company law 1956

Company Law

1956

Contents

• FEATURES• TYPES• FORMATION• COMMENCEMENT• DOCTRINES• DIRECTORS• METHODS OF RAISING CAPITAL• MEETINGS• WINDING UP

FEATURES

• Separate legal entity• Limited Liability• Transferability of shares• Perpetual Succession• Can own and sell property• Can sue and be sued

Types

• Public • Private• Holding and Subsidiary• Companies limited by

shares/guarantee/unlimited• Corporations • Public Financial Institutions

FORMATION

• PROMOTER and his role• Pre – Incorporation Contracts Documents for IncorporationMOAAOAAgreement with MD/Director/managerQualification sharesStatutory Declaration.• Effects of Incorporation

Commencement

• Not required in the case of Private Companies• Link with prospectus• Minimum subscription• Director’s shares

DOCTRINES

• CORPORATE VEIL• ULTRA VIRES• CONSTRUCTIVE NOTICE• INDOOR MANAGEMENT• CORPORATE GOVERNANCE

DIRECTORS

• ROLE• TYPES• APPOINTMENT• POWERS

Role of Directors

• Section 291 which states that the Board of Directors can do all those acts which a company can do. This leads to the principle of Agency i.e. the Board of Directors are agents of the company. However it may be noted that this applies to the whole Board and not individual Directors.

Role of Directors (continued)

• The Directors have a fiduciary relationship with the company i.e. a relationship of trust and faith.( please note that it does not extend to the shareholders).

• Four duties of Director (Prof Gower) - to act in interest of company - to act within the parameters - not to put himself in a position of conflict where his

personal interests clash with the company’s - his responsibility cannot be fettered( delegated)

TYPES

• Managing Director• Whole Time Director• Part Time Director• Independent Director• Nominee Director• Additional Director• Alternate Director

APPOINTMENT

• By the Articles of Association• By the Shareholders

DEFINITION AND NATURE OF A COMPANY

Company Law, 1956

Company’s Act of 1956• a group of persons associated together for the

purpose of carrying on a business, with a view to earn profits.

• The word ‘Company’ is an amalgamation of the Latin word ‘Com’ meaning “with or together” and ‘Pains’ meaning “bread”.

• a group of persons who have come together or who have contributed money for some common person and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose.

Characteristics of a Company

• Separate Legal Entity• Limited Liability• Perpetual Succession

Separate Legal Entity

• On incorporation under law, a company becomes a separate legal entity as compared to its members.

• The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members.

• It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately.

Salomon v. Salomon & co. Ltd.(1897) A.C. 22. •S sold his boots business to a newly formed company for £ 30,000. •His wife, one daughter and four sons took up one share of £ 1 each. •S took 23,000 shares of £1 each and £ 10,000 debentures in the company. •The debentures gave S a charge over the assets of the company as the consideration for the transfer of the business. •Subsequently when the company was wound up, its assets were found to the worth £ 6,000 and its liabilities amounted to £ 17,000 of which £ 10,000 were due to S (secured by debentures) and £ 7,000 due to unsecured creditors, the unsecured creditors claimed that S and the company were one and the same person and that the company was a mere agent for S and was hence they should be paid in priority to S.

• Held, the company was, in the eyes of the law, a separate person independent from S and was not his agent.

• S, though virtually the holder of all the shares in the company, was also a secured creditor and was entitled to repayment in priority to the unsecured creditors

• Held, the company was, in the eyes of the law, a separate person independent from S and was not his agent.

• S, though virtually the holder of all the shares in the company, was also a secured creditor and was entitled to repayment in priority to the unsecured creditors.

Limited Liability• The liability of the members of the company is limited to

contribution to the assets of the company up to the face value of shares held by him.

• A member is liable to pay only the uncalled money due on shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets.

• On the other hand, partners of a partnership firm have unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets.

• This cannot be done in case of a company once the members have paid all their dues towards the shares held by them in the company.

Perpetual Succession

• A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company.

• There is a very good saying. Even where during war all the members of a private company, while in general meeting was killed by a bomb, the company survived; not even a hydrogen bomb could have destroyed it.

Separate Property•A company is a distinct legal entity. The company’s property is its own. A member cannot claim to be owner of the company’s property during the existence of the company

Transferability of Shares•Shares in a company are freely transferable, subject to certain conditions, such that no shareholder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares.

Common Seal

A company is a artificial person and does not have a physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force.

Capacity to sue and Being Sued•A company can sue or be sued in its own name as distinct from its members.

Separate Management•A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company.

