LEGAL ASPECTS OF BUSINESS.

SESSION-6

COMPANIES ACT 1956.

“ A COMPANY IS AN ASSOCIATION OF MANY PERSONS WHO CONTRIBUTE MONEY OR MONIES WORTH TO A COMMON STOCK AND EMPLOYED IN SOME TRADE OR BUSINESS AND WHO SHARE THE PROFIT AND LOSS ARISING THERE-FROM.

THE COMMON STOCK SO CONTIBUTED IS DENOTED IN MONEY AND IS THE CAPITAL OF THE COMPANY.

THE PERSONS WHO CONTRIBUTE TO IT OR TO WHOM IT PERTAINS ARE MEMBES. THE PROPORTION OF CAPITAL TO WHICH EACH MEMBER IS ENTITLED IS HIS SHARE.THE SHARES ARE ALWAYS TRANSFERABLE ALTHOUGH THE RIGHT TO TRANSFER IS OFTEN MORE OR LESS RESTRICTD.” AS DEFINED BY LORD JUSTICE LINDLEY.

AS PER PROF.HANEY “ A COMPANY IS AN ARTIFICIAL PERSON CREATED BY LAW, HAVING SEPARATE ENTITY, WITH A PERPETUAL SUCCESSION AND COMMOMNSEAL.”

CHARACTERISTICS OF A COMPANY: 1) INCORPORATE ASSOCIATION: THE

COMPANY MUST BE INCORPORATED OR REGISTERED UNDER THE ACT.

2) ARTIFICIAL LEGAL ENTITY/PERSON: THE COMPANY BEING A JURISTIC PERSON,

DOES NOT POSSESS THE BODY OF A NATURAL BEING.IT EXISTS ONLY IN CONTEMPLATION OF LAW.

3) A SEPARATE LEGAL ENTITY: SOLOMAN VS SOLOMANCO.LTD.

UNLIKE PATNERSHIP, THE COMPANY IS DISTINCT FROM TH E PERSONS WHO CONSTITUTE IT. IN THE FAMOUS CASE OF SALOMON V. SALOMON CO.LTD., SALOMON WAS LEATHER MERCHANT. HE CONVERTED HIS BUSINESS INTO A LIMITED COMPANY-SALOMON CO. LTD. THE COMPANY SO FORMED CONSISTED OF SALOMON, HIS WIFE AND FIVE CHILDREN AS MEMBERS.

THE COMPANY PURCHASED THE BUSINESS OF SALOMON FOR $39,000, THE PURCHASE CONSIDERATION WAS PAID IN TERMS OF $10,000 DEBENTURES CONFERRING A CHARGE OVER THE COMPANYS ASSETS, $20,000 IN FULLY PAID $1 SHARE EACH AND THE BALANCE IN CASH. THE COMPANY WITHIN A YEAR RAN INTO DIFFICULTIES AND LIQUIDATION PROCEEDINGS COMMENCED.THE ASSETS OF THE COMPANY WERE NOT EVEN SUFFICIENT TO DISCHARGE

THE DEBENTURES(HELD BY SALOMON ENTIRELY).AND NOTHING WAS LEFT FOR THE UNSECURED CREDITORS. IT WAS HELD BY THE HOUSE OF LORDS THAT THE COMPANY WAS VALIDLY CONSTITUTED. THE BUSINESS BELONGED TO THE COMPANY AND NOT TO SALOMAN.

4) PERPETUAL SUCCESSION: A COMPANY BEING AN ARTIFICIAL PERSON DOES NOT DIE. ITS LIFE IS NOT DEPENDANT ON ITS MEMBERS.

5) LIMITED LIABILITY: THE MEMBERS OF A COMPANY ARE ONLY LIABLE TO CONTRIBUTE TOWARDS PAYMENT OF ITS DEBTS TO A LIMITED EXTENT, E.G., IN A COMPANY LIMITED BY SHARES, A MEMBERS LIABILITY IS LIMITED TO THE NOMINAL VALUE OF THE SHARE.

6) TRANSFERABLE SHARES: THE COMPANYS SHARES ARE CAPABLE OF BEING EASILY TRANSFERED .THEY ARE TRADED IN A STOCK EXCHANGE MARKET.

