COMPANY LAW

COMPANY ACT 1956

CONTENTS
1. Corporate Personality 2. Registration and Incorporation 3. Memorandum of Association 4. Articles of Association 5. Floating / Raising capital 6. Prospectus, 8. Shares and Dividends, 9. Borrowing Powers and Debentures, 10. Commencement of Business, Meeting and Proceedings, 11. Company Management (BOD), 12. Accounts and Auditors 13. Prevention of Oppression and Mismanagement 14. Amalgamation, Reconstruction and Arrangement 15.Winding up

FORMATION OF COMPANY
Formation of company
1. Promotion, 2. Agreement(MOA & AOA), 3. Floating/raising capital (Prospectus), Shares and Dividends, Borrowing Powers and Debentures, 4. Commencement of Business, (Meeting and Proceedings, Company Management (BOD)

LORD JUSTICE LINDLEYS DEFINITION

An association of many persons who contribute money or moneys worth to a common stock, and employ it in some common trade or business (i.e., common purpose), and who share the profit or loss arising there from. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted.

CHARACTERISTIC OF COMPANY

Separate Legal Entity: A company is in law regarded as an entity separate from its members. In other words, it has an independent corporate existence. It can own property, make contracts and file suits in its own name. Shareholders are not the joint owners of the company's property. A shareholder cannot be held liable for the acts of the company. Similarly, members of the company are not its agents.
E.g., Raj & Co, Ltd. is an entirely different person from Raj, even if he holds practically all the shares in the company. Its property is not the property of Raj. Salmon vs. Salmon

Limited Liability: As a company has a separate legal entity, its members cannot be held liable for the debts of the company. The liability of every member is limited to the nominal value of the shares bought by him or to the amount of guarantee given by him. a) Limited by shares, b) Limited by Guarantee.

Limited by shares means the liability of members is limited to the unpaid value of the shares.
E.g., if the face value of a share in a company is Rs. 10 and a member has already paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3 per share during the life time of the company.

Limited by guarantee means the liability of members limited to such amount as the members may undertake to contribute to the assets of the company, in the event of its being wound up.

Perpetual Succession: Perpetual succession means continued existence A company is a juristic person with a perpetual succession. It is created by a process of law and can be put an end to by process of law. The death, insolvency or lunacy of members does not affect the life of a company. It continues to exits even if all its members die. Members may come and go but the company goes on until it is wound up. Common Seal: The common seal acts as the as the official signature of the company. Being an artificial entity, a company cannot act and sign itself. Therefore, it acts through human beings. All the acts of the company are authorised by its common seal.

Transferability of Shares: The shares of a company are freely transferable and can be sold or purchased in the share market. This is one of the reasons why people prefer to form companies than partnership. The capital of a company is divided into parts, called shares. These shares are transferable. Separate Property: Separation of ownership and control: Members have no right to participate directly in the day-to-day management of a company. They elect their representatives, called directors, who manage the company's affairs on behalf of the members. Thus, the ownership of a company is distributed among the shareholders while management is vested in the board of directors. The management of a company is delegated and centralised.

Company is a legal person distinct from its members, it is capable of owning, enjoying and disposing of property in its own name. Capacity to sue and be sued in its corporate name. On incorporation a company acquires a separate and independent legalpersonality. As a legal person it can sue be sued in its own name. Finances- Company has privileges to raise money by way of shares, debentures etc. Professional management------

1. A company is a juristic person with a perpetual succession

a. As such it never dies b. Its life depends on the life of its members c. It is created by process of law and can be put to en end by process of law.

2. A company limited by shares

a. Has unlimited liability b. Exists only in contemplation of law c. Has a perpetual succession d. Come to an end on the death of all the members

3. During the war all the members of a private company, while in general meeting were killed by a bomb. Does the company cease to exist because all the members died? State reason.

What is the corporate veil? When it is pierce?

The veil of corporation is the principle. The court is bound by this principle. The effect of this principle is that there is a fictional veil (and not a wall) between the company and its members. Its become necessary for the courts to break through or lift the corporate veil or crack the shell of corporate personality or look at the persons behind the company who are the real beneficiaries of the corporate fiction.

The various cases in which the veil has been lifted

Protection of revenue Prevention of fraud or improper conduct Determination of character of company whether it is enemy Where the company is sham=hoax=fraud. Company avoiding legal obligations Company acting as agent or trustee of the shareholders Avoidance of welfare legislation protection of public policy, etc.

CORPORATION OR BODY CORPORATE

Body corporate or corporation includes a company incorporated outside India but does not includea) a corporation sole, b) a registered co-operative society, and c) any other body corporate. (not being defined in company Act)

A body which has been or is incorporated under some statute and which has a perpetual succession, a common seal and is a legal entity apart from the members constituting it, will come within the definition of the term body corporate.

PRACTICAL PROBLEM
Practical Problems 1. Five persons are the only members of a private company. All of them go in a boat on a pleasure trip into the open sea. The boat capsizes and all the five die being drowned. Does the private company cease to exist?

PRACTICAL PROBLEM
2. A, B and C carrying on business under the name and style of A, B &C Clothiers formed a private company. They held all the shares in the company. They sold certain premises to the new company and made a huge profit which was assist to tax. The contention that the profit could not be taxed. Is this contention valid?

TYPES OF COMPANIES

Private company- Min 2 & Max 50 members

Min paid up capital 1,00,000/-; Min Directors 2. Min quorum of 2 members required for meetings. It restricts the rights to transfer of its shares. It is defined as a closed corporation.

Public company- Min 7 & Max. unlimited,

Min 3 directors are required to run the business, Min Paid up capital Rs 5,00,000/- is required to incorporate. Min quorum of 5 persons is required to meeting. No restriction to transfer shares by its members.

