Company law

COMPANY LAW

The Companies Act - 1956
A COMPANY
is a voluntary association of persons, formed for the purpose of doing
business, having a distinct name and limited liability.
Companies Act-1956
The Companies Act-1956
is the Principal Act that regulates, controls and administers the
companies that have come into existence even before the
commencement of this Act.

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This Act is largely based on the report of the Company Law
Committee known as

BHABHA COMMITTEE.
This Act has undergone several amendments resting with the latest
Amendment Act of 2000.
Objectives

To bring the Public limited companies including Private companies
under the supervision
and
control of the Govt.

It has laid down that the companies must
function strictly on
democratic principles
paving the way for
public participation.
Company Law Board

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For the purpose of improving the efficiency and establishing
uniformity and coordination in regulating the activities of various
companies, the ‘Board of Company Law Administration’, was
established which is now known as

COMPANY LAW BOARD,
w e f 1964.
Registrars of Companies

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Registrar of Companies are appointed by the Central Govt. to
supervise, regulate and control the day-today administration of
the companies.

The word ‘company' is an amalgamation of the Latin word 'Com'
meaning “together" and 'Pains' meaning "bread".
It is referred to as a group of persons who took their meals together.

A company is a group of persons who have come together or who
have contributed money for some common purpose and who
have incorporated themselves into a distinct legal entity.
The Companies Act, 1956

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Incorporated / Body Corporate means, a legally united body that
can act as a unit.
If incorporated, it will have a legal personality of its own, separate
and distinct from its members..

Corporate

Corporate means pertaining to corporation or business.
Corporations are the most common form of business organisation
and one which is chartered by a state and given many legal rights
as an entity separate from its owners.

This form of business is characterised by the limited liability of its
owners, the issuance of shares of easily transferable stock, and
existence as a going concern.

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The process of becoming a corporation, called incorporation,
gives the company separate legal standing from its owners and
protects those owners from being personally liable in the event
that the company is sued; a condition known as limited liability.

A voluntary association of persons formed for the purpose of
some business for profit with capital divisible into transferable
shares, limited liability, a distinctive name, as a corporate body, a
personality separate and distinct from its members, a common
seal and perpetual succession’
‘Company’ u/s 3(1) (i) of the Companies Act-1956
A company means ‘a company formed and registered under the
Companies Act or an existing company.
A Company
A creation of law, and NOT a human being and not natural.
It is an artificial person, immortal, invisible, intangible, existing
only in contemplation of law, clothed with many rights and
obligations, powers and duties prescribed by law.
Implications

The company is capable of enjoying rights and being subject to
obligations which are different from those enjoyed by its
members. Like a natural person, it can enter into contracts, sue
and be sued, can own property, no death, no mind, no physical
shape.
Corporate Personality

Unlike a partnership firm, a company has a ‘corporate personality’
distinct from all its members. Hence a share holder of a company
cannot be held liable for the acts and debts of the company even
though he holds virtually the entire share capital of a One-man
Company.
Salomon vs. Salomon & Co. Ltd.

Salmon sold his boot business to a newly formed company
for 30,000 ponds. This Company with 7 shareholdersSalomon, his wife, four sons and a daughter, all except
Salmon, took up one share of 1 pound each and ….

the company took over the personal boot-business
assets of Salomon for 38782 pounds, where Salomon
took 20000 shares of 1 each, debentures worth 10000
of the company with charges on the company’s assets.
Salomon vs. Salomon & Co. Ltd
Subsequently the company went into liquidation.
The unsecured creditors contended that Salomon could not
be treated as a secured creditor…

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in respect of the debentures and this is a One-man
company.
But the House of Lords held that the Company is
distinct from its members.

A company is entitled to own and hold property in its own name
and the property belongs to the company and the members have
no direct proprietary rights over the property of the company.
Kinds of Companies
Companies are broadly classified as

INCORPORATED
and
UNINCORPORATED
Companies.
Unincorporated
Companies
They are only Association of persons without legal personality.
They are not body corporates, NOT REGISTERED
under Company Law.
Incorporated Companies

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INCORPORATED or REGISTERED companies may be further
classified as

(1) COMPANY LIMITED BY SHARES, (2) COMPANY LIMITED BY
GURANTEE and (3) UNLIMITED COMPANIES.
Companies
Limited by Shares
Limited by Liabilities mean companies limited by shares; they have to
adopt the Memorandum of Association in such a way that the
liability of the shareholders is limited to an extent of the face
value of the shares held by them.
Companies
Limited by Guarantee
Section 12(2)(b) defines such a company as one having the liability of
its members limited by the Memorandum to such amount as the
members may undertake to contribute to the company at the time
of its winding up.
Unlimited Companies

A company having NO limit on the liability of its members is terms
as unlimited company. Here, the liability of a member ceases
when he ceases to be a member.
Companies not covered under the Companies Act.
1- Chartered Companies- regulated by its charter. E.g. East India
Company.
2- Statutory Companies- a company formed under the Act of
Parliament or
State Legislature.
Companies not covered under the Companies Act

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These companies are formed to carry on the work of some special
public importance and for which the undertaking requires extraordinary powers, sanctions and privileges.
E.g. LIC of India.

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Such companies do not use the word ‘limited’ as part of their
names, e.g. Reserve Bank of India.

