Company Law Common Lecture for All

8/13/2019 Company Law Common Lecture for All

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COMPANY LAW

COMPANY ACT 1956


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CONTENTS

1. Corporate Personality2. Registration and Incorporation

3. Memorandum of Association

4. Articles of Association

5. Floating / Raising capital

6. Prospectus,8. Shares and Dividends,

9. Borrowing Powers and Debentures,

10. Commencement of Business, Meeting and Proceedings,

11. Company Management (BOD),

12. Accounts and Auditors13. Prevention of Oppression and Mismanagement

14. Amalgamation, Reconstruction and Arrangement

15.Winding up


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FORMATION OF COMPANY

Formation of company1. Promotion,

2. Agreement(MOA & AOA),

3. Floating/raising capital (Prospectus), Shares and

Dividends, Borrowing Powers and Debentures,

4. Commencement of Business, (Meeting and

Proceedings, Company Management (BOD)


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LORD JUSTICE LINDLEYS

DEFINITION

Anassociation of many persons who contributemoney or moneysworth to a common stock, andemploy it in some common trade or business(i.e., common purpose), and who share the profit

or loss arising there from. The common stock so contributed is denoted in

money and is the capital of the company.

The persons who contribute it, or to whom itbelongs, are members.

The proportion of capital to which each memberis entitled is his share. Shares are alwaystransferable although the right to transfer them isoften more or less restricted.


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CHARACTERISTIC OF

COMPANY Separate Legal Entity: A company is in law regarded as an entity separate from its

members. In other words, it has an independent corporateexistence. It can own property, make contracts and file suitsin its own name. Shareholders are not the joint owners of thecompany's property.

A shareholder cannot be held liable for the acts of thecompany. Similarly, members of the company are not itsagents.

E.g., Raj & Co, Ltd. is an entirely different person from Raj, even if he holdspractically all the shares in the company. Its property is not the property of Raj.Salmon vs. Salmon

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

a) Limited by shares,

b) Limited by Guarantee.


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Limited by shares means the liability ofmembers is limited to the unpaid value ofthe shares.

E.g., if the face value of a share in a company is Rs.

10 and a member has already paid Rs. 7 per share,he can be called upon to pay not more than Rs. 3 pershare during the life time of the company.

Limited by guarantee means the liabilityof members limited to such amount as

the members may undertake tocontribute to the assets of the company,in the event of its being wound up.


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Perpetual Succession: Perpetual succession meanscontinued existence

A company is a juristic person with a perpetualsuccession. It is created by a process of law and can beput an end to by process of law. Thedeath, insolvency or lunacy of members does not affectthe life of a company. It continues to exits even if all itsmembers die. Members may come and go but thecompany goes on until it is wound up.

Common Seal:

The common seal acts as the as the official signature of

the company. Being an artificial entity, a companycannot act and sign itself. Therefore, it actsthrough human beings. All the acts of the company areauthorised by its common seal.


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Transferability of Shares:The shares of a company are freely transferable and can be sold or purchased in

the share market. This is one of the reasons why people prefer to form companiesthan partnership. The capital of a company is divided into parts, called shares.These shares are transferable.

Separate Property: Separation of ownership and control:

Members have no right to participate directly in the day-to-day management of acompany. They elect their representatives, called directors, who manage thecompany's affairs on behalf of the members.

Thus, the ownership of a company is distributed among the shareholders whilemanagement is vested in the board of directors. The management of a companyis delegated and centralised.

Company is a legal person distinct from its members, it is capable of owning,enjoying and disposing of property in its own name.

Capacity to sue and be sued in its corporate name.On incorporation a companyacquires a separate and independent legalpersonality. As a legal person it cansue be sued in its own name. Finances- Company has privileges to raise moneyby way of shares, debentures etc.

Professional management------


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1. A company is a juristic person with aperpetual succession

a. As such it never dies

b. Its life depends on the life of its members

c. It is created by process of law and can be put to en end byprocess of law.

2. A company limited by sharesa. Has unlimited liability

b. Exists only in contemplation of law

c. Has a perpetual succession

d. Come to an end on the death of all the members

3. During the war all the members of a privatecompany, while in general meeting werekilled by a bomb. Does the company cease toexist because all the members died? Statereason.


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What is the corporate veil? When

it is pierce? The veil of corporation is the principle.

The court is bound by this principle. The

effect of this principle is that there is a

fictional veil (and not a wall) between thecompany and its members. Its become

necessary for the courts to break through

or lift the corporate veil or crack the shell

of corporate personality or look at thepersons behind the company who are

the real beneficiaries of the corporate

fiction.


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The various cases in which the

veil has been lifted Protection of revenue Prevention of fraud or improper conduct

Determination of character of company

whether it is enemy Where the company is

sham=hoax=fraud.

Company avoiding legal obligations

Company acting as agent or trustee ofthe shareholders

Avoidance of welfare legislation

protection of public policy, etc.


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CORPORATION OR BODY

CORPORATE Body corporate or corporation

includes a company incorporated

outside India but does not include-

a) a corporation sole,b) a registered co-operative society,

and

c) any other body corporate. (notbeing defined in company Act)


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A body which has been or isincorporated under some statute and

which has a perpetual succession, a

common seal and is a legal entityapart from the members constituting it,

will come within the definition of the

term body corporate.


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PRACTICAL PROBLEM

Practical Problems

1. Five persons are the only members

of a private company. All of them go

in a boat on a pleasure trip into theopen sea. The boat capsizes and all

the five die being drowned.

Does the private company cease toexist?


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PRACTICAL PROBLEM

2. A, B and C carrying on businessunder the name and style of A, B &C

Clothiers formed a private company.

