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Companies Act

Definition of company
A company is a voluntary association of persons. It has a capital which is divided into small parts known as shares. At the same time it is an artificial person created by a process of ;aw. It has a perpetual succession and a common seal. Since it is artificial personnel it has no body or soul.

Characteristics of a company
1. 2. 3. 4. 5. 6. 7. Separate legal entity Limited stability Perpetual succession Common seal Transferability of shares Separate property Capacity to sue

Classification of Companies
A. Classification on the basis of liability B. Classification on the basis of number of members C. Classification on the basis of incorporation D. Classification on the basis of control
Classification on the basis of liability i. Companies limited by shares. ii. Companies limited by guarantee. iii. Unlimited companies.

Classification on the basis of number of members i. A private company ii. A public company Classification on the basis of incorporation i. Charted companies. ii. Statutory companies. iii. Registered companies.
Classification on the basis of control i. Holding company ii. Subsidiary company

Formation of Company
Company comes existence when a number of persons come together with an intention to do some business. These persons are called promoters. The following is the procedure to be followed while incorporating a company.

Documents to be filed with the registrar

1. The memorandum of association. 2. The articles of association if any, duly signed by the subscribers to the memorandum of association. 3. A statement of the nominal capital. 4. A list of directors and their consent to act as directors signed by each. 5. An undertaking in writing signed by each such director to take and pay for his qualification shares. 6. A declaration that all the requirements of the companies act have been complied with.

Certification of incorporation
The legal effects of incorporation are as follows:

1. A company becomes a body corporate, distinct from its members. It becomes a legal person. 2. A company has perceptual succession and common seal, it remains in existence until it is dissolved by liquidation. 3. A company can sue and be sued in its own name. 4. A company has a right to hold and sell property. 5. Company debts and obligations are liabilities of the company only and cannot be enforced against the individual share holders.

Promoter Duties and Liabilities

Before a company is formed there must be some persons who have an intention to form a company and who take necessary steps to carry that intention into operation, such persons are called promoters. The word promoter is not, defined anywhere in the companies Act. In fact it is a short and convenient way of designing those who set in motion the machinery by which the act enables them to create an incorporated company. A promoter is a person who brings the company into existence. A promoters is one who undertakes to form a company with reference to a given objects and to set it going and who takes the necessary steps to accomplish that purpose.

Liability of Promoters
A company can be compelled by the company to hand over any secret profit which he had made without full disclosures to the company. 1. Promoter may be held liable for the noncompliance of the provisions of the act. 2. Promoter is liable for any untrue statement in the prospectus to a person who has subscribed for any shares or debentures on the faith of the prospectus. 3. Besides civil liability the promoters are criminally liable for any other director or office of the company. 4. A company may proceed against a promoter for deceit or breach of duty, where the promoters has misused or retained any property of the company or for his quality of misfeasance or breach of trust.,

Memorandum and Articles of Association

Memorandum of association is one of the document which has to be field with the registrar of companies at the time of incorporation of the company. The memorandum is an extremely important document in relation to the affairs of the company.

Purpose of memorandum 1. Potential shareholders shall know the purpose for which their money will be used. 2. Any one who deals with the company shall know without reasonable doubt whether the contract which he is entering into is within the scope of the company or not.

Memorandum of every company must contain the following clauses 1. The name of the company with limited as the last word of the name in the case, of public limited company and with private limited as the word in case of private limited company. 2. The state in which the registered office of the company is to be situated. 3. The objects of the company which can be classified into main objects and other objects. 4. The liability of the members. 5. The share capital of the company.

Articles of Association
Articles means the articles of association of a company as originally framed or as altered from time to time in pursuance of this Act. The articles of association are next in importance to the memorandum of association. It contains the fundamental conditions upon which alone a company is allowed to be incorporated. The articles usually contain the following matters, 1. Lien on shares 2. Calls on shares 3. Transfer of shares 4. Transmission of shares 5. Forfeiture of shares 6. Share warrants 7. Alteration of capital 8. Manager 9. Secretary 10.Dividends and reserves

The following companies must have their own articles, i. Unlimited companies ii. Companies limited by guarantee iii. Private companies limited by shares. There are three alternatives forms in which a public company may adopt articles. 1. It may adopt table-A in full 2. It may wholly exclude Table-A and set out own articles in full 3. It may frames its own articles and adopt part of table-A

Differences between memorandum of association and articles of association Articles of association 1. They are regulations for the internal management of the company and are subsidiary to the memorandum. 2. They are the rules for carrying out the objects of the company as set out in the memorandum. 3. They are subordinate to the memorandum. If there is a conflict between the articles and the memorandum, the latter prevails. 4. A company limited by shares need not have articles of its own. In such a case, Table-A applies. 5. They can be altered by a special resolution, to any extent provided they do not conflict with the memorandum and the companies Act. 6. Any Act of the company which is ultra vires the articles can be confirmed by the shareholders.