Classification on the basis of number of Members.
A Private Company, u/s 3(1)(iii), means a company with a minimum
paid up capital of not less than Rs.1.00 lac and which by its
articles, restricts the right of the members to transfer its shares;.
Private Company
Minimum number of members is 2; limits the Maximum number to 50,
excluding the employees who shall continue to be members even
after ceasing to be such employees and Prohibits any invitation
to the public to subscribe for any shares in or debentures of the
company
Public Company

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As per Sec.3(1) (iv), it is a company which is not a Private
Company.
A Public Limited Company is an association consisting of not
less than 7 members, which is registered under the Companies
Act and NO restriction with regard to the maximum number of
members in a public company.

Public Company
It must have a minimum paid up capital of Rs. 5.00 lacs,
NO restriction to transfer its shares, Does not prohibit any invitation
from the public to subscribe for any shares or debentures of the
company.
Classification on the basis of CONTROL
On the basis of
CONTROL,
companies may be classified as
Holding Companies
and
Subsidiary Companies
Holding and Subsidiary Companies
A company is a
Holding Company
of another if the other is its
Subsidiary.
Holding Company

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A parent company that owns enough stake in another company to
control its board of directors, and, therefore, controls its policies
and management.

Holding and Subsidiary Companies
That other controls the composition of its Board of directors.. e.g.
company A is a subsidiary of company B, if:
The Holding Company B controls the composition of the board of
directors of
Subsidiary Company A.
Subsidiary Company

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A subsidiary company is one in which another, a larger company,
known as the parent company, owns all or at least a majority of
the shares.
As the owner of the subsidiary, the parent company may control
the activities of the subsidiary.

Classification on the basis of
OWNERSHIP
From the point of OWNERSHIP, companies may be divided into:
(1)Government Company
(2)Non-government company or a
Foreign company…and
(3)Statutory company.
Government Company

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Section 617 defines it as any company in which not less than 51
per cent of the paid up share capital is held by the central / state
government.

Non-government Company or a Foreign Company

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It is a company which is incorporated outside India and has a
place of business in India.

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Section 591 to 602 of the Act deals with it.

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E.g.. Standard Chartered Bank

Statutory Company or
Public Undertaking

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A statutory company is one which is formed by passing a Special
Act by the Government and the companies are governed by the
respective Acts.
They are not required to file any Memorandum or Articles of
Association with the Register of Companies.

Formation of a Company

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There are 3 stages:

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Pre-incorporation stage

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Provisional state

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Perfect stage

Perpetual Succession u/s 34(2)

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The provision for transferability of shares helps to preserve the
continuity of the company.
A member can sell his shares and drop out and the transferee of
the shares steps into his shoes, leaving the company and its
assets untouched.

This is described as ‘perpetual succession’ which means the
company is an entity separate and distinct from its shareholders.
Perpetual Succession u/s 34(2)
Life of a company is not measured by the lives of its members; it
continues with no regard to the death of a member; even the
death of all members of a company does not put an end to the
company, since in law the shares are transmitted to the
successors of the deceased member.
Characteristics of a company

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As a corporate person, the company is entitled to own and hold
property in its own name. In consequence of its incorporation, it
is an artificial legal person.

As a juristic person distinct from its members, it has its own
corporate names and enjoys perpetual succession.


Shares of the company are generally transferable without restrictions;
Law recognizes the existence of the company, quite independent
of the motives, intentions etc. of the shareholders..

Liability of the members is LIMITED to the value of the shares held by
them.
It is not UNLIMITED, as in the case of a partnership firm.

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A company, being a body corporate, can sue and be sued in its
own name, the company though a legal person, is not a citizen
under the Citizenship Act or the Constitution of India. In State
Trading Corporation of India vs.

C T C , the SC held that STC is not a a citizen.
Advantages of an
Incorporated Company

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Corporate personality

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Limited liability

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Perpetual succession

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Transferable shares

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Restriction on purchase of its own shares by a company

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Separate property

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Capacity to sue

Lifting or Piercing
The Corporate Veil

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A corporation is clothed with a distinct personality, but in reality it
is an association of persons who are the beneficial owners of the
body corporate.
The separate personality is a statutory privilege; it must be used
for legitimate business purposes only.

Piercing
The Corporate Veil

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Where a fraudulent and dishonest use is made of the legal entity,
the individuals concerned will not be allowed to take shelter
behind the corporate personality.
The Court will break through the corporate shell and apply the
principle of what is known as “lifting or piercing the corporate
veil”

Piercing
The Corporate Veil

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The court will look behind the corporate entity and take action as
though no entity separate from the members exited.
For e.g. if it was found that the sole purpose of the company is to
avoid taxation, the Court will ignore the concept of separate
entity, and make the individuals liable to pay taxes

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Noted case: Sir Dinshaw Manakjee

Case : Sir Dinshaw Manakjee

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The assessee was a wealthy man enjoying huge dividend and
interest income. He formed 4 pvt. Co.s and agreed to hold a block
of investment as an agent. Income received was credited in the
accounts of the company but the company handed back the
amount to him as a pretended loan.
The court decided to disregard the corporate entity as it was
being used for tax evasion.

