
• Should have at least 2 directors
• The word “Pvt. Ltd.” must be added at the end of its name
• Public Company: A Public Company means a Company
which is not a Private Company.
• Minimum paid up capital is Rs. 5 Lacs.
Conversion of Private Co. into Public Co. (by 3 ways)
1. Conversion by Choice: If Pvt. Co. alters its
articles so that they do not contain provisions
which make it a Pvt. Co., it shall cease to be
Pvt. Co.
2. Conversion By Default: Where the articles of
Co. contain all the 3 essentials contained in
sec 3(1) (iii), but default is made in complying
with.
3. Conversion by operation of Law: On account
of holding shares or huge turn over a Pvt. Co.
Is converted into Public Company
 Formation of a Company:
• The process of formation of a company may
be divided into three parts:
1. Promotion
2. Incorporation/ Registration
3. Floatation
1. Promotion: It is the process of conceiving an
idea and developing it into a project to be
accomplished by the incorporation and
floatation of a company. The persons who take
the necessary steps to accomplish these
objectives are called promoters.
2. Steps involved in incorporation
• Acquire DIN and DSC
• Ascertaining availability of name by filing e-
form 1A
• Preparation of Memorandum of Association
(MOA) and Articles of Association (AOA).
Other documents to be filed with the ROC:
• e-form 18 – Notice of the situation of the
registered office of the company.
• e-form 32 – Particulars of the directors,
manager or secretary.
• e-form 1 - Statutory declaration
• Payment of Registration fees
• Certificate of Incorporation
3. Floatation:
• After a company has received its certificate of
incorporation, it is ready for floatation i.e. it can go
ahead with raising capital sufficient to commence
business.
• In case of private companies capital is obtained from
friends and relatives by private arrangement.
• In case of public companies capital can be raised in
either of the following two ways-
• 1. By issuing Prospectus- If public is to be invited to
subscribe to its capital.
• 2. By issuing Statement in lieu of prospectus- If
capital is to be arranged privately.
 Certificate of Commencement of Business:
• A private company can commence business
immediately after the certificate of
incorporation has been obtained.
• In case of Public companies it is necessary to
obtain a certificate of commencement of
business. This certificate can be obtained only
after ‘floatation’ of the company.
 Prospectus

• Definition-’’Any document described or issued as

a prospectus & includes
• Any notice
• Circular
• Advertisement, or
• Other document
• Inviting deposits from the public or
• For the subscription or purchase of any shares
in, or debenture of a body corporate’’[Sec.2(36)]
What constitutes a prospectus?
• An invitation to public
• Invitation be by or on behalf of the company
• Invitation must be to subscribe or purchase
• Must relate to shares/debentures or other
instrument
• Authentication of Prospectus
• The Act provides that any prospectus issued by
or on behalf of the company must be
• Dated
• Signed by every person named in it as director
• Delivered to the Registrar of Companies for
registration on or before the date of publication.
• Statement in lieu of prospectus
• A public company which has a share capital
but does not issue a prospectus on its
formation, cannot allot any shares without
first filling with the Registrar of companies a
document called “ the statement in lieu of
prospectus”.
• The document must be filed at least three
days before the first allotment of shares or
issue of debentures.
• It must be signed by every person who is
named therein as director or a proposed
director or by his agent duly authorized in
writing.
 MOA
• MOA is the company’s charter & is a document of great
importance in relation to proposed company.
• MOA must be printed & must be divided into paragraphs
numbered consecutively. It is the company's charter & must
contain the following six clauses-
• The Name Clause
• The Registered Office Clause
• The Object Clause
• The Liability Clause
• The Capital Clause
• The Subscription Clause
• THE NAME A company shall have a registered office to
which all communication must be made within 30 days
after the date of its incorporation or from the day on
which it begins to carry on business.
• The company in law is equal to a natural person & has a
legal entity of its own. It must bear its own name. The
promoters give any name to the company, subject to the
following restrictions-
• The last word must be the word "Limited” in case of
public limited company & “Private Limited” in case of
private limited company.
• The name must not in the opinion of Central Government
be undesirable.
• The Object Clause-It must mention-The main objects of
the company to be pursued by the company on its
incorporation & objects incidental or ancillary to the
attainment of main objects
• -Other objects of the company not included in the “main
objects’” sub clause.
