Legal Aspects of BusinessUnit 2: Company Law

Prepared and Presented by,N. Ganesha PandianAssistant Professor

Madurai School of managementMadurai

Contents Major principles Nature and types of companies Formation of companies Memorandum and Articles of Association,

Prospectus Power, duties and liabilities of Directors winding up of companies Corporate Governance

Meaning of a Company Sec 3(1)(i) of the Act merely states that a

company means a company formed and registered under this act or an exiting company as defined.

Sec 3(1)(ii) provides that, ‘an existing company means ‘company formed and registered under previous company law.

Definition of a company A joint stock company may be defined to mean a voluntary

association of persons formed for some common purpose with capital divisible into transferable shares, limited liability with a distinctive name, having a corporate body, a legal personality on its own.

It is creation of law. It has no physical existence like a natural person

Justice James “ A company is an association of persons united for a common object”

Haney “ A company is an artificial person created by law, having separate entity, with a perpetual succession and a common seal”

Characteristic features of the company

1, Separate legal entity 2, Separate property 3, Common seal 4, Capacity to sue and to be sued 5, Limited liability 6, Perpetual succession 7, Transferability of shares

Corporation or Body corporate Term ‘corporate’ or ‘body corporate’ refers to company Corporation is wider than the company It includes a, Companies incorporated in India and foreign

companiesb, Nationalized banksc, Public financial institutions sec 4(A)d, Corporations formed under Acts of parliament

Contd… But excludes,a, a cooperative society registered under any law

relating to cooperative societies b, any other body corporate – central government

may by notification in the official gazettec, a society registered under societies registration

act 1860

Corporate veil Real person behind the company are disregarded once they have

formed a company and given to their association the status of a legal entity. The principle is known as ‘the veil of incorporation’

‘Corporate veil’ refers to the ‘partition’ or ‘curtain’ between the company and its members. The court in general consider bound by this principle in deciding the matter and therefore they refuse to go behind the persons responsible for acts of commission and omissions

The corporate entity is disregarded and the corporate veil is lifted or pierced in exceptional cases which is classified into

1, Exceptions under judicial interpretations2, Exceptions under statutory provisions

I, Exceptions under judicial interpretations

1, Protection of revenue 2, Avoidance of welfare legislation3, Prevention of fraud or improper conduct 4, Where the company is a sham 5, Company acting as agent or trustee of the

shareholders6, Determination of character of the company7,Where the doctrine conflicts public policy

II, Exceptions under statutory provisions

1, Reduction in no. of members below legal minimum (sec45)

2, Mis description of name (sec147)3, Failure to refund application money sec69(5)4, Investigation of the affairs and ownership of a

company (sec239)5, Misrepresentation in prospectus 6, Non – Payment of tax

Illegal associations (sec11) According to sec 11, no company, association or

partnership consisting of more than 20 persons (10 in case of banking business) can be formed to carry on any business for gain unless it is registered under the companies act or any other Indian Law

Otherwise such an association will be deemed to be illegal association having no legal existence

Association not for profit (sec25) Sec 25 provides that the central government may be

license direct that the association be regarded as a company with limited liability without using the words ‘Limited’ or ‘Private Limited’

These companies are also called licensed companies u/s 256 of the central government is empowered to grant exemption to such companies from any of the provisions of the company act

Privileges enjoyed by sec 25 companies

1, Permitted to register with limited liability – no need to use these words ‘Limited’ or ‘Private Limited’

2, Exempted from paying stamp duty on MoA and at time of registration

3, Need not send the list of its members to the registrar4, May be permitted to have even firm as a member5, Secretary need not possess the qualification prescribed under

sec 2(45)6, Board meetings once in six months7, Exempted from maintaining at its registered office a register of

directors and managers etc.,

Classification of companies According to sec12 of the companies act 1956,

seven or more persons or where the company to be formed will be private company and two or more persons may form an incorporate company with or with out limited liability

In words of Leonard W. Hein “the right of limited liability is desirable, but not a necessary adjunct to incorporation”

Classification of companies

Incorporation

MembershipControlLiability

No. of member

sChartered companie

sStatutory companie

sRegistered

companiesLicensed

company

Foreign company

Limited liability

Limited by sharesLimited

by guaranteeUnlimited liability

Private

Public Subsidiary

HoldingGovernem

ent

Non Governme

nt

On the basis of incorporation

1. Chartered companies – companies established as a result of royal charter granted by a king or queen of a country (eg) East India company and Bank of England

2. Statutory companies – Companies that are formed by special acts of parliament or state legislations are called statutory companies (eg) RBI ,LIC and etc.

