COMPANY LAW

INTRODUCTION

• Law relating to companies was governed by the Companies Act, 1956.

• The Parliament recently passed the Companies Act, 2013 which has brought about some changes in the earlier law.

• All the provisions of the new Act have not yet been notified (i.e. they are not yet in force) most sections of the old Act are still in force and the basic concepts of the law remain the same.

MEANING OF "COMPANY"

• Literal meaning: an association of persons formed for the purpose of carrying out a particular object

• Legal meaning: A company formed and registered under the Companies Act or under any law which was in force earlier

• Three main characteristics:– legal personality– separate legal entity with perpetual

succession– limited liability

CHARACTERISTICS OF A COMPANY

1. Legal Personality:– co. is an artificial person created by law– can sue and be sued in its own name– can hold and transfer property

2. Separate Legal Entity with Perpetual Succession:– is distinct from its members– assets of co. do not belong to members and assets of

members do not belong to co.– Perpetual succession: death/insolvency/transfer of

shares by a member will not end the co. The co. can be destroyed only by action of law.

3. Limited Liability:– means that the members will pay as much as they

have agreed to pay.

CHARACTERISTICS OF A COMPANY

4. Power to sue and to be sued5. Separate property from members6. Transferability of shares

LIFTING THE CORPORATE VEIL

• Ordinarily, law respects the corporate personality of a company and treats it separately from its members.

• However, there may be situations wherein the law 'lifts the corporate veil' that separates the personality of the comany and its members and hold the members, directors or certain persons personally liable for the acts done in the name of the company.

• Courts identify the co. with its members

LIFTING THE CORPORATE VEIL - INSTANCES:• To determine character: e.g. to see if it is an

'enemy'.• For benefit of revenue: if co. tries to evade tax• Fraud or improper conduct: e.g. whether it was

created to defraud creditors• Reduction of membership: if go below statutory

min. and cont. business for six months, every member aware of the fact will be personally liable

• Misdescription of name• Fraudulent conduct of business

TYPES OF COMPANIES

• On the basis of incorporation:– Statutory Cos.: created by a statute. e.g. LIC,

SBI– Registered Cos.: incorporated under the

Companies Act.• On the basis of liability:

– Limited Liability• limited by share• limited by guarantee

– Unlimited Liability: every member is liable for debts of co.

TYPES OF COMPANIES

• On the basis of no. of members– Private Companies

• minimum paid up capital is 1 lakh rupees• restricts the right to transfer the shares of the

members• number of members 2 - 200 (under 2013 Act,

earlier it was max. 50); except in case of one person company

• prohibits invitation to public to subscribe for shares– Public Companies

• company that is not a private co.• min. paid up capital of 5 lakh rupees• min. 7 members required

TYPES OF COMPANIES

• On the basis of control– Holding Co: has control over another– Subsidiary Co: over which control exercised

• Other Types:– Foreign Co: incorporated outside India but

has a place of business in India– Government Co: where min. 51% shares

controlled by Central Govt./State Govt./partly by Central and partly by State Govt.

– One Person Co.: concept introduced by the 2013 Act. It is a Co. with only one person as a member. Is considered to be a Pvt. Co.

FORMATION OF A COMPANY

• Under the 2013 Act, the following documents have to be submitted during registration to the Registrar of Companies:– Memorandum of Association– Articles of Association– declaration by an advocate/CA/CS that all conditions

under the Act are complied with – affidavit by subscibers of MoA and directors that they

have never been convicted of any offence– address for correspondence– particulars of all subscibers including identity proofs– details of first directors named in the AoANOTE: earlier, only MoA, AoA and copy of agreement

was required

MEMORANDUM (OF ASSOCIATION)

• It is the document which contains the rules regarding constitution and activites of the co.

• Co. has to work within the framework laid down by the memorandum.

• defines the extent and power of the co. • Acts of Co. beyond those defind by the MoA are

said to be ultra vires (means beyond powers), and thus they are void. [Doctrine of Ultra Vires]

• used for informing the public about the activites of the company

CONTENTS OF MOA

• Name of the company with suffix "limited" in case of a public limited co. and "pvt. ltd." in case of a pvt. limited co.

