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MBL1 contact class

Ms. Arpitha H.CAssistant CoordinatorDistance Education DepartmentNational Law School of India UniversityBangalore-560072email- arpithahc@nls.ac.in

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Overview of the syllabus

Unit 1 - Formation of a company Unit 2 - Characteristics of corporate personality Unit 3 - Management of a company Unit 4 - Corporate finance and Investor protection Unit 5 - Company law and secretarial functions Unit 6 - The Competition Act, 2002 Unit 7 - Corporate accounts and audit Unit 8 - Winding up Unit 9 - The Depositories Act, 1996

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History of company legislation

Closely following the English Act of 1948 13th to 14th century –Merchant Guilds prevailed 14th century –Inclusion of the term Company for trading overseas 16th century –Concept of regulated companies 17th century –Joint stock company During this time the only method of incorporation was through the royal

charter or an Act of the Parliament. South sea company Bubble Act, 1720 1844 –Joint Stock Companies Act- incorporation through registration. “ Registrar of Companies”- All the required details of the company Limited Liability Act, 1855 Then came the Companies Act, 1913 H.C Bhaba Committee Till 1956, we have been following the 1913 Act, with various amendments.

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Amendments made in the 1956 Act as against the 1913 Act

The promotion and formation of companies Capital structure of a company Company meetings and procedure The presentation of company accounts, their

Audit, and the powers and duties of Auditors The Inspection and Investigation of the affairs of

the company

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The constitution of Board of Directors and the powers and duties of Directors, managing directors and managers

The Administration of the Company Law. After this various Amendments in the Year 1996, 2000

(Minimum paid up capital requirement, small depositors, shelf prospectus, Information memorandum and Red herring Prospectus etc, 2002 (Insertion of Part VI A ( Sections 424A to 424L) for the Revival and rehabilitation of sick Industrial Companies and Establishment of NCLT) and the Competition Act, 2002 and 2006- Director Identification Number (Section 266A TO 266 G earlier) 2013 Act- ( Section 153 to Section 159)and E –Filing

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Finally the Companies Act, 2013- The Act comprises of 29 chapters, 470 Clauses with 7 Schedules as against 658 sections and 14 Schedules in the Companies Act, 1956

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THE COMPANIES ACT, 2013

Need for a new Legislation- Why?- The changing national and international economic

environment- Exponential growth of the Indian economy- Changes in the stakeholders’ expectations- Manifold Increase in Number of Companies

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Applicability of the Act of 2013

The Provisions of the Act applicable to:- Companies incorporated under this Act or under

any previous Company Law- Insurance Companies- Banking Companies- Companies engaged in the generation of supply

of electricity

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What is a company?

Any association of persons for a common object Two organizations for such an Association- a company

and a partnership law. Useful for both small scale and large scale business as it

is the only organization that limits personal liability for business debts.

Definition of a Company Section 3 (1) (i)(1956 Act) Section 2(20) of the 2013

Act- A company means a company incorporated under this Act or under any previous company Law.

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Who can form a Company?

Section 3 (1)- 2013 Act (a) Seven or more Members (b) Two or more Members (c) One person( section 2(62))

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Features of a company

Incorporated association Minimum number 7 for public company Minimum number 2 for private company Illegal association (Section 11)Legal entity separate from its membersLord Macnaughten-

“ The Company is at law a different person altogether from the subscribers ….; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the proceeds, the company is not in law, the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form,except to the extent and in the manner provided by the Act”

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Kondoli tea Co. Ltd. In re ILR (1886) Soloman v. Soloman & Co. Ltd.[1895-99] All.ER

33 Chamundeeswari v. CTO,Vellore Rural[2007] 78

SCL 151 (Mad.)- held any dues from Company have to be recovered only from company and not from its directors.

Artificial personLimited Liability

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Features of a company

When the company is registered with the limited liability –the members liability is restricted to the nominal value of the shares taken by them or the amount guaranteed by them.

Circumstances under which a member can lose the privilege of a limited liability

- Reduction of Members below the statutory requirement - Any Business carried out during the course of Winding up with an

Intention to defraud Creditors.( Section 542)Transferability of shares (Section 82)Perpetual successionCommon sealRight to Sue and be Sued

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Lifting the corporate veilStatutory Provisions 1. Reduction of Membership ( Section 45)

2. Misrepresentation in the Prospectus (section 62 & 63)- Fine up to Rs 50,000 or imprisonment up to 2 years or both

3. Failure to return application money ( Section 69 and SEBI regulation,2009- failure will lead to refund the same with an Interest of 6 % per annum.

4. Failure to deliver share certificates within the stipulated time( section 113)- Rs.5000 per day till such default continues.

5. Mis-description of name (section 147)6. Holding – Subsidiary Company7. Fraudulent Conduct[ section 542]

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Lifting the corporate veil

Judicial Interpretations

1.Protection of Revenue- Sir Dinshaw Maneckjee petit, Re.AIR 1927 Bom. 3712.Prevention of Fraud or Improper conduct- Gilford Motor Company v. Horne-1933] 1 CH 9353.Determination of the Enemy character of a company- Daimler Co.Ltd v. Continental Tyre and Rubber Co.Ltd, (1916)2 AC 3074.Formation of subsidiaries to only act as an Agent-State of U.P v. Renusagar Power Co.[1991] 70 Comp.Cas.1275.Where a company is used to avoid welfare legislation6.Illegal or improper use

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Advantages of Incorporation

1. Independent corporate existence2. Limited liability3. Separate property- On incorporation the corporate property

belongs to the company and the members have no direct proprietary right in it.

