Companies Act

Syllabus- Module IV

• Companies Act, 1956-Meaning and types of companies, • Formation of a company, • Memorandum and Articles of Association,• Share Capital and Shareholders, Prospectus and Issue

of Shares, • Buy Back of Shares, • Debentures, • Company Meetings and Proceedings,• Powers, Duties, Liabilities of Directors, and• Winding up of Company.

THE COMPANIES ACT 1956

• Def: An association of persons who contribute money or money’s worth to a common stock and employ in some trade or business and who share the profit and loss arising therefrom ( Lord Lindley)

• Capital

• Members

• Share (transferable)/Perpetual succession

FEATURES OF A COMPANY

1. Incorporated Association: Incorporated or Registered under the Companies Act. An unregistered association of more than 10 persons in the case of banking business and 20 in the case of any other business becomes an illegal association

FEATURES OF A COMPANY (Contd.)

2. Artificial Person- It is clothed with rights and obligations

3. Separate legal Entity : Unlike partnership, it is distinct from those who constitute it. Members liability is limited to their shares. Examples: Salomon vs Salomon & Co Ltd (1877)AC 22; Lee Vs Lee Air Farming Ltd (1960)3 All ER 429


4. Limited Liability: limited to nominal value of shares. If the shares are fully paid-no liability

5. Separate Property: share holders are not part owners of the company or its property Ex: Bacha F. Guzdar Vs CIT Bombay [AIR (1955) SC 74]


6. Transferability of Shares: According to Articles of Association (S 82).Restrictions in Pvt companies

7 Perpetual Existence: The company goes on for ever

8. Common seal: must have the name of the place where the seal would be used. A person must be authorised by the Articles to use the seal


9. A company may sue and be sued in it’s own name.

LIFTING OF THE CORPORATE VEIL

• In the case of dishonest or fraudulent use of incorporation:

1. For the protection of revenue (tax):

2. Where the co is acting as agent of shareholders

3. Where co formed by certain persons to avoid their own valid contractual obligations: Ex: Gilford Motor Co v. Horne (1933) 1 Ch.935 ( eg, not to carry on business of which goodwill is sold- S 27 Indian Contract Act)

LIFTING OF THE CORPORATE VEIL (contd.)

4. Company is formed for a fraudulent purpose, or is a sham: DDA v. Skipper Construction Co 9P) Ltd. (1966)4 SCALE 202

5. Where a co formed is against public interest or public policy : Ex: [Daimler Co. Ltd. V.Continental Tyre and Rubber Co. (1916) 2 AC 307]


6. Where device of incorporation is used for some illegal purpose.

7 where the no of members falls below the statutory minimum: 6 months after that (S.45): all members, with knowledge, become personally liable


8. Where Prospectus includes a fraudulent misrepresentation- fine Rs 50,000, 2 yrs RI.

9 Where a negotiable instrument is signed by an agent without indicating thereon that he is acting as an agent ( S 28 Negotiable Instruments Act), like a Director of a co on behalf of the co without mentioning the name of the co.

10. Holding and Subsidiary companies- subsidiary co. may loose it’s separate identity, when the court so directs


11. Investigation into related companies

12. For investigation of ownership of a company

13. Where, in the course of winding up of a co. it appears that the business was carried on with intent to defraud (s. 542)

Private/ Public companies

Feature Pvt PublicMin no of Members 2 7

Quorum 2 5

Paid up share capital Rs 1 lakh Rs 5 lakh

Retirement of Directors

Not required At least 2/3 rd must retire by rotation

Increase in no of Directors

No permission reqd Permission for having more than 12

Commencement of business

After certificate of incorporation

Certificate to commence business from registrar reqd

Issue of Prospectus for Shares/debentures

Can not Can

Statutory meeting Not reqd. Required

Private/ Public companies (contd.)