3. Registered companies – Companies registered under the Indian companies act 1956 or under any of the previous companies acts are called registered companies

4. Licensed companies – companies established for promotion of arts, science, religion, charity or any other objects can obtain license (sec25)

5. Foreign companies – A company incorporated outside India under the law of the country of incorporation but having established its business in India

On the basis of number of membersA, Private company : In terms of sec3(1)(iii) of the act, a private company means a

company which has a minimum paid up capital of rs.1 lac or such higher paid up capital as may be prescribed and which by its articles:

1. Restricts the rights to transfer its shares if any,2. Limits the no. of its member to fifty not including, employee of the

company3. Prohibits any invitation to the public to subscribe for any share or

debenture4. Prohibits any invitation or acceptance of deposits from persons

other than its members, directors or their relatives

Contd…B, Public company: As per sec3(1)(V) of the act, a public company is a

company which1. Is not a private company2. Has a minimum paid up capital of rs. 25 lacs or

such higher paid up capital as may be prescribed3. Is a private which is a subsidiary of a company

which is not private

On basis of liability1. Limited liability: Liability of the shareholders

remains limited to the nominal value of the shares held by him

2. Limited by guarantee: In a guarantee company, the liability of a shareholder is limited to the amount has voluntarily undertaken to contribute towards the assets of the company to meet out any deficiency at the time of its winding up

On the basis of ownership 1. Government company – section 617 of

companies act 1956, defines a government company as any company in which not less than 51% of the paid up capital is held by the any government or subsidiary of a government company.

2. Non-Government company – It is controlled and operated by private capital

Contd…1. Investment companies – The principal business of which

consists in acquiring, holding and dealing in shares and securities

2. Finance companies – According to rule 2(CC) of the companies (acceptance of deposit) rules,1975, a “Finance company” means a non banking company which is a financial institution within the meaning of clause (C) of sec45-1 of RBI act, 1934

3. Producer companies – Formation of “producer company” dealing with primary produce, on co-operative principles. The scope of the proposed company is restricted to dealing with primary produce

Formation and incorporation of company

A company may be formed either to take over an existing business or to carry on new business

The procedure for the formation of a company may be divided into 3 principal stages

1. Promotion2. Incorporation3. Commencement of business

Company promotion The word promotion has not been defined in

the companies act. According to Bowen “the term promoter is a

term not of law but of business, usually summing up in a single word a no. of business operations familiar to the commercial world by which a company is generally brought into existence”.

Functions of promoters1. Promoter chooses the company’s name and ascertains

that it will be accepted by the registrar of companies2. Prepares details of company’s MOA and AOA ,

nomination of directors, solicitors, bankers, auditors and secretary and registered office of company

3. Promoter responsible for registration of company, issue of prospectus(public), in fact bringing the company into existence

Legal position of promoters

Companies act 1956 imposed fiduciary duties on the promoters.

He shouldn’t make any secret profits at the expense of company

Preliminary or pre-incorporation contracts:1. As promoters are not agents of the company in such

cases, companies are not liable for the acts of promoters entered into before incorporation

2. However the above term “Provisional” contracts which are entered into by a public company

Incorporation of company1. While selecting name, the promoters will keep in mind the provisions

of sec 20 and guidelines names of companies issued by government2. Decision on objects, the place where business is to be carried out,

the extent of the responsibility of each member for losses and etc., embody in the document called “Memorandum of Association”

3. Frame of rules and regulations for the company’s internal management which will be incorporated in “Articles of Association”

4. These two documents to be signed by at least 7 person (public company) 2 persons (private company) with requisite stamp duty and delivered with necessary stamp duty and delivered with necessary registration and filing ties

Documents to be prepared for incorporation of a public company limited by shares

1. Memorandum of Association2. Articles of Association3. Name of availability letter received from

registration of companies4. The MOA of a company is required to contain the

name of the state in which the registered office will be situated

5. Where a company by its AOA appoints any person a director, manager or secretary

Contd… According to sec 266 of the companies act, a person can’t be

appointed as director by the articles of a public company having share capital, unless the person before the articles are registered has signed and filed with the registrar either himself or through his agent his consent to act as director

Power of attorney on a non judicial stamp of a value prescribed in the stamp laws of the state concerned, empowering the attorney of the promoters

A declaration under sec 33(2) in form no:1 by an advocate of the supreme court, or a high court, an attorney or pleader entitled to appear before high court or a chartered accountant practicing in India, who is engaged in formation of a company, or by a persons name in article