7) COMMON SEAL: A COMPANY CAN BE HELD BOUND BY ONLY THOSE DOCUMENTS WHICH BEAR ITS SIGNATURE. COMMON SEAL IS THE OFFICIAL SIGNATURE OF THE COMPANY.

8) SEPARATE ENTITY: SHARE HOLDERS ARE NOT, AS PER LAW, PART OWNERS COMPANY OR ITS PROPERTY. A COMPANY BEING A LEGAL PERSON CAN HOLD AND OWN PROPERTY IN ITS OWN NAME.

9) CAPACITY TO SUE AND BEING SUED.

KINDS OF COMPANIES:

CLASSIFICATION CAN BE DONE ON THE FOLLOWING BASIS:

A) ON THE BASIS OF MODE OF INCORPORATION:

1) CHARTERED COMPANIES: LIKE EAST INDIA COMPANY.

2) STATUTORY COMPANIES : THEY ARE CREATED BY SPECIAL ACT LIKE LIFE INSURANCE CORPORATION , S.B.I, R.B.I ,ETC.

3) REGISTERED COMPANIES: ARE THE COMPANIES REGISTERED UNDER THIS ACT.

B) ON THE BASIS OF LIABILITY OF MEMBERS:

4) LIMITED BY SHARES: WHERE THE LIABILITY OF THE MEMBERS OF A COMPANY IS LIMITED TO THE AMOUNT UNPAID ON THE SHARES.

5) LIMITED BY GUARANTEE: WHERE THE LIABILITY OF THE MEMBERS OF A COMPANY IS LIMITED TO A FIXED AMOUNT WHICH THE MEMBERS UNDERTAKE TO CONTRIBUTE TO THE ASSETS OF THE COMPANY IN THE EVENT OF ITS BEING WOUND UP.

6) UNLIMITED: EVERY MEMBER IS LIABLE FOR THE DEBTS OF THE COMPANY, AS IN AN ORDINARY PATNERSHIP, IN PROPORTION TO HIS INTEREST IN THE COMPANY.

C) ON THE BASIS OF NUMBER OF MEMBERS:

7) PRIVATE: WHERE THE MINIMUM NUMBER OF MEMBER IS TWO AND MAXIMUM FIFTY.

8) PUBLIC: WHERE THE MINIMUM NUMBER OF MEMBERS IS SEVEN AND MAXIMUM IS LIMITED BY SHARES.

D) OTHER TYPES OF COMPANIES: 1) GOVT. COMPANIES : MEANS ANY

COMPANY IN WHICH NOT LESS THAN 51% OF THE PAID UP SHARE CAPITAL IS HELD BY THE CENTRAL GOVT. AND PARTLY BY ONE OR MORE STATE GOVTS.

2) FOREIGN COMPANY : MEANS A COMPANY INCORPORATED OUTSIDE INDIA BUT HAVING A PLACE OF BUSINESS IN INDIA.

FORMATION OF A COMPANY:

THE WHOLE PROCESS CAN BE DIVIDED INTO FOUR STAGES :

1) PROMOTION2) REGISTRATION3) FLOATATION / RAISING OF CAPITAL

AND4) COMMENCEMENT OF BUSINESS

PROMOTION DENOTES PRELIMINARY STEPS TAKEN FOR THE PURPOSE OF REGISTRATION OF THE COMPANY. THE PERSON WHO UNDERTAKES THESE STEPS ARE CALLED PROMOTERS.THEY PREPARE MEMORANDUM AND ARTICLES OF ASSOCIATION AND OTHER NECESSARY DOCUMENTS. THESE DOCUMENTS ARE FILED WITH REGISTRAR OF COMPANIES(ROC).

ROC AFTER SCRUTINISING THESE DOCUMENTS AND ON BEING SATISFIED THAT THEY ARE IN ORDER , ISSUES THE CERTIFICATE OF INCORPORATION.

THIS CERTIFICATE IS CONCLUSIVE AS TO ALL THE REQUIREMENTS OF THE ACT WITH RESPECT TO REGISTRATION HAVE BEEN DULY COMPLIED WITH.