These companies may be incorporated as limited liability company or unlimited liability companies.

Private Company
Characteristics of Private company 1. minimum paid up capital Rs. one lakh. 2. Restriction of transferability of shares 3. Restriction on number of members 50 but bill 2012 says 200. 4. Prohibition on issue of shares

Advantages of Private company

1. Subscription- to sign MOA requires 2 members 2. Exemption from prospectus-provisions- public participation by issuing prospectus is prohibited. No need to file statement in lieu of prospectus 3. Directors 2 directors may be in permanent nature 4. Statutory meeting private company exempted to file a report of meeting 5. further issue of capital 6. company on undisclosed principal need not disclose to public while signing an agreement with third parties 7. Disclosure of interest

Conversion of Private Company into Public Company and vice-a-versa

1. Conversion by default 2. Conversion by operation of law 3. Conversion by choice Vice a versa a public company can be converted by passing special resolution

TYPES OF COMPANIES

S. 617; Government Company means any company in which not less than 51% of paid up share capital is held by-

Central Government, State Government, Partly Central and partly State Government E.G. State Trading Corporation of India, In R.K Chatterji vs. UOI (1969), 39, Comp, Cas, 329, it was held that the Government Company has distinct entity and is not an agent of the Government. In State of Punjab vs. Raja Ram (1982) 52 Comp. case 104 , It was held that Food corporation of India is not a Government Department. It has separate legal entity and it can sue and be sued. In Government Company the Auditor is appointed by CAG of India. Whether Government Company is an State Under Article 12 of the Constitution of India? YES

Foreign Company, any company incorporated outside India and has an established place of business in India is called a foreign company. Section 591(1). A company incorporated in India and having all foreign share holders shall be called Indian company. The office of the registrar for the foreign companies is in New Delhi and the concerned registrar having jurisdiction over the principal place of business of the foreign companies.

In Pratap Sing Vs. Bank of America (1976) 46 Comp. Cas. 532 (Bom). The court has no jurisdiction over a company incorporated in foreign country except in respect of cause of action arising at place where its in India is located. Bank Muscat SAOG, in Re (2004) 51 SCL 191(Kar). In respect of foreign companies, it is the place where its principal place of business is situated which is deemed in law to be its registered office which decides the jurisdiction of court.

TYPES OF COMPANIES

Holding and Subsidiary Company; A company which controls another company is known as the holding company and the company so controlled is termed as subsidiary company on the basis of control; holding company H and subsidiary company S.
Company H controls the composition of Board of Directors of S. Company H holds More than 50% of nominal value of equity shares of Subsidiary Company S.

Whether H and S both are separate legal entity? yesAn example will illustrate the point. Company B is a subsidiary of company A, and company C is a subsidiary of company B. Company C will be a subsidiary of company A. A subsidiary company cannot hold shares or be a member of its holding company except as a legal representative of a deceased member of the holding company or any trustee. Ownership A holding company buys, absorbs or otherwise obtains a majority percentage of stock in another company, which becomes known as its subsidiary. Typically, a holding company must control 50 percent or more of a companys stock before it's considered a subsidiary. Management A holding company directs the management and operations of the subsidiaries it owns and maintains the authority to add or remove board members, directors and other key management and personnel. Financial Control A subsidiary has little to no financial control over its operations. Even independently acting subsidiaries are ultimately financially controlled by their holding company. Legal Responsibility A holding company may invest in subsidiaries in a variety of industries to diversify its investment, lower its risk potential and, in some instances, take advantage of shared loss and tax consolidation

TYPES OF COMPANIES

Producer company- Section 581(B) OBJECTS: production, harvesting, procurement, grading, pooling, handling, marketing, selling, export, import, processing, etc.

LLP limited liability partnership Company with license under section 25 Company limited by guarantee Unlimited company

OBJECTIVE TYPE QUESTION

1. The reserve bank of India is an example of a
a. Registered company b. Statutory company c. Chartered company

2. A private company has minimum of

a. 7 members b. 2 members but maximum no limit c. 2 members and maximum 50 including past and present employees d. 2 members and maximum 50 excluding past and present employees, who become members while in the employment of the company and continue to be members.

PRACTICAL PROBLEM
In a private limited company it is observed that there are, in fact, 54 members. On an enquiry, it is ascertained that 6 of such members have been employees of the company in the recent past and that they acquired their shares while they were still employees of the company. Is it necessary to convert the company into a public limited company?

PRACTICAL PROBLEM
Two Hindu families carry on together a business as joint owners. The first family consists of 3 brothers and their respective sons, being 12 in number, one of the brothers son is a minor. The second family consists of the father, 4 major sons and 2 minor sons. Is the business illegal ?

PRACTICAL PROBLEM
The paid up share capital of XYZ (private) Co. Ltd. is Rs 20 lakhs consisting of 2,00,000. equity shares of Rs. 10 each fully paid up. ABC (Private) Ltd. and its subsidiary DEF (private) Ltd. are holding 60,000 and 50,000 shares respectively in XYZ (Private) Co. Ltd. Whether XYZ (Pvt.) Co. Ltd. Is a subsidiary of ABC (Private) Ltd.

` OF COMPANY
1. Promotion 2. Registration 3. Floatation/raising of capital 4. Commencement of business

Any 7 or more persons (2 or more in case of private company) associated for lawful purpose may form an incorporated company, with or without limited liability. They shall subscribe their names to a memorandum of association and also comply with other formalities in respect of registration. A company may form, may be A company limited by shares A company limited by guarantee An unlimited company.

