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Amity Business School

MBA M&S/ HR, Semester 2 Legal Aspects of Business Ms. Shinu Vig

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The Companies Act, 1956

The Act defines the word Company as a company formed and registered under the Act.

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Characteristics of a Company:

1.
2. 3. 4. 5. 6. 7.

Independent corporate existence. (Salomon v. Salomon and Co. Ltd.) Perpetual succession. Common Seal Limited liability. Transferability of shares. Separate property Power to sue and to be sued.

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Classification of Companies: The two basic types of companies which may be registered under the Act are: Private Companies Public Companies

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Private Companies [Sec 3(1)(iii)]: Private company is a company which has a minimum paid-up capital of one lakh rupees and by its articles: i. Restricts the rights of its members to transfer shares. ii. Limits the number of its members to fifty iii. Prohibits any invitation to the public to subscribe to its shares and debentures iv. Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

A private company can be formed by merely two members.

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Public Companies [Sec 3(1)(iv)]: A Public company is a company which: i. Is not a private company ii. Has a minimum paid up capital of Rs.5 lakh iii. Is a private company which is a subsidiary of a public company A public company shall have atleast 7 members but there is no restriction with regard to the maximum number of persons. Listed Public Company: It means a public company which has any of its securities listed on a recognised stock exchange.

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MCA 21 Project: MCA21 project is designed to fully automate all processes related to the proactive enforcement and compliance of the legal requirements under the Companies Act, 1956. MCA portal is the single point of contact for all MCA related services, which can be easily accessed over the Internet by all users. The re-engineered electronic forms, also called e-Forms, are capable of helping people in the process of filing the information electronically. These e-forms are required to be signed digitally through Digital Signature Certificates (DSC).

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Formation of a Company: The process of formation of a company may be divided into three parts: 1. Promotion 2. Incorporation/ Registration 3. Floatation Promotion: It is the process of conceiving an idea and developing it into a project to be accomplished by the incorporation and floatation of a company. The persons who take the necessary steps to accomplish these objectives are called promoters.

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Steps involved in incorporation i. Acquire DIN and DSC ii. Ascertaining availability of name by filing e-form 1A iii. Preparation of Memorandum of Association (MOA) and Articles of Association (AOA). iv. Other documents to be filed with the ROC: e-form 18 Notice of the situation of the registered office of the company. e-form 32 Particulars of the directors, manager or secretary. e-form 1 - Statutory declaration v. Payment of Registration fees vi. Certificate of Incorporation

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Floatation: After a company has received its certificate of incorporation, it is ready for floatation i.e. it can go ahead with raising capital sufficient to commence business. In case of private companies capital is obtained from friends and relatives by private arrangement. In case of public companies capital can be raised in either of the following two waysi.By issuing Prospectus- If public is to be invited to subscribe to its capital. ii.By issuing Statement in lieu of prospectus- If capital is to be arranged privately.

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Certificate of Commencement of Business: A private company can commence business immediately after the certificate of incorporation has been obtained. In case of Public companies it is necessary to obtain a certificate of commencement of business. This certificate can be obtained only after floatation of the company.

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Memorandum of Association (MOA):
It is the charter of the company. It tells the objects of the company and the utmost possible scope of its operations beyond which its actions cannot go. If anything is done beyond this scope, that will be ultra vires (beyond powers of) the company and so void. It enables the shareholders, creditors and all those who deal with the company to know what its powers are and what are its range of activities. MOA must be subscribed by atleast 7 persons in case of a public company and by atleast 2 persons in case of a private company, who shall sign the memorandum in the presence of atleast one witness.

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Contents of Memorandum of Association (MOA):

MOA is divided into following clauses: i. Name Clause ii. Registered Office Clause iii. Objects Clause iv. Liability Clause v. Capital Clause vi. Association or Subscription Clause

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Articles of Association (AOA):

They contain the regulations relating to the internal management of the company. They define the duties, rights, powers and authority of the shareholders and the directors in their respective capacities and of the company.
They are subordinate to and are controlled by memorandum. Articles cannot supersede the objects as set out in the memorandum of association.

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Contents of Articles of Association (AOA): i. Share capital and its alteration ii. Rights of shareholders iii. Allotment of shares, calls and forfeiture of shares iv. Transfer and transmission of shares v. Exercise of borrowing powers; issue of debentures vi. General meetings, notice, quorum, proxy, poll vii. Number, appointment, duties of directors viii. Dividends-interim and final ix. Accounts and audit; keeping of books x. Winding up

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Prospectus: A prospectus means any document described or issued as prospectus and includes 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 debentures of a body corporate. The persons issuing the prospectus are bound to make true disclosures and not to omit material facts. A false statement or omission of facts gives rise to civil as well as criminal liability.

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Contents of a Prospectus:

1. 2. 3. 4. 5. 6. 7. 8.