Feature Pvt Public

Requirement for dirctors to file written consent,sign MOU and contract for qualification shares

Not reqd. Required

Right to transfer shares

Restricted Freely transferable

Restriction on managerial remuneration

None Up to 11% of net profits

Govt., Foreign Co

• Govt Co. 51% Paid-up share capital (S.617, 619-A)

• Foreign Co: Incorporated outside India, having a place of business in India (S. 592)

Formation of a company

• Promotion (Raising Capital)

• Registration, and

• Floatation

Promotion

• Means taking preliminary steps for registration and floatation of the co ( like hiring premises, secretary, looking for persons interested in purchasing shares of the proposed co.). Promoters are in a fiduciary relationship (relationship of trust and confidence)with the co. This relationship requires them to make full disclosure. They can make profits, but not a secret profit

Registration of a Company- Requirements (S.33)

• Any 7 or more persons ( 2 or more for for pvt. Cos) ( S.12,13).These are Promoters.

• Memorandum of Association• Articles of association• Agreement, if any, with M.D.,whole time director

or manager• Statutory declaration of compliance by an

advocate/CA or a person named in the articles as director/manager or secretary of the co

Registration of a Company- Requirements (contd.)

• If the first directors are appointed by articles, then written consent of directors signed by them and an undertaking that they would take qualification shares (if any) and pay for them

• Check with Registrar of Companies availability of names, and file three names in order of priority (s 20)

• File the address of the registered office (s 146), particulars of directors, managers and secretary, if any (S.303)

Min. authorised Capital for Use of Certain Key words in Name

Key word Required Authorised Capital

Corporation Rs 5 croreInternational, Globe, Universal, Continental, Inter-continental, Asiatic, Asia being the first word of the name Rs 1 croreAny words mentioned above used within the name Rs 50 lakhHindustan, India Bharat, being the first word Rs 50 lakhIf any of the above words are used within the name Rs 5 lakh

Industries, Udyog Rs 1 croreEnterprises, products, business manufacturing Rs 10 lakh

Memorandum of Association

• It’s the charter of the co.It contains ‘main objects’, and ‘other objects’ which are incidental or ancillary to the main objects. It defines and confines the powers of a co.

• Specifies the name of the co, name of the state, amount of authorised share capital, divided into shares of fixed amount

• Signed by at least 7/2 persons (members, in the presence of an attesting witness, mentioning the no of shares taken by the member

• Printed and affixed with Seal, in numbered paragraphs• Contains a declaration that the liability of members is

limited

Articles of Association

• These are bye laws or internal regulations of the co defining rights, duties etc. of share holders, directors, etc.

• Articles are subordinate to and controlled by the Memorandum

• Articles given in table A of sch I automatically apply, if the co does not register it’s own articles

Matters to be Provided for in ‘Articles of Association’

• Business of the co

• Amt of share capital issued and the classes of shares

• Rights of each class of shareholders

• Execution or adoption of preliminary agreement, if any.

• Allotment, transfer of shares, calls for payment of shares, co’s lien on shares

Matters to be Provided for in ‘Articles of Association’ (contd.)

• Borrowing, issue of debentures

• Meetings, notices, quorum, proxy, poll, voting, resolution, minutes

• Director’s appointment, their nos, powers

• Dividends, general reserves

• Accounts and audit

• Book keeping

Prospectus- Steps Necessary before Issue

Certificate of Incorporation

• After the documents are filed, the fee paid, the Registrar, if satisfied, will enter the name of the co. on the register of companies, and issue a certificate of incorporation. However, a public co., having share capital needs a ‘Certificate to Commence Business’ from the Registrar, which is issued only after ‘floatation’ of the co.

Prospectus- Definition

• Notice inviting deposits/offers from the public for subscription/ purchase of shares/debentures of a company.

• Invitation to existing members of a company to subscribe, by way of right, is not a prospectus.

Prospectus- Steps Necessary before Issue

• Certificate of Incorporation• Appointment of Board of Directors and Chairman• Appointment of expert agencies by the Board,

such as: 1. Bankers 2. Auditors 3. Appointment of Secretary (mandatory if paid

up share capital more than Rs fifty lakhs)• Entering into underwriting contract, brokerage

contracts

Prospectus- Steps Necessary before Issue (contd.)