PROMOTION
Promotion means preliminary steps taken for the purpose of registration and floatation of the company. The persons who assumes to task are called promoters.
In Twycross v. Grant 1877 2 CPD 469 : PromoterOne who undertake to form a company with reference to a given project, and to set it going, and who takes the necessary steps to accomplish that purpose.

INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

A company may be formed for any lawful purpose by (a) seven or more persons, where the company to be formed is to be a public company; (b) two or more persons, where the company to be formed is to be a private company; or (c) one person, where the company to be formed is to be One Person Company that is to say, a private company, - by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration:

PROCEDURE OF REGISTRATION
S. 33 To obtain the registration of a company an application has to be filed with the registrar of companies. The application must be accompanied by the following documents1. Memorandum of association 2. Articles of Association, if necessary, 3. The agreement, if any.

Certificate of Incorporation
S. 34-The certificate of incorporation brings the company into existence as a legal person. Upon its issue the company is born. It provides that from the date of incorporation such of the subscribers of the memorandum and other persons, as may from time to time be the members of the company, shall be body corporate, -- --capable forthwith of exercising all the functions of the incorporated company.

CERTIFICATE OF INCORPORATION
Re Peels Case (1867) L.R. 2 Ch. 674. A certificate of incorporation given by the registrar in respect of a company is conclusive evidence that all the requirements of the Companies Act have been complied with in respect of registration.

WHO IS PROMOTER?

A promoter is a person who does the necessary preliminary work incidental to the formation of a company. the first persons who control a companys affairs are its promoters. It is they who conceive the idea of forming the company, with reference to a given object and then to set it going. It is they who take the necessary steps to incorporate the company, provide it with share and loan capital and acquire the business or property which it is to manage. When these things have been done, they hand over the control of the company to its directors. Promoters perform the following in the formation of the corporation: They seek business opportunities. They raise capital. They find investors and encourage them to enter into stock subscription agreements. They enter into contracts on behalf of the corporation to be formed. They cause the articles of incorporation to be prepared, in which process they select the state of incorporation, select a corporate name, or plan special charter provisions to be included.

Practical Problem
A computer stationary dealer, entered into a contract with the company for the supply of computer stationary to the company worth Rs. 2 lakhs. The company went into liquidation before it could obtain certificate of commencement of business. Can A prove in the winding up for the price of furniture supplied to the company. no

MEMORANDUM OF ASSOCIATION
Memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of the company Act 1956. s. 2(28). It is a fundamental document. It is the charter of the company and defines its raison detre (reason for existence). The memorandum of association is an extremely important document in relation to the affairs of the company. It is a document which sets out the constitution of the company and is really the foundation on which the structure of the company is based. It contains the fundamental conditions upon which alone the company is allowed to be incorporated.

Palmers, - it is a document of great importance in relation to the proposed company. It is primary document of the company and sometime it is called charter of the company. Purpose of memorandum: The purpose of the memorandum is two fold. 1. The intending share holder who contemplates the investment of his capital shall know within what field it is to be put at risk. 2. Anyone who shall deal with the company shall 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. At least seven persons in the case of public company and at least two in the case of a private company must subscribe to the memorandum.

CONTENTS OF MEMORANDUM

Name of the company i.e., Ltd., or Pvt. Ltd. The state in which the registered office of the company is to be situate, The objects of the company- (a) main object and (b) other objects. Objects must not be illegal, immoral and opposed to public policy or in contravention of act. The states to whose territories the objects extend. Limited liabilityby share or by guarantee Share capital. . In the case of a company having a share capital, the amount of share capital with which the company proposes to be registered and its division into shares of a fixed amount

Ashbury Railway Carriage & Iron Co. v. Riche , decided in the House of Lords in 1875 (Law Rep. 7 H. L. 653)
In this case the objects set out in the company's memorandum were "to make and sell, or lend on hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery and rolling stock; to carry on the business of mechanical engineers and general contractors; to purchase, lease, work and sell mines, minerals, land and buildings; to purchase and sell as merchants, timber, coal, metals, or other materials, and to buy any such materials on commission or as agents." The directors purchased a concession for making a railway in Belgium and contracted with Riche to construct the line. Was here a valid contract? The construction of a railway, as distinct from rolling stock, was ultra vires. Therefore Riche's action for breach of the alleged contract failed as it was void ab initio. This would have been the case even if every shareholder of the company had given approval - it was an act which the company had no lawful power to do.

The law has since changed through Section 108 of the Companies Act 1989, substituting a new section 35 of the Companies Act 1985. Under that new section it remains the duty of the directors to observe any limitations on their powers flowing from the company's memorandum (section 35(3)) and a member of a company may bring proceedings to restrain the doing of an act in excess of those powers (section 35(2)); but, by section 35(1): "The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's memorandum."
Thus by applying the modern law to the Ashbury case, the directors committed a breach of duty by making the contract and might have been restrained by action by a member; but once the contract was made its validity could not be questioned provided that the making of the contract was "an act done by the company." Yet it might be objected that it was not such an act because the directors had no power to make the contract. This objection is met by section 35A(1): "In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company's constitution."

ARTICLES OF ASSOCIATION
The Articles of Association or just Articles are the rules, regulations and bye- laws for the internal management of the affaires of a company. It deals with the rights of the member of the company inter-se. The articles are framed for carrying out the aims and object of the Memorandum of association. The articles of association of a company are sub -ordinate to and are controlled by the memorandum of association Article mean the AOA of a company as originally framed or as altered from time to time in pursuance of this Act.

CONTENTS OF ARTICLES
Share capital, rights of shareholders, share certificates, etc. Lien on shares, calls on shares, transmission of shares, forfeiture of shares, conversion of shares into stocks, share warrants, Alteration of capital General meetings, Voting rights of members

Directors, managers, secretary, dividends and reserves, Accounts audits and borrowing powers, Capitalization of profits Winding up.