They held all the shares in thecompany. They sold certain premises

to the new company and made a huge

profit which was assist to tax. The contention that the profit could not

be taxed. Is this contention valid?


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TYPES OF COMPANIES

Private company- Min 2 & Max 50members

Min paid up capital 1,00,000/-; Min Directors 2.

Min quorum of 2 members required for meetings.

It restricts the rights to transfer of its shares.

It is defined as a closed corporation.

Public company- Min 7 & Max. unlimited,Min 3 directors are required to run the business,

Min Paid up capital Rs 5,00,000/- is required toincorporate.

Min quorum of 5 persons is required to meeting.No restriction to transfer shares by its members.

These companies may be incorporatedas limited liability company or unlimitedliability companies.


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Private Company

Characteristics of Private company -

1. minimum paid up capital Rs. one

lakh.

2. Restriction of transferability ofshares

3. Restriction on number of members

50 but bill 2012 says 200. 4. Prohibition on issue of shares


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Advantages of Private

company 1. Subscription- to sign MOA requires 2 members 2. Exemption from prospectus-provisions- public

participation by issuing prospectus is prohibited.No need to file statement in lieu of prospectus

3. Directors2 directors may be in permanent

nature 4. Statutory meetingprivate company

exempted to file a report of meeting

5. further issue of capital

6. company on undisclosed principalneed notdisclose to public while signing an agreementwith third parties

7. Disclosure of interest


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Conversion of Private Company into

Public Company and vice-a-versa

1. Conversion by default

2. Conversion by operation of law

3. Conversion by choice

Vice a versa

a public company can be converted

by passing special resolution


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

Central Government, State Government, Partly Central and partly State GovernmentE.G. State Trading Corporation of India,

In R.K Chatterji vs. UOI (1969), 39, Comp, Cas, 329, it was held that the GovernmentCompany has distinct entity and is not an agent of the Government.

In State of Punjab vs. Raja Ram (1982) 52 Comp. case 104 , It was held that Foodcorporation of India is not a Government Department. It has separate legal entity and it cansue and be sued.

In Government Company the Auditor is appointed by CAG of India.Whether Government Company is an State Under Article 12 of the Constitution of India?YES

Foreign Company, any company incorporated outside India and has an established place of business in India is called a foreign company. Section591(1).

A company incorporated in India and having all foreign share holders shall be called Indian company.

The office of the registrar for the foreign companies is in New Delhi and the concerned registrar having jurisdiction over the principal place of business ofthe foreign companies.

In Pratap Sing Vs. Bank of America (1976) 46 Comp. Cas. 532 (Bom). The court has nojurisdiction over a company incorporated in foreign country except in respect of cause ofaction arising at place where its in India is located.

Bank Muscat SAOG, in Re (2004) 51 SCL 191(Kar). In respect of foreign companies, it isthe place where its principal place of business is situated which is deemed in law to be itsregistered office which decides the jurisdiction of court.


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TYPES OF COMPANIES

Holding and Subsidiary Company; A company which controls another company is known asthe holding company and the company so controlled is termed as subsidiary company

on the basis of control; holding company H and subsidiary company S.Company H controls the composition of Board of Directors of S.

Company H holds More than 50% of nominal value of equity shares of Subsidiary Company S.

Whether H and S both are separate legal entity? yesAn example will illustrate the point.Company B is a subsidiary of company A, and company C is a subsidiary of company B.Company C will be a subsidiary of company A.

A subsidiary company cannot hold shares or be a member of its holding company except as alegal representative of a deceased member of the holding company or any trustee.

Ownership

A holding company buys, absorbs or otherwise obtains a majority percentage of stock inanother company, which becomes known as its subsidiary. Typically, a holding company mustcontrol 50 percent or more of a companys stock before it's considered a subsidiary.

Management

A holding company directs the management and operations of the subsidiaries it owns and

maintains the authority to add or remove board members, directors and other keymanagement and personnel.

Financial Control

A subsidiary has little to no financial control over its operations. Even independently actingsubsidiaries are ultimately financially controlled by their holding company.

Legal Responsibility

A holding company may invest in subsidiaries in a variety of industries to diversify itsinvestment, lower its risk potential and, in some instances, take advantage of shared loss andtax consolidation


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TYPES OF COMPANIES

Producer company- Section 581(B)

OBJECTS:

production, harvesting, procurement,

grading, pooling, handling, marketing,selling, export, import, processing, etc.


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LLP limited liability partnership

Company with license under section

25

Company limited by guarantee

Unlimited company


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OBJECTIVE TYPE

QUESTION1. The reserve bank of India is an

example of aa. Registered company

b. Statutory company

c. Chartered company

2. A private company has minimum ofa. 7 members

b. 2 members but maximum no limit

c. 2 members and maximum 50 including past andpresent employees

d. 2 members and maximum 50 excluding past and

present employees, who become members while in

the employment of the company and continue to be

members.


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PRACTICAL PROBLEM

In a private limited company it isobserved that there are, in fact, 54members. On an enquiry, it isascertained that 6 of such membershave been employees of the companyin the recent past and that theyacquired their shares while they were

still employees of the company. Is it necessary to convert the company

into a public limited company?


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PRACTICAL PROBLEM

Two Hindu families carry on together abusiness as joint owners. The first

family consists of 3 brothers and their

respective sons, being 12 in number,one of the brothers son is a minor.

The second family consists of the

father, 4 major sons and 2 minor sons. Is the business illegal ?


