COMPANY LAW

UNIT - II

NATURE OF A COMPANY
A Company, in common parlance, means a group of persons associated together for the attainment of a common end, social or economic. The term registered company means a company incorporated under the companies Act, 1956 are mostly business companies but they may also be formed for promoting art, charity, research, religion, commerce, or any other useful purpose.

DEFINITION OF A COMPANY
An association of many persons who contributed money or moneys worth to a common stock, and employ it in some trade or business (for common purpose) and who share the profit or loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The person who contributed it, or to whom it belongs, are members.The proportion of capital to which each member is entitled is his share. Share are always transferable although the right to transfer them is often more or less restricted. On incorporation a company becomes a body corporate or corporation with a perpetual succession and a common seal. It also acquires a personality distinct from its members.

CHARACTERISTICS OF A COMPANY
Separate legal entity Limited liability Perpetual succession Common seal Transferability of shares Separate property Capacity to sue

COMPANY LAW IN INDIA

Companies are governed in India by companies act, 1956. Every company is required to register themselves with the Registrar of Companies (ROC) and file the necessary documents for various statutory requirements.

KINDS OF COMPANIES
On the basis of Incorporation Statutory Companies Registered Companies On the basis of liability Companies with Limited Liability Companies limited by Shares Companies limited by Guarantee Companies with Unlimited Liability [Sec. 12(2)]

On the basis of Number of Members A Private Company A Public Company

 On the basis of Control Holding Company Subsidiary Company On the basis of Ownership Governmental Company Foreign Company

FORMATION OF A COMPANY
Incorporation Of company:
Mode of Forming Incorporated Company (Sec.12)
Any 7 or more persons can associate to form a Public incorporated company with or without limited Liability Any 2 or more persons can associate to form a Private Incorporate Company with or without limited Liability They shall subscribe their names to a memorandum of Association and also comply with other formalities in respect of registration A Company so formed may be: 1. A Company limited by Shares 2. A Company limited by Guarantee 3. An Unlimited company

Document to be filed with the registrar:

Before a Company is registered, it is desirable to ascertain from the Registrar of Companies if the proposed name of the Company is approved. Then the following documents duly stamped together with the necessary fees are to be filed with the Registrar: 1. The Memorandum of Association duly signed by the subscribers 2. The Articles of Association 3. The Agreement 4. The list of the Directors

5. A Declaration with all requirements of Companies Act and other

formalities relating to registration have been compiled with. Such declaration shall be signed by any of the following persons:
a) An Advocate of The Supreme Court or High Court b) An Attorney or a pleader entitled to appear before a High Court, or c) A secretary or a chartered accountant in whole-til\me practice in India, who is engaged in the formation of the company; or d) A Person named in the articles as a director, manager or secretary of the company [Sec. 33(2)]
Then within 30 days of the date of incorporation of the company, a notice of the situation of the registered office of the company shall be given to the registrar who shall record the same [Sec. 146]

Certificate of Incorporation
When the requisite documents are filed with the Registrar, the registrar shall satisfy himself that the statutory requirements regarding registration have been duly compiled with. In exercising this duty, the registrar is not required to carry out any investigation. The only duty cast on him before he registers a company is to see that the requirements prescribed under Secs.33 (1) and (2) are complied with [Methodist Church v. Union of India,(1985) 57 Comp. Cas. 443] If the registrar is satisfied as to the compliance of statutory requirements, he retains and registers the Memorandum, the Articles and other documents filed with him and issues a Certificate of Incorporation ,ie., of the formation of the company [Sec. 33(3)]

 If there are minor defects in any document, the Registrar may ask for its rectification. But if there is a material & substantial defect, he may refuse registration If he improperly refuses to register, he may be compelled to do by the Court of Law but it generally doesnt interfere into the decision of the registrar unless it is perverse or clearly wrong By issuing certificate of incorporation the Registrar certifies under his hand that the company is incorporated and in the case of a limited company, that the company is limited (Sec. 34)

Conclusiveness of Certificate of Incorporation

A Certificate of Incorporation given by the registrar in respect of a company is conclusive evidence that all the requirements of the companies Act have been complied with in respect of registration. This is known as Rule in Peels case as it states: When once the memorandum is registered and the company holds out to the world as a company undertaking business, willing to receive shareholders and ready to contract engagements, then, it would be of the most disastrous consequences if after all that has been done, any person was allowed to go back and enter into an examination of the circumstances attending the original registration and the regularity of the execution of the documents

Once the certificate of Incorporation is issued by the registrar, nothing is to be inquired into as to the regularity of the prior proceedings. The certificate cannot be disputed on any grounds whatsoever. It cannot be challenged even in cases: 1. Where the Memorandum is altered after the signatories put their signatures on the Memorandum but before it is registered with the Registrar, or 2. Where the Memorandum is Signed by only one person for all the 7 subscribers, or 3. Where all the signatures to the Memorandum are forged.