• the state in which registered office is situate• object of incorporation of co.• liability of members: whether limited or unlimited

and to what extent• details of share capital• in case of a one person co., the name of the

person who will become member in event of death of sole member

ARTICLES (OF ASSOCIATION)

• Regulation for management of the co. are prescribed by AoA

• Can be altered by the members at any time. But they may also prescribe the condition or procedure for making such changes.

• Contains the rules and regulations for internal management of the co. subject to the Companies Act.

• A company may adopt all or any of the regulations contained in the model articles given in the 2013 Act which is applicable to such company.

• is a public document like MoA

DIFFERENCE BETWEEN MOA AND AOA

MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION

Is charter of company and defines scope and activities Regulates internal management

Defines relation to outside world deals with rights of the members

supreme document of the company subordinate to memorandum

cannot be altered except in manner and extent provided in the Act can be altered through special resolution

PROSPECTUS (public offer)

• Public co. invites public to subscribe towards its share capital by issue of a prospectus

• Prospectus provides information about the financial background of the co., its activities, future programmes, nature of investment, risks etc.

• Definition: “prospectus” means any document described or issued as a prospectus and includes a red herring prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate;

SHARE CAPITAL

• Refers to the amount of capital raised by a company through issue of shares

• Features of share capital– can be raised only by companies limited by shares

and registered with share capital– can be raised by a company either at the time of its

formation for starting its operations or later on for further expansion

– share capital (except in case of redeemable preference shares), once raised, cannot be returned by the company to the shareholders as long as it continues to exist. It can be returned only at the time of the winding up of the company.

SHARES

• The term share has been defined as follows:"a 'share' is a share in the share capital of a

company and includes stock except where a distinction between stock and share is expressed or implied"

• Thus, a share is a fractional part or unit of the capital of a company

TYPES OF SHARES

• Preference Shares: carries preferential rights– in respect of dividends at a fixed rate,– in regard of payment of capital on winding up

• Equity Shares:– means a share which is not an equity share– the rate of dividend is not fixed

SHAREHOLDERS

• Also referred to as a 'member',• a shareholder is a person who holds the shares

of the company and whose name appears on the 'register of members' of the company.

• rights of the shareholders:– to receive notices of general meetings and to attend

and vote in such meetings– to receive dividends when declared– to transfer shares– inspect registers and records of the company– to share in assets of company on its dissolution

ISSUE OF SHARES

• TERMS OF ISSUE OF SHARES:• A limited company may issue the shares

on following different terms.– Issue of Shares for Consideration other than cash or

for cash or on capitalization of reserves.– Issue of Shares at par i.e. at face value or at nominal

value.– Issue of Shares at a Premium i.e. at more than face

value.– Issue of Shares at a Discount i.e. at less than the face

value.

ISSUE OF SHARES AT A PREMIUM

• When the shares are issued at a price higher than the nominal value of the shares then it is called as shares issued at a premium. The amount of premium is decided by the board of Directors as per the guide lines issued by SEBI. Such share premium collected by the company is credited to a separate A/c called as “Securities Premium A/c”. Although Securities Premium is a profit to the company, it is not a revenue profit, it is treated as capital profit, which can be utilized only for the following purposes– Issue of fully paid bonus shares to the existing shareholders.– Writing off the preliminary expenses of the company.– Writing off the expenses of issue or the commission paid or discount

allowed on any issue of shares / debentures.– Providing the premium payable on redemption of preference shares

or debentures. The company can utilize the security Premium for any other purpose only on obtaining the sanction of the court.

ISSUE OF SHARES AT A DISCOUNT

• The Companies Act, permits issue of shares at a discount subject to the following conditions:– The issue must be of a class of shares already issued.– Not less than 1 year has at the date of issue elapsed since

the date on which the company became entitled to commence business.

– The issue at a discount is authorized by a resolution passed by the company in the general meeting & sanctioned by the company law board.