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PRACTICAL PROBLEM

The paid up share capital of XYZ(private) Co. Ltd. is Rs 20 lakhs

consisting of 2,00,000. equity shares

of Rs. 10 each fully paid up. ABC(Private) Ltd. and its subsidiary DEF

(private) Ltd. are holding 60,000 and

50,000 shares respectively in XYZ(Private) Co. Ltd.

Whether XYZ (Pvt.) Co. Ltd. Is a

subsidiary of ABC (Private) Ltd.


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` OF COMPANY

1. Promotion 2. Registration 3. Floatation/raisingof capital 4. Commencement of business

Any 7 or more persons (2 or more in case ofprivate company) associated for lawfulpurpose may form an incorporated

company, with or without limited liability. They shall subscribe their names to a

memorandum of association and also complywith other formalities in respect ofregistration.

A company may form, may be-

A company limited by shares

A company limited by guarantee

An unlimited company.


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PROMOTION

Promotion means preliminary stepstaken for the purpose of registration

and floatation of the company. The

persons who assumes to task arecalled promoters.

In Twycross v. Grant 1877 2 CPD 469 : Promoter-

One who undertake to form a company with

reference to a given project, and to set it going, andwho takes the necessary steps to accomplish that

purpose.


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INCORPORATION OF COMPANY AND MATTERS

INCIDENTAL THERETO

A company may be formed for any lawfulpurpo se by

(a) seven or more persons, where thecompany to be formed is to be a publiccompany;

(b) two or more persons, where the companyto be formed is to be a private company; or

(c) one person, where the company to beformed is to be One Person Company that is

to say, a private company,- by subscribing their names or his name to a

memorandum and complying with therequirements of this Act in respect ofregistration:


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PROCEDURE OF

REGISTRATION

S. 33To obtain the registration of acompany an application has to be filed

with the registrar of companies. The

application must be accompanied bythe following documents-

1. Memorandum of association

2. Articles of Association, if necessary,3. The agreement, if any.


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Certificate of Incorporation

S. 34-The certificate of incorporationbrings the company into existence asa legal person. Upon its issue thecompany is born. It provides that fromthe date of incorporation such of thesubscribers of the memorandum andother persons, as may from time to

time be the members of the company,shall be body corporate, -- --capableforthwith of exercising all the functionsof the incorporated company.


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CERTIFICATE OF

INCORPORATION Re Peels Case (1867) L.R. 2 Ch. 674.

A certificate of incorporation given by

the registrar in respect of a company

is conclusive evidence that all therequirements of the Companies Act

have been complied with in respect of

registration.


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WHO IS PROMOTER?

A promoter is a person who does the necessary preliminary work incidental to theformation of a company.

the first persons who control a companys affairs are its promoters.

It is they who conceive the idea of forming the company, with reference to a givenobject and then to set it going.

It is they who take the necessary steps to incorporate the company, provide it withshare and loan capital and acquire the business or property which it is to manage.

When these things have been done, they hand over the control of the company toits directors.

Promoters perform the following in the formation of the corporation:

They seek business opportunities.

They raise capital.

They find investors and encourage them to enter into stock subscriptionagreements.

They enter into contracts on behalf of the corporation to be formed. They cause the articles of incorporation to be prepared, in which process they

select the state of incorporation, select a corporate name, or plan special charterprovisions to be included.


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Practical Problem

A computer stationary dealer, enteredinto a contract with the company forthe supply of computer stationary tothe company worth Rs. 2 lakhs. Thecompany went into liquidation before itcould obtain certificate ofcommencement of business.

Can A prove in the winding up for theprice of furniture supplied to thecompany. no


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MEMORANDUM OF

ASSOCIATION

Memorandum means the memorandum of associationof a company as originally framed or as altered fromtime to time in pursuance of any previous companieslaw or of the company Act 1956. s. 2(28).

It is a fundamental document.

It is the charter of the company and defines its raisondetre(reason for existence).

The memorandum of association is an extremelyimportant document in relation to the affairs ofthe company. It is a document which sets out theconstitution of the company and is really the foundation

on which the structure of the company is based. Itcontains the fundamental conditions upon which alonethe company is allowed to be incorporated.


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Palmers, - it is a document of great importance inrelation to the proposed company. It is primarydocument of the company and sometime it is calledcharter of the company.

Purpose of memorandum:

The purpose of the memorandum is two fold.

1. The intending share holder who contemplates theinvestment of his capital shall know within what field it isto be put at risk.

2. Anyone who shall deal with the company shall knowwithout reasonable doubt whether the contractual

relation into which he contemplates entering with thecompany is one relating to a matter within its corporateobjects.

At least seven persons in the case of public companyand at least two in the case of a private company mustsubscribe to the memorandum.


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CONTENTS OF

MEMORANDUM Name of the company i.e., Ltd., or Pvt. Ltd. The state in which the registered office of the

company is to be situate,

The objects of the company- (a) main object and(b) other objects.

Objects must not be illegal, immoral andopposed to public policy or in contravention ofact.

The states to whose territories the objectsextend.

Limited liabilityby share or by guarantee

Share capital. . In the case of a company havinga share capital, the amount of share capital withwhich the company proposes to be registered

and its division into shares of a fixed amount


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Ashbury Railway Carriage & Iron Co. v. Riche ,

decided in the House of Lords in 1875 (Law Rep. 7 H.

L. 653)

In this case the objects set out in the company's memorandum were "to make and sell, or lend on hire, railway carriages andwagons, and all kinds of railway plant, fittings, machinery and rolling stock; to carry on the business of mechanical engineersand general contractors; to purchase, lease, work and sell mines, minerals, land and buildings; to purchase and sell asmerchants, timber, coal, metals, or other materials, and to buy any such materials on commission or as agents."