PROSPECTUS
S. 2(36) : Any document described or issued as a prospectus and include any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debenture of, a body corporate. Any document inviting deposits from the public or inviting offers from the public for the subscription of shares or debentures of a company is a prospectus.

Subscription means taking or agreeing to take shares for cash. Shelf prospectus means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus. It is valid up to one year. Issued means issued to the public. A red-herring prospectus is a prospectus which does not have complete particulars on the price of securities offered and quantum of securities offered.

Under section 55 a prospectus required to be in writing, dated and signed by its officers. Registration of prospectus. a prospectus can be issued by or on behalf of a company only when a copy thereof has been delivered to the registrar for registration. S. 56

STATEMENT IN LIEU OF PRSOPECUS

A private company cannot raise money from public as prohibited by law but it can access privately by making a statement to the registrar. Such statement is known as statement in lieu of prospectus. Note: every prospectus must be issued within ninety days of its registration.

CONTENT OF PROSPECTUS
S. 56- (a) name and address of registered office, (b) consent of the Central Government name of regional stock exchange (d)provisions relating to punishment for fictitious applications, etc. General Information
Capital structure of the company Terms of the present issue Particulars of Issue Company management and project.

contents
Every prospectus to be dated Every prospectus to be registered Experts consent Disclosure to be made Issuing house- the whole of the capital of the company is allotted to an intermediary known as an issuing house. N.B. the true nature of the companys venture should be disclosed.

LIABILITIES FOR MISSTATEMENT IN PROSPECTUS

Civil liability - against the company, director, promoters, other officers and experts.
Criminal Liability- against the company, directors, promoters, other officers. Remedies Rescission of contract, claim for damages, compensation.

CIVIL LIABILITY SECTION 62

where a prospectus invites persons to subscribe for shares in or debentures of a company, the following persons shall be liable to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement included therein, that is to say,
(a) every person who is a director of the company at the time of the issue of the prospectus ; (b) every person who has authorized himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time ; (c) every person who is a promoter of the company ; and (d) every person who has authorized the issue of the prospectus

CRIMINAL LIABILITY
Section 63: Where a prospectus issued after the commencement of this Act, includes any untrue statement, every person who authorized the issue of the prospectus shall be punishable
1. With imprisonment for a term which may extend to two years, or 2. with fine which may extend to fifty thousand rupees, or 3. with both imprisonment and fine.

Derry v. Peek (1889) 14 App. Cas. 337

Facts :Plaintiff received a prospectus regarding the incorporation of Defendants company, which highlighted that the company would have the right to use steam or mechanical power. After receiving the prospectus, Plaintiff bought shares of the company, relying on the allegations of the prospectus, and believing that the company had the absolute right to use steam or mechanical power. The board of trade refused to allow steam or mechanical power, and the company was wound up, unable to complete its work. Thereafter, Plaintiff brought suit against Defendant for fraudulent misrepresentations. The trial judge dismissed the action, after coming to the conclusion that the directors knew that the use of steam or mechanical power was contingent on the board of trade and it was not unreasonable or deceitful for them to rely on the board. On appeal, the dismissal was reversed, because the court found that the Defendants may have reasonably believed the prospectus and, because they did not have reasonable grounds for what they wrote in the prospectus, they should be held liable for Plaintiffs reliance. Defendant appealed. Issue: Whether it is deceit when a company forms a prospectus to solicit investors, which later proves to be wrong? Held. Reversed. The House of Lords reversed the judgment of the court of appeals, and reinstated the judgment of the lower court. The court found this to be an action of deceit, under which the establishment of misrepresentation alone is not enough to prove liability. In this case, Plaintiff relied on the prospectus, which may have been misrepresentation, but Defendants reasonably believed they could glean approval of the board of trade and should not be held liable for their later failure to do so.

Problem
A purchased from B 1000 shares of a company on the basis of prospectus containing wrong statements. What remedies are available to A against the company?

SHARE AND SHARE CAPITAL

S. 2(46) "share" means share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied. Share is not a negotiable instrument. It is an expression of proprietary relationship between a shareholder and the company.

DEFINITION

A share is the interest of a shareholder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders in accordance with law.

Rights of Share holders

. To attend general meeting and vote Typically shares carry one vote each at general meetings but there may be non-voting shares or shares with multiple votes. Some shares may carry the right to vote only in particular circumstances where the company has different classes of shares. To a share of the company's profits The distribution of profits is paid by means of a dividend of a certain amount paid on each share. A dividend may be paid only if the company has made profits and to the extent that it decides to distribute them. To a final distribution on winding up If the company is wound up and all the creditors are paid the remaining assets are available for division among the members. This may be in two stages: (1) a return of capital; (2) distribution of surplus capital. That the company be run lawfully In most circumstances only the members of the company will have the legal right to sue to make the company act lawfully, and even they may be restricted in their ability to sue under the common law rule in Foss v Harbottle.

SHARE CAPITAL
Authorized or nominal capital = this is the nominal value of the shares which a company is authorized to issue by its MOA. Issued and subscribed capital = issued capital is the nominal value of the shares which are offered to the public for subscription. Sometimes, all the shares which are offered to the public for subscription may not be taken up. In such a case that part of the issued capital which is taken up by

Called up capital = this is that part of the issued capital which has been called up on the shares. Paid up capital = this is that part of the issued capital which has been paid up by the shareholders or which is credited as paid up on the shares. Uncalled capital = this is the remainder of the issued capital which has not been called. Reserve capital = this is that part of the uncalled capital of a company which can be called only in the events of its winding up.