Company• A Company is association of

persons who have come together for a specific purpose

• Has a separate legal entity as soon as it is incorporated under law

• Liability of shareholders of a limited company is limited to the extent of unpaid share

• Property belongs to the company and not to its members

• Shares may be transferred without the permission of the other members, in absence of provision to contrary in AOA

• Public co: 7-Unlimited members• Private co: 2-50 Members• Decision of the majority prevails

Partnership • Partnership firm is sum total of

persons who have come together to share the profits of the business carried on by them or any of them

• It does not have a separate legal entity

• Liability of the partners is unlimited• Property of the firm belongs to the

partners and they are collectively entitled to it

• A partner cannot transfer his shares in the partnership firm without the consent of all other partners

• Banking biz: 2-20 members• Other business: 2-10 members• 100 % consensus is required for any

decision• On the death of any partner, the

partnership is dissolved unless there is provision to the contrary

Illegal Association• Not more than 10 (other business) or 20 persons (banking

business) can come together for carrying on any business, unless the association is registered under the Companies Act or any other Indian law. Any association, which does not comply with the above norms, is an illegal association.

• However, you cannot apply this provision in the following cases– A Joint Hindu Family business comprising of family members only– But where two or more Joint Hindu families come together for

business through partnership, the total number of members cannot exceed 10 or 20 as the case may be, but in computing the number of persons, minor members of such family will be excluded

– Any association of charitable, religious, scientific trust or organisation which is not formed with a profit motive

– Foreign companies

Consequences of non-Registration

Law does not recognize an illegal association. An illegal association cannot enter into any contract, cannot sue any members or any outsider, and cannot be sued by any members or outsiders for any of its debts. The members of the illegal association are personally for the obligations of the illegal association. A member may be liable to a fine of Rs. 1000. Any member of an illegal association cannot sue another member in respect of any matter connected with the association.

TYPES OF COMPANIES

Company Law, 1956

Public co

•7-Unlimited members

•Minimum number of directors is 3

Private co• 2-50 Members• Restricts the right of

members to transfer its shares

• Limits the number of its members to fifty

• Prohibits an invitation to the public to subscribe to any shares in or the debentures of the company

• Minimum number of directors is 2

privileges and exemptions of aprivate limited company

• Minimum number of members is 2• Minimum number of directors is 2• Prohibition of allotment of the shares or debentures in

certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply

• A special resolution to issue shares to non-members is not required

• does not need a separate certificate of commencement of business

• No person other than the member of the company concerned shall be entitled to inspect or obtain the copies of profit and loss account of that company

Companies Deemed to be Public limited Company

• Where at least 25% of the paid up share capital of a private company is held by one or more bodies corporate

• Where the annual average turnover of the private company during the period of three consecutive financial years is not less than Rs. 25 crores

• Where not less than 25% of the paid up capital of a public company limited is held by the private company

• Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public

Company limited by guarantee

• is a registered company having the liability of its members limited by its MOA to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company.

• The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern.

• A guarantee company may be a company with share capital or without share capital.

Company limited by shares

• the liability of members is limited to the amount of uncalled share capital.

• No member of company limited by the shares can be called upon to pay more than the face value of shares or so much of it as is remaining unpaid.

• Members have no liability in case of fully paid up shares.

Government Companies• Any company in which not less than 51% of the paid up

share capital is held by the Central Government or any State Government or partly by the Central Government and partly by the one or more State Governments and includes a company which is a subsidiary of a government company.

• Government Companies are also governed by the provisions of the Companies Act.

• However, the Central Government may direct that certain provisions of the Companies Act shall not apply or shall apply only with such exceptions, modifications and adaptions as may be specified to such government companies.

Holding and Subsidiary companies• A company shall be deemed to be subsidiary of another

company if– That other company controls the composition of its board of

directors– That other company holds more than half in face value of its

equity share capital– Company B is subsidiary of the Company A and Company C is

subsidiary of Company B, therefore Company C is subsidiary of Company A

• The control of the composition of the Board of Directors of the company means that the holding company has the power at its discretion to appoint or remove all or majority of directors of the subsidiary company without consent or concurrence of any other person

One man company• One man company is a company in which one man

holds practically the whole of the share capital of the company, and in order to meet the statutory requirement of minimum number of members, some dummy members who are mostly his friends or relations, hold just 1or 2 shares each.

• It is like any other company is a legal entity distinct from its members.

• The dummy members are usually nominees of the principal shareholder who is the virtual owner of the business and who carries it on with limited liability.