Certificate of incorporation After filing the requisite document to the registrar, he

retains and registers the memorandum, the articles and other documents filled with him and issue a “certificate of incorporation” (ie) of the formation of company sec 33(3)

If there is any minor defect in any document, the registrar may ask for its rectification. But if there is a material and substantial defect, he may refuse registration

Commencement of business

1. A private company may commence its business immediately on incorporation

2. A public company can’t commence immediately, unless they obtain certificate of commencement from registrar

3. A company is bound to commence business within a year of its incorporation

Memorandum of association

MoA is most important document of a company and it lays down the powers and objects of a company and the scope of operation of the company beyond with its action can’t go

Sec 2(28) of companies act defines memorandum as follows “ The Memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this act”

Set out the constitution of the company

Purpose of memorandum According to Lord Mac Millian “the purpose of

memorandum is to enable the shareholders, creditors as well as those who are deal with the company, to know the company’s permitted range of enterprise”

It enables the prospective shareholders the purpose for which their money is going to be utilized by the company and the risks the shareholder are expected to such investment

Contents of memorandum The memorandum of association of every

company shall contain the following clauses:1. Name clause2. The registered office clause3. Objects clause4. Liability clause5. Capital clause6. Subscription clause

1. Name clause {sec13(1)(a)} – this clause contains the name of company

2. The registered office clause {13(1)(b)} – notice of situation of registered office

3. Objects clause {13(1)(c)&(d)} – the clause must contains the object of clause

4. Liability clause {13(2)} – this clause has to state the nature of liability that members incur

5. Capital clause {13(4)(a)} – must state, the different types of shares (capital)

6. Association or subscription clause {sec13(4)(c)} –this clause provides that those who have agreed to subscribe to the memorandum must signify their willingness to associate and to form a company

Doctrine of ultra vires1. “Ultra” means beyond, “vires” means powers. An action outside the

memorandum is ultra vires the company. The doctrine of ultra vires refers to unauthorized acts.

2. An act may be ultra vires the companies act, the memorandum of association; Article of association, the directors.

3. Act which ultra vires the companies act shall not only be invalid and void but also illegal

4. Acts ultra vires the memorandum, shall be void5. Acts ultra vires the articles can be adopted or ratified by altering the

articles with retrospective effect.6. Acts Ultra vires the directors can be made valid and binding upon the

company by the acquiescence of all the members of a company.

Articles of Association According to sec2(2), “Article” means the

articles of association of a company as originally framed or altered from time to time in pursuance of any previous companies act or this act

The articles of association are the rules and regulations and bye-laws for the internal management of the affairs of a company

Contents of articles The articles contain rules and regulations regarding 1. Share capital and variation of rights2. Lien on shares 3. Calls on shares4. Transfer, transmission, forfeiture and surrender of share5. Issue of share warrants6. Alteration and reduction of capital7. Voting powers of members8. Borrowing powers9. Audit committee10. Dematerialization11. Buyback of shares12. Proceedings at the board and at the general body meetings13. Appointment, powers, duties, qualifications, remunerations and etc of

directors14. Appointment of manager, managing director and secretary15. Dividends and reserves16. Maintenance of books of accounts and their audit17. The company’s seal18. Winding up

Contd… Table A of schedule I of the act deals with regulations for management

of a company limited by shares However, the following companies shall have their own article of

association1. Unlimited companies2. Companies limited by guarantee3. Private companies limited by sharesForm and signature of articles:The articles shall be a, Printed b, divided into paragraphs c, Signed by each subscriber of memorandum

Alteration by articles The articles of association of a company can at any

time be altered by special resolution. It is statutory power and any provision in the articles making the articles unalterable would be invalid as it is contrary to the provisions of the companies act

The company must file with the registrar a copy of the special resolution within a month from the date of its passing. The altered articles will bind the members in the same way as did the original articles (sec31)

Doctrine of constructive notice MoA and AoA are available for public

inspection in the Registrar’s office on payment of rs.50/- for each inspection (sec 610)

The person contracting with the company know the contents of these two documents is known as “Doctrine constructive notice” or “Constructive notice of memorandum of articles”

Doctrine of Indoor management Outsiders are bound to read the registered

documents and to see that the proposal dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of internal proceedings as required by the MoA.