A PRIVATE COMPANY CAN COMMENCE ITS BUSINESS ON RECEIPT OF CERTIFICATE OF INCORPORATION. A PUBLIC COMPANY HAS TO RAISE CAPITAL AND FOR THIS PURPOSE ISSUE A PROSPECTUS . PROSPCTUS IS SUBSCRIPTION OF CAPITAL IS SOUGHT FROM PUBLIC OR ISSUE A STATEMENT IN LIEU OF PROSPECTUS WHEN SHARE CAPITAL IS SOUGHT FROM RELATIVES AND FRIENDS.

MEMORANDUM OF ASSOCIATION: IT DEFINES AS WELL AS CONFINES

THE POWERS OF THE COMPANY. THE MEMORANDUM OF A LIMITED

COMPANY IS TO CONTAIN ITS NAME, THE NAME OF THE STATE IN WHICH REGISTERED OFFICE IS TO BE SITUATED, THE OBJECTIVES, THE LIABILITY,

AND THE SUBSCRIPTION CLAUSE.

ARTICLES OF ASSOCIATION:

THE ARTICLES OF ASSOCIATION OF A COMPANY ARE ITS BYE-LAWS OR RULES AND REGULATIONS. IT CONTROLS THE INTERNAL MANAGEMENT OF THE COMPANY AND DEFINES THE POWERS OF ITS OFFICES.

ARTICLES CONTAIN PROVISIONS RELATING TO SHARE CAPITAL, RIGHTS OF SHAREHOLDERS, SHARES AND STOCK, MEETINGS .

ARTICLES MAY BE ALTERED BY PASSING SPECIAL RESOLUTION.

THE MEMORANDUM AND ARTICLES WHEN REGISTERED BECOMES PUBLIC DOCUMENTS AND CAN BE INSPECTED BY ANYONE ON PAYMENT OF NOMINAL FEE.

THUS THERE IS A PRESUMPTION THAT ANYBODY DEALING WITH THE COMPANY HAS READ AND UNDERSTOOD THESE DOCUMENTS.THIS IS KNOWN AS ‘DOCTRINE OF CONSTRUCTIVE NOTICE’.

PROSPECTUS:

A PUBLIC COMPANY NORMALLY INVITES PUBLIC TO SUBSCRIBE TO ITS SHARE CAPITAL. FOR THIS PURPOSE A PROSPECTUS IS REQUIRED TO BE ISSUED.

A PROSPECTUS MEANS ANY DOCUMENT DESCRIBED OR ISSUED AS PROSPECTUS AND INCLUDES ANY NOTICE, CIRCULAR, ADVERTISEMENT OR OTHER DOCUMENTS INVITING DEPOSITS FROM THE PUBLIC OR INVITING OFFERS FROM THE PUBLIC FOR THE SUBSCRIPTION OR PURCHASE OF ANY SHARES OR DEBENTURES OF A BODY CORPORATE.

THE PROSPECTUS MUST BE DATED, SIGNED AND REGISTERED WITH THE REGISTRAR.

AND THERE MUST BE FULL , FRANK AND HONEST DISCLOSUR E OF ALL FACTS.

SHARE AND SHARE CAPITAL:

THE CAPITAL OF A COMPANY IS DIVIDED INTO A NUMBER OF INDIVISIBLE UNITS OF A FIXED AMOUNT. EACH OF THESE UNITS IS KNOWN A ‘SHARE’. A SHARE CERTIFICATE ISSUED BY A COMPANY SPECIFIES THE SHARES HELD BY A MEMBER AND PRIMAFACIE EVIDENCE OF THE TITLE OF MEMBER OF THE SHARES.

STOCK IS THE AGGREGATE OF FULLY PAID SHARES.

THERE ARE TWO TYPES OF SHARES NAMELY EQUITY AND PREFERENCE SHARES.

PREFERENCE SHARES HAVE PREFERENTIAL RIGHTS AS TO DIVIDEND OR RETURN OF CAPITAL WHEN THE C OMPANY GOES FOR LIQUIDATION.

A COMPANY LIMITED BY SHARES OR A COMPANY LIMITED BY GUARANTEE HAVING A SHARE CAPITAL IS PROHIBITED FROM BUYING ITS OWN SHARES(INSIDER TRADING).