PROMOTION AND FORMATION OF A COMPANY

Company Law, 1956

forming

The process of forming a company can be divided into four distinct stages:•Promotion•Registration or incorporation•Capital Subscription•Commencement of Business

• Promotion– This is the first stage in the formation of a company. It refers to the entire

process by which a company is brought into existence. – It starts with the conceptualization of the birth a company and determination

of the purpose for which it is to be formed.

• Promoters– The persons who conceive the company and invest the initial funds are known

as the promoters of the company. – The promoters enter into preliminary contracts with vendors and make

arrangements for the preparation, advertisement and the circulation of prospectus and placement of capital.

– However, a person who merely acts in his professional capacity on behalf of the promoter (e.g. lawyer, CA, etc) for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and whom the promoter pays is not a promoter.

• Pre-Incorporation or Preliminary Contracts– The promoters of a company usually enter into contract to acquire some

property or right for the company, which is yet to be incorporated. – Such contracts are called Pre-Incorporation or Preliminary Contracts.

• Company not bound by pre-incorporation contract

• English & colonial produce co. ltd Re (1906) • A solicitor prepared the memorandum and

Articles of association of a company and paid the necessary registration fees and other incidental expenses to obtain of the company.

• He did this on the instruction of certain persons who later became directors of the company.

• Held, the company was not liable of his work.

• Company can not enforce pre-incorporation contract

• Natal land & colonization co. Ltd. V. Pauline colliery & Development syndicate ltd., (1904)

• The N company agreed with an agent of the P syndicate Ltd before its formation to grant a mining lease to the syndicate.

• The syndicate was registered and discovered a seam of coal.

• The company refused to grant the lease. • Held, there was no binding contract between the

company and the syndicate.

• Promoters are personally liable• Kelner v. Baxter, (1866) • A hotel company was about to be formed and persons

responsible for the new company signed an agreement on 27th January, 1866, for the purchase of stock on behalf of the proposed company, payment to be made on 28th January, 1866.

• The company was incorporated on 20th February 1866. • the goods were consumed in the business and the

company went into liquidation before the debt was paid.

• The persons signing the agreement were sued on the contract.

• Held, The persons signing were promoters and personally liable on their signatures.

Promoter Duties• He must not make any secret profit out of the

promotion of the company. Secret profit is made by entering into a transaction on his own behalf and then sell to concerned property to the company at a profit without making disclosure of the profit to the company or its members.

• He must make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company.

If promoter duties not fulfilled, company may

• Rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered

• Retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit

• the company can sue him to for breach of trust. Damages up to the difference between the market value of the property and the contract price can be recovered from him

promoter may be rewarded by the company in these ways

• The company may to pay some remuneration for the services rendered

• The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members

• The promoter may sell his property for fully paid shares in the company after making full disclosures

• The promoter may be given an option to buy further shares in the company

• The promoter may be given commission on shares sold• The articles of the Company may provide for fixed sum to be

paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back

Incorporation of the company

• Registration– The promoters must make a decision regarding

the type of company i.e. a public company or a private company or an unlimited company, etc and accordingly prepare the documents for incorporation of the company.

– In this connection the Memorandum and Articles of Association (MA & AA) are crucial documents to be prepared.

• Mode of forming incorporated company – Any 7 or more persons (2 or more in case of a

private company) associated for any lawful purpose may form an incorporated company, with or without limited liability.

– They shall subscribe their names to a Memorandum of Association and also comply other formalities in respect of registration.

– A company so formed may be:• A company limited by shares, or• A company limited by guarantee, or• Unlimited company

• Registration of the Company– Once the documents have been prepared, vetted, stamped and

signed, they must be filed with the Registrar of Companies for incorporating the Company. The following documents must be filed in this connection:

• The Memorandum of Association duly signed by subscribers and the Articles of Association, if any signed by subscribers to the Memorandum of Association

• An agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager

• A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear before the High Court or a company secretary or Chartered Accountant in whole – time practice in India who is engaged in the formation of the company or by a person who is named as a director or manager or secretary of the company that the requirements of the Companies Act have been complied with in respect of the registration of the company and matters precedent and incidental thereto

>> continued on next slide

–In addition to the above, in case of a public company, the following documents must also be filed• Written consent of directors in Form 29 to

agree to act as directors and their written consent to act as directors and take up qualification shares

• The complete address of the registered office of the company in Form 18.

• Details of the directors, managing director and manager of the company in Form 32.

Certificate of Incorporation

• Once all the above documents have been filed and they are found to be in order, the Registrar of Companies will issue Certificate of Incorporation of the Company.

• This document is the birth certificate of the company and is proof of the existence of the company.

• Once, this certificate is issued, the company cannot cease its existence unless it is dissolved by order of the Court.