This limitation of the doctrine of constructive notice is called “Doctrine of indoor management”

Prospectus Issuing a “prospectus” by which the public is

invited to subscribe to the capital of the company through equity shares, debentures and/or deposits

Objectives of prospectus:1. To inform the public about the forming of a new

company;2. To induce the investors to invest in its shares,

debentures and deposits

Definition of prospectus A prospectus is defined under sec2(36) of the companies act

as “any document described or issued as a prospectus and include any notice, circular, advertisement or other document inviting offers of deposits from the public for subscription or purchase of any shares in or debentures of a body corporate”

Thus a prospectus means1. A document 2. An invitation to public to invest in shares, deposits and

debentures3. It is widely advertised

Contents of a Prospectus sec 56 of the matters and reports stated in schedule II to the

companies act must be included in a prospectus1. General information:I, Name and address of registered officeII, Name(s) of stock exchangesIII, Declaration about refund of the issue if minimum subscription

of 90% is not received within 120 days from the opening of the issue

IV, Declaration about the issue of allotment letters/refunds within a period of 10 weeks and interest in case of any refund at the prescribed rate under sec 73

Contd…V, Date of opening of the issueVI, Date of closing of the issueVII, Name and address of auditors and lead managersVIII, Whether rating form CRISIL or any rating agency

has been obtained for the proposed debentures/ shares issue. if no rating has been obtained, this should be answered as “No”

2.Capital structure of the company i. Authorized, issued, subscribed and paid up

capitalii. Size of the issue, giving separately reservation

for preferential allotment to promoters and others

3. Terms of the present issue i. Terms of payment ii. How to apply iii. Any special tax benefits

4. Particulars of the issue i. Objects ii. Projects cost iii. Means of financing (Including contribution of promoters)5. Company management and project i. History and main objects and present business of the company ii. Promoters and their background iii. Location of the project iv, Collaborations, if any v, Nature of the product(s), export possibilities vi, Future prospect vii, Stock market date

Contd…6. Particulars in regard to the company and

other listed companies under same management

7. Outstanding litigations relating to financial matters or any criminal proceeding

8. Management perception of risk factors

Statutory and other information include information about :

1. Minimum subscription2. Expenses of the issues3. Underwriting commission and brokerage4. Previous public or rights issue giving particulars about

date of allotment, refunds, premium, discount and etc.,5. Issue of shares otherwise than for cash6. Particulars about purchase of property, if any7. Revaluation of assets, if any8. Material contracts and time and place where such

document may be inspected

Guidelines framed by SEBI regarding additional disclosures in

prospectus1. An index to the contents of the prospectus2. Details of: a, Actual expenditure incurred on the project b, means and source of financing such expenditure

c, year wise break up of the expenditure proposed to be incurred on the said project

3. Details of ‘bridge loan’ or other financial arrangement

Contd…4. The turnover disclosed in the profit or loss statement shall be

bifurcated into: a. turnover of products manufactured by company b. turnover of products traded by company c. details of products and not normally dealt in by the company5. The statement of assets and liability prepared after deducting

the amount of revaluation reserve from both fixed assets and reserves and the net worth arrived at after such deduction

6. The following details in case of companies undertaking major expansion or new projects; a, technology b, market c, Competitions d, managerial competence e, capacity build up

Contd…7. No projections of future profits shall be made8. A statement by the directors 9. The details of: a, the aggregate shareholding of the promoter group b, The aggregate no. of securities purchased or sold

by the promoter groupc, The maximum and minimum price at which

purchases and sales referred to.

Abridged prospectus Sec 56(3) of the companies act, 1956 requires

that no one shall issue form of application for shares in or debentures of a company unless the same is accompanied by a memorandum containing salient features of prospectus(more commonly known as ‘abridged form of prospectus’), as may prescribed

Registration of prospectus As per sec 601 of the companies act, 1956 a copy of

the prospectus must be filed with the registrar of companies on or before the date of publication of the prospectus, further

1. The copy sent for registration must be signed 2. Prospectus issued in more than one language, a copy

should be sent3. A copy should be delivered for registration4. The prospectus must be issued by newspaper ad

Documents to be enclosed with the prospectus for registration

The following documents are to be filed along with the prospectus1. Consent letter from an expert, if any, as required under sec 58 of the act2. Copy of any contract appointing and fixing remuneration of M.D or

manager3. Copy of other contracts not being a contract entered into in the ordinary

course of business carried on or intended to be carried on or a contract entered into more than 2 years before the date of prospectus

4. A statement certified by the auditor stating any adjustment in respect of loses or assets and liabilities and reasons for such adjustment

5. Copies of underwriting agreements6. Consent letter of auditors, legal auditors, solicitors, bankers or brokers to

act as such7. Certified copies of power of attorneys given by directors to their agents

to sign the prospectus on their behalf

Refusal of registration As per sec 60(3) of the act, the registrar shall not register a prospectus

unless- 1. It is dated as provided under sec 55 of the act2. It contains matters as provided under sec56 of the act3. It contain statements or reports of experts engaged or inserted in

formation, promotion or management of the company as provided under sec 57 of the Act