Ultra vires Acts

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Directors of a company will be personally liable for all those acts
which they have done on behalf of a company if they are:

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Ultra vires the company and

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Ultra vires the directors

2- Companies limited by Guarantee

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By S.12(2)(b), this is a company having the liability of its members
limited by its memorandum to such an amount as the members
may respectively undertake by the memorandum to contribute to
the assets of the company in the event of its being wound up.

3- Unlimited companies

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By S.12(2)(c), this is a company NOT having any limit on the
liability of its members.

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The maximum liability of the members of an Unlimited Company,
in the event of its being wound up, might stretch up to the full
extent of their fortunes to meet the obligations of the company by
contributing to its assets.

Corporation

Corporations are the most common form of business
organisation with many legal rights as a legal entity separate from
its owners; this form of business is characterized by the limited
liability
of its owners.

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The process of becoming a corporation, called incorporation,
gives the company separate legal standing from its owners and
protects those owners from being personally liable in the event
that the company is being sued.

promotion, incorporation and commencement

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1- Promotion is the process of conceiving an idea and developing
it into a concrete proposition or project to be accomplished by the
incorporation and flotation of a company.

promotion, incorporation …

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The person who takes the necessary steps to accomplish these
objectives is known as Promoter, who has a fiduciary / trustee,
relation with the company

Incorporation by Registration

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Any 7 or more persons may form a public company and any 2 or
more persons may form a private company.
Selects a name and send it to Registrar of companies to seek its
availability.

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Decides the objectives of the company

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The place where the business is to be carried on

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Capital

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Frame rules and regulations – Articles of Association

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The Registrar issues a certificate of Incorporation

Commencement of Business

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A private company can commence business after it is
incorporated.
A public company must obtain a further certificate – Certificate to
Commence Business from Registrar

Memorandum of Association

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It contains the fundamental provisions of the company’s
constitution.

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It is the company's charter of its existence and operations and is
of supreme importance in determining its powers.
It defines as well as confines the powers of the company.
It not only shows the objects of formation, but also determines
the utmost possible scope of its operations beyond which its
action cannot go.

Purpose of Memorandum of Association

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Purpose is two-fold1-the intending shareholder who contemplates the investment of
his savings should know the field in, or the purpose for which it is
going to be used and what risk he is taking in making the
investment.
2-anyone dealing with the company will know without reasonable
doubt whether the contractual relation into which he
contemplates entering with the company is one relating to a
matter within its corporate objects.

Purpose of Memorandum of Association

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The memorandum enables shareholders, creditors and all those
who deal with the company to know what its powers are and the
range of its activities.

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A company cannot depart from the provisions of the
memorandum however great the necessity be. If it enters into a
contract which is beyond the powers conferred on it by the
memorandum, the act will be ultra-vires the company and void.

Memorandum of Association- its contents – section 13

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Name clause

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Situation clause

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Liability clause

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Capital clause

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Association clause

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Objects clause

Doctrine of ultra vires
ultra vires = beyond legal capacity
In the case of a company, whatever is NOT stated in the
memorandum as the objects or powers is prohibited by the
doctrine of ultra vires.
As a result, an act which is ultra vires is void and does not bind
the company.
Neither the company nor the contracting party can sue on it.
The company cannot make it valid, even if every member assents
to it.

Doctrine of ultra vires

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The rule is meant to protect shareholders and the creditors.
If the act is ultra vires (beyond the powers of ) the directors only,
the share holders can ratify it.
If it is ultra vires the objects clause, no body can ratify it.

Ashbury Railway Carriage Co. Ltd vs. Riche.

In the memorandum, the Railway Company were to make and sell or
lend or hire railway plants etc. to carry on business of mechanical
engineer and general contractors.

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The company entered into contract with M/s Riche, a firm of
railway contractors to finance the construction of a railway line in
Belgium. Subsequent rejection of this contract on the ground of
its being ultra vires, Riche brought a case for damages .


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According to Riche, the words ‘general contractors’ in the objects
clause gave power to the company to enter into such a contract
and it was within the powers of the Company.
The House of Lords held that the contract was ultra vires the
company and it is void.

Articles of Association

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It is the bye laws / rules and regulations, that govern the
management of its internal affairs.
They are subordinate to and are controlled by the Memorandum.

The AoA of a company are subordinate to and are controlled by
the MoA which is the dominant instrument and contains the
general constitution of the company.

AoA are the internal regulation over which member of company have
full control.
Articles of Association

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The memorandum lays down the scope and powers of the
company and the articles govern the ways in which the objects of
the company are to carried out and can be framed and altered by
the member. But they must keep within the limits marked out by
the memorandum and the Companies Act.

Doctrine of Indoor Management

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According to this doctrine, as laid down in the Royal British Bank
vs.Turquand, persons dealing with a company having satisfied
themselves that the proposed transaction is not in the nature
inconsistent with the memorandum and articles, are not bound to
inquire into the regularity of any internal proceedings.

Doctrine of Indoor Management

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In other words, while persons, contracting with a company, are
presumed to know the provisions of the contents of the
memorandum and articles, they are entitled to assume that the
provisions of the articles have been observed by the officers of
the company.
It is no part of the duty of an outsider to see that the company
carries out its own internal regulations.