Rule In Peel’s Case

• The certificate of incorporation given by registrar in respect of a company is conclusive evidence that all the requirements of the Companies Act have been complied in respect of registration

• Commencement of Business• A private company or a company having no share

capital can commence its business immediately after it has been incorporated. However, other companies can commence their activities only after they have obtained Certificate of Commencement of Business. For this purpose, the following additional formalities have to be complied with:

If a company has share capital and has issued a prospectus

• Shares up to the amount of minimum subscription must be allotted.

• Every director has paid to the company on each of the shares, which he has taken the same amount as the public has paid on such shares.

• No money is or may become payable to the applicants of shares or debentures for failure to apply for or to obtain permission to deal in those shares or debentures in any recognized stock exchange.

• A statutory declaration in Form 19 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed.

If a company has share capital but has not issued a prospectus

• It must file a statement in lieu of prospectus with the Registrar of Companies

• Every director has paid to the company on each of the shares, which he has taken the same amount as the other members have paid on such shares

• A statutory declaration in Form 20 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed.

• Once the above provisions have been complied with, the Registrar of Companies grants “Certificate of Commencement of Business” after which the company can commence its activities.

“Memorandum of Association of a company is its charter & defines the limitations of the powers of a company. It contains the fundamental condition upon which alone the company is allowed to be incorporated”

- Lord Cairns

MEMORANDUM OF ASSOCIATION

Definitions“Memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act”

Sec.2 (28)


“The purpose of Memorandum of Association is to enable the share holders, creditors and those who deal with the company to know what its permitted range of enterprise is.”

- Lord Macmillan


• Form as given in table B, C, D, & E in Schedule I• Printed• Divided into paragraphs• Numbered consecutively• Signed by at least 7 persons for public & 2 for

private company. Signatures attested by one witness. Subscribers shall at least take one share

FORM OF MEMORANDUM OF ASSOCIATION

Six Clauses

CONTENTS OF MEMORANDUM OF ASSOCIATION

Name Registeredoffice

Liability CapitalAssociation

or subscription

Objects

The words :• Ultra means beyond• Vires means the powers• Ultra Vires means beyond the powers

A company which owes its incorporation to statutory authority cannot effectively do anything beyond the powers expressly or impliedly conferred upon it by the statute or Memorandum of Association.

DOCTRINE OF ‘ULTRA VIRES’

The company has been formed with the object :• To make and sell, or lend or hire railway carriage

and wagons and all kinds of railway plants, to carry on the business of mechanical engineers and general contractors etc.

• The company contracted with Riche to finance the construction of Railway line in Belgium. The company repudiated the agreement and was sued for breach of contract.

ASHBURY RAILWAY CARRIAGE & IRON COMPANY LTD. Y. RICHE

Rich Contended :• Firstly, that the contract in question came well

within the meaning of the words ‘general contractors’, and, was therefore, within the powers of the company, secondly, that the contract was ratified by the majority of the shareholders.

ASHBURV RAILWAY CARRIAGE & IRON COMPANY LTD. Y. RICHE

• Void ‘Ab Initio’• Injunction• Personal Liability of Directors• Acquisition of Property that is Ultra Vires• Directors personally liable to third parties

EFFECTS OF DOCTRINE OF ULTRA VIRES

• Special Resolution.• Written Approval of Central Government.• No Approval of Central Government is

necessary if the change of name involves only the addition or deletion of the word “Private”.

• Change by ordinary resolution and approval of Central Government when name is identical or too closely resembles the name of an existing company.

ALTERATION OF NAME CLAUSE

From one premises to another premises in the same city, town or village

• By passing a resolution of Board of Directors

CHANGE OF REGISTERED OFFICE

From one town or city or village to another town or city or village in the same state

1. Special Resolution.2. Confirmation of Regional Director — when

jurisdiction of Registrar of companies is changed.

3. Copy of (i) & (ii) to be filed with ROC.4. Notice of new location to ROC within 30

days.


From one state to another state1. Special Resolution2. Confirmation of Central Govt.3. For certain Purposes only

(As given in section 17)


A. Special ResolutionB. Alteration is sought on any of these grounds:

• To carry on its business more economically & more efficiently

• To attain its main purpose by new or improved means• To enlarge or change the local area of its operations• To carry on some business which under existing

circumstances may conveniently or advantageously be combined with the business of the company

• To restrict or abandon any of the objects specified in the memorandum

• To sell or dispose off the whole or any part of the undertaking

• To amalgamate with any other companyC. Copy of (A) is filed with ROC within 30 days

ALTERATION OF OBJECTS CLAUSE

• The liability of a member of a company cannot be increased unless the member agrees in writing.

