Make Chapter 0 Basics of Law Your Own Chapter 0: Notes

Chapter 0 Basics of Law

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© CA Darshan D. Khare’s WowClass.com

What is law ? And why shall I read the same?

A system of rules which a particular country or community recognizes for regulating the actions of its members and which it may enforce by the imposition of penalties.

1. The principles and regulations established in a community by some authority and applicable to its people whether in the form of legislation or customs and policies recognised and enforced by judicial decisions.

2. The written or positive rules or collection of rules prescribed under the authority of the state or the nation as by people in its constitution compared by law, statute law.

Why law is required then ?

Chapter 0: Concepts and Basics of Company Law

1. Man used to walk only

No Need

2.Started Using

3

Traffic Jam

Indian Motor Vehicle Act,

1988

Accident

Damage

Wastage

Basics of Law Chapter 0

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The law is not made for preparation sake. The situation demands the law. There is history behind every law. If you read the history thoroughly it will help you to understand the law better. Following are the examples of law which came as consequences from the history.

Bhopal Gas tragedy: Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985

It occurred on the night of 2–3 December 1984 at the Union Carbide

India Limited (UCIL) pesticide plant in Bhopal, Madhya Pradesh. Over

500,000 people were exposed to methyl isocyanate (MIC) gas and other

chemicals. The toxic substance made its way into and around the shanty

towns located near the plant.

Estimates vary on the death toll. The official immediate death toll was

2,259. The government of Madhya Pradesh confirmed a total of 3,787

deaths related to the gas release. A government affidavit in 2006 stated

that the leak caused 558,125 injuries, including 38,478 temporary partial

injuries and approximately 3,900 severely and permanently disabling

injuries.[4] Others estimate that 8,000 died within two weeks, and another

8,000 or more have since died from gas-related diseases.

Dowry in India: Dowry Prohibition Act, 1961 The Dowry Prohibition Act 1961, prohibits the request, payment or acceptance of a dowry, "as consideration for the marriage", where "dowry" is defined as a gift demanded or given as a precondition for a marriage. Gifts given without a precondition are not considered dowry, and are legal. Asking or giving of dowry can be punished by an

imprisonment of up to six months, or a fine of up to ₹5000 (US$74, £52 or A$100). It replaced several pieces of anti-dowry legislation that had been enacted by various Indian states. Murder and suicide under compulsion are addressed by India's criminal penal code.

Terrorism in India: The Prevention of Terrorism Act, 2002 The Prevention of Terrorism Act, 2002 (POTA) was an Act passed by the Parliament of India in 2002, with the objective of strengthening anti-terrorism operations. The Act was enacted due to several terrorist attacks that were being carried out in India and especially in response to the attack on the Parliament. The Act replaced the Prevention of Terrorism Ordinance (POTO) of 2001 and the Terrorist and Disruptive Activities (Prevention) Act (TADA) (1985–95), and was supported by the governing National Democratic Alliance. The Act was repealed in 2004 by the United Progressive Alliance coalition.

So what are the factors on which law is based?

Factor Law 1 Law 2 Law 3 Law 4

Whether Law? No No Yes Yes

Preference NA NA 2nd 1st

Not at the cost of others

https://en.wikipedia.org/wiki/Bhopal_disaster#cite_note-first3-4


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Then What is the process to prepare the law in India?

Central Law

State Law

Drafting

1st Reading

At both Houses

At both Houses

Introduction

Parliament

State Legislature

Declaration

in OZ

CG Official Gazette

State Official Gazette

Inputs form

Public

Public Comments

Public Comments

Discussion by

Committee

Standing Committee

Standing Committee

Discussion

and approval

at both houses

House of People

House of State Councils

State legislative assembly

State Legislative Council

Approval by

President/

Governor

Presidents till now

Governor of state

Basics of Law Chapter 0

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As we have read Contract Act, 1872 and we came to know that some laws are not applicable to the state of Jammu and Kashmir; why sir?

Take Note:


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Chapter 1 Preliminary and Basics of Company Law

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PM:What is the Meaning of Company? And why it is required?

“company” means a company incorporated under this Act or under any previous company

law;

Sec 2(67): “previous company law” means any of the laws specified below:-

(i) Acts relating to companies in force before the Indian Companies Act, 1866 (10 of

1866);

(ii) the Indian Companies Act, 1866 (10 of 1866);

(iii) the Indian Companies Act, 1882 (6 of 1882);

(iv) the Indian Companies Act, 1913 (7 of 1913);

(v) the Registration of Transferred Companies Ordinance, 1942 (Ord. 54 of 1942);

(vi) the Companies Act, 1956 (1 of 1956); and

(vii) any law corresponding to any of the aforesaid Acts or the Ordinances and in force—

(A) in the merged territories or in a Part B State (other than the State of Jammu and

Kashmir), or any part thereof, before the extension thereto of the Indian

Companies Act, 1913 (7 of 1913); or

(B) in the State of Jammu and Kashmir, or any part thereof, before the commencement

of the Jammu and Kashmir (Extension of Laws) Act, 1956 (62 of 1956), in so far

as banking, insurance and financial corporations are concerned, and before the

commencement of the Central Laws (Extension to Jammu and Kashmir) Act, 1968

(25 of1968), in so far as other corporations are concerned;

(viii) the Portuguese Commercial Code, in so far as it relates to sociedadesanonimas; and

the Registration of Companies (Sikkim) Act, 1961 (Sikkim Act 8 of 1961).

Justice Marshall

• A company is Artificial person. • It is invisible & Intangible. • It exists in Contemplation of law.

Justice James

• Company is an Association of Person united for Common Object.

Justice Lindley

• The company is association of person. It has the charactaristics stated below.

Chapter 1: Preliminary and Basics of Company Law

Definition of Company [Sec 2(20)]

Preliminary and Basics of Company Law Chapter 1


खुदबनीनही ींहु

बनायीगयीहु

मैनैसर्गिकनही ीं;

मैतोकृर्िमहु

मेराअपनावजूदहै,

अस्तित्वहै

मैजन्ोींजन्ोींतक;

युगो ींयुगो ींतकबसचलतीजाऊ

.....

पैसाहीसबकुछनही ींहोता

...

ऑटोग्राफप्लीज...... इने्वस्टकरोऔरभूलजाओ। मैमेरीप्रॉपटीनही ींदूींगी।

The company is not natural person like

human plant or animal. It is created by human. It is a creation for some specific

object. So it will run for achieving the object

and beyond for new objects.

As the company is created by

human,its not natural. Itsan

artificial entity which cannot be formed on its own. It has to be created. But creation

will be judicial i.e. legal under

any law in force in the

territory of any country.

Company have its own

identity,its own legal existence like any other

human. It is just that the

Company is intangible and exist only on

paper. As company is separate legal entity, it has right to enter

into contract on its own, it work in its own name.

Everything which is done in

the company will be known

by the name of the company.

Members, owners, promoters, BOD, stakeholders may come and go but

company will remain till eternity.