4. It includes a statement purporting to be made by an expert without a statement that he has given and not withdrawn his consent

5. It doesn’t contain the consent letters in writing of directors6. It is not accompanied by consent letters in writing of directors, legal

advisers and etc as provided under sec60(3) of the act

Shelf prospectus “Shelf prospectus” means a prospectus issued by

any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus

Who shall file a shelf prospectus?Any public financial institution, public sector bank or

scheduled bank whose main object is financing, shall file a shelf prospectus

Information memorandum “Information memorandum” means a process

undertaken prior to the filing of a prospectus by which a demand for the securities proposed to be issued by a company is elicited and the price and the terms of issue for such securities is assessed by means of a notice, circular, advertisement or document

{sec 2(19B)} the concept of information memorandum has been introduced with a view to ascertain the quantum and acceptable price of securities to be offered by a company

Red-herring prospectus A “Red-herring prospectus” means a

prospectus which doesn’t have complete particulars on the price of the securities offered and the quantum of securities offered. Every variation as made and highlighted shall be individually intimated to the person invited to subscribe to the issue of securities

Misleading prospectus1. A prospectus constitutes the basis of the contract b/w the

company and the shareholders and therefore it must disclose all material facts very accurately

2. It must not misrepresent or conceal material facts and thereby improperly influence and mislead the prospective investor into becoming an allottee of shares and in consequence suffer loss

3. A Prospectus containing false, misleading, ambiguous or fraudulent statement of material facts, is termed as “Misleading prospectus”

Liabilities in case of Mis-statement in prospectus

1. Company 2. Promoters 3. Directors 4. Experts

Two types 1. Civil liability 2. Criminal liability Civil Liability divided into 1. Remedies against company2. Remedies against directors, experts and

promoters

Shares and debentures

Definition of shares Section 2(46) of the companies act defines

“share” as ‘share in the share capital of company and includes stock except where distinction between share and stock is expressed or implied.

Kinds of shares Preference share Equity share Deferred share

Equity capital share

With voting rights With differential rights as to divided, voting or

otherwise in accordance with such rules and subject to such conditions as may be prescribed

Shares which do not have any preferential right in respect of dividend as well as repayment of capital are known as with “equity shares”

Share certificate Share certificate is a certificate issued by the company to the member

of the company under the common seal specifying the number of shares held by him and the amount paid on each share. A member of a company has a right to receive a share certificate.

It is a prima facie evidence of his title to the shares. Rule 6 of the companies (issue of share certificates) rules, 1960 provides

that every share certificate shall be issued under the common seal of the company and shall be signed by two directors or persons authorized by the two directors and the secretary or some other person appointed by the board for the purpose.

Contents of share certificate

A share certificate usually contains the following particulars Name of the company Address of the registered office of company Date of issue Name of the allottee|transferee Certificate number No of shares held Distinctive numbers Folio no Amount paid on the shares.

Preference shares1. Payment of dividend 2. Payment of capital

Classification of Preference shares

Non Participating

Participating

Irredeemable

redeemable

Non -Cumulative

Cumulative

Preference share capital As per sec 85(1) of the act, preference share capital

means that part of the share capital which fulfils both the follow requirements.

1. In respect of dividend, it carriers a preferential right to be paid at a fixed amount at an amount calculated at fixed rate which may be free subject to income tax.

2. An respect of capital, it carries on winding up or on re payment of capital preferential right to be repaid the amount of capital paid up.

Deferred shares Only private company can issue

deferred shares such shares are normally issued to the promoters and directors of the company. It is also known as founders shares. A public company cannot issue deferred shares.

Sweat equity shares As per explanation given to sec 79(a) of the Act,

sweat equity share means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions by whatever name called

Share capital Share capital means the capital raised by the issue of shares.