Royal British Bank vs.Turquand

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The directors of the banking company were authorized by the
articles to borrow on bonds sums of money from time to time, by
resolution of the company in general meeting.
The directors gave a bond to Turquand without the authority of
the resolution.
Held that Turquand could sue the company on the strength of the
bond, as he was entitled to assume that the necessary resolution
has been passed.

What is Constructive Notice?

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Members are deemed to be aware of the contents of the MoA and
AoA. Other persons dealing with the company are affected with
notice of what is contained in them, but are not bound to make
further inquires and may assume that the internal management of
the company is in order/regular.

Rule of constructive notice

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The doctrine of indoor management protects third parties who
have acted in good faith.
The rule of constructive notice is confined only to the extent of
powers under the memorandum and articles and there is no
contractive notice as regards the manner in which the power is
exercised.

constructive notice
An outsider is entitled o presume that the procedural aspects of a
transaction have indeed been carried out.
Rule of constructive notice

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Persons dealing with companies are bound to take notice of
disabilities imposed on the co. by the memorandum and articles
or other documents.
They run a great risk in not acquainting themselves with such
disabilities.

constructive notice

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They are entitled to assume that the director or other persons
exercising authority on behalf of the co. are duly functioning and
perfuming their duties in accordance with the internal guidelines
of the company.

A Prospectus.
U s 2(36)

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Any document described or issued as a prospectus and includes
any notice, circular, advertisement., or other documents inviting
deposits from the public or inviting offers from the public for the
subscription or purchase of any shares in, or debentures of, a
body corporate.

It means a prospectus is an invitation issued to the public to take
shares or debentures of the company.
Every prospectus should contain all the minute details.

Statement in lieu of Prospectus.

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All public companies must either issue a prospectus or file with the
Registrar a statement in lieu of prospectus.
If a public company makes a private arrangement for raising capital, it
will not issue a prospectus. In that event, a statement in lieu of
prospectus must be filed with the Register of Companies, at lease 3
days before allotment of any shares or debentures can be made.

DEMAT/
DEMATERIALISATION

Dematerialisation is the process of converting physical shares /
share certificates, into an electronic form; once converted
into dematerialised form are held in a Demat account.
Demat Process

Investor having securities in physical form must get them
dematerialised, if he intends to sell them. This requires the
investor to fill a Demat Request Form which is available with a
Depository Participant.
Depository
An organisation that facilitates holding of securities in electronic
form and enables the DPs to provide services to investors
relating to securities transaction.

NSDL and CSDL
As per SEBI, the minimum net worth stipulated for a depository is
Rs.100 crore. Two depositories in India, are National Securities
Depositories Limited and Central Securities Depositories Limited.
Membership

Members of a company are the persons, who for the time being
constitute the company,
as a corporate entity.

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In the case of a company limited by shares, the shareholders are
the members.
Both terms are used interchangeably and generally, every
shareholder is a member and every member is a shareholder.

Mode of acquiring Membership-

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As per Section 41, a person may become a member either:

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By subscribing to the memorandum

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By agreeing in writing to become a member and having his name
entered in the co’s register of members.

Acquiring Membership-

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By registration of the name of a person as member of a
company :

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By application and allotment

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By transfer of share

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By transmission of shares

Acquiring Membership-

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By acquiescence of estoppel:
A person is deemed to be a member if he allows his name to be
on the register of members.

Termination of Membership-

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A person ceases to be a member of company when his name is
removed from the register of members for sufficient cause:
On transfer of his shares

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His shares are forfeited for non-payment of calls

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He takes a valid surrender of his shares

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His shares are sold to enforce a lien (legal claim on somebody’s
property)

Termination of Membership-

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On his death

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He is adjudicated insolvent

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The member is a company which is being wound up

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The company is wound up

Liability of Members

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Liability of members depends on the nature of the company
If the company is registered with unlimited liability, every member
is liable in full for all the debts of the company during the period
of his membership.
Where a company is limited by guarantee, each member will be
bound to contribute in the event of the company being wound up,
a sum of money specified in the liability clause of the MoA.

Liability of Members

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Most companies are generally incorporated with liability of
members limited by shares.
Each member is bound to contribute the full nominal value of his
shares and his liability ends there.
In the case of fully paid-up shares, the member is not liable to
contribute any more.

Company limited by shares

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"Limited by shares" means that the liability of the shareholders
to creditors of the company is limited to the capital originally
invested, i.e. the nominal value of the shares and any premium
paid in return for the issue of the shares by the company. A
shareholder's personal assets are thereby protected in the event
of the company's insolvency, but money invested in the company
will be lost.

Company Meetings –
Statutory Meeting

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A statutory meeting is a general meeting of the members of the
company, the main purpose is to provide an opportunity to the
members for discussing matters relating to the formation of the
company or arising out of the statutory report; which states u/s
165(2) to send a report to every member at least 21 days before
the meeting.

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Only public companies limited by shares are required to hold a
statutory meeting and only one statutory meeting is held in the
life of any public company.

Notices

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Section 165(2) provides that the directors shall forward at least
21 days before the meeting is held, a report called a statutory
report to every member of the company.

Notices

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By provisions of sec.170, 171 and 171(20(ii) shorter notices can
be given if agreed to by the members.
Such report can be sent shorter notice provided it is so agreed to,
by all the members entitled to attend and vote at the meeting.