The company does not have life equal to its

promoters or members. Even after death of all, company can run for ages. The

company will only cease to exist when it

is dissolved.

The liability of the members of the

company is normally limited up the amount of the

share capital invested in the company. The

personal assets of the owners of the

company will not be liable for any

payment to creditor.

Human uses signature to

show the authentication of document

and to mention personal

identity. For company

signature means Seal. The

document is deemed to be

signed by company if the document bears the seal of the

company.

The ownership of the company is represented by the shares

of the company. So

for ease of transactions,

the shareholders can transfer the shares of the company

with its ownership &

it does not affect the

company in any way, it

only changes the

shareholding pattern.

The Company is combination of the

three pillars: Investor, Management,

Auditor. Investor invests the money which is used by

management to run the business and is checked by auditor whether money is

being properly used or not. Thus the

investors need not enter in to day to day

transaction of the company or

management of the company.

As company is separate legal

entity it has right to enter into

contract on its own. Thus

company can purchase or sale property on its

own. Do transaction on its

own. Its like company has its entire separate

range of assets or liabilities.

Characteristics of Company

Incorporated association

Artificial Judicial Person

Separate Legal Entity

Perpetual Succession

Limited Liability

Common Seal

Transfer of shares

Separation of Ownership from

Management

Separate Property


Make Your Own Notes

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Why Company it is required?

The situation can be understood when we compare the advantages of the company with the closest option to do business that is partnership.

Heading Partnership Firm Company Structure

Partnership

Prevailing Law

Partnership is prevailed by ‗The Indian Partnership Act, 1932‘ and various Rules

made there under

Companies are prevailed by ‗Companies Act, 2013‘

Registration Registration is optional Registration with ROC required.

Creation Created by Contract

Created by Law

Distinct entity

Not a separate legal entity from its partners.

Is a separate legal entity under the Companies Act, 2013.

Perpetual Succession

It does not have perpetual succession as this depends upon the will of partners.

It has perpetual succession and members may come and go.

Number of Members

Minimum 2 and Maximum 20 partners and in case of banks max 10 partners.

2 to 200 members in case of Private Company and Minimum 7 to ∞

members in case of Public Company.

Admission as partner /

member

A person can be admitted as a partner as per the partnership Agreement.

A person can become member by buying shares of a company.

Cessation as partner /

member

A person can cease to be a partner as per the agreement.

A member / shareholder can cease to be a member by selling his shares.

Ownership of Assets

Partners have joint ownership of all the assets belonging to partnership firm.

The company is independent of the members &has ownership of assets.

Liability of owners

Unlimited. Partners are severally and jointly liable for actions of other partners and the firm and liability extend to their

personal assets.

Generally limited to the amount required to be paid up on each share.

Dissolution By agreement, mutual consent, insolvency, certain contingencies, and by

court order.

Voluntary or by order of National Company Law Tribunal.

Share Certificate

The ownership of the partners in the firm is evidenced by Partnership Deed, if

any.

Share Certificates are proof of ownership of shares held by the

members in the Company.

Partners

Owners Management Employees

Company

Owners Management Employees

BOD

Employee


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Separate Legal Entity: Land Mark Case Laws

Facts of the Case:

Conversion of the Proprietorship in to Company: Salomon was carrying on the business of boot manufacturing as a sole proprietor. He transferred the business to the new company incorporated by him called Salomon & Co Ltd. Purchase Consideration:: Total Consideration Pound 39,000 Cash Paid Pound 9,000 Shares of Pound 1 each Pound 20,000 Secured Debentures to Salomon. Pound 10,000 Stake Holders of new Company: The 6 members of Salomon‘s family got 1 share each. Salomon is the managing director of the company normally known as one man company. Inability to Pay the debts by Company: In course of business company borrowed Pound 7000. After some time company ran into financial difficulties and went into liquidation. The Assets realized Pound 6000.

Contention Unsecured Creditors

The creditors contended that as Salomon is the whole and sole of the company, he cannot owe the money to himself as debenture holder. And the Salomon & Co Ltd is mere agent of Mr. Salomon.

Supporting:

The Salomon & Co Ltd has a separate legal entity other than members itself. It has its own rights & responsibilities. Therefore it cannot be regarded as the agent of the member.

Decision of the Court:

As the Salomon & Co Ltd is different from its members i.e. Salomon family, the debentures held by them shall be paid in priority to unsecured creditors.

Learning from case Law: Separate legal Entity

1. There can be a transfer of property from a member to the company & vice-versa. 2. A person can be a member, director, employee and creditor of the company at same time. 3. A company has rights and duties of its own.

A company is not an agent of members or directors.

Salomon Vs. Salomon & Co. Ltd.

99% Shareholder of Company&

Debenture Holder

Shares of Pound 1 each £ 20,000

Secured Debentures to Salomon

£ 10,000

In winding up of Salomon & Co asset Realised are only £ 6000/-

Other Creditors gave

loan of £ 7000/-

The contention of the creditors was that Salomon is 99% shareholder of company. So

company and Salomon are not different. So the asset realised of £ 6000 should only be paid to

creditors.


Make Your Own Notes

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Facts of case

a. The company was formed to manufacture aerial topdressing. b. Lee was a qualified pilot & held all the shares except 1 share &was appointed as governing

or chief director & Chief Pilot. c. Lee was killed while piloting company‘s aircraft and widow of Lee claimed compensation

under Workmen‘s Compensation Act. d. The company opposed the claim stating that the same person cannot be an employer and

an employee at the same time.

Question

Whether wife of the Lee can receive the compensation from the company?

Decision of Court

It was held that: there was a valid contract between the company and Lee of service as worker. Therefore contention of Mrs. Lee is right in law.

Facts of case

(a) The shareholder of the company used the typewriters of the company for his personal use. (b) He did not enter into any contract with the company for such use and he did not pay any

consideration to the company for the use of the same.

Question

Whether the shareholders of the company can use the property of the company for their own personal purpose?

Decision

Lee Vs Lee Air Farming Ltd.

Lee Air Farming Ltd.

Mr Lee

Lee met with accident while testing plane on

Duty & died.

Wife of Lee demanded compensation as per

workman compensation act from company.

Company contended that no compensation will be paid to Lee’s wife as the company & Lee are not

different & they are one & the same.

Gramophone & Typewriter Co. Vs Stanley.

Promoter and Shareholder

Misused the typewriters of the company without any contract with

company


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Property of the company is not the property of the shareholders, it is the property of the company. Therefore shareholders do not have any right on the property of the company during the entire life

of the company.

Facts of the case

a. The company indulged in agricultural business. b. As the income from the agricultural business is exempt from Income Tax, shareholders

contended that the dividend income from the company is also exempt from Income Tax.

Question

Whether company need to pay DDT if it is involved in the business, which is tax exempted?

Decision

The court held that dividend income received by a shareholder is not agricultural income and so dividend income is liable to be taxed.