MEETINGS, AND RESOLUTIONS: COMPANY CAN ONLY ACT THROUGH

PERSONS WHO TAKE VARIOUS DECISIONS IN MEETINGS.

MEETING OF COMPANY CAN BE OF A) SHAREHOLDERS, B) DIRECTORS AND C) CREDITORS AND DEBENTURE HOLDRS.

SHAREHOLDERS MEETINGS INCLUDE STATUTORY MEETING, ANNUAL MEETING, EXTRAORDINARY GENERAL MEETING ETC.

ACCOUNTS AND AUDIT:

EVERY COMPANY IS REQUIRED TO MAINTAIN PROPER BOOKS OF ACCOUNT WITH RESPECTS TO ALL RECEIPTS AND EXPENDITURE, SALES AND PURCHASES, ASSETS AND LIABILITIES AND SUMMARIZED ACCOUNT OF ALL BRANCH OFFICES.

BOOKS OF ACCOUNT CAN BE INSPECTED BY ANY DIREC TOR,REGISTRAR, AUTHORISED OFFICERS OF CENTRAL GOVT. AND OF SEBI.THESE BOOKS ARE TO BE PRESERVED FOR 8 YRS.

AUDITOR:

AN AUDITOR OF A COMPANY IS A PRACTISING CHARTERED ACCOUNTANT.

FIRST AUDITOR IS APPOINTED BY THE BOARD, AND SUBSEQUENT AUDITORS BY THE SHAREHOLDERS.

RIGHTS OF AUDITOR: TO ACCESS TO BOOKS, ACCOUNTS AND

VOUCHERS. TO OBTAIN INFORMATION AND

EXPLANATION.

TO VISIT BRANCHES, AND RIGHT TO ACCESS TO BOOKS .

DUTIES OF AUDITOR

ACQUAINTANCE WITH THE ACT, MEMORANDUM AND ARTICLES,

TO MAKE REPORTS TO MEMBERS. TO BE UNBIASED AND IMPARTIAL

AND TRANSPARENT.

CO. MGMT AND ADMINISTRATION: THE ACT DEFINES A DIRECTOR AS

INCLUDING ‘ANY PERSON OCCUPYING THE POSITION OF A DIRECTOR BY WHATEVER NAME CALLED.’

THE PERSONS THROUGH WHOM A COMPANY ACTS AND DOES ITS BUSINESS ARE TERMED AS DIRECTORS, COLLECTIVELY KNOWN AS BOARD OF DIRECTORS.

ONLY AN INDIVIDUAL CAN BE APPOINTED AS DIRECTOR.

MINIMUM NUMBER OF DIRECTORS IN A PRIVATE COMPANY IS TWO AND IN A PUBLIC COMPANY THREE.MAXIMUM IS AS PROVIDED IN THE ARTICLES.

A PERSON CAN HOLD THE DIRECTORSHIP , AT THE SAME TIME IN UPTO 15 COMPANIES.

MANAGING DIRECTOR IS A DIRECTOR WHO IS ENTRUSTED WITH SUBSTANTIAL POWERS OF MANAGEMENT AND HIS TENURE IS FIVE YEARS AND ELIGIBLE FOR REAPPOINTMENT.

WINDING UP OF A COMPANY:

WINDING UP OF A COMPANY IS A PROCESS WHEREBY ITS LIFE IS ENDED AND ITS PROPERTY ADMINISTERED FOR THE BENEFIT OF ITS CREDITORS AND MEMBERS.

AN ADMINISTRATOR, CALLED LIQUIDATOR IS APPOINTED AND HE TAKES CONTROL OF THE COMPANY, COLLECTS ITS ASSETS, PAYS ITS DEBTS AND FINALLY DISTRIBUTES ANY SURPLUS AMONG THE MEMBRS IN ACCORDANCE WITH THE RIGHTS.

THERE ARE TWO MODES OF WINDING UP:

1) COMPULSORY WINDING UP 2) VOLUNTARY WINDING UP.

WRITTEN ASSIGNMENT :

CORPORATE GOVERNANCE.