Annual General Meeting - AGM

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As per Section 166(1), every company must in each year hold a
general meeting as its annual general meeting in addition to any
meetings in that year and specify the meeting as such in the
notices calling it.
Not more than 15 months elapse between any two AGMs.

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In an AGM, the statements of Accounts are laid before the
meeting.

Annual General Meeting - AGM

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4 important Transactions:
The consideration of the accounts, balance sheet and the report
of the board of directors and auditors

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The declaration of a dividend

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Appointment of directors in place of those retiring

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Appointment and fixing of remuneration of Auditors.

Requisites of a Valid Meeting

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It must be properly convened.

1-the persons entitled to attend must have been summoned by proper
authority, i.e. The board of directors
2-21- days clear notice must be given along with the relevant
materials, explanatory statements

Requisites of a Valid Meeting

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It must be legally constituted which means that the holding of the
meeting must not be contrary to any provisions in the Act /
Articles

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The business of the meeting must be validly transacted which
means that there must be proper person in the chair, the rules as
to quorum (minimum number required for valid meeting ) and the
provisions of act and articles are to be complied with.

Quorum

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Quorum is the minimum number required for a valid meeting; any
Resolution passed with out a quorum is invalid
Quorum of a company meeting is to be fixed by Articles of
Association u/s 174 of the Act, in the absence of any clause in the
A/A, 5 persons personally present in the case of public company
and 2 in the case of any other company,

Proxy

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The term ‘ proxy ‘ covers only the person who is appointed to a
act on behalf of a member at a meeting but also the instrument by
which the appointment is made.
Sec. 176 states that a member of a company who is entitled to
attend and vote at a meeting of the company, may appoint another
person whether a member (shareholder) or non-member, as his
proxy............

Resolutions

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When something is proposed or a proposition is made at a
meeting, it is called a ‘Motion’, which may sometimes, undergo
alterations and amendments.
A Motion when adopted becomes a Resolution.
Resolution, is therefore, nothing but decisions of a company
meeting.------

Kinds of Resolutions

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1- Ordinary Resolution – u/s 189(1)
a resolution is an ordinary resolution when the votes at a general
meeting cast by members entitled to vote in its favour are more
than the votes against it,
In other words, an Ordinary Resolution is one which is passed by
a simple majority of votes of members.

2-Special Resolution –u/s 189(2)

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Here the intention to propose the resolutions as a special
resolution is specifically mentioned in the notice of the general
meeting and which is passed by such a majority that the number
of votes cast in favour of the resolution is 3 times the number of
votes cast against it, either by a show of hands or on a poll in
person or proxy.

3- Resolutions requiring
Special Notice –u/s 190(1)

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Where a special notice of a resolution is required by the Act or by
the A/A, the intention to propose such a resolution must be
notified by the proposer to the company at least 14 days before
the meeting.
On receipt of such a Notice, the company must give a notice, not
less than 7 days before the meeting, to all its shareholders, either
by an Advt. in the news paper or by any other methods.

Directors

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A director is one who directs
Any person occupying the position of a director – as per the Co.s
Act, but it does not define it clearly.
But it can be said that :
Directors are persons appointed according to the law and
authorized to direct, control, conduct or superintend the affairs of
the company

Directors

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Directors as Agents:

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It is the Directors who as Agents act on behalf of the company,
make contracts on its behalf but are not personally liable for them
as long as they act within the scope of their authority.
Directors as Trustees:
They occupy fiduciary position and are the trustees for the
company.

Duties of the Directors
Fiduciary Duties: Honesty, good faith, they must act within the
powers of the company as given by MoA and AoA., he should at
with such care as is reasonable for a person of their knowledge
and experience, they must be reasonably diligent in attending to
the affairs of the company, though they need not attend every
Board meeting.
Statutory Duties: It is duty of the directors to see that all
money received from applicants for shares are deposited in
a Bank, the Board must forward a Statutory report to every
member of meetings, call extra ordinary general meeting
on the requisition of the members, they must approve the
balance sheet and P&L account, arrange AGM, he should
disclose his interest to the Board.


Sec.299 provides that a director who is in any way interested in a
contract by or on behalf of the company, must disclose such
interest to the Board.
Directors Liabilities
Liability as Shareholder:
As shareholders, Directors are liable to pay on the shares held by
them.
Liability for breach of fiduciary duty:
A director must act honestly and must exercise such degree of skill
and diligence as would amount to reasonable care which an
ordinary man might be expected to take.

Implication, if they fail to do so, there arises, Liability for ultra vires
acts

*

Liability for mala fide acts

*

Liability for negligence.


*
*

Liability to Third Parties:
A- liability under the Act: where they issue a prospectus which
does not contain the particulars by the Act

*

It contains material misrepresentation

*

Allotment of share is irregular

*

Company not making allotment within 120 days

Liability apart from the Act:
Personal liability, where a director enters into a contract which is ultra
vires the company, the third party is entitled to recover damages
from the directors for breach of authority; or if something is
concealed in the prospectus or if they are guilty of tortiuous act.

*
*

Liability for Statutory Penalties:
Provisions under sections 39, 49, 77, 146 269 etc., are to be
complied with, by the Director, the absence of which will court
impose statutory penalties.