Facts of the case

a. Macaura held all the shares of the Timber Company except 1. b. He insured the timber of the company in his own name. c. The timber is destroyed by fire. d. Macaura wants to claim the compensation for the timber destroyed from the company.

Question

Whether Macaura can claim the compensation from the insurance company for loss?

Decision

a. It was held that the insurance company is not liable to Macaura due to loss of Insurable Interest as the owner of the timber is company and the insurance is in the name of Macaura.

b. As the company is a separate legal entity, the timber should be insured in the name of the company.

Bacha F. GuzdarVs. Commissioner of Income Tax.

Income from agriculture business is

exempt from tax.

Company Distributed Dividend

Shareholders contended that the dividend is from

agricultural business income. So as income is exempt from direct tax, the shareholders

need not pay DDT also. (dividend distribution tax).

MacauraVs. Northern Assurance Co. Ltd.

2.

Huge timber stock

1. 99% shareholder

Macaura

3. Insured with

Company refused to give compensation to Macaura as well

as to the timber company.

5.

Stock burnt in Fire

Northern Assurance

Company

4. Insurance in personal name

of Macaura

5.

5.


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Lifting of Corporate Veil

Meaning A. The company has a separate legal entity from its members. This principle is called the ‗Veil of

Incorporation‘. B. All the directors and the members take the decision behind the veil. And it is considered as

decision of the company. C. This advantage of acting behind the veil is available to the members and directors or any other

person belonging from the inner management of the company, only if he is acting for the benefit of the company & its members in legitimate manner.

D. Therefore, where there is fraudulent intention to misuse the veil for benefits of their own or conducting illegal act, such person will not get benefit of acting behind veil. In such case the veil will be removed and person responsible for the fraud shall be penalized and will be held personally liable.

Crux

In short the person committing fraud or illegal activity or coercive activity inside the company shall be held personally liable for the acts done by setting aside the separate identity of the company.

Lifting of Corporate Veil: Land Mark Case Laws

Facts of the case

a. The assessee earned huge income from dividend & Interest from investments. b. He formed 4 private Companies and contributed his income as capital against shares of

company. c. He took back all the income contributed by him in company as capital by way of pretended

loan.

Question

Whether assessee is exempted from tax? Or he will be liable for the tax.

Decision

Protection of Revenue a. It was held that companies and the assessee are no separate legal entity. These are created

only for purpose of running from tax burden. b. As the company has done no business & is formed just for the purpose of converting

dividend income into loan and avoid tax.

DinshawManeckji Petit


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Facts of the case

a. The German company incorporated the company in London for selling its tyres. b. The German Company held entire share capital of London Company.

c. During the first world war, the Germen company commenced an action of recovery of trade form English Company.

Question Determining the Character of Company – Whether enemy or not?

Decision of Court It was held that the company was alien company & the payment of debt to it would amount to

trading with enemy. Therefore the company is not allowed to proceed with action.

Facts of case

Daimler Co. Ltd Vs. Continental Tyre& Rubber Co. (Great Britain) Ltd.

Germany

British

Jones Vs. Lipman

Lipman

Farmland

1. Owns

2. sale for £5250

Jones 3. Changes mind &

transfer to company

Newly formed company


Make Your Own Notes

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a. L agreed to sale a piece of land to J for Pound 5,250. b. He subsequently changes his mind and transfers the plot to company formed for this transfer

only. c. The company had L and Cleark of his Solicitor as member.

d. J brought an action against L & Company for specific performance of the contract.

Question Whether contention of the J for demand of the land is valid?

Decision of Court The court looked into reality and ignored the transfer and ordered the company to transfer the

land to J.

Facts of case a. Horne as an employee entered in an agreement that he shall not solicit the company‘s

customers or compete it for a certain period of time after leaving its employment. b. After cessation of his employment Horne formed a Company that carried on competing

business.

c. He allotted whole of the shares of the company to his wife & director of the company.

Question Whether such company can solicit the customers?

Decision of Court Horne is in fact controlling the company. Its formation was mere Cloak or Sham to break the agreement with plaintiff. The court issued the injunction against him. And his company was restrained from soliciting the Plaintiff‘s customer.

Facts of case

a. The transport company could not obtain the licenses in its own name. b. Hence it formed the subsidiary company and made the application for licenses in the name of

the subsidiary. c. Vehicles were to be transferred to subsidiary.

Guildford Motors Company Vs. Horne

1. Employee Restriction on

employee to solicit the customers of the

company

Horne: Employee 2. Resigned from company

3. Formed a new company

Customers

Customers

Started soliciting customers in name of

company

Merchandise Transport Ltd. Vs. British Transport Commission

Merchandise Transport

company

1. Applied for license

British Transport Commission

2. Formed Subsidiary

Subsidiary Transport

company

3. Applied for license


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Question

Whether such licenses can be allotted to subsidiary company?

Decision of Court

Held that parent and subsidiary company is one commercial unit. And application for the license was rejected.

Facts of case

a. The company attracted the provisions of the Payment of the Bonus Act, 1965 as the number of the employees exceeds the minimum employees required for the applicability of the act.

b. So company to avoid the payment of bonus created the subsidiary and accepted new employees under the same.

Question

Whether company need to pay bonus to its employees?

Decision of Court

Company avoiding legal obligation or welfare legislation Where the sole purpose of formation of a new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Corporate veil should be pierced to look at the real transaction.

Facts of case

Workman of Associated Rubber Industry Ltd. Vs. Associated Rubber Industry Ltd.

Associated Rubber

Industries Ltd.

Associated Rubber

Industries Ltd.

2. Formed Subsidiary to avoid applicability of POBA

1. The number of workers are increasing day by day.

Group of workers of

holding company

3. Appointed New workers under new subsidiary.

Group of workers of subsidiary company

Both the group of workers formed union

F.G. Films Ltd.

American film

Company

1. President

of Company

2. Holder of 100% shares

British film Company

2. Financed a film in name of British Film Co.

3. Film to be released in India


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a. An American company financed the production of the film in India in the name of a British Company.

b. The president of the American Company held the 90% of the capital of the British company. c. The film was refused to be registered as the British Film.

Question

Whether such decision of refusal is valid?

Decision of Court

The decision is considered as valid since the British Company acted as nominee of the American company.

Decision of Court

Determining the technical Competence The experience of the promoters could be considered as the experience of the company in the

technical field of the company.

Status of the Company Regarding Citizenship and Fundamental Rights:

Citizenship The citizenship in India is available for Individuals only. As the company is not an individual, it cannot be a citizen of India.

Fundamental Rights The fundament rights granted to a citizen of India by the constitution of India are not available to the company. However, the rights granted by the constitution of India to any other person are available for the company.

Mandatory Use of the Word ‘Limited’ or ‘Private Limited’

Name of the Company Every company shall use at the end of its name:

i. The word ‗Private Limited’ – If it is a private limited company. ii. The word ‗Limited’ – if it is a public limited company.

