Social Legal Issues Indian Companies Act 1956 Social

Social & Legal Issues Indian Companies Act 1956

Social & Legal Issues Companies Act, 1956 • A company implies an association of persons for some common object(s). According to the act : A company formed and registered under the companies act 1956 or under any previous company law. A company is a contractual entity created by the members.

Social & Legal Issues Characteristics of a Company 1. 2. 3. 4. 5. 6. 7. 8. 9. Incorporated Association Artificial legal Person Separate legal Entity Perpetual Succession Limited Liability Transferable Shares Common Seal Separate Property Capacity to Sue and Being Sued

Social & Legal Issues Kinds Of Companies • • • A) On the basis of mode of Incorporation: Chartered Companies Statutory Companies Registered Companies B) On the basis of Liability of Members Limited by Shares Limited by Guarantee Unlimited C) On the basis on the number of members Private Public D) Others: Govt. Companies, Foreign company, Holding and subsidiary company

Social & Legal Issues Distinction between private and Public Company Pvt. Company Public Company Minimum number of members to to form a company is 2 form a company is 7 Max. number of members should not exceed 50 No restriction Right to transfer share is restricted Freely transferable Prospectus can not be issued Prospectus is issued Commence business immediately after getting the certificate of incorporation Can start only after receiving the certificate to commence business from registrar of companies Numbers of Directors must be at least 2 Must have at least 3

Social & Legal Issues Distinction between private and Public Company Directors consent to work as a Director with Registrar is not necessary Number of Directors can be increased to any number Not more than 12 without the approval of the central govt. Directors are required to retire by rotation At least 2/3 rd of Directors must retire by rotation Managerial Remuneration –No restriction Not more than 11% of net profit. ( not mere than 5% to a sgl. Director) Can be registered with a paid up capital of Rs. 1 lakh Rs 5 Lakh Can not accepts deposits from public Can accept deposits from public Need not hold statutory meeting or file a statutory report Must do so

Social & Legal Issues Lifting The Corporate Veil • The circumstances under which the courts may lift the corporate veil are: 1. Under Statutory Provisions • • Reduction of Membership Misrepresentation of Prospectus Fraudulent Conduct of Business Failure to return application money Mis-description of name Non-payment of tax Liability of ultra -Vires acts

Social & Legal Issues Lifting of the Corporate Veil 2) Under Judicial Interpretations: • For determining the enemy of the company: Daimler Company vs Continental Tyre rubber company • For the Benefit of revenue-Sir Dinshaw Maneckjee Petil, Re • For prevention of Fraud and Improper conduct • Others

Social & Legal Issues Formation and Incorporation of a Company • • Promotion • • Registration/Incorporation • • Flotation/Raising of Capital • • Commencement of Business

Social & Legal Issues Promotion • • Promotion refers to the entire process through which a • company is brought into existence. • • It starts with the conceptualization of the birth of the company • with an objective for which it is to be formed. • • The persons who conceive the company and invest the initial • funds, are known as promoters.

Social & Legal Issues Registration/Incorporation of Company • • • The Promoters of the company will submit the following documents with the Registrar of Companies for the registration of company: • Memorandum of Association • The article of association • A list of persons who have consented to act as directors of the proposed company • A statutory declaration of compliance. • Any agreement with the relevant persons of the proposed company.

Social & Legal Issues Registration/Incorporation of Company • • The Registrar of the Companies is to allot a Corporate • • Identity Number to each company registered on or after November 1, 2000. • After scrutiny of all the documents a certificate of incorporation is issued

Social & Legal Issues Flotation and Raising of Capital • • A public company can take either of the following • • • steps: • a) Issue a prospectus to invite public for subscription • b) Deliver a statement in lieu of prospectus where the company has either not issued the prospectus or it has issued the prospectus , has not proceeded to allot any shares offered to the public for subscription

Social & Legal Issues Commencement of Business • • • • Every private company and a company not limited by shares can commence business immediately on receipt of certificate of incorporation. But a public company limited by shares is debarred from commencing business on borrowing money without the certificate of commencement of business �� Where a company has issued Prospectus – �� The minimum subscription in cash has been raised �� Every director of the company has paid in cash his qualification shares , a proportion payable on application and allotment on the shares offered for public subscription. �� No money is liable to be repaid to applicants for any shares or debentures which have been offered for public subscription by reason for any failure to apply for, or to obtain permission for the shares of debentures to be dealt in any recognized stock exchange

Social & Legal Issues Commencement of Business • • • • �� A statutory declaration duly verified by one of the directors or the secretary in the prescribed form that the above conditions have been complied with, is filed with the registrar �� Where the company has not issued prospectus –it has to satisfy the following conditions: �� A statement in lieu of the prospectus if filed with the Registrar �� Every director of the company has paid in cash his qualification shares , a proportion payable on application and allotment on the shares. �� A statutory declaration duly verified by one of the directors or the secretary in the prescribed form that the above conditions have been complied with, is filed with the registrar. �� When the company has compiled with the above conditions the Registrar will issue a certificate to commence business.