*
*

Criminal Liability: IPC comes into picture:Sec.44 (4) – filing of
prospectus or statement in lieu of prospectus containing untrue
statement – 2 years imprisonment, Rs. 5000 as fine.
58(A)308, 68, 105, etc....

Majority Rule and Minority Rights

*

*

A company is run by democratic process – members right to vote
is recognized as right of property and the shareholder may
exercise it as he thinks fit. Majority of members acting in food
faith in the interest of company enjoy the supreme authority.

But the supremacy of the majority does not prevail in all cases
and the minority are not helpless altogether, but is protected by
the common law and law of the Company Act.

Vacation of office by Directors

*
*

Sec.283.
1- If he fails to obtain the share qualification with in a period of
two months from the date of his appointment or at any time
thereafter ceases to hold share qualification by the articles of
company

*

2-if he is found to be of unsound mind by a court

*

3- if adjudicated insolvent


*
*
*
*

4- if convicted by the court for offence involving moral turpitude
and sentenced imprisonment
5-if he fails to pay any calls in respect of shares
6-if he absents himself from 3 consecutive meetings with out
proper leave
7-if he acts in contravention of sec.299 relating to disclosure of
interest


*

8- if he is disqualified by an order of court

*

9- if he is removed

Removal of Directors – sec- 284

*
*

Procedure for removal before expiry of his office:
A special notice u/s 190 is given for moving a resolution for the
removal, which shall be given to the company not less than 14
days and the company, in turn, should give its members such
intention by notice or advt. before 7 days before meeting

Removal of Directors

*
*

The director concerned should also be informed. And he may be
heard, by reading out his representation at the meeting.
The matter of removal may be informed to the Registrar of
Companies / the stock exchange

*

A vacancy caused by the removal of any director may be filled by
general meeting

Charge
u / s 100 of T P Act

*
*

Where immovable property of a person is by act of parties or
operation of law, made security for the payment of money to
another, and the transaction does not amount to a mortgage, the
latter person is said to have a charge on the property.
Charge includes a ‘lien’.

Kinds of CHARES

*

Debentures may be issued either unsecured or they may be
secured by a charge on the property of the company, the charge
may be fixed or floating.

Fixed or Specific Charge:

*

*

A charge is fixed when it is made specifically to cover ascertained
and definite assets like land, buildings or machinery. A fixed
charge is against security of certain specific property and the
company loses the right to transfer such property.

In the winding up of the company, a debenture holder secured by
a specific charges, will be placed in the highest ranking class of
creditors.

Floating Charge

*

*

A floating charge is peculiar to companies as borrowers. It is not
attached to any definite property but covers property of a
fluctuating type, e.g.. Stock in trade, work in progress etc. and is
thus necessarily equitable.

It crystallizes into a fixed security when
The company goes into liquidation
Company ceases to carry on the business
The creditor takes steps to enforce their security

Debenture

*

This is document creates or acknowledges a debt.

*

It constitute a charge on the undertaking of the co. or its property.

*

A debenture denotes an instrument issued by a co. showing all
debts.

Winding up

*

1- by the court

*

2- voluntary winding up

*

3- subject to the supervision of court

Winding up – by the court
u/s 433

*
*
*

*

If the co. has, by special resolution, resolved that the co. may be
wound up by court
If default is made in delivering the statutory report to the Regr. or
in holding statutory meeting.
Co. does not commence its business within a year of its
incorporation

Number of shareholders reduced to below 7in the case of public
and below 2 in the case of private ltd. Co.

*
*

Unable to pay its debt
Court is of the opinion that it is just and equitable for the public
interest that this particular co. should wound up.

Voluntary Winding Up

*

*
*

Voluntary winding up when the period, if any, fixed for the
duration of the company by Articles has expired or if the co.
passes a special resolution is passed to that effect-

Steps- the Board makes a declaration to that effect that they have
made a full inquiry into the affairs of the company ....
Shareholders and creditors decide not to carry on the business –

Members’ Winding up-

*

Steps –

*

The company appoints one or more liquidators for the purpose of
winding up affairs and to distribute the assets, fix remuneration of
the liquidators – informs Regr. Of Companies of the appointment
etc.

Remedies of Debenture holder

*
*
*
*

A debenture holder who wishes to realize his security and get his
money back, may exercise remedies given in the Trustee-deed
with out recourse to court.
Remedies: Sale of charged property

Appointment of Receiver – debenture may appoint a Receiver, if
the conditions give him power to do so, or, apply to the court to
appoint a Receiver.
A Receiver is to protect the property charged to the debenture
holders.

Creditors’ Winding up-

*

Steps: meeting of Creditors –

*

appointment of Liquidator –

*

their remuneration is fixed –

*

Committee of Inspection

Compulsory / Court
winding up

*
*

*

Powers of the Court:
The court may at time after making a winding up order, on the
application either of the official liquidator or any creditor or
contributory.

And on the proof to its satisfaction that all proceedings in relation
to the winding up ought to be stayed, make an order staying the
proceedings, either altogether or for a limited time on such terms
and conditions as the court thinks fit.

Winding up under the supervision of the Court
A supervision order can be made either on the application of
creditors or on the application of the company.