• Restrictions on object-1-not against the provisions of
company’s Act
• -not against the policy of our constitution
• -not include anything in contravention of general law
• The Registered Office Clause –This clause must mention
the state in which registered office of the company is to
situate. This fixes the domicile of the company & this
domicile clings to it throughout its existence.
• The Liability clause-From the liability point of view
companies are of 3 sorts-
• 1-A company limited by shares object-1-not against
the main object
• 2-A company limited by guarantee
• T3-An unlimited company
• If the company is to be incorporated a" company
limited by shares” the liability of the members shall
be limited by shares. This means that no member
can be called upon to pay more than nominal
amount of his shares, or so much thereof as remains
unpaid; & if his shares be fully paid up, his liability is
nil.
• In case of company limited by guarantee “ the
liability clause must state that each member
undertakes to contribute to assets of the
company in the event of its being wound up
for payment of debts & liabilities of the
company such amount as may be required.
• A company not having any limit on the
liability of its members is termed as an
unlimited company. Such companies are rarely
formed now. The liability of members of an
unlimited is unlimited.
 The Subscription Clause
• This is also known as’ association clause .’In this clause the
subscribers to the memorandum declare that they desire to
be formed into a company & agree to take the shares
opposite their names.
• There must be at least 7 persons (or 2 persons in case of
private company) & they all must subscribe for at least 1
share each. The full name ,address & occupation of each
must be given. Then each of the subscribers must sign the
memorandum in the presence of at least one witness who
shall attest the signature. One witness to all the signatures
is sufficient. But a subscriber cannot attest the signature of
another subscriber.
 Articles of Association
The articles of association cover the internal running
of the company and will provide among other things
for-
1)The holding of meetings
2)appointment, removal& proceedings of directors
3)The allotment & transfer of shares
4)Alteration of capital
5)Borrowing
6)Dividends & reserve funds&
7)The rights of holders of different classes of
shares(preference or ordinary)
Memorandum and Articles distinguished

The important points of distinctions are-

MOA is the dominant document whereas the AOA
are subordinate importance & controlled by
the MOA. If there arises any conflict b/w the
provisions of two documents, the AOA must
give way.
The MOA deals with all the major external affairs
of the company while the AOA deals only with
its internal management.
• An act of the company in violation of its MOA
is ultra vires {beyond Power} & void &
altogether incapable of ratification while
anything done in violation of articles is only
irregular & can be ratified by the shareholders.
• The MOA cannot be easily altered but the AOA
can be altered by a special resolution.
• No company can be registered without a
memorandum whereas a public company
limited by shares may not have articles.
 Directors
• A Director is a member of a Board appointed to direct
the affairs of a company. Only an individual can be
appointed as a director. Every public limited company
shall have at-least 3 directors and other companies
shall have at-least 2 directors.
Appointment of Directors: Directors may be appointed-
• By provision in the Articles
• By shareholders in general meeting
• By the Board of Directors
• By Central Government
`General Powers vested in the Board of Directors:
• The Board of Directors is entitled to exercise all such
powers and to do all such acts and things as the
company is authorized to exercise and to do.
• In the exercise of its powers the Board is subjected to
the provisions of the Companies Act, the
memorandum and the articles and any regulations, not
inconsistent with them, made by the company in
general meeting.
Minimum No. of Directors:
• Private Companies- 2 directors
• Public Companies- 3 directors
• Except where express provision is made & the
powers of a company in respect of any particular
matter are to be exercised by the company in
general meeting, in all other cases board of
directors are entitled to exercise all its powers.
• Duties of directors
• 1)Fiduciary duties –The first & the foremost duty is
to act honestly.
• It includes the duty not to utilise the position &
knowledge possessed by him for his personal
advantage or against companies interest.
• 2)Duties of care & skill- A director need not exhibit in his
performance of his duties a greater degree of skill than
may reasonably be expected from a person of his
knowledge & experience.
• 3)Duty to attend Board meeting- Since a person may
simultaneously become the director of 20 companies ,is not
bound to give continuous attention to the affairs of the
company.
• Sec.283[1][g] provides that the office of director becomes
vacant if he absents himself from 3 consecutive meetings of
the Board of directors , or from all meetings of Board for a
continuous period of 3 months ,whichever is longer, without
obtaining leave of absence from the Board.
• 4)Duty to attend his duties personally-Since the
directors are agents of the company , they must
perform their duties personally.