Prohibition on use of name No person shall use ‗Limited‘ or ‗Private Limited‘ at the end of the name or title under which he carries on business unless the following conditions are satisfied:

a. Association is company as defined u/s 3(1)(i) b. Such Company is company limited by shares or guarantee.

Punishment for improper use of "Limited" or "Private Limited":

If any person or persons trade or carry on business under any name or title, of which the word ―Limited‖ or the words ―Private Limited‖ or any contraction or imitation thereof is or are the last word or words, that person or each of those persons shall, unless duly incorporated with limited liability, or unless duly incorporated as a private company with limited liability.

Such offence will be punishable with fine of Rs. 500 to Rs. 2000 per day during use of such name.

New Horizons Ltd. Vs. Union of India.


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Kinds of Companies

According to Incorporation

A chartered company is an association formed by investors or shareholders for the purpose of trade, exploration, and colonization.

Statutory corporation are public enterprises brought into existence by a Special Act of the Parliament. The Act defines its powers and functions, rules and regulations governing its employees and its relationship with government departments.

A Company which is formed or registered under Companies Act, 2013 or any other previous company law is called as Registered or Incorporated Company.

Kinds of Companies


1. Chartered Company.

2. Statutory Company.

3. Registered Company.

According to Membership

1. Public Company.

2. Private Company.

3. One Person Company

According to Control

1. Holding Company.

2. Subsidiary Company.

According to Liability or No Share Capital Companies

1. Limited Company: By shares or Guarantee.

2. Unlimited Company.

According to Ownership

1. Government Company.

2. Foreign Company.

3. Company regulated by 3rd person or others.

Companies as per Object

1. Non-profit Company.

2. Financial Company.

3. Investment Company.

4. Producer Company.


Chartered Company. Statutory Company. Registered Company.


Make Your Own Notes

1.13


According to liability and shareholding

Heading Limited Company Unlimited Company

Section 2(21): Company Limited by Guarantee

2(22): Company Limited by Shares 2(92): Unlimited Company

Definition

―limited company‖ means a company having limit on the liability of its

members.

―unlimited company‖ means a company not having any limit on the liability of its

members.

Meaning

In case of limited company members are liable to pay only predefined fixed

amount during life of the company or during winding up irrespective of

liability of the company.

In case of unlimited company the members are liable to the entire amount

of liability existing at the time of the winding of the company from company‘s

assets as well as personal assets if necessary.

Practical concept

The limited company is more practical and useful concept than the unlimited

company.

The unlimited company is less practical and useful concept then the limited

company.

Types

The limited company have many subtypes. But the main three subtypes

are: a. Company limited by shares. b. Company limited by Guarantee. c. Company limited by shares as well

as Guarantee.

The unlimited company do not have any

subtypes.

Companies with Limited Liability

Heading Limited by Guarantee Limited by Shares

Section 2(21): Company Limited by Guarantee 2(22): Company Limited by Shares

Definition

―company limited by guarantee‖ means a company having the liability of its members limited by the memorandum

―company limited by shares‖ means a company having the liability of its members limited by the memorandum to

According to Liability or No Share Capital Companies

Limited Company Unlimited Company.

By shares By Guarantee

Public Company Private Company

One Person Company Other Private Companies


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to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

the amount, if any, unpaid on the shares respectively held by them.

Meaning

The company in which the investor does not invest any amount at the

incorporation or during the life of the company, but they invest the amount

max upto amount agreed at the time of winding up of the company depending

on the liability of the company is company limited by guarantee.

The Company in which the investor invests the funds at the incorporation

or/& during the life of the company or/& at the winding up against the instrument

indicating ownership and part in capital of the company is company limited by

shares.

Owners In these companies the members or owners act as guarantor.

In these companies the shares are held by the shareholders.

Practical Use

These companies are normally the non-profit making organisations.

These companies are normally profit making organisations.

Classes There can be different classes of members voting and not voting.

There can be different classes of members based on the shares.

Capital clause

Company limited by guarantee do not have capital clause.

Company limited by shares have capital clause in its MOA

Companies with Limited Liability

Private Companies 2(68) Means a company having a minimum paid-up sharecapital as may be prescribed, andwhich by its articles, — (i) restricts the right to transfer its shares; (ii) limits the number of its members to two hundred(except in case of One Person Company):

The section provides that where two or more persons hold one or more shares in acompany jointly, they shall, for the purposes of this section, be treated as a single member. However, following shall not be included in the number of members:

persons who are in the employment of the company; and

persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased.

(iii) prohibits any invitation to the public to subscribe for any securities of the company.

Public Company 2(71) The Companies Act, 2013, defines public company asa company which-

is not a private company

has a minimum paid up share capital as may be prescribed

Seven or more members are required to form the company. This section provides that a company which is subsidiary of a company(not being a privatecompany) shall be deemed to be public company even where such subsidiary companycontinues to be a private company in its articles.

One Person Company 2(62) ―One Person Company means a company which has only one person as amember.

Small Company 2(85) ―small company‖ means a company, other than a public company,— (i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may

be prescribed which shall not be more than Ten crore rupees; and (ii) turnover of which as per its last profit and loss accountfor the immediately preceding

financial yeardoes not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than Hundred crorerupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act;


0.15


Companies based on Memberships.

Headings Public Company Private Company One Person Company Small Company

Section 2(71) 2(68) 2(62) 2(85)

Meaning

A company in which any one can become member of the company

then it is public company.

A company in which only specific group of persons can hold the shares and not

any third person then it is called as private company.

A Company in which only one individual can become the member of

the company, it is OPC.

A company which is a private company but having capital and turnover below specified limits.

Membership

Incorporated by min 7 members. There is no limit on maximum

members.

Incorporated by min 2 members. Maximum members can be 200.

Incorporated by only 1 member. Maximum members can be 1.

Incorporated by 1 or 2 members. Maximum members can be 200.

Directors

Min BOD = 3 Max BOD = 15

Above 15 with GM-SR permissible.





Min BOD = 1/2 Max BOD = 15


Who can be member / Director

Any person can be member. But only Individual can be directors.Which

means, if the 1st BOD are from MOA then min 3 out of 7 members shall be

individuals.

Any person can be member. But only Individual can be directors. Which

means, if the 1st BOD are from MOA then min 2 out of all members shall be

individuals.

Only individual can be member and

director of OPC.

As it can be OPC or Private company the member can be any person in case of Private Co and Only Individual in case of OPC.

And Only Individual can be director.

Right to transfer share

The members of the public company have right to freely transfer their

shares.

Right of members to transferthe shares can be restrictedby article.

Choice to restrict the rightto transfer share isavailable to OPC as beforewell.

Depends on whether small company is private or OPC.

Max Limit on Capital

and Turnover

There is no max limit on capital and

the turnover of the company.

There is no max limit on capital and the

turnover of the company.

Max paid up share capital Rs. 50 lakh or

Max annual turnover Rs. 2 crore.