The Certification of Incorporation has been held to be Conclusive on the following points:
That requirements of the Act in respect of registration of matters precedent and incidental thereto have been complied with. That the association is a company authorized to be registered under the Act, and has been duly registered. That the date borne by the certificate of Incorporation is the date of birth of the company, ie., the date on which the company comes into existence Even though the certificate of Incorporation is conclusive for the purpose of incorporation, it does not make an illegal object one. But the position is firmly established that if a company is born, the method to put an end to it is by winding it up.

 Copy of Certificate of Incorporation:

Any one can obtain a copy of the certificate of incorporation of a company on payment of the prescribed fee.

Effects of Registration(Sec. 34)

On the registration of the Memorandum of a company, the registrar shall certify under his hand that the company is limited From the date of incorporation mentioned in the certificate of incorporation, the subscribers to the Memorandum and other persons, who are members of the company, shall be a body corporate. The body corporate shall be known by the name contained in the Memorandum. It shall be capable forthwith of exercising all the functions of an incorporated company. It shall have perpetual succession and a common seal. The liability of the members to contributed to the assets of the company in the event of its being wound up shall be limited.

PROMOTER
A Promoter is a person who does the necessary preliminary work incidental to the formation of a company. It is a compendious term used for a person who undertakes, does and goes through all the necessary and incidental preliminaries, keeping in view the object, to bring into existence an incorporated company. Chronologically, the first person who controls a companys affairs are its promoters. It is they who conceive the idea of forming the company, with reference to a given object and then to set it going. It is they who take the necessary steps to incorporate the company, provide it with share and loan capital and acquire the business or property which it is to manage. When these things have been done, they hand over the control of the company to its directors, who are often the promoters themselves, under a different name.

Functions of a Promoter
The Promoters of a company decides its name and ascertains that it will be accepted by the registrar of companies. He settles the details of the companys Memorandum and Articles, the nomination of Directors, solicitors, Bankers, Auditors and secretary and the registered office of registration of the company, the issue of prospectus, where s public issue is necessary. He is in fact responsible for bringing the company into existence for, the object which he has in view.

Legal status of a Promoter

A Promoter is neither an agent nor a trustee of the company under incorporation but certain fiduciary duties have been imposed on him under the Company Act, 1956. He is not an agent because there is no principal born by that time and he is not a trustee because there is no Cestui Que trust in existence. Hence he occupies the peculiar position of a Quasi-Trustee

Fiduciary Position of a Promoter

In equity the promoters of a company stands in a fiduciary
relation to it and those persons whom they induce to become shareholders in it, and cannot in equity bind the company by any contract with themselves as promoters without fully disclosing to the company all material facts which the company ought to know The Fiduciary position of a promoter may be summed up as follows: Not to make any profit at the expense of the Company To give benefit of negotiations to the Company To make full disclosure of interest or profit Not to make unfair use of position

Duty of Promoters as regards Prospectus

The Promoters must see, in connection with the prospectus, if any is issued, or the statement in lieu of prospectus, that the prospectus:
1. 2. Contains the necessary particulars Does not contain any untrue or misleading statements or does not omit any material fact

If the promoters fails to perform this duty: (a) Allotment of shares may be set aside in the case of a fraudulent or Innocent misrepresentation (b) He may be sued for damages (c) He may be sued for compensation for misrepresentation (d) He may be sued for damages by shareholders who have suffered by reason of his non-compliance with the statutory requirements as to the contents of the prospectus (e) He may become liable to criminal proceedings

Remuneration of the Promoters

A Promoter has no rights to get compensation from the company for his services in promoting the company unless there is a contract to that effect. If there is no such contract, he is not entitled to get any compensation in respect of any payment made by him in connection with the formation of the company In practice, a promoter takes remuneration for his service in one of the following ways: He may sell his own property at a profit to the company for cash or fully-paid shares provided he makes a disclosure to this effect. He may be given an option to buy a certain number of shares in the company at par. He may take a commission on the shares sold. He may be paid a lump sum by the company.