Memorandum of Association
1. It is the charter of the company indicating the nature of its business, its nationality and its capital. It also defines the companys relationship with outside world. 2. It defines the scope of the activities of the company or the areas beyond which the actions of the company cannot go. 3. It being the charter, is supreme document. 4. Every company must have its own memorandum. 5. There are strict restrictions on its alteration. Some of the conditions of incorporation contained in it cannot be altered except with the sanction of the company law broad. 6. Any Act of the company which is ultra vires the memorandum is wholly void and cannot be ratified even by the whole body of shareholders.

In order to finance its activities, a company needs capital which is raised by a public company by the issues of a prospectus inviting deposits or offers for shares and debentures from the public. A private company is prohibited from making any invitation to the public to subscribe for any shares in, or debentures of the company. Hence it need not issue a prospectus. The important contents of the perspectives are, 1. General information of the company 2. Capital structures of the company 3. Terms of the present issue 4. Particulars of the issue 5. Company, management and project 6. Particulars in regard to the company 7. Outstanding litigation pertaining to matters 8. Management perception of risk factors

1.General information of the company: general information of the company like the name, address of registered office, names of regional stock exchange and other stock exchanges where application is made for listing of present issue, rating from CRISIL or any other rating agency. 2.Capital structure of the company: a) Authorized issue, subscribed and paid-up capital. b) Size of present issue giving separate reservations for preferential allotment to promoters and others. c) Paid up capital. 3.Terms of the present issue a) Term of payments b) Rights of the instruments holders c) Availability of forms, prospectus and mode of payments

4. Particulars of the Issue a) Objects b) Project cost c) Means of financing. 5. Company, management and project a) History and main objects and present business of the company. b) Subsidiary of the company. c) Promoters. 6. Particulars in regard to the company particulars in regard to the company and other listed companies under the same management.

7. Outstanding litigation pertaining to matters Outstanding litigation pertaining to matters likely to affect operation and finance of the company including tax liabilities of any nature etc.

8. Management perception of risk factors management perception of risk factors. Such as sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw material or in marketing of products, cost/time over run etc.

Misleading Prospectus-Consequence and Remedies

If there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material fact, it may result in i. Civil liability ii. Criminal liability


Civil Liability
A person who has been induced to subscribe for shares on the faith of a misleading prospectus has remedies against the company, and the directors, promoters and experts. The remedies available against the company are, a) To Rescind the Contract: Any person who takes shares on the faith of statement of fact contained in a prospectus can apply to the court for rescission of the contract, if those statements are false or fraudulent or if some material information has been withheld. b) Claim for damages: Any person induced by a fraudulent statement in a prospectus to take shares is entitled to sue the company for damages.

ii. Criminal Liability

where a prospectus contains any untrue statement, every person who authorizes the issue of the prospectus is punishable with

imprisonment which may extend to two years or with fine which may
extend to Rs.500 or with both. He will not be liable if he proves 1. That the statement was immaterial or

2. That he had reasonable ground to believe that the

statement was true


Share holders meetings

As per the companies Act, the meetings of a company are classified as, a) Statutory meeting b) Annual General Meeting(AGM) c) Extraordinary General Meeting(EGM) d) Class meeting Statutory meeting Every company limited by shares and company limited by guarantee and having a share capital shall within a period of not less than one month and not more than six months from the date at which the company is entitled to commence business, hold a general meeting of the members of the company. The following companies are not required to hold a statutory meeting. i. A private company ii. An unlimited company iii. A company limited by guarantee and not having a share capital.