Social & Legal Issues Memorandum of Association • • Meaning and Importance • MOA of a company is its charter and defines the limitations of the • powers of the company • It is not unalterable • • Content: • i) Name of the Company: with ‘limited’ and ‘private limited’ as the • last word(s) of the name • ii) Registered Office • iii) Objects of the company : main objects , Incidental and ancillary • objects, other objects not included in first two.

Social & Legal Issues Memorandum of Association • • iv) Liability: A declaration is made that the liability of the members is limited. v) Capital-The amount of authorized share capital divided into shares if fixed amount vi) Association or Subscription: The initial members are called subscribers, who sign the memorandum in the presence of one witness

Social & Legal Issues Articles of Association • • Article of Association of a company are its bye laws. • It controls the internal management of the company • and defines the powers of its offices.

Social & Legal Issues Difference of Mo. A and Ao. A • Charter of Company • Defines the scope of activities • Supreme Document • Must for every company • Strict restrictions, some alterations may require sanction of central govt. • Act ultra-vires is wholly void and can’t be ratified • Regulations for internal Mgt • Rules for carrying out the objects of Co. • Subordinate to the memorandum • Company limited by shares need to have it. • Act ultra-vires but intravires the memorandum can be ratified

Social & Legal Issues Doctrine of Ultra -Vires • • • • Ultra –Vires means beyond the powers. • Ashbury Railway Cairrageand Iron Company Ltd vs Riche Doctrine of Constructive Notice • The memorandum and articles when registered with the Registrar becomes public document and accessible to all. • Therefore there is a presumption that any outsider dealing with the company has read and understood these documents. This is known as doctring of constructive notice. • Kotla Venkatswamy vs C Ramamurthy.

Social & Legal Issues Doctrine of Indoor Management • • • Persons dealing with the company in good faith have a right to assume that the internal requirements prescribed in public documents (memorandum and articles have been observed. Exceptions: • Where the outsider had knowledge of irregularity. • In case of forgery • Negligence on the part of the outsider • Acts outside the scope of apparent authority • Rayal British Bank v. Turquand

Social & Legal Issues Registration of the Company • • The promoters file the memorandum of association • • • article of association and a declaration by a lawyer that the requirements of the act have been followed with the Registrar of the Companies. • Registrar of the Companies issues the Certificate of Incorporation of the company. • Distinct Legal Entity

Social & Legal Issues Prospectus • • “Prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting offers from the public for the subscription and purchase of shares in, or debentures of a body corporate. ”

Social & Legal Issues Prospectus • Pre-Requisites of Prospectus • • Prospectus must be dated • • Prospectus must be signed • • Prospectus must be registered • Golden rule of the Prospectus • There should be an honest disclosure of all facts. The • true nature of the company’s venture to be disclosed.

Social & Legal Issues Prospectus • • • Deemed Prospectus- When a company allots shares or debentures to the public through the medium of Issue Houses, then the issue houses invite subscription from the public through their own offer document. This is also called prospectus by implication. • Statement in Lieu of Prospectus- Where a public company does not invite public to subscribe for its shares, but arranges to get money from private sources>The promoters here need not issue a prospectus but are required to draft prospectus • Red Herring Prospectus- is a prospectus , which does not have complete particulars on Price of securities offered and quantum of securities offered. E. g. -Jet Airways, Suzlon

Social & Legal Issues Membership • Persons who collectively constitute the company as a corporate entity are members or shareholders • a) The subscribers to the memorandum • b) Who agrees in writing to become member and whose name appears in the register of members • c) Who holds equity share capital and whose name is entered as beneficial owner in the records of the depository • The agreement in writing to take shares of the company • The registration of name in the register of members

Social & Legal Issues Member/Shareholder S. no Shareholder Member 1 Is a member May not be a shareholder because the company may not have a share capital 2 Person who owns a bearer share warrant is a shareholder Struck off from the list 3 A legal representative of a member Applies for registration 4 No share allotted to a subscriber to the memorandum Subscriber to a memorandum

Social & Legal Issues Who can be a member • • Minor Insolvent Partnership Firm Foreigner Company Trade Union or Society President of India

Social & Legal Issues Modes of acquiring membership/Index of a member • Membership by subscription • Membership by application and registration • A company with more than fifty members shall keep an index of members

Social & Legal Issues Rights of member / Register of Member • Statutory Rights • Contractual/otherwise • Name address and occupation • Share held by each member and the amount paid up on those shares • Date at which each person was entered in the register as a member • Date at which any person ceased to be a member

Social & Legal Issues Termination of Membership • • Transfers his shares Shares are forfeited by the company Surrenders his shares Shares are sold by the company to enforce its lien Dies Is adjudged insolvent Shares have been redeemed by the company Rescind the contract of membership on fraud or misrepresentation

Social & Legal Issues Director • A company is an artificial legal person and the directors as a body endow the artificial legal person with human face than can act and react. • The person through whom a company acts and does its business, and termed as director. • An individual can be appointed as director, no corporate body corporate, association or firm • Cannot hold a office of more than fifteen companies