The directors purchased a concession for making a railway in Belgium and contracted with Riche to construct the line.

Was here a valid contract?

The construction of a railway, as distinct from rolling stock, was ultra vires. Therefore Riche's action for breach of the allegedcontract failed as it was void ab initio.

This would have been the case even if every shareholder of the company had given approval - it was an act which thecompany had no lawful power to do.

The law has since changed through Section 108 of the Companies Act 1989, substituting a new section 35 of theCompanies Act 1985. Under that new section it remains the duty of the directors to observe any limitations on their powersflowing from the company's memorandum (section 35(3)) and a member of a company may bring proceedings to restrainthe doing of an act in excess of those powers (section 35(2)); but, by section 35(1): "The validity of an act done by acompany shall not be called into question on the ground of lack of capacity by reason of anything in the company'smemorandum."

Thus by applying the modern law to the Ashbury case, the directors committed a breach of duty by making the contract andmight have been restrained by action by a member; but once the contract was made its validity could not be questionedprovided that the making of the contract was "an act done by the company."

Yet it might be objected that it was not such an act because the directors had no power to make the contract. This objectionis met by section 35A(1):

"In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, orauthorise others to do so, shall be deemed to be free of any limitation under the company's constitution."


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ARTICLES OF

ASSOCIATION The Articles of Association or just Articles are

the rules, regulations and bye- laws for theinternal management of the affaires of acompany. It deals with the rights of the

member of the company inter-se. The articlesare framed for carrying out the aims andobject of the Memorandum of association.The articles of association of a company aresub -ordinate to and are controlled by thememorandum of association

Article mean the AOA of a company asoriginally framed or as altered from time totime in pursuance of this Act.


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CONTENTS OF ARTICLES

Share capital, rights of shareholders,share certificates, etc.

Lien on shares, calls on shares,

transmission of shares, forfeiture ofshares, conversion of shares into

stocks, share warrants,

Alteration of capital General meetings,

Voting rights of members


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Directors, managers, secretary, dividends and reserves,

Accounts audits and borrowing

powers, Capitalization of profits

Winding up.


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PROSPECTUS

S. 2(36) : Any document described orissued as a prospectus and include anynotice, circular, advertisement or otherdocument inviting deposits from the

public or inviting offers from the public forthe subscription or purchase of anyshares in, or debenture of, a bodycorporate.

Any document inviting deposits from thepublic or inviting offers from the public forthe subscription of shares or debenturesof a company is a prospectus.


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Subscription means taking or agreeingto take shares for cash. Shelf prospectus means a prospectus

issued by any financial institution or bank

for one or more issues of the securitiesor class of securities specified in thatprospectus. It is valid up to one year.

Issued means issued to the public.

A red-herring prospectus is a prospectuswhich does not have completeparticulars on the price of securitiesoffered and quantum of securitiesoffered.


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Under section 55 a prospectusrequired to be in writing, dated and

signed by its officers.

Registration of prospectus. aprospectus can be issued by or on

behalf of a company only when a copy

thereof has been delivered to theregistrar for registration. S. 56

S O


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STATEMENT IN LIEU OF

PRSOPECUSA private company cannot raise

money from public as prohibited by

law but it can access privately by

making a statement to the registrar.Such statement is known as

statementin lieu of prospectus.

Note: every prospectus must beissued within ninety days of its

registration.

CONTENT OF


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CONTENT OF

PROSPECTUSS. 56- (a) name and address of registeredoffice,(b) consent of the Central Government name of regional stock exchange

(d)provisions relating to punishment forfictitious applications, etc.

General Information Capital structure of the company

Terms of the present issue Particulars of Issue

Company management and project.


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contents

Every prospectus to be dated Every prospectus to be registered

Experts consent

Disclosure to be made Issuing house- the whole of the capital

of the company is allotted to anintermediary known as an issuinghouse.

N.B. the true nature of the companysventure should be disclosed.

LIABILITIES FOR


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LIABILITIES FORMISSTATEMENT IN

PROSPECTUS Civil liability - against the company,

director, promoters, other officers and

experts.

Criminal Liability- against thecompany, directors, promoters, other

officers.

RemediesRescission of contract,

claim for damages, compensation.


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CIVIL LIABILITY SECTION 62

where a prospectus invites persons to subscribe forshares in or debentures of a company, the followingpersons shall be liable to pay compensation to everyperson who subscribes for any shares or debentures onthe faith of the prospectus for any loss or damage he

may have sustained by reason of any untrue statementincluded therein, that is to say,(a) every person who is a directorof the company at the

time of the issue of the prospectus ;

(b) every person who has author ized himself to be namedand is named in the prospectus either as a director, or as

having agreed to become a director, either immediately orafter an interval of time ;

(c) every person who is a promo ter of the company ; and

(d) every person who has authorized the issue of theprospectus


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CRIMINAL LIABILITY

Section 63: Where a prospectusissued after the commencement of

this Act, includes any untrue

statement, every person whoauthorized the issue of the prospectus

shall be punishable1. With imprisonment for a term which may

extend to two years, or

2. with fine which may extend to fifty thousand

rupees, or

3. with both imprisonment and fine.