Annual General Meeting (AGM)

Every company shall in each year hold in addition to any other meeting a general meeting as its annual general meeting. The annual general meeting is to be held in addition to any other general meeting that must have been held in a year. The first annual general meeting must be held within 18 months from the date of incorporation. In that case the company is not required to hold an annual general meeting in the year incorporation or in the following year. Every annual general meeting shall be called during business hours on a day that is not a public holiday, shall be held either at the registered office of a company or some other place within the city, town or village in which the registered office of the company is situated.

Extraordinary General Meeting(EGM)

A statutory meeting and annual general meeting of a

company are called ordinary meetings. All general meetings other than these are called extraordinary general meetings. This meetings

are generally held for the purpose of dealing with any extraordinary
matter which cannot be postponed till the next annual general meeting. An extraordinary general meeting may be convened by any one of the following, 1. The Board of Directors 2. Any directors or any two members 3. Requisitionists 4. Company law board.

Class Meeting Class meetings of various kinds of shareholders and creditors are held under different circumstances. Similarly where a scheme of arrangement is proposed, meetings of the several classes of share holders and creditors are required to be held. At the time of winding up also, the meetings of creditors and members, for certain purposes, are held.

Board meetings Directors of a company exercise most of their powers at the meetings of the board. The companies Act contains the following provisions relating to board meeting. 1. Number of Meetings: In the case of every company a meeting of its board of directors shall be held at least once in every 3 months and at least 4 such meetings shall be held in every year.

2. Notice of Meetings: Notice of every meeting of the board of directors of a company shall be given in writing to every director for the time being in India and at his usual address in India. 3. Quorum of Meetings: The quorum of the board shall be 1/3 of its strength or two directors which ever is higher.

Power of company law board to order meeting

If for any reason it is impracticable for a company to call, hold or conduct an extraordinary general meeting, either on its own or on the application of any director of the company, or of any member of the company who would be entitled to vote at the meeting. Procedure and requisites of a valid meeting The person responsible for calling and conducting the meeting must observe the following rules of procedure. 1. Proper Authority 2. Notice of Meeting 3. Quorum for Meeting 4. Chairman of the Meeting 5. Minutes of the Meeting 6. Proxies 7. Place of meeting 8. Voting and Poll

1. Proper authority: The authority to call a meeting lies with the board of directors. If the directors do not call the meeting, the members or the company law board may call the meeting. 2. Notice of Meeting: A proper notice should be given to the members and all others who are entitled to attend the meeting. Notice means bringing a thing to the knowledge of the other party. 3. Quorum for Meeting: Minimum number of members required to consists a valid meeting and to transact business legally therein is called quorum. 4. Chairman of the Meeting: The members personally present at the meeting shall elect one of themselves to be chairman thereof an a show of hands. So, every meeting is presided over by a chairman. The regulates, and supervisor the proper conduct of the business at a meeting.

5. Minutes of the Meeting These are a record of what the company and directors do in meetings. Minutes of proceedings of meetings every company shall keep a record of proceeding of all every general meeting and its proceedings. Minutes Book: book in which record of the proceeding of a meeting is kept.

6. Proxies:
A member entitled to attend and note at a meeting may vote either in person or by proxy. A proxy is an authority used both for, The person authorized to Act or voice for another at a meeting of the company. As the instrument by which a person appointed to Act for another at a meeting of the company.

7. Place of Meeting: May be at the registered office of company or some other place in same city, town or village where registered office of company is located. 8. Voting and Poll:

The motions proposed in a meeting are decided on the

votes of members of the company. Evert holder of equity shares has a right to vote, while preference shareholders has a right to vote only on

resolutions directly affecting the rights attached to his preference shares.

A proposal when passes and accepted by the members becomes resolution. Three kinds of resolutions are recognized by the companies Act. 1. Ordinary resolution 2. Special resolution 3. Resolution requiring a special notice.

When is an Ordinary resolution required?

Is passed in a general meeting by a simple majority of votes. Votes cast in person/by proxy , and required notice of resolution duly given. It is required for.., matters concerning with Name Clause, Capital Clause.., for appointing auditors and fixation of their remuneration., appointing of first directors who are liable to retire by rotation.., for increasing/decreasing in number of directors.., appointment of managing director, removal of a director , for winding up of a company voluntarily in certain events, appointing and fixing of remuneration of liquidators.