• From unlimited liability, it can be made limited by re-registration of the company.

ALTERATION OF LIABILITY CLAUSE

• Increase of authorized share capital.

• Consolidation and subdivision of shares.

• Conversion of shares into stock & vice versa.

• Diminution of share capital.

ALTERATION OF CAPITAL CLAUSE

Definition

‘Article’ means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies laws or of this Act’

Sec.2 (2)

ARTICLES OF ASSOCIATION

“…. The articles proceed to define the duties, the right and the powers of the governing body as between themselves and the company at large and the mode and form in which the business of the company is to be carried on and the mode and form in which changes in the internal regulations of the company may from time to time be made.

- Lord Cairns

ARTICLES OF ASSOCIATION

1. The extent to which Table ‘A’ is applicable2. Different classes of shares and their rights3. Procedure of making an issue of share

capital and allotment thereof4. Procedure of issuing share certificates and

share warrants5. Forfeiture of shares and the procedure of

their re-issue6. Procedure for transfer and transmission of

shares

CONTENTS OF ARTICLES

7. The time lag in between calls on shares conversion of shares into stock

8. Directors, their appointment, remuneration, qualifications, etc.

9. Account and audit10. Lien of shares11. Payment of commission on shares and debentures

to underwriters12. Rules for adoption for ‘preliminary contracts’ if

any


13. Re-organization and consolidation of shares capital

14. Alteration of share capital & Buyback of shares

15. Borrowing power of directors16. General meeting, proxies and polls17. Voting rights of members18. Winding up


Procedure :

• Alteration by passing a special resolution.• Copy of resolution to be sent to registrar

within 30 days.• Copy of altered articles to be registered

within 3 months of passing of resolution.

ALTERATION OF ARTICLES (SEC 31)

1. Alteration should not be inconsistent witha. Provisions of Company Act or any other statuteb. Conditions contained in memorandum

2. Approval of govt. to be obtained in certain cases3. Alteration must not deprive any person of his rights

under a contract4. Alteration must not constitute a fraud on the

minority5. Alteration must be bonafide for the benefit of the

company as a whole

LIMITATIONS REGARDING ALTERATION OF ARTICLES

The following are the legal implications:

• Company is bound to its members• Each member is bound to the company• Each member is bound to other members in

exceptional case only• Neither the company nor the members are bound

to outsiders

BINDING FORCE OF MEMORANDUM AND ARTICLES (SEC 36)

Memorandum of Association

Articles of Association

Charter of Company Regulations for interal management

Defines the scope of the activities Rules for carrying out the objects of company.

Supreme document Subordinate to the memorandum.

Must for every company Company limited by shares need not have it (Table ‘A’ applies)

Strict restrictions, alteration only with sanction of central govt./ tribunal.

Can be altered by special resolution.

Act, ‘Ultra Vires’ is wholly void & cannot be ratified.

Act ‘Ultra Vires’ (but intra vires the memorandum) can be ratified.

• Documents are open & accessible to all.

• Presumption that any outsider dealing with

company has read & understood the

documents.

• It is a negative doctrine, acting only against

the outsiders & not the company.

DOCTRINE OF CONSTRUCTIVE NOTICE

• Persons dealing with the company in good faith have a right to assume that the internal requirements prescribed in public documents have been observed

• Persons are not bound to enquire into regularity of internal proceedings

Exceptions :• Knowledge of irregularity• Negligence on part of the outsider• Forgery• Acts outside scope of apparent authority

DOCTRINE OF INDOOR MANAGEMENT

Lifting the Veil of Incorporation

• Although the general rule is that a company has a separate legal identity from its members, there are exceptions to this rule when a court will not treat a company as a separate entity

• This is often referred to as “lifting the veil of incorporation”

• Often, this is to prevent abuse of the principle of separate identity

Lifting the Veil of Incorporation (cont.)

• For example, under the Companies Act 1985, if a company trades with fewer than two members then the sole member has unlimited liability for company debts

• Also under the Companies Act, officers of the company will become personally liable if they issue bills of exchange or enter into contracts on behalf of the company but do not use the company’s full name


• At common law, the general principle is that the courts will not allow a company to be used for a fraudulent purpose or to avoid a legal duty

• For example, in Gilford Motor Co v Horne, a term in an employee’s contract prevented him from approaching former customers after he left Gilford Motor Co


• Therefore, when he left he formed his own company, and the company approached his former customers

• The court held the company was a sham being used to avoid the term in his contract

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