• Making arrangement for listing of shares on stock exchanges. For listing minimum issued equity capital should be Rs 3 crores, of which at least 25% should be offered to the public through newspaper advertisement for at least 3 days.

• Drafting a Prospectus for issue to the public

Underwriting

• Undertaking by a person (s)[Banks] that if the public fails to take up the issue, he or they will do so. Commission not more than 5% of issued price of shares and 2.5% of the price of debentures

• Rate of commission must be disclosed in the prospectus

• Names of underwriters and the opinion of directors that the resources of underwriters are sufficient to discharge their obligations must be disclosed in the prospectus

Pre-requisites to issue of ‘Certificate to Commence Business’• Shares upto the amt of minimum subscription

have been allotted ( Prospectus/ statement in lieu of prospectus has to be issued before this)

• Every director has paid on his shares the same proportion as paid by the public.

• Application for listing on any recognised stock exchange has been made

• A declaration has been filed by a director or secretary in Form 19 that these requirements have been complied with

Stock

• Fully paid up shares can be converted into stock by a resolution in a general meeting, if articles authorise such conversion. Stock certificates are issued on such conversion

Share Capital

• Kinds of share capital(i) Authorised(ii) Issued(iii) Subscribed(iv) Called up(v) Paid up• Share capital can be increased by ordinary

resolution (S 94). For reduction , a Special Resolution is needed (S 100-105)

• Diminution of Capital: Reduction of issued capital. Can be affected by ordinary resolution.

Share

• Share is interest of a shareholder in the co. to the right to:

(i) Receive dividend(ii) Attend meetings(iii) Vote in the meetings(iv) Share in the surplus assets of the co., if any,

on winding up.(v) Transfer the share subject to articles of

association• Liability to pay calls on shares until fully paid• Share certificate is the evidence

Classes of shares

• Preference Shares

• Equity shares

• Deferred or Founders shares( in the case of a private co.)

Preference Share

• Preference Share: It is a share with following preferential rights to:

(i) Dividend at a fixed rate,(ii) Repayment of capital on winding up• Resolution of BOD is necessary, if the articles

permit• Must be redeemable not later than after 10 years

from the date of issue• Must be redeemed out of profits available for

dividend

Preference Share (contd.)

• If premium is payable on redemption, it should be paid out of profits or’ share premium account’

• Where shares are redeemed out of profits, a sum equal to nominal amount of shares redeemed is transferred out of profits to ‘capital redemption reserve account’

• Preference share holders can only vote in class meetings relating to preference share holders.

DEFERRED OR FOUNDERS SHARES( sec 90)

Issued by a private Company and held by promoters or directors

Rights Shares

• A public ltd co after two years from incorporation, or one year from the date of allotment of first shares, whichever is earlier, must first offer the shares first to the existing holders of equity shares in proportion to their paid up capital.

• Right to renounce in whole or in part in favour of others who need not be a member, after 15 day’s notice to members.

• A co. need not offer rights shares if it so decides by special resolutio.

Preference Share-Types:• Participating or non –participating• Cumulative or non-cumulative • Redeemable or irredeemable2. EQUITY SHARES ( section 85)Shares which are not preference are equity shares.As per Companies ( Amendment Act ) 2000• Equity share capital has • Voting rights, OR • Is with differential rights regarding dividends , voting or in

accordance with the specific guidelines provided.SHARE CAPITAL =EQUITY SHARE K +PREFERENTIAL SHARE K

SWEAT EQUITY SHARES

• Means equity shares issued by the Company to its employees or directors

• At a discount OR

• For a consideration other than Cash AND

• May be issued for obtaining know how or IPR or any value additions.

BUY BACK OF SHARES

(SEC 77A, 77AA,77B) • Buy back of it’s own shares by a company amounts

to reduction of it’s capital and equity. It must be sanctioned by Court ( S 100-104, 402)

A company can buy its own shares or securities out of (S.77A):

• Its free reserves• Securities premium account• Proceeds of any shares or other specified

securities.