MEMORANDUM OF ASSOCIATION
The first step in the formation of a company is to prepare Memorandum of Association. Memorandum means the memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of the Companies Act, 1956 [Sec.2(28)] Its a fundamental document. Its of great importance in relation to the proposed company containing the fundamental condition upon which alone the company is allowed to be incorporated. It also regulates the external affairs of the company in relation to outsiders. Its purpose is to enable shareholders and those who deal with the company to know what its permitted range of enterprise is. It not only show the object of the formation of the company but also the utmost possible scope of it. It is, as it were, the area beyond which the actions of the company cannot go; inside that area the shareholders may make such regulations for their own governance as they think fit.

Purpose of Memorandum
The purpose of the Memorandum is two-fold:

The prospective shareholders shall know the field in; or the purpose for, which their money is going to be used by the company and what risk they are undertaking in making investment. The outsiders dealing with the company shall know with certainly as to what the objects of the company are and as to whether the contractual relation in to which they contemplate to enter with the company is within the objects of the company [Cotman .V. Brougham 1918 A.C. 514]

Printing and Signing of Memorandum

Under Sec. 15, The Memorandum of Association of a company shall be a. Printed. b. Divided into paragraphs numbered consecutively. c. Signed by 7 (2 in case of private company) subscribers. Each subscriber shall sign with their address, description & occupation (if any) in the presence of at least one witness who shall at least the signature and shall likewise add personal details. If it is a printed in computer laser printer, then it should be registered by the Registrar for registration of a company, provided it is neatly & legible printed (As per press note by the Department of company affairs, dated (22-06-1993).

Form of Memorandum
Under Sec. 14, The Memorandum of Association of a company shall be in such one of the form in Tables B, C, D & E in Schedule I to the companies Act, 1956 as may be applicable to the case of the company, or in a form as near thereto as circumstance admit. Table B relates to Memorandum of Association of a company limited by shares. Table C relates to Memorandum and Articles of Association of a Company limited by guarantee and not having a share capital. Table D relates to Memorandum and Articles of Association of a company limited by guarantee and having a share capital Table E relates to Memorandum and Articles of Association of an unlimited company

Contents of Memorandum
The Memorandum of every company shall contain the following clauses The Name of the Company, with Limited as the last word of the name in the case of a public limited company and with Private Limited as the last words of the name in the case of a private limited company. The State in which the registered office of the company is to be situate. The Objects of the company can be classified as a) The main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects. b) Other objects of the company not included in (a).

 In the case of companies (Other than trading corporations) with objects not confined to one state, the states to whose territories the objects extend. Limited Liability: The Memorandum of a company limited by shares or by guarantee shall also state that the liability of its members is Limited. Share Capital Doctrine of Ultra Vires: Ultra means beyond and Vires means powers. The ultra Vires for a company means that the doing of the act is beyond the legal power and authority of the company. The purpose of these restrictions is to protect a) investors in the company b) creditors

Articles of Association
The Articles of Association are the rules, regulations and byelaws for the internal management of a company. They are framed with the object of carrying out the aims and objects as set out in the Memorandum of Association. Articles means the Articles of Association of a company as originally framed or as altered from time to time in pursuance of this act. They include the regulation contained in the Table A in Schedule I to the Act, in so far as they apply to the company [Sec. 2(2)].

In framing the Articles of a company care must be taken to see that the regulation framed do not go beyond the powers of the company itself as contemplated by the Memorandum of Association.

Contents of Articles
Articles usually contain provisions relating to the following matters:
Lien on Shares Calls on Shares Transfer of Shares Forfeiture of Shares Conversion of Shares into stocks Shares warrants Alteration of Capital General meeting and proceedings thereat Voting rights of members, voting and poll, proxies Directors, their appointment, remunerations, qualifications, powers & proceedings of board of directors Manager Secretary Dividends and Reserves Accounts, audit and borrowing powers Capitalization of Profits Winding Up

Model Form of Articles

Schedule I to the Act gives various model forms of Memorandum of Association and Articles of Association of various types of companies. The Schedule is divided into Tables which serve as a model for various companies.
Table A deals with regulations for management of a company limited by shares. Table B contains a model form of Memorandum of Association of a company limited by shares. Table C gives model forms of Memorandum and Articles of Association of a company limited by Guarantee and not having a share capital Table D gives model forms of Memorandum and Articles of Association of a company limited by guarantee and having a share capital. The Articles of such a company contain in addition to the information about the number of members with which the company proposes to be registered, all other provisions of Table A. Table E contains the model forms of memorandum and Articles of Association of an Unlimited company.