The amount invested by the shareholders towards the face value of shares are collectively known as share capital which is quite distinct from the capital put in by individual shareholders. The share capital is divided as shown below:

1. Authorized capital 2. Issue capital3. Subscribed capital4. Share warrant 5. Stock invest

1. Authorized capital: Authorized capital refers to that amount which is stated in the

‘capital clause’ of the memorandum of associations as the share capital of the company. This is the maximum limit of the company which it is authorized to raise and beyond which the company can’t raise unless the capital clause in the memorandum is altered in accordance with the provisions of sec 94 of the companies Act,1956

2. Issue capital: Issued capital refers to the nominal value of that part of

authorized capital, which has been subscribed for the signatories to MOA ii) allotted for cash or for consideration other than cash and iii) allotted as share bonus

Subscribed capital: Subscribed capital refers to the paid up value of the issued

capital. Other items used under the companies Act, 1956 are:Unissued capital: Unissued capital refers to that portion of the

authorized capital which has not yet been issuedUncalled capital: Uncalled capital refers to that portion of the

issued capital which has not yet been called up by the companyReserve capital: It refers to that portion of uncalled share capital

which shall not be except in the event and for the purposes of the company being wound up(sec 99). A limited company may, be a special resolution, determine a portion of this uncalled capital as reserve capital

Contd…Share warrant: A public company limited by shares, if authorized by its

article may issue share warrant with the prior approval of the central government only fully paid shares can be converted into share warrant with the prior approval of central government

Stock invest: stock invest is an instrument issued by banks to solve the problem of delay in refund of excess application money on account of over subscription and to solve the liquidity problem of excess application money. The stock invest is valid for three months

It is an additional facility given to the investors for applying public issues apart from the other instruments such as cash, cheques and drafts

Alteration of share capital Alteration of share capital means alteration of capital clause of the MOA of

the company by any of the following means:1. Increase of share capital by issuing new shares2. Consolidation or division of all or any of its share capital into shares of

larger amount than existing shares3. Conversion of all or any of its fully paid up shares into fully paid up

shares of denomination4. Sub-division of its shares or any of them into shares of smaller amount

that is fixed by the memorandum5. Cancellation of shares which have not been taken or agreed to be taken

and diminution of the amount of its share capital by the amount of the shares so cancelled

Reduction of share capital Sec 100 of the companies Act 1956 provides that a company limited by

shares or a company limited by guarantee and having a share capital may, if authorized by its articles, by special resolution and on its confirmation by the court on petition, reduce its share capital in any way in particular;

1. By reducing or extinguishing the liability of members in respect of uncalled or unpaid capital

2. By paying off or returning paid up capital not wanted for the purpose of the company

3. By paying off the paid up capital on the footing that it may be called up again so that the liability is not extinguished

4. By writing off or cancelling the capital which has been lost or is unrepresented by the available assets

5. By following a combination of any of the preceding methods

Debt capital A debenture capital is a certificate of

loan issued by a company The term ‘debenture’ is expressed to

include debenture stock, bonds and assets of the company or not; but there is no statutory or judicial definition of the term debenture

Debenture stockIn the word of BK Sengupta, ‘Debenture’ is the

description of an instrument whereas ‘debenture stock is the description of a debt or sum secured by an instrument

1. Debenture stock is the ‘loan capital’ in consolidated form

2. Always accompanied by a trust deed3. Stamp duty is paid in lump-sum at the time of

executing the trust deed

Main features of debenture:1. It is a document given by a company as evidence

of a debt to its holders usually arising out of a loan2. It is a form of certificate issued by a company

under its common seal3. It is generally contains a charge on the assets of

the undertaking or some class of assets or even part of its profits or even may not create any charge

4. It is generally provides for payment of interest until the amount is repaid back to the holder

Kinds of debenture1. Registered debentures: The registered debentures are those

which are payable to registered holders2. Bearer debentures: These are negotiable instrument and are

transferable by mere delivery to the transferee 3. Secured or mortgaged debentures: These are debentures

which are secured by a charge on the assets of the company. The charge may be fixed or floating

4. Naked or unsecured debentures: debentures which do not have any charge on the assets of the company known as unsecured or naked debentures

Contd…5, convertible debentures: sec 81(3) permits the issue

of convertible debentures. It enables the issue of shares to debenture holders and creditors in exchange for the amount due to them

i, Fully convertible debentureii, Non convertible debentureiii, Partially convertible debenture6, Redeemable debenture7, Irredeemable debenture

Company Directors Sec 253 of the companies act provides that no body corporate

or association or firm can be a appointed as director of a company

Sec 2(13) of the companies Act defines a director as including any person occupying the position of a director by whatever name called. It means that it is the position what is important and not the individual concerned

Sec 2(30) of companies Act defines officer includes a director as well as any person under whose direction or instruction the board or any one or more of the directors are accustomed to the Act

Qualification and Disqualifications of directors

The companies Act has not prescribed any academic qualifications for he directors of any company

Disqualification of directors: Section 274 of companies act 1956, provides that the following persons shall

not be capable of being appointed as directors of any companya, A person found by a competent court to be unsound mindb, an un discharged insolventc, a person who has applied to be adjudged an insolventd, a person who has been convicted by a court e, a person who has not paid any call in respect of shares of the company held

by him whether alone or jointlyf, a person has been disqualified by a court or tribunalg, a person who is already a director of a public company