BUY BACK OF SHARES(Contd)

• Must be authorised by Articles

• Must be approved by Special resolution, and completed within 12 months of the special resolution

• Buy back must not exceed 25% of paid up capital and free reserves of the co.

• In any financial year it should not exceed 25% of paid up capital.


• Debt: Equity ration after buy back should not exceed 2:1.

• After special resolution and before buy back, co. must file before ROC and SEBI ‘declaration of solvency’ in prescribed form, along with affidavit that BOD has made full enquiry.

• A sum equal to the nominal value of the shares bought back will be transferred to ‘capital redemption reserve account’, and disclosed in the balance sheet.


• However, a co. may redeem (buy back) u.s. 80 redeemable preference shares without following the procedure prescribed in S 77.

SHARE WARRANT

Share Certificate is issued within three months of allotment on fully or partly paid up shares.

Share warrant is issued only on following conditions:• Fully paid up shares• If the AOA permit• On approval of the Central Government.• Must have common seal of the Company.• Share warrant can be transferred like a negotiable

instrument

Company Meetings

• Types of Meetings:

• STATUTORY MEETING • ANNUAL GENERAL MEETING• EXTRA ORDINARY GENERAL

MEETING• CLASS MEETING• BOARD MEETING

Statutory Meeting

• Once in life time

• Only for public ltd companies having share capital

• Held between 1 to 6 months of Commencement of Business

• 21 day’s notice

• Statutory Report of the BOD to be circulated and discussed

Statutory Meeting (Contd)

• Statutory Report includes:1. Total no. of shares allotted, fully and partly

paid up for cash or other consideration2. Cash in hand3. Abstract of receipts and payments up to a date

within 7 days.4. Commission or discount paid on issue of

shares or debentures5. Names, addresses and occupations directors,

auditors, mangers, secretary, etc.

Statutory Report

Statutory Meeting (Contd)

• Statutory Report includes ( contd.):

6. Arrears due on calls from every director.7. Commission or brokerage paid to any director or

manager on the issue of shares and debentures.

8. To be certified by at least two directors including MD, and also by the auditors as regards shares allotted, receipts and payments, cash in hand, etc.

9. In case of default fine up to Rs 5,000/

Statutory Report

AGM (S 166-168)

• Every co must hold, during business hours at the registered office or within that city.

• Not more than 15 months should elapse between two meetings

• First meeting can be held up to 18 months from the date of incorporation

• Business to be transacted (S 173)1. Consideration of annual accounts, balance sheet,

report of BOD and auditors2. Declaration of dividend3. Appointment/ election in place of retiring directors4. Appointment of auditors and fixation of their

remuneration

Board of Directors

• Board of Directors manages the affairs of a company (S 291)

• Directors are persons who direct, conduct, manage and supervise a company’s affairs

• Director’s are agents of the company• Directors appoint officers• They recommend rate of dividends• Directors are not employees but can hold a

salaried employment in addition to directorship

Board of Directors (contd)

• Articles of a co. fix the maximum and minimum numbers of directors. Public Ltd Co. must have at least 3 (not more than 12), and Pvt co. at least 2 directors.

• Co. may increase or reduce the no by ordinary resolution in General Meetings.

• First directors are normally appointed through MOA, usually named in AOA

• Company elects directors in General Meetings• Directors can also be appointed by Board of

Directors, central govt. and third parties.

Board of Directors (contd)

• Board of Directors meets once at least in 3 months; at least 4 meetings in a calendar year.

• Quorum: 1/3rd of total no of directors or 2, whichever is higher.

• No quorum necessary in the adjourned meeting.• Chairman, named in the articles, or elected, has a

casting vote in case of equality• BOD is entitled to exercise all powers of the co.