Max paid up share capital Rs. 50 lakh to Rs. 10 cr and (as per CG)

Max annual turnover Rs. 2 cr to Rs. 100 cr. (as per CG)

Compliances

Huge compliances nearly all the provisions of the Companies Act,

2013 are applicable to them.

Moderate compliances. Not all the provisions of the companies act apply

to them.

Very low requirement of compliances. These companies are exempt from

maximum provisions.

Depends on whether small company is private or OPC.

Public subscription

&Issue of Prospectus

Public Company is free to invite public for subscription i.e., a Public Company can issue a Prospectus.

A Private Company is prohibited from inviting the public for subscription of

its shares, i.e. a Private Company cannot issue Prospectus.

As there is only one member, the question of issuing prospectus does

not arise.

Prohibited.


1.16


Heading Listed Company Unlisted Company

Meaning Company whose shares are traded on an official stock exchange. It must adhere to the listing requirements of that exchange, which may include how many shares are listed and a minimum earnings level.

The company which is not listed on stock exchange and the shares cannot be traded.

But the company can issue shares to public and shares can be freely transferred

to 3rd parties.

Governing Law

1st : Security Exchange Board of India Act, 1992 2nd : Companies Act, 2013

Only Companies Act, 2013.

Share trading

Shares of these companies are freely tradable.

Shares of these companies are not freely tradable.

Paid up value

Shares of these companies are normally fully paid up.

Shares of these companies can be fully or partly paid up.

Face value Face value of shares of these companies is Rs. 10 or less.

These companies can have any face value for the shares of the company.

Who can issue shares?

√ √ √ √

How many members?

Min 7 Max ∞

Min 7 Max ∞

Min 2 Max 200

Min 1 Max 1

Who can issue prospectus?

√ √ X X

Who can make public issue?

√ √ X X

Who can issue debentures?

√ √ √ X

Who can accept public Deposit?

√ √ X X

Trading of shares allowed for:

√

X

X

X

Whether employees can be members?

√

√

X

X


Listed Company Unlisted Company

As per membership

Private Company O P C Small Company


Listed Company Unlisted Company

As per membership

Private Company O P C


Make Your Own Notes

1.17 1.17


Holding Company 2(46) ‗Holding and subsidiary‘ companies are relativeterms. A company is a holding company in relation to one or more other companies, means acompany of which such companies are subsidiary companies. Explanation.—For the purposes of this clause, the expression "company" includes any body corporate.

Subsidiary Company 2(87) Section 2(87) defines ―subsidiary company‖ in relation to any othercompany (that isto say the holding company), means a company in which the holding company - (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the totalvoting powereither at its own ortogether with one or more of its subsidiary companies. Provided that such class or classes of holding companies as may be prescribed shall nothave layers of subsidiaries beyond such numbers as may be prescribed.

Associate Company 2(6) Associate Company means a company in which other company has a significant influence, but which is not a subsidiary company of thecompany having such influence and includes a joint venture company. Explanation. -For the purpose of this clause

The term ―significant influence‖ means control of at least 20% of total voting power, or ofbusiness decisions under an agreement control of or participationin business decisions under an agreement;

the expression "joint venture" means a joint arrangement whereby the parties that have jointcontrol of the arrangement have rights to the net assets of the arrangement.

"total voting power", in relation to any matter, means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes;

Holding Company Subsidiary Company

As per Control

S1 Ltd Subsidiary Company (Direct)

S2 Ltd Subsidiary Company (Direct)

H Ltd

Holds more than 50% of total voting power of

Controls composition of BOD of

S1 Ltd holds 30% of total voting power of

S1 Ltd holds 30% of total voting power of

P Ltd Sub Subsidiary Company of H Ltd

Associate Company


1.18


Illustrations (A) A will be subsidiary of B, if B controls the composition of the Board of Directors of A, i.e., if B can, without the consent or approval of any other person, appoint or remove a majority of directors of A. B will be deemed to possess the power to appoint majority of persons as directors of A:

(i) when these persons cannot be appointed in that capacity without B‘s consent, or (ii) when their appointments follow necessarily from their appointment as directors, manager

or the holder of any office in B company, or (iii) when the holding company (i.e., B) itself or it‘s another subsidiary holds the directorship in

‗A‘ company [Section 2(46) and 2(87)]. (B) (i) A will be a subsidiary of B, if B is entitled to exercise control over more than half the total voting power of A, where A is an existing company in respect of which the holders of preference shares, issued before the commencement of the Companies (Amendment) Act, 1960 had the same voting rights in all respects as the holders of equity shares. (ii) Again, A will be subsidiary of B, if B holds more than half of total share capital, where A is any company other than the one specified under (i) above. In other words, B must hold more than 50% of the share capital on the basis of the nominal capital whatever may be the amount paid up on the shares [Sections 2(46) and(87)].

Bombers 1. Whether shares held in fiduciary capacity are to be counted for making company a

subsidiary? Ans: Under Companies Act, 2013 the following shares shall be considered for creating subsidiary.

(i) shares (i.e. voting power) held in fiduciary capacity (ii) shares held by virtue of provisions of any debentures and (iii) sharesheld as security by a company whose business includes money lending.

The 2013 Actdoes not exclude such shareholdings for reckoning whether one company controls50% or more voting powers in another company. 2. What will be the status of the private company which is subsidiary of the public company? Ans: The private company which is the subsidiary of the public company will also be considered as the public company under sec 2(71) of the companies act 2013. 3. What will be the status of the private company which is the subsidiary of the foreign

company? Ans: Under old companies act 1956 the private company which is the subsidiary of the foreign company was always considered as public company. But under new Companies Act, 2013 the private company which is the subsidiary of foreign company will be considered as private company only. 4. A subsidiary of the public company even if it is private it is always considered as public

company. Whether same applies to private company which is subsidiary of the listed company? Whether it will be considered as listed? Whether it require to comply listing requirements?

Ans: The subsidiary company of the listed company whether public or private is not considered as listed company. But few requirements are required to be complied by them. a. One Independent director of holding shall be director at subsidiary. b. Audit committee of the holding shall review FS of subsidiary. c. Minutes of the BM of subsidiary shall be placed at holding companies BM.

5. Whether companies having common directors will be considered as subsidiaries of each other?

Ans: The common director will not be considered for the holding subsidiary relation. What is required is ultimate control over BOD of other company. 6. Whether Subsidiary company can hold shares in holding company? Ans: The sec 19 of the Companies Act, 2013 (Discussed later in next chapter) prohibits the subsidiary company form holding the shares in the holding company except in following cases:

a. The subsidiary company hold shares in the holding company before the holding company becomes the holding company of such subsidiary.


Make Your Own Notes

1.19 1.19


b. The subsidiary company can hold the shares in the holding company as nominee of any member of the holding company who is deceased.

c. Where the subsidiary company holds the shares of the holding company as a trustee.