Social & Legal Issues Qualifications of a director • No academic, professional or share qualification • Articles may provide for any qualifications • Where share qualification is fixed by articles then the act provides • a) Qualification shares must be taken within 2 months after appointment • Nominal value of qualification shares must not exceed Rs. 5000 or one share where its value exceeds Rs. 5000 • Share warrants will not count for this purpose

Social & Legal Issues Appointment of Directors • First director • Appointment of directors by company • Appointment of directors by the board • Appointment of directors by third parties (nominee director) • Appointment of directors by proportional representation • Appointment by central government • Appointment by small shareholders Consent for appointment Written consent is required to be signed and files with the registrar and the company

Social & Legal Issues Removal of Directors • By shareholders • By Central Government • By Tribunal

Social & Legal Issues Powers of Board of Directors • The board of directors of a company shall be entitled to exercise all such powers and to do all such acts and things, as the company is authorized to exercise and do. • The following powers are: • The power to make calls • The power to issue debentures • The power to borrow money otherwise than on debentures • The power to invest funds • The power to make loans • The power to buy back of shares

Social & Legal Issues Power to be exercised in the general meetings • • • Sale, lease or disposal of the undertaking Showing any concession regarding payment of debts Make investment of the amount of compensation received Contribution to charitable Borrowing monies exceeding the aggregate of the paid up capital and free reserves of the company

Social & Legal Issues Duties /Limitations • • • Good faith Reasonable care Disclose interest Participate in the communities Attend board meetings • Actions malafide • Incompetent to act • Deadlock in the board

Social & Legal Issues Company meeting • • General meeting • • • Notice of meting must be proper and adequate Chairman of the meeting Quorum Voting Agenda Minutes Requisites of valid meeting

Social & Legal Issues Kinds of Meetings of a Company Shareholders General Meetings Statutory Meetings Extra Ordinary Meetings Class meetings Annual General Meetings Directors Creditors/ Debenture holders

Social & Legal Issues Statutory Meetings • • • Object When held Not required to be held Notice Statutory report In case of default

Social & Legal Issues Annual general meeting • Which company to hold • When to be held Gap between two AGM Ø First AGM Ø Subsequent AGM Ø Extension of time maximum 3 months Ø Business to be transacted Ø Notice 21 days Ø Default

Social & Legal Issues Board Meetings Ø When to hold: Atleast once in every three calendar months and 4 meetings every year Ø Notice: To be given to every director in writing. No form or period of notice is laid down. Usually a week’s notice is sufficient. The notice must state the date, time and place of meetings. Ø Quorum: 1/3 of the total strength or two, whichever is higher. Ø Passing of resolution by circulation is permissible

Social & Legal Issues Motion • A proposal under consideration by members in a meeting before it is voted upon • • Rules Should be positive in terms and should always be in writing Within power, scope and relevant to business Comply with the provisions of the Act, memorandum and articles • Duly proposed by any member in a meeting • Should not be withdrawn before consent

Social & Legal Issues Resolution • Any motion voted upon and agreed to in a meeting and entered in minutes. A motion passed with or without amendment is called resolution Types of Resolution Ordinary resolution Special resolution Resolutions requiring special notice

Social & Legal Issues Winding up of a Company • Company dissolved • Winding up 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 members in accordance with their rights

Social & Legal Issues Winding up of a Company • Winding up of a company differs from insolvency of an individual in as much as a company cannot be made insolvent under the insolvency law. Even a solvent company can be wound up.

Social & Legal Issues Modes of winding up • Compulsory winding up under orders of the National company law Tribunal NCLT • Voluntary Winding up • The power of the court are transferred to the National Company Law Tribunal by the company (Amendment)Act 2002. The central government is in the process of formation of this Tribunal

Social & Legal Issues Grounds for winding up by the Tribunal (NCLT) • By the company passing a special resolution. • Default in holding statutory meeting or in delivering statutory report to the registrar • Failure to commence business within a year from the date of incorporation or suspension of business for a whole year • Reduction in membership below the minimum required • Inability to pay its debts of Rs 1 lakh • Tribunal is of the opinion that it is just and equitable • Default of company’s filing its balance sheet and profit and loss account on annual return for any five consecutive financial years

Social & Legal Issues Grounds for winding up by the Tribunal (NCLT) • If the company has acted against the interests of sovereignty and integrity of India, the security of the state, friendly relations with foreign states public order, decency or morality. • If the Tribunal is of the opinion that the company should be wound up as it had become sick and is unlikely to become viable in future •

Social & Legal Issues Who may petition for winding up • • • The company Any Creditor Any Contributor Any combination of creditor, contributory acting jointly or separately The registrar Any person authorized by the central government The official liquidator The central government and the state government Workers of a company cannot prefer a winding up petition against the company

Social & Legal Issues Liquidator • • • To conduct proceeding in winding up To make a report To take custody of company’s property To comply with directions of the creditors or contributories or the committee of inspection To summon meeting of creditors and contributories To obtain directions from the tribunal To keep statutory books To get accounts audited Central governments control of liquidator Information as to a pending winding up