A winding up under supervision being essentially the
continuation of the voluntary winding up, it follows that unless
the court otherwise directs the liquidator would exercise the same
powers and have the same privileges.

Official Liquidator
u/s 448

*

There shall be attached to each high court, an ‘official liquidator’
appointed by the central government.

*

Also attached to District Court.

*

O L is the custodian of the company's property.

*

Official liquidator or Provisional liquidator is only custodial
powers to protect the interest of the property like a prudent man;
to institute or defend any suit in the name of the company.

Member and Shareholder

*

*
*

Under the Act, the words ‘member ‘ and ‘shareholder’ / ‘holder of
shares’ have been used interchangeably. A member (S 41) is a
person, other than a subscriber to the memorandum, can become
a member when he agrees in writing to the co. The provision
speaks of ‘person’, i.e. only a person can become member.

A shareholder means only a Regd. Shareholder
A member may be beneficially entitled to the shares but he is
certainly not a shareholder

Member and Shareholder

*

It is only the person whose name is entered in the Register of
shareholders of the company as the holder of shares who can be
said to be shareholder qua ( in the capacity of) the co. and not the
person beneficially entitled to the shares.

Classification of Companies on the basis of business activities
undertaken
1- Manufacturing
2- Services
3- Non-Banking
Finance Activities
4- Non-profit making (Section-25)
5- Producer
(Section 581 A)

M&A are manifestations of an inorganic growth process.
Mergers can be defined to mean unification of two players into a
single entity.

The Companies Act, 1956 consolidates provisions relating to mergers
and acquisitions and other related issues.

MERGER AND ACQUISITION:

It refers to a business strategy, corporate finance
and management dealing with the buying, selling and combining
of different companies that can aid, finance, or help a growing
company in a given industry grow without having to create
another business entity.
MERGER AND ACQUISITION:

Merger under the provisions of the companies act is a
process u/s 391 and 396 of the Companies Act deal with the
procedure and powers.

A business may grow over time as the utility of its products and
services is recognized or an inorganic overall increase in the
revenues and profits.

The Central Government has a role to play in this process and it acts
through an Official Liquidator (OL) or the Regional Director of the
Ministry of Company Affairs; the entire process is routed to the
satisfaction of the Court.
Single Window Concept
Law should provide for a single forum which would approve the
scheme of mergers and acquisition in an effective time bound
manner which should also provide for mandatory intimation to the
regulators also.
Stock and Shares

Stock is the aggregate of fully paid up shares that is legally
consolidated.
QUESTIONS- 2 MARKS
-Explain – lifting the corporate veil
-Remedies for misrepresentation in prospectus
-Voting by proxy
-Difference between a share and a debenture
-What is statement in lieu of prospectus
-Doctrine of Constructive Notice
-What is a Govt. Co?
-Meaning of a company under the co.s act-

QUESTIONS- 2 MARKS

*

Define a statutory co.

*

What is a statutory meeting?

*

What is Quorum?

*

What is MoA?

*

What is a prospectus?

*

Who is an official liquidator?

*

Distinguish between a member and a shareholder.

*

Doctrine of ultra virus.

QUESTIONS- 2 MARKS

*
*
*
*

What is a government company.
What are the documents to be filed with the Registrar at the time of
forming a company.
What is Articles of Association.
What are the salient features of various types of resolutions of a
company?

QUESTIONS- 4 MARKS

*

What is meant by share capital of a company? Explain with examples,
how the share capital of a company can be classified.

*

What is the relevance of object clause in the M o A?

*

Difference between AoA and MoA.

*

What are the contents of MoA?

QUESTIONS- 4 MARKS

*
*
*

What are the modes of acquisition of membership of a co. and
how does it cease?
How are the directors of a co. appointed and how can they be
removed from office?
Define ‘prospectus’. State the consequences of misstatement in a
prospectus.

QUESTIONS- 4 MARKS

*

What are the powers of Board of Directors in a company.

*

Describe the types of preference shares.

*
*

State the provision of the Co. Act relating to incorporation of a
company.
How and in what circumstances can a company reduce, increase
or reorganize its share capital.

QUESTIONS- 8 MARKS

*

What is winding up of a company? Discuss the different
circumstances in which a company may wind up.

*

When will a court order for a compulsory winding up?

*

Difference between a holding co. and a subsidiary co.

QUESTIONS- 8 MARKS

*
*
*

How is a co. formed under the co. act? Describe the various
documents to be filled with the Registrar.
Explain requisites of a prospectus. What is the extent of liability
for statements made in the prospectus?
What is the liability of directs for mis-statements in the
prospectus?

COMPULSORY QUESTIONS

*
*

A public limited company with a paid up capital of Rs. 5o lac
shares of Rs. 10 each wants to reduce its capital to Rs.10 lac by
converting the sharers of Rs. 10 each to Rs.2 each. Is it possible?
If so, how?
A co. served a notice of a general mtg. on its members. The
Notice stated that a resolution to increase the share capital of the
co. would be considered at such mtg. A shareholder complains
that the amount of the proposed increase was not specified in the
notice. Is the Notice valid?