Derry v Peek (1889) 14 App Cas 337


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

Facts :Plaintiff received a prospectus regarding the incorporation of Defendantscompany, which highlighted that the company would have the right to use steamor mechanical power. After receiving the prospectus, Plaintiff bought shares of the

company, relying on the allegations of the prospectus, and believing that thecompany had the absolute right to use steam or mechanical power. The board oftrade refused to allow steam or mechanical power, and the company was woundup, unable to complete its work. Thereafter, Plaintiff brought suit againstDefendant for fraudulent misrepresentations. The trial judge dismissed the action,after coming to the conclusion that the directors knew that the use of steam ormechanical power was contingent on the board of trade and it was notunreasonable or deceitful for them to rely on the board. On appeal, the dismissalwas reversed, because the court found that the Defendants may have reasonably

believed the prospectus and, because they did not have reasonable grounds forwhat they wrote in the prospectus, they should be held liable for Plaintiffsreliance. Defendant appealed.

Issue: Whether it is deceit when a company forms a prospectus to solicitinvestors, which later proves to be wrong?

Held. Reversed.The House of Lords reversed the judgment of the court of appeals, and reinstated

the judgment of the lower court. The court found this to be an action of deceit,under which the establishment of misrepresentation alone is not enough to proveliability. In this case, Plaintiff relied on the prospectus, which may have beenmisrepresentation, but Defendants reasonably believed they could glean approvalof the board of trade and should not be held liable for their later failure to do so.


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Problem

A purchased from B 1000 shares of acompany on the basis of prospectus

containing wrong statements.

What remedies are available to Aagainst the company?

SHARE AND SHARE


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SHARE AND SHARE

CAPITAL

S. 2(46) "share" means share in the

share capital of a company, and

includes stock except where adistinction between stock and shares

is expressed or implied.

Share is not a negotiable instrument. It is an expression of proprietary

relationship between a shareholder

and the company.


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DEFINITION

A share is the interest of a shareholderin the company measured by a sum of

money, for the purposes of liability in

the first place, and of interest in thesecond, but also consisting of a series

of mutual covenants entered into by all

the shareholders in accordance with

law.


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Rights of Share holders. To attend general meeting and voteTypically shares carry one voteeach at general meetingsbut theremay be non-voting shares or shares with multiple votes. Someshares may carry the right to vote only in particular circumstanceswhere the company has different classes of shares.

To a share of the company's profitsThe distribution of profits is paid by means of a dividendof a certain

amount paid on each share. A dividend may be paid only if thecompany has made profits and to the extent that it decides todistribute them.

To a final distribution on winding up

If the company is wound up and all the creditors are paid theremaining assets are available for division among the members.This may be in two stages: (1) a return of capital; (2) distribution of

surplus capital. That the company be run lawfully

In most circumstances only the members of the company will havethe legal right to sue to make the company act lawfully, and eventhey may be restricted in their ability to sue under the common lawrule in Foss v Harbottle.
http://www.companylawclub.co.uk/topics/what_voting_rights_do_shares_have.shtmlhttp://www.companylawclub.co.uk/topics/general_meetings.shtmlhttp://www.companylawclub.co.uk/topics/classes_of_shares.shtmlhttp://www.companylawclub.co.uk/topics/dividends.shtmlhttp://www.companylawclub.co.uk/topics/dividends.shtmlhttp://www.companylawclub.co.uk/topics/classes_of_shares.shtmlhttp://www.companylawclub.co.uk/topics/general_meetings.shtmlhttp://www.companylawclub.co.uk/topics/what_voting_rights_do_shares_have.shtml


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SHARE CAPITAL

Authorized or nominal capital = this is thenominal value of the shares which acompany is authorized to issue by itsMOA.

Issued and subscribed capital = issuedcapital is the nominal value of theshares which are offered to the public forsubscription.

Sometimes, all the shares which areoffered to the public for subscription maynot be taken up. In such a case that part

of the issued capital which is taken up by


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Called up capital = this is that part of theissued capital which has been called upon the shares.

Paid up capital = this is that part of the

issued capital which has been paid up bythe shareholders or which is credited aspaid up on the shares.

Uncalled capital = this is the remainder

of the issued capital which has not beencalled. Reserve capital = this is that part of the

uncalled capital of a company which canbe called only in the events of its windingup.


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ILLUSTRATION

A company is registered with a capitalof Rs. 1,00,000 divided into 10,000shares of Rs. 10 each. Theauthorized capital of the company insuch a case is Rs. 1,00,000. Thecompany offers 8,000 shares to thepublic which takes them up. The

issued capital of the company is Rs.80,000. The calls up only Rs 6 pershare. In such a case the called upcapital is Rs. 48,000 and the uncalled

capital is Rs. 32,000.


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SHARES AND DIVIDENDS

A share is the interest of a shareholderin a company.

Share means share is the sharecapital of a company. It includes stockexcept where a distinction betweenstock and share is expressed orimplied. S. 2(46).

A share is evidenced by sharecertificate.

Each share to be distinguished by

appropriate number. S. 84


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TYPES OF SHARES

Preference shares, and equity shares. Section 85(1) preference shares, with

reference to any company limited by shares,are those which have two characteristics:

(a) they have a preferential right to be paiddividend during the life time of the company,and

(b)They have a preferential right to the return ofcapital when the company goes into

liquidation.

Section 85(2) equity shares, with reference toany company limited by shares, are thosewhich are not preference shares.


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SHARES VS. DEBENTURES

Ownership: A shareholder is an owner of the companywhereas a debenture holder is only a loan creditor. A share isa part of the owned capital whereas a debenture is a part ofborrowed capital.

Return:The return on shares is known as dividend while thereturn on debentures is called interest. The rate of return onshares may vary from year to year depending upon the profitsof the company but the rate of interest on debentures is pre-fixed. The payment of dividend is an appropriation out profits,whereas the payment of interest is a charge on profits and isto be paid even if there is no profit.