Kinds of directors1. Executive directors2. Non executive directors3. Representative directors4. Nominee directors5. Independent directors

Appointment of Directors The appointment of a director may be

grouped as:1. Appointment of first directors2. Appointment at general meeting3. Appointment by Board of directors4. Appointment by third parties5. Appointment by central government

1. Appointment of first directors (sec 254) a. The first directors are usually appointed by

name in the articles or in the manner provided therein.

b. Where the articles do not provide for the appointment of first directors, those of the subscription to memorandum are deemed to be first directors of company

c. The first directors can hold office until the directors are duly appointed in accordance with the provisions of sec 255

Appointment of directors at General meeting (sec 255)

According to sec 255 the directors must be appointed by the company in general meeting

Sec 256 states that of the directors subject to retirement by rotation only one-third or a number nearest to one-third shall retire at an annual general meeting

In the first place, those directors shall retire who have been longest in office since their last appointment

Appointment of directors other than those retiring (sec 257) recognizes the right of any person, whether a member of a company or not, to contest election as a director at any general meeting of a company

Consent to act as director: sec 264 requires that every person proposed as candidate for the office of a director shall sign, and file with the company, his consent in writing to act as a director, if appointed

Appointment of directors by the board The board of director may appoint a directora, as an additional director (or) (sec260)b, to fill a casual vacancy (or) (sec262)c, as an alternate director (sec313)

Appointment of directors by third party

The articles may empower a third party to appoint directors. Similarly, banking company or a financial institution which has advanced loans to the company may appoint their nominees on the board

Appointment of directors by the central government

The central government has been empowered to appoint directors on an order passed by the company law board

A person appointed by the central government in pursuance of the above provisions shall not be:

1. Considered for the purpose of reckoning two-third or any other proportion of the total no. of directors of the company

2. Required to hold qualification shares3. Required to retire by rotation

Powers of board of directors

The board of directors of a company shall be entitled to exercise all such powers and perform all such acts and things as the company is authorized to exercise and do in general meetings

General powers of the board (sec292)1. The power to make calls on shareholders in respect of money

unpaid on their shares 2. The power to authorize the buyback of shares3. The power to issue debentures4. The power to borrow money otherwise than on debentures5. The power to invest funds of the company and 6. The power to make loans

The board however by a resolution passed at a meeting delegate to any committee of directors, the managing director, the manager or any other principal officer of the company, the power specified in clauses (4),(5)and (6) on such conditions as the board may prescribe

Besides the power specified in sec 292, there are certain other powers also which can be experienced only at the meeting of the board

1. The power of filling casual vacancies in the board2. Sanctioning of a contract in which a director is inserted3. The power to recommend the rate of dividend, to be declared

by the company at the AGM subject to the approval by the shareholders

Contd… In the following cases, not only that the powers be

exercised at the board’s meeting but also that every director present and entitled to note must consent thereto:

a, the power to appoint a person as M.D or manager, who is already M.D or manager of another company

b, The power to invest in any shares and debentures of any other body corporate

Powers of the board of directors only with the consent of the shareholders in general

meeting (sec 293)1. Sale, lease or otherwise dispose of the whole, or the whole of

the undertaking of their company2. Remit or give time for the repayment of any debt by a director3. Invest otherwise than in trust securities, the amount of

compensation received by the company in respect of compulsory acquisition of any fixed assets by the company

4. Borrow money exceeding the aggregate of the paid up capital of the company and its free reserves

5. Contribute in any year to charitable and other net profits for the funds not directly relating to the business of the company or the welfare of its employee any FY whichever is greater

Duties of directors Duties of directors may be divided

under two heads: 1. Statutory duties2. General duties

Statutory duties1. To file returns of allotments in case of issue of securities2. To disclose the extent of interest in contracts entered into by the company3. Not to issue irredeemable preference shares or share redeemable after 10

yrs4. To disclose receipt from transfer of property 5. To disclose receipt of compensation from transferee of shares6. Duty to attend board meetings7. Duty to convene general meetings8. To prepare and place at the AGM along with the balance sheet and P&L a/c

a report on the company’s affairs9. Duty to make declaration of solvency in the case of members’ voluntary

winding up

General duties

1. Duty of good faith 2. Duty of care and affection3. Duty not delegate

Responsibilities of Board of directors

a, Preparation of strategic plans operating plans and budget

b, monitoring major capital expensesc, Defining and reviewing the board functions periodicallyd, Setting the values, mission and vision of the company

and chalking out procedures to realize theme, Provision of adequate resources to achieve the set

objectivesf, Mentoring, monitoring and evaluating the agreed

objectives

Contd…g, Ensuring compliances and disclosuresh, monitoring and managing potential conflicts of

interests of management, board members and shareholders including misuse of corporate assets and abuse in related party transactions

i, Ensuring the integrity of company’s accounting and financial reporting system

j, Monitoring the effectiveness of corporate governance practice

Removal of directorsThe company directors may be removed

as stated below:1. Removal by shareholders2. Removal by central government 3. Removal by company law board