• 5)Duty to disclose interest-If a director has an interest
in a contract with his company ,the company can
avoid the contract.
• 6)Miscellaneous duties-There are other duties which
the Act requires to be performed by the directors. E.g-
a)To take share qualification
• b)Declaration & payment of debts
• c) To see the truthfulness of the contents of the
prospectus & sign it.
 Meetings
• The meetings may be divided into 4
categories:
• Directors meeting
• Share holder’s meeting
1. Statutory meeting
2. Annual general meeting
3. Extra-ordinary general meeting
• Creditor, s meeting
• Debenture holder’s meeting
• Director’s meeting-shall be held at least in every 3
months & at least 4 such meeting shall be held in
every .
• The mgmt. of the company is vested in the Board
of Directors collectively & the directors must, act
at the board meeting.
• Quorum means minimum numbers of persons
necessary for transaction of business
• Quorum for Board meeting is 1/3 of its total
strength or 2 directors, whichever is higher[any
fraction should be rounded as 1 ]
• Shareholder’s meeting-are of 3 kinds
1)Statutory meeting(Sec 165):-Every public company hold this
meeting
– held between 1&6 months of the date at which the company
is entitled to commence business
– held once in whole life of company
2)Annual General Meeting(Sec 166):-
• held every year
• -held at registered office of the company or within local limits in
which registered office is situated

3)Extraordinary General Meeting(Sec 169):-Every meeting which

is not statutory or annual general meeting is extraordinary
general meeting
• Requisite & Procedure of the general meeting
• Notice-To whom notice is to be given-
1)to every member of the company.
2)auditors of the company
• Length of notice-A general meeting may be called by giving not less
than 21 days notice in writing
• Contents of notice-Notice must specify-place, day, hour/time,
statement of business to be transacted
• Business to be transacted is of 2 sorts-ordinary business & special
business
• Quorum-In case of public company-5 members
• in case of private company-2 members
• -they should be personally present & shall be quorum for meeting of
the company
 Auditor
• Section 224 (1) of the Companies Act, 1956
states that every company whether it is public
or private limited shall have an auditor to
audit its accounts. The appointment of auditor
is mandatory in the Annual General Meeting
for the ensuing year.
 Appointment of Auditor
• Every company shall, at each annual general meeting, appoint
an auditor or auditors to hold office from the conclusion of
that meeting until the conclusion of the next annual general
meeting and shall, within seven days of the appointment, give
intimation thereof to every auditor so appointed
• Provided that before any appointment or re- appointment of
auditor or auditors is made by any company at any annual
general meeting, a written certificate shall be obtained by the
company from the auditor or auditors proposed to be so
appointed to the effect that the appointment or re-
appointment, if made, will be in accordance with the limits
specified in sub- section (1B).]
(1A) Every auditor appointed under subsection
(1), shall within thirty days of the receipt from
the company of the intimation of his
appointment, inform the Registrar in writing
that he has accepted, or refused to accept, the
appointment.
• (1B) On and from, the financial year next following
the commencement of the Companies
(Amendment) Act, 1974 (41 of 1974 ), no company
or its Board of directors shall appoint or re- appoint
any person 4 who is in full time employment
elsewhere] or firm as its auditor if such person or
firm is, at the date of such appointment or re-
appointment, holding appointment as auditor of
the specified number of companies or more than
the specified number of companies:
• Provided further that where any partner of the firm is also a partner of any other firm or firms of auditors, the number of compa- nies which may be taken into account, by all the firms together,
in relation to such partner shall not exceed the specified number in the aggregate: Provided also that where any partner of a firm of auditors is also holding office, in his individual capacity, as the
auditor of one or more companies, the number of companies which may be taken into account in his case shall not exceed the specified number, in the aggregate.
• (1C) For the purposes of enabling a company to comply with the provisions of sub- section (lB), a person or firm holding, immediately before the commencement of the Companies (Amendment)
Act, 1974 , (41 of 1974 .) appointment as the auditor of a number of companies exceeding the specified number, shall, within sixty days from such commencement, intimate his or its
unwillingness to be re- appointed as the auditor from the financial year next following such commencement, to the company or companies of which he or it is not willing to be re- appointed as
the auditor; and shall simultaneously intimate to the Registrar the names of the companies of which he or it is willing to be re- appointed as the auditor and forward a copy of the intimation to
each of the companies referred to therein. Explanation I.- For the purposes of sub- sections (1B) and (lC)," specified number" means,-(a) in the case of a person or firm holding appointment as
auditor of a number of companies each of which has a paid- up share capital of less than rupees twenty- five lakhs, twenty such companies;
• (b) in any other case, twenty companies, out of which not more than ten shall be companies each of which has a paid- up share capital of rupees twenty- five lakhs or more. Explanation II.- In
computing the specified number, the number of companies in respect of which or any part of which any person or firm has been appointed as an auditor, whether singly or in combination with
any other person or firm., shall be taken into account.]