Government Company 2(45) means any company in which not less than 51% of the paid-up share capital is held by-

(i) the Central Government, or (ii) by any State Government or Governments, or (iii) partly by the Central Government and partly by one or more State

Governments, And the section includes a company which is a subsidiary company of such a Governmentcompany; [ Explanation.- For the purposes of this clause, the "paid up share capital" shall be construed as "total voting power", where shares with differential voting rights have been issued.]

Foreign Company 2(42) means any company or body corporate incorporated outside Indiawhich—

(i) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(ii) conducts any business activity in India in any other manner

Sec 379 From chapter foreign Company states that: Where not less than fifty per cent of the paid-up share capital, whether equity orpreference or partly equity and partly preference, of a foreign company is held by one ormore citizens of India or by one or more companies or bodies corporate incorporated inIndia, or by one or more citizens of India and one or more companies or bodiescorporate incorporated in India, whether singly or in aggregate, such company shallcomply with the provisions of this Chapter and such other provisions of this Act as maybe prescribed with regard to the business carried on by it in India as if it were acompany incorporated in India.

Place of Business

Foreign Foreign India India

50% of PC is held by India?

No Yes No Yes

According to Ownership

Government Company. Foreign Company Company regulated by 3rd Person

Government Company.

Min 51% of paid up share capital held by

CG SG & / or

Subsidiary of Government Company

or

Incorporation of Company

Incorporated In India Indian Companies Act, 2013 is

applicable

Incorporated in Foreign


1.20


Status of the Company

NA NA Foreign Company Deemed Indian Company

Laws Applicable?

No laws No laws Chapter Foreign Company

Indian Companies Act, 2013

Bombers 1. Whether Foreign LLP (Limited Liability Partnership) are also foreign Company? Ans: Under Companies Act, 2013 the foreign LLP are also considered under foreign company. 2. What if the foreign company have place of business in India but does not conduct the business from such place? Ans: The conduct of business is necessary for complying the definition of the foreign company. Mere having the POB in India does not qualify for the definition of the foreign company. 3. Whether electronic place of business is also considered as place of business? Ans: Yes a electronic portal to make business is also place of business in India. E.g. Amazon company selling goods in India is also qualified for being place of business in India. Rule 2(1)(h) of

the Companies (Specification of Definitions Details) Rules, 2014 provides that “electronic mode”, for the purposes of clause (42) of section 2 of the Act, means carrying out electronically based,

whether main server is installed in India or not, including, but not limited to—

(i) business to business and business to consumer transactions, data interchange and other digital supply transactions;

(ii) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;

(iii) financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;

(iv) online services such as telemarketing, telecommuting, telemedicine, education and information research; and

(v) all related data communication services. whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise.

Investment Company An investment company is a company whose main business isholding securities for investment purposes. Investment companies invest money on behalf of their clients who, in turn, share the profits and losses.

Non Profit Company / Charitable Company / Section 8 Company

Section 8 of the Companies Act, 2013 deals with the formation of companies which are formedto promote the charitable objects of commerce, art, science, sports, education, research,social welfare, religion, charity, protection of environment etc. Such company intends to applyits profit in promoting its objects and prohibiting the payment of any dividend to its members. Power of Central government to issue the license -This section allows the CentralGovernment to register such person or association of persons as a company with limitedliability without the addition of

Companies as per Object

Non Profit Company Charitable Company Section 8 Company

Financial Company Nidhi Company

Investment Company Producer Company Banking Company

Insurance Company


Make Your Own Notes

1.21 1.21


words ‗Limited‘ or ‗Private limited‘ to its name, by issuinglicence on such conditions as it deems fit. The registrar shall on application register suchperson or association of persons as a company under this

section.

Producer Company The Company by its main object in its MOA involved in primary production stated in sec 581B of Company Act, 1956 is a producer company.

Financial Company / Nidhi Company [Sec 406] Company which has been incorporated as a nidhi with the object ofcultivating the habit of thrift (cost cutting) and savings amongst its members, receivingdeposits from, and lending to, its members only, for their mutual benefits and which complieswith such rules as are prescribed by the Central Government for regulation of such class ofcompanies.[Section 406 of the Companies Act,2013]

Banking Company According to Sec. 5 of the Banking Regulation Act, 1949, abanking company means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawn by Cheque, Draft, Order, or otherwise.

Insurance Company Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured.


1.22


History of Company Law in India

Preamble of Companies Act, 2013 [Sec 1]

1. After application of this section the act will be called as ―The Companies Act, 2013‖ 2. It will be applicable to whole of India. 3. This section also states that the Act will come into force at first and the remaining sections will

be published in the form of Notification in official gazette from time to time as and when they are required.

4. This section further states that this is a general act and will be applicable to all the companies or body corporate incorporated in India or having its registered office in India. Only in case of some special companies they have to follow the special provisions applicable to them by special acts or rules along with this act, such cases are as follows: a. Insurance companies registered under The Insurance Act, 1938 (4 of 1938) or The Insurance

Regulatory and Development Authority Act, 1999 (41 of 1999) b. Banking Companies registered under The Banking Regulation Act, 1949 (10 of 1949) c. Companies engaged in the generation or supply of electricity formed under The Electricity

Act, 2003 (36 of 2003) d. Any other company formed under any special act prevailing in India. e. such body corporate, incorporated by any Act for the time being in force, as the Central

Government may, by notification, specify in this behalf, subject to such exceptions, modifications or adaptation, as may be specified in the notification.

In 1844

British created their own Companies act.

In 1850

India created own

Companies act.

In 1882

India Amended (Major)

Companies act.

Minor amendment many times

In 1908

British created new

Companies act.

In 1913

India created New Companies act.

Companies Act 1913 amended many times in 1914, 1915, 1920, 1926, 1930 &1936.

In 1947

India became

Independent Nation.

In 1956

Own Companies Act based on British law

In line with Cohen committee of England the new committee was

formed in India Bhabha Committee for creation of new

Company law.

Companies Act 1956 amended many times in

1985, 1988, 1990, 2000, 2002 & 2006.

In 2004

Formation of JJ Irani

committee

In 2006

British created

their own Companies act.

In 2008

1st bill of Companies

Act, 2013

In 2013

Last bill of 2012

formed Companies Act, 2013


Make Your Own Notes

1.23 1.23


Module Update

Section 21 states that- In this Act, unless the context otherwise requires, —

1. Sec 2(1) - Abridged prospectus means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations in this behalf;

2. Sec 2(2)- Accounting standards means the standards of accounting or any addendum there to for companies or class of companies referred to in section 133; Section 133 of the Act deals with the Central Government to Prescribe Accounting Standards. As per the section, the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. Section 133 is to be read with Rule 7 of the Companies (Accounts) Rules, 2014. Accordingly, (i) The standards of accounting as specified under the Companies Act, 1956 shall be deemed to

be the accounting standards until accounting standards are specified by the Central Government under section 133.