General information Capital structure of the company. Terms of the present issue Particulars of the issue Company management & project Certain prescribed particulars Outstanding litigations Management perception of risk factors

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Initial Public Offer (IPO): When an unlisted company makes a fresh issue of securities for the first time to the public it is called IPO. This paves the way for listing and trading of securities on Stock Exchanges.

Further Public Offer (FPO): When an already listed company makes a fresh issue of securities to the public it is called Further Public Offer.

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Rights Issue: When an issue of securities is made by a company to its shareholders existing as on a particular date fixed by the company (i.e. record date), it is called a rights issue. The rights are offered in a particular ratio to the number of securities held as on the record date. Bonus issue: When a company makes an issue of securities to its existing shareholders as on a record date, without any consideration from them, it is called a bonus issue. The shares are issued out of the Companys free reserve or share premium account in a particular ratio to the number of securities held on a record date.

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Shares: A share means a share in the share capital of the company.

The share capital of a company is divided into a number of indivisible units of specified amount. Each of such unit is called a share.

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Share Capital:

The term share capital is used in following different senses: i. Nominal/ Authorised/ Registered Capital ii. Issued Capital iii. Subscribed Capital iv. Called-up Capital v. Paid-up capital

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Types of Shares: Preference share A preference share is one which carries: i. A preferential right in respect of dividends at a fixed rate, and ii. A preferential right in regard of repayment of capital on winding up. Equity share Equity share means a share which is not a preference share. The rate of dividend is not fixed.

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Shareholders: Shareholder/ member is a person who holds the shares of the company and whose name appears on the register of members of the company. Rights of shareholders: i. Right to receive notices of general meetings and to attend and vote at those meetings. ii. Right to receive dividends when declared iii. Right to transfer shares, subject to restrictions, if any. iv. Right to inspect registers and records of the company. v. Right to share in assets of company on its dissolution.

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Debentures:

A debenture means a document acknowledging a loan made to the company and providing for the payment of interest on the sum borrowed until the debenture is redeemed. It provides for the repayment of principal and interest at specified date/ or dates. It generally creates a charge on the assets of the company.

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Directors: A Director is a member of a Board appointed to direct the affairs of a company. Only an individual can be appointed as a director. Every public limited company shall have atleast 3 directors and other companies shall have atleast 2 directors. Appointment of Directors: Directors may be appointedi. By provision in the Articles ii. By shareholders in general meeting iii. By the Board of Directors iv. By Central Government v. By third parties

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General Powers vested in the Board of Directors: The Board of Directors is entitled to exercise all such powers and to do all such acts and things as the company is authorised to exercise and to do. In the exercise of its powers the Board is subjected to the provisions of the Companies Act, the memorandum and the articles and any regulations, not inconsistent with them, made by the company in general meeting. Minimum No. of Directors: Private Companies- 2 directors Public Companies- 3 directors

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Kinds of Company Meetings: I. Shareholders meetings: i. Statutory meeting ii. Annual General Meeting iii. Extraordinary General Meeting II. Board meetings III. Meetings of the Board Committees IV. Meetings of debenture holders V. Meetings of creditors for winding up.

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Statutory Meeting (Sec 165):

It is required to be held only by a public company. It must be held within a period of not less than 1 month and not more than 6 months from the date at which the company is entitled to commence business. Atleast 21 days before the day of meeting, a notice of the meeting is to be sent to every member stating it to be a Statutory meeting.

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Annual General Meeting (AGM) (Sec 166): It must be held by all companies in each calendar year and not more than 15 months shall elapse between two meetings. 21 days notice is required. The business to be transacted at such meeting may comprise of : a. Ordinary Business- It relates to following matters: i. Consideration of final accounts ii. Declaration of dividend iii. Appointment of directors in place of those retiring iv. Appointment of auditors b. Special Business

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Extra-ordinary General Meeting (EGM) (Sec 169):

All general meetings other than AGMs are called EGMs. EGM is convened for transacting some special or urgent business that may arise in between two AGMs. All business transacted at such meetings are called special business. EGM can be called any time by giving a 21 days notice.

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Matters relating to General Meetings: Notice: A notice of atleast 21 days must be given in writing to every member. Proxy: Every member of company entitled to attend and vote at a meeting has the right to appoint another person, whether a member or not, to attend and vote for him. Such a person is called proxy. The instrument appointing a proxy shall be lodged with company atleast 48 hrs before meeting. Quorum: Public companies- 5 members personally present. Private companies- 2 members personally present.

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Board Meetings: Must be held at least once in every 3 months. At least 4 such meetings must be held in every calendar year.

Quorum: One-third of the total strength of the directors or two directors, whichever is higher.
Chairman: The Chairman for the meetings of the Board of Directors may either be named in the Articles or he may be elected by the directors.

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Winding Up of Companies:

Winding up of companies is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called a 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 proportion to the contribution made by them to the company.

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Modes of Winding Up:

A. B.

C.

Compulsory Winding up by the Court Voluntary Winding up - Members Voluntary Winding up - Creditors Voluntary Winding up Voluntary Winding up under the supervision of the Court