*
*

A co. put up telephone wires in a certain area. There was no
power in the M o A to put up wires there. The defendants cut them
down. Can the company sue for damages done?
Under the Articles of a public co. 3 directors are liable to retire by
rotation at the next AGM.
A and B have been longest in office, but C and D, who are the next
in succession, had become directors on the same day. Both
desire to continue in office. What should done?


*

The members of a co. appointed A to be the liquidator in a
creditors’ voluntary winding up.

*
*
*

At the meeting of creditors, it was proposed that B be
appointed liquidator.
7 creditors representing Rs.90000 of the debts voted against
the appointment.
Who was the duly appointed liquidator?


*

The directors of a co. bought shares from A. They did not
disclose to him that negotiations were conducted for the sale of
all the Co.s share at a higher price than they were to pay to A.
-A sued to have the the sale set aside.
-Will he succeed?


*
*

The directors of Hindustan Chemicals Ltd. allotted to themselves
certain rights shares for which no application was made by certain
shareholders as required by section 81 of the Companies Act.
Discuss the validity of their action specially in view of the fact that the
market price of share of his company is 50% above par.


*
*
*
*

X transfers his shares in a public company to Y.
The directors refuses to transfer or to give reasons for their
refusal.
- Can the directors be compelled to state their reasons for their
refusal?
- Has Y any redress?

Question

*

A public limited company with a paid up capital of Rs. 50 lac
shares of Rs. 10 each wants to reduce its capital to Rs.10 lac by
converting the shares of Rs. 10 each to Rs.2 each.

*

Is it possible?

*

If so, how?

*
*

The Memorandum of Association is the most dominant document
of a company and it contains the general constitution of the
business.
It mainly contains:

*

Name clause

*

Situation clause

*

Liability clause

*

Capital clause

*

Association clause

*

Objects clause

*

*

In the instant case, this company wanted to reduce its capital
from Rs. 50 lac to Rs.10 lac by converting the value of shares
from Rs. 10 to Rs.2 each.

Since this subject of ‘Capital’ is a matter that comes under the
purview of the Memorandum of Association of the Company, any
alteration requires the permission of the shareholders and the
authorisation of the Registrar of Company.

*
*

*
*

A Notice be given to all the members of the company showing the
precise intention before 21 days of the Annual General Meeting or
the Extra-Ordinary General Meeting.
It should also specified that this particular item of reduction in the
value of the shares is a subject of Special Resolution.

Once it is passed in the meeting, the matter be informed to the
Registrar of Companies of the State where the Company is
located.
Correction be carried out in all the copies of the MoA.

Question

*

A company put up telephone wires in a certain area. There was no
power of authority in the M o A to put up wires there.

*

The defendants cut them down.

*

Can the company sue for damages done?

*

The MoA contains the fundamental provisions of the company’s
constitution.

*
*
*

It is the company's’ charter of its existence and operations and is
of supreme importance in determining its powers.
It defines as well as confines the powers of the company.

The MoA of a company mainly contains the following clauses,
beyond which it can not go, however immediate the requirement
be.

*

Name clause

*

Situation clause

*

Liability clause

*

Capital clause

*

Association clause

*

Objects clause.

*

The MoA not only shows the objects of formation, but also
determines the utmost possible scope of its operations beyond
which its action can not go.

*
*
*

In this specific issue there was no power of authority in the M o A
to put up telephone wires at that particular place.
So, there is violation of the “objective clause’ of the MoA.
Hence the company can not sue for damages from the
defendants.

What is a ‘share warrant’?

*
*

*

S. 114 of the Companies Act defines ‘share warrant’.
Share warrant is a document issued by a company certifying that
the bearer is entitled to the shares specified in it.

The name of the bearer will not appear on the register of members
until he surrenders the warrant to the company in return for
transfer of the shares, but he may still be regarded as a member
of the company under the provisions of the Articles of
Association. The company is contractually bound to recognize
the bearer as shareholder.

What is ‘buy back’ of shares?

*

The term refers to a company buying back its own shares, either
from its shareholders or from the open market. The principle
was that protection of the interest of the creditors of the company
requires strict conformity with the statutory procedure.

*

*

*

The Companies (Amendment) Act, 1999, permitted a company,
after following the prescribed procedure, to buy-back its own
securities with suitable safeguards specified in sections 77-A, 77AA and 77-B of the Companies Act, 1956.

Section 77-A allows buy back with a clear demarcation of the
fund from which a buy-back may be financed. Further, a buy-back
exercise can be carried out only up to an amount up to 25% of the
paid up capital of the company.

There should be authorization in the articles of the company, a
declaration of solvency and finally the whole process has to be
authorized by a special resolution of a company at its general
meetings so as to ensure shareholder protection.

Buy-back should also be in accordance with SEBI guidelines which
include daily advertisements, disclosure of purchases daily,
declaration by promoters of the upfront pre and post buy-back
holding in order to prevent manipulation, etc.
Who are the members of a company?

*

S. 41 of the Companies Act, 1956 defines a ‘member’ of the
company.

*

*

Subscribers to the Memorandum of the company are deemed to
have agreed in writing to become the members of the company
and on its registration, shall be entered as members in its
Register of members.

Also, every other person whose name is entered in its Register of
members shall also be a member of that company. Further every
person holding equity share capital of company and whose name
is entered, as beneficial owner in the records of the Depository
shall be deemed to be a member of that company.

Company law

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