4. Perpetual succession5. Transferability of shares6. Infinite membership7. Mobilization of huge resources8. Ease in control and management

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Disadvantages of Incorporation

1. Formality and expense2. Loss of privacy3. Divorce of control over ownership4. Detailed winding up procedureIs company a citizen? Right to Property exists but Heavy Engineering

Mazdoor Union v. State of Bihar [1969]39 Comp. cas.905 (SC) and State trading Corporation of India Ltd. v.CTO [1963]33 Comp. Cas.1057. It was held that a company has no fundamental rights which are expressly available to citizens only.

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Kinds of companies

Private company (Section 2(68)) Public company Limited liability companies- Companies Limited by shares- Companies limited by Guarantee Unlimited Liability Companies Statutory companies Registered companies Existing companies Association not for profit Government companies(Sec 2 (45)) Foreign companies(Sec. 2(42)) Holding and subsidiary companies(Sec 2 (46) and Sec 2(87)) Investment companies One Person Company(Sec 2 (62)

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Private companies

- Section 2 (68) - Company which has a minimum paid up capital of 1 lakh- Restricts the right to transfer its shares- Limits the number of members to 200 except for one person Company - Prohibits invitation to the public to subscribe for any shares of the company.- Prohibits acceptance of deposits from persons other than the members,

directors or relatives.Who shall not be treated as Members for the purpose of the 2013 Act?- Only Restrictions contained in articles are valid- Existing private companiesOther requirements- Minimum of 2 persons to form a private company- Only a competent person can be a subscriber- The Words Pvt. Ltd. towards the end

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Public company (sec.2 (71))

As per the Companies (Amendment) Act, 2000, Public company is any company:

i) Which is not a private company.ii) Minimum paid up capital of 5 Lakhs.iii) private company which is a subsidiary of a Public

Company.- Hill crest Realty Sdn.Bhd.v. Hotel Queen Road(P.)

Ltd.[2006] 71 SCL 41(CLB) New Delhi

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Distinction between private companies and public companies

Minimum number of members Maximum number of members Transferability of shares Prospectus Statement in lieu of prospectus Minimum number of directors Commencement of business Statutory meetings and statutory meetings Director’s Consent Appointment of Directors Retirement of Directors Quorum for general meetings Public deposits Paid up capital

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Conversion of a private company in to a public company

1. Conversion by default (section 43)2. Conversion by operation of law (section 43 A)3. Conversion by choice (section 44)

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Conversion of a public company in to a private company

1. Passing of a special resolution authorizing the conversion and altering the articles so as to contain the matters specified in section 3 (1) (iii)

2. Changing the name of the Company by omitting the word ‘ Private’

3. Approval from central government4. Filing of printed copy of the Articles as altered

within one month of the receipt of the approval from the central government.

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Types of Companies

Statutory companies Registered companies Limited Liability companies

- Companies Limited by shares- Companies limited by Guarantee

Unlimited Liability company Existing company Associations not for profit( section 25) Government companies (section 2(45)) of the Companies Act,2013 Foreign companies (Sec 2(42)) Holding and subsidiary companies Investment companies Producer company (part IX A of the Act) Illegal association

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Exceptions to Illegal Association- Stock Exchange- Associations ‘Not for profit-Making’- Joint Hindu Family.

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Formation of a company

4 stages- Promotion- Registration- Floatation- Commencement of Business

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Who is a promoter?(See Section 2 (69))

May be an Individual, syndicate, association, partner or a company.

In twycross v. grant,1877 2 C.P.D. 469 Page 541 C.A – “ One who undertakes to form a company with reference to a given project, and to set it going, and who takes the necessary steps to accomplish that Purpose”.

Legal position of a promoterNot an agent nor a Trustee, but stands in a fiduciary

relationship with the company.

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Duties of a promoter

Not to make any secret profit out of the promotion of a company.

To disclose to the company any interest which he has in a transaction entered into by it.

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Remedies Available to the company against the promoter for breach of his duties

1. Recession of Contract2. To recover secret profit

- Promoter not in fiduciary relation when he acquired the property but only when he sold it to the company.

- Promoter in fiduciary position when he acquired the property and when he sold it to the company

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Liability of a promoter

Section 56 and schedule II lays the matters to be stated and reports to be set out in a prospectus- held for non compliance of the provisions and the schedule.

Section 62 and 63- liable for any untrue statement in the prospectus. By virtue of section 203, the court may suspend a promoter from

taking part in the management of the company for a period of 5 years if :

a) He is convicted of offence in connection with the promotion, formation or the Management of a company; or

b) If in the Liquidation proceedings , it is found that he is guilty of an offence for which he is punishable under section 542.

c) Guilty of any fraud or misfeasance in relation to the company or of any breach of his duty to the company

d) On Liquidator’s report if found guilty, liable to public examination Can a promoter be remunerated?

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Pre-incorporation contracts

Position before 1963 Position after 1963

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Registration of a company

Section 12 of the Act Procedure

(A) Type of company(B) Application for availability of the name(C) Corporate identity number(D) Preparation of memorandum and articles of a company(E) Vetting of the memorandum and articles, printing, stamping and signing of the

same(F) Preparation of other documents

a) Power of attorneyb) Consent of the director’s (section 266)c) The particular’s of the director’sd) Notice of registered address (section 146)e) Statutory declaration

G. Filing of documents for registration Certificate of incorporation

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Floatation of a company

Can go ahead with raising capital sufficient to commence its business.

Section 70 of the companies Act, 1956

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Commencement of business

Section 149 of the Act to be complied. Penalty- fine which may extend to Rs. 5000 for

everyday of default.

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Q&AClarifications

Suggestions for improvements

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Thank You!