However, it can not do any act which is required to be done in a General Meeting.General Meeting can not invalidate any act done validly by the BOD except where the directors act in personal interest or the Board is incompetent. (S 291)

Powers, Duties, Liabilities of Directors – Powers of BOD

1. To exercise all powers of the company in accordance with the Companies Act, Memorandum, Articles of Association, resolutions in general meetings and other laws

2. Power, to be exercised through resolutions of the BOD (Board of Directors) (i) to issue debentures, (ii) to make calls on unpaid shares, (iii) fill casual vacancies in the Board( Adnl. Directors, Alternate Directors), (iv) recommend rate of dividend to be declared in AGM, (v) borrow ( Can not borrow more than Paid up Capital+ free Reserves) , (vi) invest funds - can delegate, (vii) give loans , (viii) appoint officers [board can delegate powers at (v) to (viii) through its resolution]

Powers, Duties, Liabilities of Directors – Powers of BOD ( contd.)

3. Can not contribute in any year to any charitable fund more than 5% of average net profit in the last three years.

4. General meeting can invalidate any act of the board, if and only if the directors act in their personal interest, or the board is incompetent

5. All directors present and voting, must consent (i) if a person who is already an MD or manager of another co is appointed as MD or manager (S 316,386), or (ii) if the co. wants to invest in the shares or debentures of another body corporate.

Duties of Directors

1. Statutory duties:(i) To file return of allotment of shares with ROC, within 30 days (S.

75)(ii) Not to issue irredeemable preference shares or shares

redeemable after 10 years (S. 80)(iii) To disclose personal or conflicting interest ( S 299,300)(iv) To attend board meetings ( vacates office if he does not attend 3

consecutive meetings or meetings for 3 months, whichever is longer, without permission)

(v) To convene AGMs(vi) To place before AGMs financial accounts(vii) To make declaration of solvency(viii) To disclose receipts from transferee of co. property or shares.

Duties of Directors (contd.)

2. General duites• Duty of good faith• Duty of care ( reasonable skill and diligence)• Duty not to make secret profits• To be responsible for (i) negligence, (ii) breach of

duty, (iii) breach of trust, (iv) misfeasance ( dishonest or malafide act or misconduct)

• Duty not to delegate, except when authorised (Directors are agents. A delegate can not delegate further except in the ordinary course of business, in case of need or emergency, or when authorised.

Liabilities of Directors1. Liability to company ( as agent- good faith, care, not to be

negligent, not engage in breach of trust, malafides, misconduct, dishonesty, not to do ultra-vires acts )

2. Liability to third parties [ as agent; liability under the companies act ( prospectus, allotments, etc), liability for breach of warranty or authority, etc]

3. Liability for breach of statutory duties ( preceding slide)4. Liability for acts of co-directors ( not an agent of co-directors- no

liability)5. Criminal Liability [ fraudulent acts, issuing prospectus containing

untrue statements (S 44, 63), violation of SEBI regulations, FEMA, Income Tax Act, other laws, granting loan to directors without approval of central govt. ( S 295), failure to produce books , furnish information to Inspector ( S 240)

MEMBERSHIP

A member is a :• Subscriber to the MOA• Agreeing to become a member by getting

name registered• Holder of the equity share Capital of the

Company.• FOR A COMPANY LIMITED BY SHARES ,

MEMBERS WHOSE NAMES APPEAR IN REGISTER OF MEMBERS ARE ALSO CALLED SHAREHOLDERS.

Winding Up of a Company

• Grounds:1. Inability to pay debts2. Failure/inability to commence business3. Reduction in membership below 7/2• Modes of Winding Up: 1. Compulsory winding by Court 2. Voluntary winding up 3. Voluntary winding up under supervision of

court.

Winding Up (contd.)

• Who can Move:

1.Creditors

2.Members

3.Administrator

4.Liquidator

Compulsory Winding Up

• Grounds:1. Special resolution2. Default in holding statutory meeting3. Failure to commence business within an year

of incorporation4. Reduction in Membership5. Inability to pay debts6. Grounds which the court considers just and

equitable, eg. complete deadlock in management, no real business, fraudulent or illegal purpose, etc.

Documents

Companies Act