Special resolutions
Is required for changing the place of registered office from one state to another.., for alterations of Objects clause,omission/addition of private from name.., alteration of Articles.., conversion of any portion uncalled capital into reserved capital.., for payment of interest out of capital.., applying to Central Govt for an inspector to investigate in company affairs.., for applying in court to wind up., for authorizing a liquidator to accept shares as consideration for transfer of its assets.., and for disposal of books and papers of a company in voluntary winding up after completion of the process.

Resolutions requiring Special Notice

Its only a different kind of ordinary resolutions of which notice of the intention to move a resolution has to be given. Notice shall be given not less than 14days before the meeting to the members as notice of meeting is given/by advertisement. Is required for appointment of an auditor other than retiring ones.., to re-appoint the retiring auditor, for removal of a director before expiry of his period.., for appointment of a director in place of who is removed. Passing of Resolutions by Postal Ballot[sec.192-A]a listed company may conduct it by postal ballot. It has send a notice along with a draft resolution explaining the reasons, which should be returned within a period of 30days from the date of posting of the ballot.


Board of Directors
The company being an artificial person, its activities have to be carried out by persons authorised for that purpose. The executive authority is usually exercised by Board of Directors, most of whom are normally elected by the shareholders. The Board of a public company should consist of minimum 3 members and 2 in case of a private company

A person shall not be capable of being appointed director of a company,

Of unsound mind Undischarged insolvent Applied to be adjudicated as an insolvent and his application is pending. Convicted by a court of any offence involving moral turpitude and sentenced thereof to imprisonment for not less than six months and not less than five years has elapsed from the date of expiry of the sentence. Not paid call moneyznd six months have elapsed from the date of payment An order has been passed from court in pursuance of section 203

Meeting of Directors

The companies Act contains the following provisions relating to board meeting.
Number of Meetings: In the case of every company a meeting of its board of directors shall be held at least once in every 3 months and at least 4 such meetings shall be held in every year. Notice of Meetings: Notice of every meeting of the board of directors of a company shall be given in writing to every director for the time being in India and at his usual address in India. Quorum of Meetings: The quorum of the board shall be 1/3 of its strength or two directors which ever is higher.

Powers of the Board of Directors

GENERAL POWERS The BODs may exercise all powers of the Company and can do all such acts and things that the Company can do. But these powers must be according to provisions of Companies Act., MOA, AOA and the resolutions of the Company.

Power to- Make calls on shareholders in respect of money unpaid To buy-back its shares To issue debentures To borrow other than debentures To invest funds of the Co., and To make loans. Powers only at the meetings: To fill casual vacancies in the Board, additional directors or alternate directors. To sanction a contract in which a director is interested To recommend the rate of dividend to be declared.

Restrictions on Powers of Directors

The BODs of a public Co. cannot exercise the following powers without the consent of the shareholders in general meeting: Sell or lease the undertaking of the Co. Remit or give time for the re-payment of any debt Invest otherwise than in trust securities. Borrow money exceeding the aggregate of the paid-up capital and free reserves. Contribute to any charitable not directly related to the business of the Co.

Qualifications and Disqualifications for Directors

A public company cannot prescribe any qualifications for directorship except share qualification. Again, share qualification requirement cannot exceed holding of shares exceeding Rs. 5000/- in nominal value or value of one share where nominal value of one share exceeds Rs.5000/-. A director may obtain his share qualification within 2 months after his appointment.

Section 274 of the Companies Act, 1956 provides that the following persons shall not be capable of being appointed as directors of any company : (a) a person found by a competent court to be of unsound mind and such finding remaining in force; (b) an undischarged insolvent; (c) a person who has applied to be adjudged an insolvent;



(d) a person who has been convicted by a Court of an offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of the expiry of the sentence; (e) a person who has not paid any call in respect of shares of the company held by him, whether alone or jointly with others and six months have elapsed from the last date fixed for the payment of the call; and

Disqualifications contd.
(g) a person who is already a director of a public company which, (i) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999; or (ii) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more.

Number of Directorships
Whole-time Directorship A person cannot be appointed as a whole-time director in more than one company. Part-time Directorship Not more than 15 companies excluding the directorships of,

No. of Directorships


private companies [other than subsidiaries or holding companies of public company(ies)]. ii. unlimited companies, iii. associations not carrying on business for profit or which prohibit payment of a dividend, and iv. alternate directorships (i.e., he is appointed to act as a director only during the absence or incapacity of some other director).