(ii) Till the National Financial Reporting Authority* is constituted under section 132 of the Act, the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India in consultation with and after examination of the recommendations made by the National Advisory Committee on Accounting Standards constituted under section 210A of the Companies Act, 1956.

Further, in exercise of the powers conferred by section 133, the Central Government in consultation with the National Advisory Committee on Accounting Standards prescribed that Companies (Accounting Standards) Rules, 2006 and the Companies (Indian Accounting Standards) Rules, 2015 may be followed. *The Central Government hereby appoints the 1st October 2018 as the date of constitution of National Financial Reporting Authority.

3. Sec 2(3) - Alter or Alteration includes the making of additions, omissions and substitutions;

4. Sec 2(5) - Articles means-

the articles of association of a company as originally framed, or

as altered from time to time, or

applied in pursuance of any previous company law, or

applied in pursuance of this Act;

5. Sec 2(6) - Associate company, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. Explanation. — For the purpose of this clause, —

a) the expression "significant influence" means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement;

b) the expression "joint venture" means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;

Vide Circular dated 25/06/2014 it has been clarified that the shares held by a company in another company in a fiduciary capacity (a fiduciary is a person who holds a legal or ethical relationship of trust with one of more parties (persons or group of persons. Typically, a fiduciary prudently takes care of money or other assets for another person) shall not be counted for the purpose of determining the relationship of associate company. Students may please note that the definition of Associate company as defined under AS 23/ Ind AS 28 (Accounting for Investments in Associates in Consolidated Financial Statements/ Investment in Associates and Joint Ventures) is slightly different from the above definition as given in the Companies Act, 2013.


1.24


6. Sec 2(7) - Auditing standards means the standards of auditing or any addendum thereto for companies or class of companies referred to in sub-section (10) of section 143. *Section 143 of the Companies Act, 2013 deals with the Powers and Duties of Auditors and Auditing Standards. Sub-section (10) to section 143 provides that the Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority: Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards.

7. Sec 2(8) - Authorised capital or Nominal capital means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company;

8. Sec 2(10) - Board of Directors or Board, in relation to a company, means the collective body of the directors of the company;

9. Sec 2(11) - Body corporate or Corporation includes a company incorporated outside India, but does not include— i. a co-operative society registered under any law relating to co-operative societies; and

ii. any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;

10. Sec 2(12) - Book and Paper and Book or Paper include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form;

11. Sec 2(13) - ―Books of account‖ includes records maintained in respect of— i. all sums of money received and expended by a company and matters in relation to which

the receipts and expenditure take place; ii. all sales and purchases of goods and services by the company;

iii. the assets and liabilities of the company; and iv. the items of cost as may be prescribed under section 148 in the case of a company which

belongs to any class of companies specified under that section; Section 148 of the Companies Act, 2013 authorises Central Government to Specify Audit of Items of Cost in Respect of Certain Companies.

12. Sec 2(14) - Branch office, in relation to a company, means any establishment described as such by the company;

13. Sec 2(15) - Called-up capital means such part of the capital, which has been called for payment;

14. Sec 2(16) - charge means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage;

15. Sec 2(17) - Chartered Accountant means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of section 6 of that Act;

16. Sec 2(18) - Chief Executive Officer (CEO) means an officer of a company, who has been designated as such by it;

17. Sec 2(19) - Chief Financial Officer (CFO) means a person appointed as the Chief Financial Officer of a company; These definitions of CEO & CFO should be read with section 2(51) and 203 which deals with the definition and appointment of Key Managerial Personnel (KMP) of the Companies Act, 2013.

18. Sec 2(26) - Contributory means a person liable to contribute towards the assets of the company in the event of its being wound up Explanation: For the purpose of this clause, it is hereby clarified that a person holding fully paid-up shares in a company shall be considered as a contributory.

19. Sec 2(27) - Control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner; It is an inclusive definition and relevant for the provisions relating to subsidiary and holding companies.

20. Sec 2(30) - Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not;


Make Your Own Notes

1.25 1.25


Provided that— a) the instruments referred to in Chapter III-D of the Reserve Bank of India

Act, 1934; and b) such other instrument, as may be prescribed by the Central Government in

consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture;

21. Sec 2(34) - Director means a director appointed to the Board of a company;

22. Sec 2(35) - Dividend includes any interim dividend;

23. Sec 2(36) - Document includes summons, notice, requisition, order, declaration, form and register, whether issued, sent or kept in pursuance of this Act or under any other law for the time being in force or otherwise, maintained on paper or in electronic form;

24. Sec 2(37) - Employees’ stock option means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price;

25. Sec 2(38) - Expert includes an engineer, a valuer, a Chartered Accountant, a Company Secretary, a Cost Accountant and any other person who has the power or authority to issue a certificate in pursuance of any law for the time being in force;

26. Sec 2(40) - Financial statement in relation to a company, includes— i. a balance sheet as at the end of the financial year;

ii. a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;

iii. cash flow statement for the financial year; iv. a statement of changes in equity, if applicable; and v. any explanatory note annexed to, or forming part of, any document referred to in sub-clause

(i) to sub-clause (iv): Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement; Exemption: For private companies, the proviso to section 2(40) shall be read as follows: ―Provided that the financial statement, with respect to one person company, small company, dormant company and private company (if such private company is a start-up) may not include the cash flow statement;

Explanation. - For the purposes of this Act, the term ―start-up‟ or ―start-up company‖ means a

private company incorporated under the Companies Act, 2013 or the Companies Act, 1956 and recognised as start-up in accordance with the notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.‖ The exceptions, modifications and adaptations shall be applicable to a private company which has not committed a default in filing its financial statements under section 137 of the said Act or annual return under section 92 of the said Act with the Registrar. Note: Students may note that ‗Profit and Loss Account‘ may also be referred as ‗Statement of Profit and Loss‘ under the Act at some places.

27. Sec 2(43) - Free reserves means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend: Provided that— i. any amount representing unrealised gains, notional gains or revaluation of assets, whether

shown as a reserve or otherwise, or ii. any change in carrying amount of an asset or of a liability recognized in equity, including

surplus in profit and loss account on measurement of the asset or the liability at fair value,shall not be treated as free reserves;


1.26


28. Sec 2(50) - Issued capital means such capital as the company issues from time to time for subscription;

29. Sec 2(52) - Listed company means a company which has any of its securities listed on any recognised stock exchange;

30. Sec 2(53) - Manager means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not;

31. Sec 2(54) - Managing Director means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. Explanation.— For the purposes of this clause, the power to do administrative acts of a routine nature when so authorised by the Board such as:

the power to affix the common seal of the company to any document or

to draw and endorse any cheque on the account of the company in any bank or

to draw and endorse any negotiable instrument or

to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within the substantial powers of management;

Explanation.- For any individual to be called as managing director, an individual shall first be a director duly appointed by the Company under the provisions of the Companies Act, 2013. This also implies that an individual who is not a director in the company cannot be appointed as Managing Director of that company.