– The maximum rate of discount must not exceed 10% or such rate as the company law board may permit.

– The shares to be issued at a discount must be issued within two months of the sanction by the company law board or within such extended time as the company law board may allow

BUY BACK OF SHARES

• Shares may be bought back by the company on account of one or more of the following reasons– i. To increase promoters holding– ii. Increase earning per share– iii. Rationalise the capital structure by writing off

capital not represented by available assets.– iv. Support share value– v. To thwart takeover bid– vi. To pay surplus cash not required by business

CONDITIONS FOR BUY BACK OF SHARES1. The buy-back is authorised by the Articles of association of

the Company;2. A special resolution has been passed in the general meeting

of the company authorising the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. Also, the shares for buy back should be free from lock in period/non transferability.The buy back can be made by a Board resolution If the quantity of buyback is or less than ten percent of the paid up capital and free reserves;

3. The buy-back is of less than twenty-five per cent of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year;

4. The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back;

CONDITIONS FOR BUY BACK OF SHARES5. There has been no default in any of the following

a. in repayment of deposit or interest payable thereon,b. redemption of debentures, or preference shares orc. payment of dividend, if declared, to all shareholders within the stipulated time of 30

days from the date of declaration of dividend ord. repayment of any term loan or interest payable thereon to any financial institution or

bank;6. There has been no default in complying with the provisions of filing

of Annual Return, Payment of Dividend, and form and contents of Annual Accounts;

7. All the shares or other specified securities for buy-back are fully paid-up;

8. The buy-back of the shares or other specified securities listed on any recognised stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and

9. The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed.

DEBENTURES

• Debenture means a document acknowledging a debt.

• It is an instrument issued by a company under seal, acknowledging a debt to some person, and containing an undertaking to repay the debt after a specified date or on a particular date or at the option of the company, and in the meantime, to pay interest at a fixed rate and at regular intervals.

• Thus, it is an instrument of credit or a certificate of loan.

COMPANY MEETINGS AND PROCEEDINGS• Types of meetings:

1.General meetings2.Board meetings3.Meetings of Creditors and Debenture holders

• proper authority to convene a meeting• proper notice of the meeting has to be given• quoram for the meeting:

– for general meetings: 2 members, in case of pvt co. and 5 members in case of pub. co. should be personally present

– for board meeting: (in absence of specific provisions in the AoA) 1/3rd of the total no. of directors or at least 2 directors, whichever is higher.

COMPANY MEETINGS AND PROCEEDINGS• RESOLUTIONS: When a motion is passed

in a meeting by voting, it becomes a resolution, i.e. it is recorded as a decision of the meeting.– Ordinary resolution: passes by simple majority

of voted of members present in person or by proxy at properly constituted and convened general meeting

– Special resolution: passed by at least 3/4th majority of votes of members present in person or proxy at a properly constituted and convened general meeting

COMPANY MEETINGS AND PROCEEDINGS

• MINUTES OF MEETINGS: refers to a note to preserve the memory of anything.

• They are the written records of the business transacted and decisions arrived at a meeting

• the Companies Act provieds that every company must keep minutes containg a fair and correct summary of the proceedings.

1. GENERAL MEETINGS

a.STATUTORY MEETING: First official general meeting of shareholders of pub. co. ltd. by shares or a public co. ltd. by guarantee and having share capital.

b.ANNUAL GENERAL MEETING: Meeting of share holders which is held every year. It is a mandatory provision. The first general meeting must take place within 18 months of incorporation of company, and subsequent meetings must be held every year withing 6 months of the closing of the financial year of the co. and within 15 months from the date of the previous AGM.

1. GENERAL MEETINGS

c. EXTRA-ORDINARY GENERAL MEETINGS: is convened for transacting some special or urgent business that may arise in between two annual general meetings. All business transacted at such meetings are called special business. It can be called any time by giving a 21 days notice.

2. 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 in board meetings consists of 1/3rd of the total strength of the directors or two directors, whichever is higher.