ILLUSTRATION

A company is registered with a capital of Rs. 1,00,000 divided into 10,000 shares of Rs. 10 each. The authorized capital of the company in such a case is Rs. 1,00,000. The company offers 8,000 shares to the public which takes them up. The issued capital of the company is Rs. 80,000. The calls up only Rs 6 per share. In such a case the called up capital is Rs. 48,000 and the uncalled capital is Rs. 32,000.

SHARES AND DIVIDENDS

A share is the interest of a shareholder in a company. Share means share is the share capital of a company. It includes stock except where a distinction between stock and share is expressed or implied. S. 2(46). A share is evidenced by share certificate. Each share to be distinguished by appropriate number. S. 84

TYPES OF SHARES
Preference shares, and equity shares. Section 85(1) preference shares, with reference to any company limited by shares, are those which have two characteristics: (a) they have a preferential right to be paid dividend during the life time of the company, and (b)They have a preferential right to the return of capital when the company goes into liquidation.

Section 85(2) equity shares, with reference to any company limited by shares, are those which are not preference shares.

SHARES VS. DEBENTURES

Ownership: A shareholder is an owner of the company whereas a debenture holder is only a loan creditor. A share is a part of the owned capital whereas a debenture is a part of borrowed capital. Return: The return on shares is known as dividend while the return on debentures is called interest. The rate of return on shares may vary from year to year depending upon the profits of the company but the rate of interest on debentures is prefixed. The payment of dividend is an appropriation out profits, whereas the payment of interest is a charge on profits and is to be paid even if there is no profit. Repayment: Normally, the amount of shares is not returned during the life of the company, while the debentures are issued for a specified period and the amount of debentures is returned after that period. However, an amendment in 1998 to The Companies Act, 1956 has permitted the companies to buy back its own shares from the market, particularly, when the price of its share in the market is lower than the book value.

voting rights: Shareholders enjoy voting rights whereas debenture-holders do not normally enjoy any voting right. Issue on Discount: Both shares and debentures can be issued at a discount. However, shares can be issued at discount in accordance with the provisions of Section 79 of The Companies Act, 1956 which stipulates that the rate of discount must not exceed 10% of the face value. Security : Shares are not secured by any charge whereas the debentures are generally secured and carry a fixed or floating charge over the assets of the company. Convertibility: Shares cannot be converted into debentures whereas debentures can be converted into shares if the terms of issue so provide, and in that case these are known as convertible debentures

DIVIDENDS
One of the main objects of commercial enterprises is to earn profits which are distributed among shareholders by way of dividend. Dividend shall not be paid out of capital. Dividend can be paid only out of profits.

DEBENTURE

Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.

Raising of shares/ issue of shares

Companies limited by shares have to issue shares to raise the necessary capital for their operations. Issue of share may be made by three ways By private placement of shares By allotting entire shares to an Issue House, which in turn, offers the shares for sale to the public. By inviting the public to subscribe for shares in the company through a prospectus.

Problem
X is a share holder of a company holding 100 shares. X dies leaving Y as his legal representative. Y is not a member of the company. Y transfers all 100 shares of the deceased members to Z. Is the transfer valid? Discuss.

Membership
S.41 (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members. (2) Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company. (3) 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 the concerned company.

The members or shareholders of a company are the persons who collectively constitute the company as a corporate entity. A registered shareholder is a member but a registered member may not be a shareholder. A legal representative is not a member until he applies for registration. A person can be a holder of shares w/o being a member.

Who can be a member

A minor can not be member. An insolvent can be a member. A Partner can be member. A Foreigner can be member.

How to become a member

1. membership by subscription 2. membership by application and registration a) by application and allotment b) by transfer c) by succession d) by agreement to be in writing. 3. Membership by beneficial ownership 4. Membership by qualification shares.

MEETINGS AND PROCEDURE

There are various types of meetings Meetings of share holders Meetings of creditors and debenture holders Meetings of directors

MEETINGS OF SHARE HOLDERS

These Meetings may be 1. General Meeting which include(a) Statutory Meeting (b) Annual General Meeting (c) Extra ordinary Meetings

II. Class Meetings of Shareholders of different classes of shares where a company has more than one class of shares.

REQUISTIE OF A VALID MEETING

The meeting must be duly convened by a proper authorityBOD/shareholders/ NCLT. A proper notice must be served in the prescribed manner-Service of notice. A quorum must be present A chairman must be preside Minutes of the proceedings must be kept

Form of notice
FORM NO. 22A THE COMPANIES ACT, 1956 Consent of shareholder for shorter notice [pursuant to section 171(2)] To The Board of Directors of I, son of resident of holding equity/preference shares of Rs. . In the company in my own name hereby given consent, pursuant to section 171(2) of the companies Act , 1956, to the annual/extraordinary general meeting on . At a shorter notice.
Signature . Name (In Block Capital)

Dated the . Day of . 19

FORM OF PROXY

(Under Schedule IX to the Companies Act, 1956) NAME OF THE COMPANY

I,...............................s/o.............................r/o.............................being the member of the aforesaid company do hereby appoint Shri......................................................... s/o.............................. r/o...........................................or failing him Shri................. s/o..............................r/o.........................................as my proxy to vote for and on behalf of me at the annual general meeting/general meeting dated...........of the Company convened and to be held on........................ and at any adjournment thereof.

Date................
Sd/- ................. Member

RESOLUTIONS

The question come for consideration at the general meeting of a company are presented in the form of motions. If the motion is carried by discussion and put to vote by show hands, it becomes a resolution. There are three kinds of resolutions Ordinary resolutions Special resolutions Resolutions requiring special notice

DIRECTORS
A Director is a person having control over the direction, conduct, management or superintendence of the affairs of the company. Function is every thing, name matters nothing. The directors are the brain of the company. A company in the eyes of law is an artificial person.