Repayment: Normally, the amount of shares is not returnedduring the life of the company, while the debentures are

issued for a specified period and the amount of debentures isreturned after that period. However, an amendment in 1998 toThe Companies Act, 1956 has permitted the companies tobuy back its own shares from the market, particularly, whenthe price of its share in the market is lower than the bookvalue.


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voting rights: Shareholders enjoy voting rightswhereas debenture-holders do not normally enjoy anyvoting right.

Issue on Discount: Both shares and debentures canbe issued at a discount. However, shares can be issuedat discount in accordance with the provisions of Section

79 of The Companies Act, 1956 which stipulates thatthe rate of discount must not exceed 10% of the facevalue.

Security : Shares are not secured by any chargewhereas the debentures are generally secured andcarry a fixed or floating charge over the assets of the

company. Convertibility: Shares cannot be converted into

debentures whereas debentures can be converted intoshares if the terms of issue so provide, and in that casethese are known as convertible debentures


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DIVIDENDS

One of the main objects of commercialenterprises is to earn profits which are

distributed among shareholders by

way of dividend. Dividend shall not be paid out of

capital.

Dividend can be paid only out ofprofits.


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DEBENTURE

Debenture is a written instrumentacknowledging a debt under the

common seal of the company. It

contains a contract for repayment ofprincipal after a specified period or at

intervals or at the option of the

company and for payment of interest

at a fixed rate payable usually either

half-yearly or yearly on fixed dates.

Raising of shares/ issue of


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Raising of shares/ issue of

shares Companies limited by shares have to

issue shares to raise the necessarycapital for their operations. Issue ofshare may be made by three ways-

By private placement of shares By allotting entire shares to an Issue

House, which in turn, offers the sharesfor sale to the public.

By inviting the public to subscribe forshares in the company through aprospectus.


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Problem

X is a share holder of a companyholding 100 shares. X dies leaving Y

as his legal representative. Y is not a

member of the company. Y transfersall 100 shares of the deceased

members to Z.

Is the transfer valid? Discuss.


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Membership

S.41 (1) The subscribers of the memorandum ofa company shall be deemed to have agreed tobecome members of the company, and on itsregistration, shall be entered as members in its

register of members. (2) Every other person who agrees in writing to

become a member of a company and whosename is entered in its register of members, shallbe a member of the company.

(3) Every person holding equity share capital ofcompany and whose name is entered asbeneficial owner in the records of the depositoryshall be deemed to be a member of theconcerned company.


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The members or shareholders of acompany are the persons whocollectively constitute the company as acorporate entity.

A registered shareholder is a memberbut a registered member may not be ashareholder.

A legal representative is not a memberuntil he applies for registration.

A person can be a holder of shares w/obeing a member.


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Who can be a member

A minor can not be member.

An insolvent can be a member.

A Partner can be member.

A Foreigner can be member.


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How to become a member

1. membership by subscription 2. membership by application and

registration

a) by application and allotmentb) by transfer

c) by succession

d) by agreement to be in writing.

3. Membership by beneficial ownership

4. Membership by qualification shares.

MEETINGS AND


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MEETINGS AND

PROCEDURE

There are various types of meetings

Meetings of share holders

Meetings of creditors and debentureholders

Meetings of directors

MEETINGS OF SHARE


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MEETINGS OF SHARE

HOLDERS

These Meetings may be1. General Meeting which include-

(a) Statutory Meeting

(b) Annual General Meeting

(c) Extra ordinary Meetings

II. Class Meetings of Shareholders of

different classes of shares where a

company has more than one class ofshares.

REQUISTIE OF A VALID


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REQUISTIE OF A VALID

MEETING

The meeting must be duly convenedby a proper authority-

BOD/shareholders/ NCLT.

A proper notice must be served in theprescribed manner-Service of notice.

A quorum must be present

A chairman must be preside Minutes of the proceedings must be

kept


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FORM OF PROXY

(Under Schedule IX to the Companies Act, 1956)

NAME OF THE COMPANY

I,...............................s/o.............................r/o.............................being the member

of the aforesaid company do hereby appoint

Shri......................................................... s/o..............................

r/o...........................................or failing him Shri.................

s/o..............................r/o.........................................as my proxy to vote for and on

behalf of me at the annual general meeting/general meeting dated...........of the

Company convened and to be held on........................ and at any adjournment

thereof.

Date................

Sd/- .................

Member


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RESOLUTIONS

The question come for considerationat the general meeting of a companyare presented in the form of motions.If the motion is carried by discussion

and put to vote by show hands, itbecomes a resolution. There are threekinds of resolutions-

Ordinary resolutions

Special resolutions

Resolutions requiring special notice

C O S


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DIRECTORS

A Director is a person having controlover the direction, conduct,

management or superintendence of

the affairs of the company. Function isevery thing, name matters nothing.

The directors are the brain of the

company.A company in the eyes of law is an

artificial person.

MAXIMUM AND MINIMUM


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MAXIMUM AND MINIMUM

DIRECTORS

Every public company must have 3directors. Maximum depends upon AOA.

Yet they should not increase more than

12.

A private company or deemed public

company should have minimum 2

directors.

No person shall hold office at the sametime as director in more than 15

companies. Earlier the limit was 20

companies.

DISQUALIFICATIONS OF


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DISQUALIFICATIONS OF

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

(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment fornot less to six months, and a period of five years has not elapsed from the date of expiry of the sentence;

(e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months

have elapsed from the last day fixed for the payment of the call; or

(f) an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force,

unless the leave of the Court has been obtained for his appointment in pursuance of that section.

[(g) such person is already a director of a public company which,-

(A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first

date of April, 1999; or

(B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on done date or pay dividend and such

failure continues for one year or more :

Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years

from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-

clause (a) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (b).]