• (2) 1 Subject to the provisions of sub- section (lB) and section 224A, at any annual general meeting], a retiring auditor, by whatso- ever authority appointed, shall be re- appointed, unless-(a) he is
not qualified for re- appointment;
• (b) he has given the company notice in writing of his unwillingness to be re- appointed;
• (c) a resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be re- appointed; or
• (d) where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or dis- qualification of that
person or of all those persons, as the case may be, the resolution cannot be proceeded with.
• (3) Where at an annual general meeting no auditors are appointed or re- appointed, the Central Government may appoint a person to fill the vacancy.
• (4) The company shall, within seven days of the Central Govern- ment' s power under sub- section (3), becoming exercisable, give notice of, that fact to that Government; and, if a company fails to
give such notice, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees.
• (5) The first auditor or auditors of a company shall be appointed by the Board of directors within one month of the date of registration of the company; and the auditor or auditors so appointed
shall hold office until the conclusion of the first annual general meeting: Provided that-(a) the company may, at a general meeting, remove any such auditor or all or any of such auditors and
appoint in his or their places any other person or persons who have been nominated for appointment by any member of the company and of whose nomination notice has been given to the
members of the company not less than fourteen days before the date of the meeting; and1. Subs. by Act 41 of 1974, s. 23, for certain words (w. e. f. 1- 2- 1975 ).
• (b) if the Board falls to exercise its powers under this sub- section, the company in general meeting may appoint the first auditor or auditors.
• (6) (a) The Board may fill any casual vacancy in the office of an auditor; but while any such vacancy continues, the remaining auditor or auditors, if any, may act: Provided that where such vacancy
is caused by the resignation of an auditor, the vacancy shall only be filled by the company In general meeting.(b) Any auditor appointed in a casual vacancy shall hold office until the conclusion of
the next annual general meeting.
• (7) Except as provided in the proviso to sub- section (5), any auditor appointed under this section may be removed from office before the expiry of his term only by the company in general
meeting, after obtaining the previous approval of the Central Government in that behalf.
• (8) The remuneration of the auditors of a company-(a) in the case of an auditor appointed by the Board or the Central Government, may be fixed by the Board or the Central Government, as the
case may be; and
• (b) subject to clause (a), shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine. For the purposes of this sub- section, any sums
paid by the company in respect of the auditors' expenses shall be deemed to be included in the expression" remuneration".
• Auditor not to be appointed except with the approval of the company byspecial resolution in certain cases.
 Winding -Up
• ‘’Process whereby life of a company is ended
& its property is administered for the benefit
of its creditors & members.’’
• Modes of Winding Up-(1)Winding up by the
Court or Compulsory Winding Up
• (2)Voluntary winding up
– Compulsory winding up occurs when the directors
or those in control do not want the company to be
wound up whereas voluntary occurs when they do
• Compulsory Winding Up-(Sec.433)-Court may order
winding up if one or more of the following grounds
are present-
a)By special resolution-The company has by special
resolution ,resolved that the company be wound up
by the court.
b)Default in holding statutory meeting-First meeting
of the shareholders of a public company is known as
statutory meeting.
• If default is made in delivering the ‘’Statutory report’’
to the Registrar or in holding the ‘’statutory meeting’’
it may be ordered to be wound up.
• c)Failure to commence business-If a company does not
commence its business within a year from its
incorporation, or suspends its business for a whole year, it
may be ordered to be wound up.
• d)Reduction in membership-Where the membership is
reduced ,in case of public company below 7,& in case of
private company below 2.
• e)Inability to pay debts-If a company is unable to pay its
debts ,it may be wound up.
• f)Just & equitable-The court is of the opinion that it is just
& equitable that the company should be wound up. Ex.
Incurring huge losses, fraudulent or illegal purposes, etc.