MAXIMUM AND MINIMUM DIRECTORS

Every public company must have 3 directors. Maximum depends upon AOA. Yet they should not increase more than 12. A private company or deemed public company should have minimum 2 directors. No person shall hold office at the same time as director in more than 15 companies. Earlier the limit was 20 companies.

DISQUALIFICATIONS OF DIRECTORS
(1) A person shall not be capable of being appointed director of a company, if-

(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent; (c) he has applied to be adjudicated as an insolvent and his application is pending; (d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less to six months, and a period of five years has not elapsed from the date of expiry of the sentence; (e) he 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 day fixed for the payment of the call; or (f) an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section. [(g) such person is already a director of a public company which,(A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first date of April, 1999; or (B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on done date or pay dividend and such failure continues for one year or more : Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under subclause (a) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (b).]

APPOINTMENT OF DIRECTORS
First director by the Article of a Company Appointment of directors by the company- by share holders in General Meeting Appointment of Directors by Directors Appointment of Directors by Third Party Appointment by Proportional Representation Appointment of Directors by the Central Government

POSITION OF DIRECTORS
Directors as Agents Directors as Employees Directors as Officers Directors as Trustees Directors are in fiduciary relationship

POWERS OF DIRECTORS
To make calls on share holders To authorize the buy-back of shares To issue debentures To borrow money otherwise than on debenture To invest the funds of the company To make loans To fill vacancies in the board, etc.

DUTIES OF DIRECTORS

Fiduciary duties
Directors must exercise their powers honestly and bona-fide for the benefits of the company

Duties of care, skill and diligence

Directors should carry out their duties with reasonable care and exercise such degree of skill and diligence as a prudent person.

1. To file return of allotment 2. Not to issue irredeemable preference share/shares, redeemable after 20 years 3. To disclose interest as fiduciary capacity 4. Duty to attend board meetings 5. A directors duties also includes the following:
To convene Statutory, (AGM) and also (EGM); To prepare and place at the AGM, along with the balance sheet and, profit and loss account, a report on the company's affairs, including the report of the Board of Directors; To authenticate and approve annual financial statement; To appoint first auditor of the company; To appoint cost auditor of the company; To make a declaration of solvency in the case of a Members' voluntary winding up;

DUTIES OF DIRECTORS
(I) Subject to the provisions of this Act, a director of a company shall act in accordance with the companys articles. (2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company. (3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence. (4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. (5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates. (6) A director of a company shall not assign his office and any assignment so made shall be void. (7) Any director who contravenes the provisions of this section shall be punishable with fine which shall not be less one lakh rupees but which may extend to five lakh rupees: Provided that if he is found guilty of making any undue gain either to himself or to his relatives, partners or associates he shall also be liable to pay an amount equal to that gain to the company.

LIABILITIES OF DIRECTORS
1.

Liability to third parties

prospectus does not contain particulars (a) from ultra vires acts (b) from negligence (c) from breach of trust (d) misfeasance- willful misconduct (e) breach of fiduciary duty

2. Liability to the company

3. Liability for breach of statutory dutiesa. b. c. to maintain proper account, filing of returns or observance of statutory formalities, etc

4. Liability for acts of his co-directorsA director is not liable for the acts of his co-director

REVISION
1. State whether the following statements are True or False
a. There is no retirement age of directors of the company. b. A company may have more than one managing director but it cannot have more than one manager. c. First directors are appointed by promoters of the company. d. Only one third of the total number of directors can be non-rotational directors. e. Additional director merely fills a temporary vacancy in the office of the director.

2. Choose the correct answer.

a. Who among the following persons cannot be appointed as director of any company? b. An un-discharged insolvent c. A person found by a competent court to be of unsound mind 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. All the above.

3. The board of directors cannot appoint

a. Additional director b. Casual director c. Alternate director d. Nominee director

4. Who among the following is not a competent authority to remove a director from his office?
a. Shareholders b. Managing directors c. Central Government d. NCLT (Tribunal)

5. Which of the following powers cannot be exercised without the consent of shareholders in general meeting?
a. The powers to make calls on shareholders b. The power to make loans c. The power to buy-back its shares d. The power to borrow monies exceeding the aggregate of the paid up capital of the company and its free reserves

6. Which of the following duties is not a general duty of directors of a company

a. Duty of good faith b. Duty of care c. Duty to attend board meetings d. Duty not to delegate

Practical problem
M/s XYZ Ltd. With a paid up capital of Rs. 5 crores has nine directors on its board and as per its articles, the quorum for the board meeting is 3. A meeting of the board was called to consider a contract relating to purchase of raw material from another company ABC (p)Ltd. , in which A&B, the director of XYZ Ltd. , are also major share holders. In the board meeting of XYZ Ltd. 3 directors including A & B attended. The matter was discussed and the three director voted for the contract. ABC Ltd. Wants to enforce the contract. Will it be succeed? Discuss.

MANAGING DIRECTORS AND OTHER OFFICERS

The directors as the representatives of the shareholders of a company are appointed to Direct manage- and control the affairs of the company. They may manage the affairs of the company
By themselves, or By means of committee, or By appointing departmental executives, or By appointing agents under Power of Attorney, or In such other nature as the company affairs may requires.

MANAGING DIRECTOR

A managing director means a director who is entrusted with substantial powers of conferred upon him by virtue of an agreement with the company or a resolution passed by the company in AGM or by its BoD or by virtue of MOU or AOA. A managing director is usually appointed under a service contract and accordingly he is both a director and an employee of the company.