APPOINTMENT OF


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APPOINTMENT OF

DIRECTORS

First directorby the Article of aCompany

Appointment of directors by the

company- by share holders in GeneralMeeting

Appointment of Directors by Directors

Appointment of Directors by Third Party

Appointment by Proportional

Representation

Appointment of Directors by the Central

Government

POSITION OF DIRECTORS


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POSITION OF DIRECTORS

Directors as Agents Directors as Employees

Directors as Officers

Directors as Trustees Directors are in fiduciary relationship

POWERS OF DIRECTORS


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POWERS OF DIRECTORS

To make calls on share holders To authorize the buy-back of shares

To issue debentures

To borrow money otherwise than ondebenture

To invest the funds of the company

To make loans

To fill vacancies in the board, etc.

DUTIES OF DIRECTORS


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DUTIES OF DIRECTORS

Fiduciary dutiesDirectors must exercise their powers honestly

and bona-fide for the benefits of the company

Duties of care, skill and diligence

Directors should carry out their duties with

reasonable care and exercise such

degree of skill and diligence as a prudent

person.


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1. To file return of allotment2. Not to issue irredeemable preferenceshare/shares, redeemable after 20 years

3. To disclose interest as fiduciary capacity

4. Duty to attend board meetings

5. A directors duties also includes thefollowing:

To convene Statutory, (AGM) and also (EGM);To prepare and place at the AGM, along with thebalance sheet and, profit and loss account, a report

on the company's affairs, including the report of theBoard of Directors;

To authenticate and approve annual financialstatement;To appoint first auditor of the company;To appoint cost auditor of the company;To make a declaration of solvency in the case of a

Members' voluntary winding up;

DUTIES OF DIRECTORS


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DUTIES OF DIRECTORS

(I) Subject to the provisions of this Act, a director of a company shall act in

accordance with the companys articles.(2) A director of a company shall act in good faith in order to promote the objects of

the company for the benefit of its members as a whole, and in the best interest ofthe company.

(3) A director of a company shall exercise his duties with due and reasonable care,skill and diligence.

(4) A director of a company shall not involve in a situation in which he may have adirect or indirect interest that conflicts, or possibly may conflict, with the interest ofthe company.

(5) A director of a company shall not achieve or attempt to achieve any undue gain oradvantage either to himself or to his relatives, partners, or associates.

(6) A director of a company shall not assign his office and any assignment so madeshall be void.

(7) Any director who contravenes the provisions of this section shall be punishablewith fine which shall not be less one lakh rupees but which may extend to five lakh

rupees:Provided that if he is found guilty of making any undue gain either to himself or to his

relatives, partners or associates he shall also be liable to pay an amount equal tothat gain to the company.

LIABILITIES OF DIRECTORS


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LIABILITIES OF DIRECTORS

1. Liability to third partiesprospectus does not contain particulars

2. Liability to the company(a) from ultra vires acts

(b) from negligence(c) from breach of trust

(d) misfeasance- willful misconduct

(e) breach of fiduciary duty

3. Liability for breach of statutory duties-a. to maintain proper account,

b. filing of returns orc. observance of statutory formalities, etc

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

REVISION


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REVISION

1. State whether the followingstatements are True or False

a. There is no retirement age of directors of the

company.

b. A company may have more than one managingdirector but it cannot have more than one

manager.

c. First directors are appointed by promoters of the

company.

d. Only one third of the total number of directorscan be non-rotational directors.

e. Additional director merely fills a temporary

vacancy in the office of the director.


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2. Choose the correct answer.a. Who among the following persons cannot be

appointed as director of any company?

b. An un-discharged insolvent

c. A person found by a competent court to be of

unsound mind

d. A person who has been convicted by a court of an

offence involving moral turpitude and sentenced in

respect thereof to imprisonment for not less than six

months, and a period of five years has not elapsed

from the date of the expiry of the sentence.

e. All the above.


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3. The board of directors cannotappoint

a. Additional director

b. Casual director

c. Alternate director

d. Nominee director

4. Who among the following is not acompetent authority to remove a

director from his office?a. Shareholdersb. Managing directors

c. Central Government

d. NCLT (Tribunal)


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5. Which of the following powers cannotbe exercised without the consent of

shareholders in general meeting?a. The powers to make calls on shareholders

b. The power to make loans

c. The power to buy-back its shares

d. The power to borrow monies exceeding the

aggregate of the paid up capital of the company

and its free reserves


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

a. Duty of good faith

b. Duty of care

c. Duty to attend board meetingsd. Duty not to delegate

Practical problem


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Practical problem

M/s XYZ Ltd. With a paid up capital of Rs. 5crores has nine directors on its board and asper its articles, the quorum for the boardmeeting is 3. A meeting of the board wascalled to consider a contract relating to

purchase of raw material from anothercompany ABC (p)Ltd. , in which A&B, thedirector of XYZ Ltd. , are also major shareholders. In the board meeting of XYZ Ltd. 3directors including A & B attended. The

matter was discussed and the three directorvoted for the contract.

ABC Ltd. Wants to enforce the contract. Will itbe succeed? Discuss.

MANAGING DIRECTORS AND


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OTHER OFFICERS

The directors as the representatives ofthe shareholders of a company areappointed toDirectmanage- andcontrol the affairsof the company. They may manage theaffairs of the company By themselves, or

By means of committee, or

By appointing departmental executives, or

By appointing agents under Power ofAttorney, or

In such other nature as the company affairsmay requires.


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APPOINTMENT OF MD AND


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OTHER CONDITIONS

Compulsory appointment of Managing orwhole time director or manager if paid upshare capital is Rs 5 crore or more.