32. Sec 2(55) - Member, in relation to a company, means— i. the subscriber to the memorandum of the company who shall be

deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;

ii. every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;

iii. every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;

33. Sec 2(56) - Memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act;

34. Sec 2(57) - Net worth means the aggregate value of the paid-up share capital and all reserves created out of the profits, securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation;

35. Sec 2(58) - Notification means a notification published in the Official Gazette and the expression ―notify‖ shall be construed accordingly;

36. Sec 2(59) - Officer includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act;

37. Sec 2(60) - Officer who is in default, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by


Make Your Own Notes

1.27 1.27


way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:— i. whole-time director (WTD);

ii. key managerial personnel (KMP); iii. where there is no key managerial personnel, such director or directors as specified by the

Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

iv. any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

v. any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

vi. every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

vii. in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer

38. Sec 2(63) - Ordinary or special resolution means an ordinary resolution, or as the case may be, special resolution referred to in section 114 (Ordinary and Special Resolution);

39. Sec 2(64) - Paid-up share capital or share capital paid-up means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called;

40. Sec 2(65) - Postal ballot means voting by post or through any electronic mode; This definition is related to section 110 to be read with Rule 22 of the Companies (Management and Administration) Rules, 2014 specifying the procedure to be followed for conducting of business through postal ballot and provides the list of items of business which should be transacted only by means of voting through a postal ballot.

41. Sec 2(66) - Prescribed means prescribed by rules made under this Act;

42. Sec 2(72) - "Public Financial Institution" means— i. the Life Insurance Corporation of India, established under section 3 of the Life

Insurance Corporation Act, 1956 (31 of 1956); ii. (the Infrastructure Development Finance Company Limited, referred to in clause

(vi) of sub-section (1) of section 4A of the Companies Act, 1956 (1 of 1956) so repealed under section 465 of this Act;

iii. specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002);

iv. institutions notified by the Central Government under sub-section (2) of section 4A of the Companies Act, 1956 (1 of 1956) so repealed under section 465 of this Act;

v. such other institution as may be notified by the Central Government in consultation with the Reserve Bank of India:

Provided that no institution shall be so notified unless— a) it has been established or constituted by or under any Central or State

Act *****14[other than this Act or the previous company law]; or b) not less than fifty-one per cent of the paid-up share capital is held or controlled by

the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments;

43. Sec 2(74) - Register of companies means the register of companies maintained by the Registrar on paper or in any electronic mode under this Act;


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44. Sec 2(75) - Registrar means a Registrar, an Additional Registrar, a Joint Registrar, a Deputy Registrar or an Assistant Registrar, having the duty of registering companies and discharging various functions under this Act;

45. Sec 2(76) - Related party, with reference to a company, means— i. a director or his relative;

ii. a key managerial personnel or his relative; iii. a firm, in which a director, manager or his relative is a partner; iv. a private company in which a director or manager or his relative is a member or director; v. a public company in which a director and manager is a director and holds along with his

relatives, more than two per cent of its paid-up share capital; vi. any body corporate whose Board of Directors, managing director or manager is

accustomed to act in accordance with the advice, directions or instructions of a director or manager;

vii. any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

viii. any body corporate which is- a) a holding, subsidiary or an associate company of such company; b) a subsidiary of a holding company to which it is also a subsidiary; or c) an investing company or the venturer of the company;

Explanation.- For the purpose of this clause, ―the investing company or the venturer of a company‖ means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.

Exemption - This Clause (viii) shall not apply with respect to section 188 (Related Party transactions) to a private company vide Notification

No. G.S.R. 464(E) dated 5th June, 2015. such other person as may be prescribed.

As per Rule 3 given in the Companies (Specification of Definitions Details) Rules, 2014, for the purposes of sub-clause (ix) of clause (76) of section 2 of the Act, a director (other than an independent director) or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.

46. Sec 2(77) - Relative, with reference to any person, means anyone who is related to another, if— i. they are members of a Hindu Undivided Family;

ii. they are husband and wife; or iii. one person is related to the other in such manner as may be prescribed; Rule 4 given in the

Companies (Specification of Definitions Details) Rules, 2014 provides of the List of Relatives in terms of Clause (77) of section 2. Accordingly, a person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:- a) Father: Provided that the term ―Father‖ includes step-father. b) Mother: Provided that the term ―Mother‖ includes the step-mother. c) Son: Provided that the term ―Son‖ includes the step-son. d) Son‘s wife. e) Daughter. f) Daughter‘s husband. g) Brother: Provided that the term ―Brother‖ includes the step-brother; h) Sister: Provided that the term ―Sister‖ includes the step-sister.

47. Sec 2(78) - Remuneration means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income Tax Act, 1961

48. Sec 2(84) - Share means a share in the share capital of a company and includes stock;

49. Sec 2(86) - Subscribed capital means such part of the capital which is for the time being subscribed by the members of a company.


Make Your Own Notes

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50. Sec 2(88) - Sweat equity shares means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called;

51. Sec 2(89) - Total voting power, in relation to any matter, means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes;

52. Sec 2(90) - Tribunal means the National Company Law Tribunal constituted under section 408;

53. Sec 2(91) - Turnover means the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year;

54. Sec 2(93) - Voting right means the right of a member of a company to vote in any meeting of the company or by means of postal ballot.


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Overall Concept for Company Stakeholders

Shareholders Board of Directors Lenders: Creditors

Equity Preference

Class Meeting Member’s Meeting

Class Meeting of similar class of

members

General Meeting Of all members

Statutory General Meeting: Held after 1 month but before 6 months from

incorporation

Annual General Meeting: Sec 96 1. 1CY – 1AGM 2. 1st AGM – max 15 months gap – 2nd AGM 3. FY End – max 6 months gap – AGM.

Earliest of Above

Extraordinary General Meeting: Sec 100

Can be held at any time during year with special notice.

Business to be conducted in GM

Ordinary Business 1.Appointment & Remuneration of BOD. 2. Appointment & Remuneration of Auditor. 3. Acceptance of Accounts. 4. Declaration of dividend.

Special Business Any business other

than ordinary business is special

business.

Resolution in General Meeting

Ordinary Resolution: Votes in Favour >

Vote against of present and voting

members.

Special Resolution: Votes in favour > 3 X


members.

Unanimous Resolution: All the votes of present

& voting members shall be in favour of

resolution.

Board Meeting 173-175

Ordinary Resolution: Votes in Favour >


Directors.

Unanimous Resolution: All the votes of present & voting directors shall

be in favour of resolution.

Creditors Meeting

Creditors Meeting are not normally conducted in the company they are conducted on very special cases like: 1. Winding Up of company. 2. Amalgamation or merger. 3. Reconstruction of company. 4. Reduction of capital. 5. change in Object clause of MOA. 6. Cases which may affect their debt.

Resolutions of creditors meeting are normally tailor made depending on provision to provision or case to case.

Documents

Make Chapter 0 Basics of Law Your Own Chapter 0: Notes