APPOINTMENT OF MD AND OTHER CONDITIONS

Compulsory appointment of Managing or whole time director or manager if paid up share capital is Rs 5 crore or more. Prior approval of the central Government is required. Number of managing directors cannot more than two. But the Central government may permit more than two if it is necessary to manage the affairs of the company. The MD can be appointed for a term of 5 years. This rule is not applicable to private companies.

DISQUALIFICATIONS OF MD
No person shall be appointed a managing and whole time director who Is an un-discharged insolvent Is suspended for default Is convicted by court of an offence of moral turpitude. Is of unsound mind, etc.

MANAGER

S. 2(24)- manager means an individual who has the management of the whole or substantially the whole of affairs of a company. He is subject to the superintendence, control and direction of the board of directors. Manager includes a director or any other person occupying the position of a manager, by whatever named called, and whether under a contract of service or not.

SOLE SELLING AGENTS

An individual, firm or company who or which is given exclusive rights to sell in a particular area the goods of the company concerned.

SECRETARY

Secretary means a company secretary within the meaning of section 2 of the companies secretary act 1980 and includes any individual possessing the prescribed qualifications appointed to perform the duties which may be performed by a secretary under this act and any other ministerial or administrative duties. The secretary is the companys eyes, ears and hands who carry out the policies of the managements.

REVISION
The term of office of managing director cannot exceed 2 years at time 3 years at a time 5 years at a time 7 years at a time

The remuneration of a managing director cannot exceed 1 percent of the net profit 5 percent of the net profit 10 percent of the net profit Rs 50,000.

The board of directors of A & Company Ltd. Appointed rajan the managing director and gave him full powers of management of the companys affairs and authorized him to sign all papers. Rajan borrowed money on promissory note. Is the company bound by this transaction?

The secretary of the company purchased some stationary for the company but he took it at home and put it for personal use. The company refused to pay to the supplier of the stationary on the plea that it never received the stationary. Is the company liable to pay?

ACCOUNTS AND AUDIT

S. 209: (1) Every company shall keep at its registered office proper books of account with respect to (a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place ; (b) all sales and purchases of goods by the company (c) the assets and liabilities of the company; and (d) in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of material or labor or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account :

INSPECTION OF BOOKS OF ACCOUNT

S. 209A.(1) The books of account and other books and papers of every Company shall be open to inspection during business hours (i) by the Registrar, or (ii) by such officer of the Government as may be authorized by the Central Government in this behalf, (iii) by such officers of the Securities and Exchange Board of India as may be authorized by it : No right of shareholder to inspect the books of account.

PENALTIES S. 218
(a) If any copy of a balance sheet or profit and loss account which has not been signed as required by law is issued, circulated or published; or (b) If any copy of a balance sheet is issued circulated or published without there being annexed or attached thereto, as the case may be, a copy each of
(i) the profit and loss account, (ii) any accounts, reports or statements which, by virtue of law, are required to be attached to the balance sheet, (iii) the auditors' report, and (iv) the Board's report

the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees.

APPOINTMENT OF AUDITORS
Every company shall, at each AGM appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next AGM and shall, within seven days of the appointment, give intimation thereof to every auditor so appointed

QUALIFICATIONS OF AUDITORS

A person shall not be qualified for appointment as auditor of a company unless he is a CA within the meaning of the Chartered Accountants Act, 1949.

DISQUALIFICATIONS
None of the following persons shall be qualified for appointment as auditor of a company (a) a body corporate ; (b) an officer or employee of the company ; (c) a person who is a partner, or who is in the employment of an officer or employee of the company ; (d) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee (e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000

RIGHTS OF THE AUDITORS

1. Right of access to books and accounts 2. Right to obtain information or explanation 3. Right to inspect branch account 4. Right to receive notices, etc. 5. Right to attend general meeting 6. Right to remuneration

MAJORITY RULE AND MINORITY PROTECTION

In Foss vs. Harbottle; two propositions used1. The court will not ordinarily intervene in the case of an internal irregularity if the matter is one which the company can ratify or condone by its own internal procedure. 2. A wrong has been done to. a company, prima facie, the only proper plaintiff is the company itself.

Foss vs. Harbottle

1.
2. 3. 1. 2.

3.
4.

Rule Only the company can sue. Mere injury is not enough Will of majority should prevail. Advantage Recognition of the separate legal personality of company. Need to preserve right of majority to decide Multiplicity of futile suits avoided. Litigation at the suit of a minority is futile if majority do not wish it.

EXCEPTIONS
The minority shareholders may bring an action to protect their interest1. Ultra-vires and illegal acts 2. Breach of fiduciary duty 3. Fraud or oppression against minority 4. Inadequate notice of a resolution passed at a meeting of members 5. Qualified majority 6. Where the personal rights of an individual member have been infringed 7. Statutory exceptions-

PREVENTION OF OPPRESSION
Oppression or oppressive conduct means not keeping to the accepted standards of honesty and fairness and a lack of regard of other shareholders interest. e.g. not calling a general meeting and keeping shareholders in dark is oppressive conduct. Depriving a member of the right to dividend. Refusal to register transmission under will.

PREVENTION OF MISMANAGEMENT
The NCLT may give relief if there is
1. Prejudicial to the public interest, or 2. Prejudicial to the interests of the company 3. The material change in the management, or 4. Control of the company

According to the Dictionary meaning of word, is any act exercised in a manner burdensome, harsh & wrongful. The term oppression has been explained by Lord Cooper as, The essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely.

NCLT
National Company Law Tribunal is a single window institution for the purpose of Corporate Justice.

Introduction MCA is going to set up the National Company Law Tribunal NCLT AND NCLAT which will replace Company Law Board, Board of Industrial and Final Reconstruction and Appellate Authority for Industrial and Financial Reconstruction and Comprising Judicial and Technical members to be authorized by (CG) who will exercise and discharge powers and functions conferred Therewith including approval of merger, corporate reorganization, capital reduction, extension of financial year etc

Need For NCLT Considering the laws on corporate insolvency and other such provisions with regards to company law prevailing in industrially advanced countries, a High Level Committee set up by the Union of India (The Eradi Committee) recommended various amendments.