3. MEETING OF CREDITORS AND DEBENTURE HOLDERS

• These are generally held in case of winding up of the companies or in case of proposed scheme of arrangement.

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.

• Directors act as – agents of companies– officers in certain matters– trustes of company– managing partners

POWERS OF DIRECTORS

• The directors powers are normally set out in the Articles. The shareholders cannot control the way in which the Board of Directors act provided its actions are within the powers given to the Board.

• Power of the individual directors: unless the Act or the articles otherwise provide, the decisions of the Board are required to be the majority decisions only. Individual directors do not have any general powers. They shall have only such powers as are vested in them by the Memorandum and Articles.

POWERS OF DIRECTORS

• According to S. 179 of the 2013 Act, the Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:a) to make calls on shareholders in respect of money unpaid on their

shares;b) to authorise buy-back of securities under section 68;c) to issue securities, including debentures, whether in or outside India;d) to borrow monies;e) to invest the funds of the company;f) to grant loans or give guarantee or provide security in respect of

loans;g) to approve financial statement and the Board’s report;h) to diversify the business of the company;i) to approve amalgamation, merger or reconstruction;j) to take over a company or acquire a controlling or substantial stake

in another company;k) any other matter which may be prescribed:

WINDING UP OF A COMPANY

• Means dissolution of a company.• Modes of winding up:

– Compulsory winding up by the Court– Voluntary winding up

• by members• by creditors

– Winding up under the supervision of the Court

COMPULSORY WINDING UP

• Who may Petition for Winding up?– the company; or– any creditor or– any contributory or– the Registrar; or– any person authorised by the Central

Government in certain cases– by the Central government or State

Government in certain cases

COMPULSORY WINDING UP• GROUNDS FOR WINDING UP:

– When the company has, by a Special Resolution (3/4 majority shareholders) resolve that the company shall be wound up by the Tribunal.

– In case there is default in delivering the statutory report to the Registrar or in holding the statutory meeting.

– In case the company fails to commence its business within one year of its incorporation, or suspends its business for a whole year and there is no intention to carry on the business.

– If the number of members is reduced below the statutory minimum i.e. below seven in case of a public company and two in the case of a private company.

– If the company is unable to pay its debts.– If the court is of the opinion that it is just and equitable that the company

should be wound up. Court may inquire into the revival and rehabilitation of sick units. If its revival is unlikely, the court can order it’s winding up.

– If the company has made a default in filing with the Registrar its balance sheet and profit and loss account or annual return for any five consecutive financial year.

– if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.

MEMBER VOLUNTARY WINDING UP

• The board of Directors of the company shall convene a general body meeting and declare with an affidavit that the company has no debts and in case they exists then they are required to make a declaration that the debts shall paid off within 3 years of commencement of winding up proceeding.

• The board of directors shall thereafter appoint Liquidator who shall be given charge of the company affairs. He shall take all the steps required for winding the company affairs. The directors are required to inform about the appointment of the same to the Registrar of the companies and they shall cease to function in company affairs.

CREDITOR VOLUNTARY WINDING UP

• This winding up proceeding is initiated in case the company is unable to pay the debts and the board of directors are not in position to declare the exact liability of the company towards creditors.

• The members of the company are first required to propose winding up resolution and thereafter a notice of the meeting is required to be sent to all creditors and members of the company. The board of directors are required to make a list of creditors and send them notice of meeting.

• A resolution to winding up the company shall bepassed and the resolution to the effect at creditors' meeting shall be filed with Registrar within 10 days of its passing.

• Here, the Liquidator is usually appointed by the creditors themselves.

WINDING UP SUBJECT TO THE SUPERVISION OF COURT• A company has to pass a special or ordinary

resolution to wind up voluntarily• Any creditor or a contributory or liquidator or the

company may apply to court and the Court may make an order that the voluntary winding up shall continue subject to supervision of the Court

• It may arise for reasons like the resolution for winding up was obtained by fraud or

• when the liquidator is negligent etc• The effect of the Court order is that the winding

up will be as if it is compulsory winding up• The court has powers to appoint or remove any

liquidator or restrict any of his powers