Prior approval of the central Governmentis required.

Number of managing directors cannotmore than two. But the Centralgovernment may permit more than two ifit is necessary to manage the affairs ofthe company.

The MD can be appointed for a term of 5years. This rule is not applicable toprivate companies.

DISQUALIFICATIONS OF MD


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DISQUALIFICATIONS OF MD

No person shall be appointed amanaging and whole time director who

Is an un-discharged insolvent

Is suspended for default Is convicted by court of an offence of

moral turpitude.

Is of unsound mind, etc.


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SOLE SELL ING AGENTS


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SOLE SELL INGAGENTS

An individual, firm or company who orwhich is given exclusive rights to sell

in a particular area the goods of the

company concerned.

SECRETARY


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SECRETARY

Secretary means a company secretarywithin the meaning of section 2 of thecompanies secretary act 1980 andincludes any individual possessing the

prescribed qualifications appointed toperform the duties which may beperformed by a secretary under this actand any other ministerial or

administrative duties. The secretary is the companys eyes,

ears and hands who carry out thepolicies of the managements.

REVISION


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REVISION

The term of office of managing

director cannot exceed

2 years at time 3 years at a time

5 years at a time

7 years at a time


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The remuneration of a managingdirector cannot exceed

1 percent of the net profit

5 percent of the net profit 10 percent of the net profit

Rs 50,000.


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The board of directors of A &Company Ltd. Appointed rajan the

managing director and gave him full

powers of management of thecompanys affairs and authorized him

to sign all papers. Rajan borrowed

money on promissory note.

Is the company bound by this

transaction?


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The secretary of the companypurchased some stationary for the

company but he took it at home and

put it for personal use. The companyrefused to pay to the supplier of the

stationary on the plea that it never

received the stationary.

Is the company liable to pay?


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INSPECTION OF BOOKS OF


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ACCOUNT

S. 209A.(1) The books of account andother books and papers of every

Company shall be open to inspection

during business hours - (i) by the Registrar, or (ii) by such officer of the Government as may be

authorized by the Central Government in this behalf,

(iii) by such officers of the Securities and Exchange

Board of India as may be authorized by it : No right of shareholder to inspect the books of account.


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APPOINTMENT OF AUDITORS


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APPOINTMENT OF AUDITORS

Every company shall, at each AGM

appoint an auditor or auditors to hold

office from the conclusion of thatmeeting until the conclusion of the

next AGM and shall, within seven days

of the appointment, give intimation

thereof to every auditor so appointed


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RIGHTS OF THE AUDITORS


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RIGHTS OF THE AUDITORS

1. Right of access to books andaccounts

2. Right to obtain information or

explanation 3. Right to inspect branch account

4. Right to receive notices, etc.

5. Right to attend general meeting 6. Right to remuneration

MAJORITY RULE AND


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MINORITY PROTECTION

In Foss vs. Harbottle; twopropositions used-

1. The court will not ordinarily intervene in

the case of an internal irregularity if the

matter is one which the company can

ratify or condone by its own internal

procedure.

2. A wrong has been done to. a company,prima facie, the only proper plaintiff is the

company itself.


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According to the Dictionary meaning ofword, is any act exercised in a mannerburdensome, harsh & wrongful.

The term oppression has beenexplained by Lord Cooper as, Theessence of the matter seems to be thatthe conduct complained of should at thelowest involve a visible departure fromthe standards of fair dealing, and a

violation of the conditions of fair play onwhich every shareholder who entrustshis money to the company is entitled torely.


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National Company Law Tribunal and itsAppellate Tribunal was recommendedwhich will have the powers of the:

CLB under the Companies Act, 1956,

BIFR and AAIFR under the SickIndustrial Companies (SpecialProvisions) Act, 1985, and

Jurisdiction and Powers relating towinding-up, restructuring and othersuch provisions, vested in the HighCourts.


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Chairman of NCLAT


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Chairman of NCLATformer judge ofthe Supreme Court or Chief Justice ofa High Court. Judicial Member ofNCLATJudge of a High Court or

Judicial Member of NCLT for 5 years.Technical Member of NCLAT25years of experience in law, finance,banking, management etc. relating tomanagement, conduct of affairs,revival, rehabilitation and winding upof companies


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The establishment of NCLT/NCLATshall offer various opportunities to

Practicing Company Secretaries as

they have been authorized to appear

before the Tribunal/ Appellate Tribunal.

Areas opened up for company

secretaries in practice under NCLT are

stated hereunder: Compromise andArrangement Sick Companies

Winding up Reduction of Capital etc.


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(iii) Which of the following can not be asolid reason for compulsory winding

up?

(a) Default in holding statutorymeeting

(b) Failure to commence business

within stipulated time

Inability to pay debts

(d) Suspension of business due to

temporary reasons


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COMPROMISE,

ARRANGEMENT


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ARRANGEMENT

COMPROMISEis a term which impliesthe existence of a dispute such asrelating to rights. It means settlement oradjustment of claims in dispute by

mutual consent.ARRANGEMENTis reorganization of the

share capital of a company by theconsolidation of shares of different

classes, or by the division of shares into shares of

different classes or

by both these methods.


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REFERENCES:


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Business and Corporate Laws by V.S.Datey, Taxmann Allied Services, Pvt.

Ltd, New Delhi, 2003

Company Law and Practice by A.K.Majmudar, Dr. G.K. KAPOOR,

Taxmann Allied Services, Pvt. Ltd,

New Delhi, 2010.

Company Law by Avtar Singh, Eastern

Date post:	04-Jun-2018
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