National Company Law Tribunal and its Appellate Tribunal was recommended which will have the powers of the: CLB under the Companies Act, 1956, BIFR and AAIFR under the Sick Industrial Companies (Special Provisions) Act, 1985, and Jurisdiction and Powers relating to winding-up, restructuring and other such provisions, vested in the High Courts.

Benefits of NCLT as Quasi Judicial Body. It shall avoid multiplicity of litigation before various Forums (High Courts, CLB, BIFR, AAIFR). Thus there will be a consolidation of Corporate Jurisdiction. There shall be at least 16 benches of the NCLT, thereby providing justice almost at ones doorstep

This tribunal shall comprise of technical experts who will provide more concrete and precise decisions. There will be a mixture of judicial and equitable jurisdiction while deciding matters. There shall be a reduction in period of winding-up from 20-25 years to 2 years. Reduction in pendency of cases, expeditious disposal of cases

Composition Of Board
Composition Of Board & Members President of NCLT Judge of High court for 5 years. Judicial Member of NCLT 10 years service in Indian Legal or Corporate Law Services, Or equivalent post in central or state government, at a pay scale of not less than a joint secretary to the Government of India, Or held a judicial office for 10 years, Or Advocate of the High Court for 10 years.

Technical Member of NCLT 10 years service in Indian Legal or Corporate Law Services, Or equivalent post in central or state government, at a pay scale of not less than a joint secretary to the Government of India, Or is or has been a Joint Secretary under the Central Staffing Scheme, Or has been a Chartered Accountant for at least 20 years, Or has been a Cost Accountant for at least 20 years, Or has been a Company Secretary for at least 20 years, Or 20 years experience in law, finance, management, banking etc. relating to management, conduct of affairs, revival, rehabilitation and winding up of companies.

Chairman of NCLAT

Chairman of NCLAT former judge of the Supreme Court or Chief Justice of a High Court. Judicial Member of NCLAT Judge of a High Court or Judicial Member of NCLT for 5 years. Technical Member of NCLAT 25 years of experience in law, finance, banking, management etc. relating to management, conduct of affairs, revival, rehabilitation and winding up of companies

The establishment of NCLT/NCLAT shall offer various opportunities to Practicing Company Secretaries as they have been authorized to appear before the Tribunal/ Appellate Tribunal. Areas opened up for company secretaries in practice under NCLT are stated hereunder: Compromise and Arrangement Sick Companies Winding up Reduction of Capital etc.

CONCLUSION
In view of the vast opportunities emerging with the establishment of National Company Law Tribunal, the Practicing Company Secretaries should standardize their competencies with the global benchmarks to provide value added services in assisting the Tribunal in dispensation of justice and speedier disposal of matters like merger, amalgamation, restructuring, revival and rehabilitation of sick companies and winding up of companies

WINDING UP
Winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

529A. OVERRIDING PREFERENTIAL PAYMENTS

(1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company (a) workmen's dues ; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of S. 529 pari passu with such dues,shall be paid in priority to all other debts. (2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.

AIR 2013- S.C. 2036

Bank of Maharashtra case The workmen of the company in winding up acquire the standing of secured creditors on and from the date of the winding up order and they become entitled to distribution of sale proceeds in the ratio as per section 529(3) of the company act.

Objective Types Questions

State which of the following statements are True or False. (i) A company can be wound up only if the members pass a special resolution to this effect. (ii) A petition to the court for winding up of the company can be filed only by the shareholders. (iii) The powers of Board of directors shall cease the appointment of liquidator. (iv) Voluntary winding up commences from the date of the passing of the resolution to that effect. (v) Reduction in membership is not a valid ground for compulsory winding up.

CHOOSE THE CORRECT ANSWER

(i) A petition to the NCLT for winding up of the company can be filed by (a) the members (b) by the creditors (c) by the Registrar of Companies (d) by all of the above

ii) Declaration of solvency is required in case of (a) Members voluntary winding up (b) Creditors voluntary winding up (c) Compulsory winding up (d) None of the above

(iii) Which of the following can not be a solid reason for compulsory winding up? (a) Default in holding statutory meeting (b) Failure to commence business within stipulated time Inability to pay debts (d) Suspension of business due to temporary reasons

(iv) A company is deemed to be unable to pay its debts if it fails to pay its creditor within three weeks of the demand a sum exceeding (a) Rs 500 (b) Rs 5000 (c) Rs 1000 (d) Rs 10,000

COMPROMISE, ARRANGEMENT
COMPROMISE is a term which implies the existence of a dispute such as relating to rights. It means settlement or adjustment of claims in dispute by mutual consent. ARRANGEMENT is reorganization of the share capital of a company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or by both these methods.

RECONSTRUCTION

RECONSTRUCTION when a company transfers the whole of its undertaking and property to a new company under an arrangement by which the share holders of the old company are entitled to receive some shares or other similar interest in the new company.

AMALGAMATION

AMALGAMATION when two or more companies combined into one company, the share holders in the amalgamating companies becoming substantially the shareholders in the amalgamated company.

REFERENCES:
Business and Corporate Laws by V.S. Datey, Taxmann Allied Services, Pvt. Ltd, New Delhi, 2003 Company Law and Practice by A.K. Majmudar, Dr. G.K. KAPOOR, Taxmann Allied Services, Pvt. Ltd, New Delhi, 2010. Company Law by Avtar Singh, Eastern Book Company, New Delhi, 2007.