Company meeting Definition: A meeting may be defined as any gathering,

assembly or coming together of two or more persons for the transactions of some lawful business of common concern

Elements of valid meeting: 1. Properly convened2. Proper authority 3. Proper notice4. Proper quorum5. Resolution6. Minutes

AGM (Annual general meeting) The annual general meeting is to be held each

year with a view to enable the shareholders to review and evaluate the overall progress of the company during the past year

The first AGM must be held within 18 months of the incorporation of the company

Thereafter it must be held within 6 months of the expiry of FY of company

Classification of meetings1. Meeting of members2. Meeting of directors and committee

of directors3. Meeting of debenture holders4. Meeting of creditors and contributors

Resolutions: A valid resolution can be passed only at the meeting which has been duly convened and duly constituted with the requisite quorum

Kinds of resolution: 1, Ordinary resolution 2, special resolution Minutes: Minutes is an authentic record of the proceedings of the

meeting. Sec 193 of the companies Act 1956, requires every company to maintain minutes of its general meetings, board meetings and meetings of the committee of the board

Reports: Reports are always in a narrative form giving a historical account of all things discussed. An report gives statement of results, events, progress etc., (i.e) full a/c of the proceedings of the meeting

Under companies Act, 2 types of reports are prepared 1, Statutory reports 2, Non-statutory reports

Winding up of company Winding up/ liquidation represents the last

stage in company’s life. It is a proceeding by which a company is dissolved

The company’s asset are disposed of, the debts are paid off out of the realized assets, and the surplus, if any is then distributed among the members in proportion to their holdings in the company.

Modes of winding up There are two modes of winding up of

a company1. Winding up by the tribunal2. Voluntary winding up a, member’s voluntary winding up b, Creditors voluntary winding up

Winding up by tribunal Also known as compulsory winding up and a company

may be wound up in the following cases1. Special resolution of the company2. Default in delivering the statutory report to the

registrar3. Failure to commence or suspension of business4. Reduction in membership 5. Inability to pay its debts6. Just and equitable

Petition An application to the tribunal for avoiding winding up of

a company is made by a petition. This may be presented in following cases

1. Petition by the company2. Petition by any creditor(s)3. Petition by any contributor(ies)y4. Petition by registrar5. Petition by central government

Commencement of winding up1. Advertisement of petition 2. Powers tribunal3. Consequences of winding up order4. Procedure of winding up by the tribunal5. Committee of inspection6. Dissolution of company7. Contributory

Voluntary winding up Voluntary winding up means winding up by

the members or creditors of a company without interference by the tribunal

A company may wound up voluntarily:1. By passing an ordinary resolution2. By passing a special resolution

Consequences of winding up

1. Consequence as to shareholders/ members2. Consequence as to creditors3. Preferential payments4. Consequence as to servants and officers5. Consequence as to proceedings against

the company 6. Consequence as to cost

Corporate governance Corporate governance is defined by The institute of

company secretaries of India as follows: “The application of best management practices, compliance of law in letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”

Principles of corporate governance The principles evolved by the ICSI are as under:1. Sustainable development of all stakeholders to

ensure growth of all individuals associated with.2. Effective management and distribution of wealth3. Discharge of social responsibility4. Application of best management practices5. Compliance of law in letter and spirit

Objectives of corporate governance Corporate governance extends beyond corporate law. It is integral to the

very existence of a company1. It tries to inspire and strengthen the investors 'confidence2. To ensure commitment of the board in managing the company in

transparent manner so as to minimize the shareholders’ value3. To see that the board is balanced as regards the representation of

adequate number of non executive director and independent directors4. To review that the board adopts transparent procedures and practices in

the interest of both company and stakeholders5. To check that the board provides adequate information pertaining to the

development 6. To ensure that the board leads the company forward so as to maximize

long term value and shareholders’ wealth

Corporate governance needs

1. Impact of globalization2. Economic changes3. Change in the structure of

shareholding4. Financial reporting and transparency 5. Shareholders’ net worth and net

wealth