Business Law 1

Companies Act 1956(Unit III)

By- Dharmesh Motwani

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What is a company?

An association of many persons who, contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss arising therefrom.

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Features of a Company

1. Incorporated Association

2. Separate legal Association

3. Limited Liability

4. Transferability of Shares

5. The company can sue & be sued

6. The company can purchase property & sell property in its own name.

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Types of Companies

Public Ltd. v/s Private Ltd.

Listed v/s Unlisted Company

Holding v/s Subsidiary Company

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Lifting of the corporate veil

Where the law disregards the corporate entity and pays regard instead to the individual members behind the legal façade, it is known as lifting the veil of corporate personality

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The corporate veil may be lifted in the following instances

To investigate the members of the company.

To investigate the company affairs where it is used for tax evasion.

To investigate the relation between holding company & subsidiary company.

Misdescription of name (L and R / L.R.)

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Formation of a Company

Promotion StagePre-Incorporation ContractsIncorporation Commencement

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Promotion Stage

Promotion may be defined as the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into business concerns for the purpose of making profits therefrom.

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Pre-incorporation Contracts

Pre – incorporation contracts are those contracts entered into between different parties on behalf of or for the benefit of the company prior to its incorporation.

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Incorporation (Documentation Process)

Type of Company & Availability of Name.Memorandum of Association & Articles of

AssociationAppointment letter of Director & ManagerA statement from subscribersA statement from CA or AdvocateIssuance of Certificate of Incorporation

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Commencement

Private Companies can commence the business after third stage

Public companies need certificate of commencement

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Memorandum of Association

The memorandum of association is a charter defining the objects & limiting the power of a company.

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Memorandum of Association

The Name ClauseThe Registered Office ClauseThe Object ClauseThe Capital ClauseThe Liability ClauseThe Association Clause or Subscription

Clause

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Articles of Association

The Articles of Association of a company are its bye-laws which govern the internal management of a company.

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Doctrine of Ultra vires (Beyond Power)

The director of company and company are prohibited from going beyond powers or MOA & AOA of company. In case they do, they can be prosecuted and the money can be taken back.

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Prospectus

A document containing detailed information about the company and an invitation to the public for subscribing to the share capital and debentures issued is called prospectus

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Contents of a Prospectus

General InformationCapital Structure of the companyTerms of the present issueCompany Projects

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Statement in lieu of Prospectus

When a public company chooses to raise its capital only from its directors, members or their relatives then it issues a statement in lieu of prospectus which contains the details of share capitals filed with the registrar.

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Shelf Prospectus

A shelf prospects means a prospects issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus.

Such prospectus is valid for one year.

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Information Memorandum

Information memorandum is issued prior to filing of shelf prospects to communicate the changes occurred between the first offer of securities and current offer. Like facts relating to new charges created, changes in the final position.

It is also used to determine the demand & Price of proposed securities.

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Red-herring Prospectus

Prospectus which doesn’t have complete particulars on the price of the securities offered and the quantum of securities offered.

It must be issued at least three days before the opening of the offer

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Process of filing shelf Prospectus

Information Memorandum

Red-herring Prospectus

Shelf Prospectus

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Various kinds of Meetings

Statutory Meeting

Annual General Meeting

Extra Ordinary General Meeting

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Statutory Meeting

For a public Ltd. Co. happens once in a life time, not required for Pvt. Ltd. Co.

Should be conducted within the one month of issuing of certificate of commencement.

A statutory report is prepared which give details about the shares allotted, the progress with respect to the contract of the company.

Failure of holding the statutory report can lead to the winding of the company.

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Annual General Meeting (AGM)

Held once in a year to adopt the final account, appoint new auditors, elect directors, declaration of dividend.

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Extra Ordinary General Meeting (EGM)

Any meeting of shareholders after the AGM would be an EGM.

Normally called between two AGMs, this meeting can be called by directors, can be called by court or if 10% of the shareholders make a requisition to the board to call for an EGM.

The board of directors must do so with in 45 days, failing which these 10% shareholders can call the EGM themselves

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Requisites of a valid meeting

Notice of the meetingAgenda of the meetingProxyQuorum of MeetingVotingMinutes of meeting

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Resolutions

Ordinary Resolutions

Special Resolutions

Passing of resolutions by postal ballot

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Shares

A share is a “Share” in the capital of the company.

Share is the interest of shareholder in the company; the right to receive dividend, attend meetings, vote at the meeting and share in the surplus assets of the company, if any, in the event of the company being wound up.

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Types of Shares

1. Preference Share

2. Equity Shares

Dividend

Ownership

Voting rights

Repayment of capital

Risk

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Share Capital

Share capital means the capital of the company expressed in terms of rupees divided into shares of fixed amount.

Preference Share CapitalEquity Share Capital

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Debentures

A document which either creates a debt or acknowledges it, is a debenture.

Fixed interest is paid in every situationHaving lower riskDon’t have voting rightsDebenture holders can not get bonus

debentures

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Winding Up

Winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members

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Process

A liquidator is appointed by the court / director and director gives the whole of the control / affairs of the company to the liquidator at the time of the winding up of the company.

After utilizing all the information's liquidator disposed the assets of the company and the funds are utilized to pay the creditors and the surplus is distributed among the shareholders. Once this is over the company is said to be dissolved.

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Modes of Winding Up

1. Winding up by Tribunal ( Court) or Compulsory winding up

2. Voluntary Winding Up

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Winding up by tribunal

1. If the company has, by special resolution, resolved that the company be wound up by the tribunal.

2. If default is made by company in delivering the statutory report to the registrar or in holding the statutory meeting.

3. If the company doesn’t commence the business within a year of its incorporation, or suspends its business for a whole year.

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Winding up by tribunal

4. If the number of members is reduced, in the case of public company below 7, and in the case of private company below 2.

5. If the company is unable to pay its debts.6. If the company has mad a default in filing with the

registrar its balance sheet and profit & loss account or annual return for any five consecutive financial year.

7. If the company has acted against the interest of the India

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Voluntary Winding Up

Voluntary winding up is one which is voluntarily decided by the members or creditors on their own level without intervention of tribunal

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Case Study ( Unit II)

Salomon v/s Salomon & Co. Ltd.