Prospectus
Sec. 2(36), defines a prospectus as any document described or issued as a prospectus & includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any document inviting deposits from the public or inviting offers from the public for the subscription of shares or debentures of a company is a prospectus.

 A Prospectus must be in writing. An Oral invitation to subscribe for shares in, or debentures of, a company, or deposits is not a prospectus. Likewise, an advertisement in television or a film is not treated to be a prospectus. Invitation to Public: A Document is not a prospectus unless it is an invitation to the public to subscribe for shares in, or debentures of, a company. But if the document satisfies the condition of invitation to the public, it is a prospectus even though it is issued to a defined class of the public [Nash .V. Lynde, (1929) A.C. 158] Dating of Prospectus (Sec. 55) Registration of Prospectus (Sec. 60)

Contents of prospectus
The golden rule as to framing of prospectus Those who issue prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state every thing with strict and scrupulous accuracy and not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature or extent and quality of the privileges and advantages which the prospectus holds as inducement to take shares.

 As per companies Act, 1956 Matters to be stated and reports to be set out in prospectus (Sec 56) Part I of Schedule II Part II of Schedule II Disclosure as per SEBI guidelines Misstatements in Prospectus and their Consequences Civil liability
Remedies against the company Remedies against the directors, promoters and experts

Criminal liability

 Remedies against the company Rescission the contract

The statement must be a material misrepresentation of fact. The statement must have induced the shareholder to take the shares The statement must be untrue The deceived shareholder is an allottee and he must have relied on the statement in the prospectus The Omission of material fact must be misleading before recession is granted.

Damages for deceit Remedies against the directors, promoters and experts

Statement in lieu of prospectus

Where apublic company does not invite public to subscribe for its shares, but arranges to get money from private sources, it need not issue a prospectus to the public. In such a case the promoters are required to prepare a draft prospectus known as a statement in lieu of prospectus, which should contain the information required to be disclosed by Schedule III of the Act.

Director
A director may be defined as a person having control over the direction, conduct, management or superintendence of the affairs of a company Position of directors
Directors as agents Directors as employees Directors as officers Directors as trustees
Of the companys money and property Of the powers entrusted to them

Powers of Directors
In most common law countries, the powers of the board are vested in the board as a whole, and not in the individual directors. However, in instances an individual director may still bind the company by his acts by virtue of his ostensible authority Powers to be exercised at Board meetings
Invest funds of the company Issue debentures Borrow money otherwise than on debentures Make calls on shareholders in respect of money unpaid on their shares Make loans

Powers to be exercised with the approval of company in general meeting

Duties of Directors
Fiduciary duties
Exercise their powers honestly and bona fide for the benefit of the company They must not make any secret profit out of their position

Duties of care, skill and diligence Other duties

To attend Board meetings, Not to delegate his functions except to the extent authorized by the Act To disclose his interest

Liabilities of Directors
Liability to third parties
Under the Act Independently of the Act

Liability to the Company

Ultra vires Act Negligence Breach of trust Misfeasance

Liability for breach of statutory duties Liability for acts of his co-directors

Winding Up of Companies
Winding up or Liquidation of a company represents the last stage in its Life, and it means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realized assets (or contribution from its members), and the surplus, if any, is then distributed among the members in proportion to their holdings in the company. The two terms Liquidation and Winding up are used interchangeably. Prof. Gowers def: Wing 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 members in accordance with their rights . (Modern Company Law, 4th ed., p. 789)

Modes of Winding Up
Winding up by the Court i.e Compulsory Winding up (Sec. 433 to 483) Voluntary winding up (Sec. 484 to 521)
Members Voluntary winding up, or Creditors voluntary winding up

Winding up subject to the supervision of the Court (Sec. 522 to 527)

Consequences of Winding Up
Consequences as to shareholders/members Consequences as to creditors Consequences as to servants and officers Consequences as to proceedings against the company Consequences as to costs DEFUNCT COMPANY(Sec 560) A Company is said to be defunct when it is not carrying on business or when it is not in operation

Corporate Governance
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders/members, management, and the board of directors. Other stakeholders include labor (employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large. For Not-For-Profit Corporations or other membership Organizations the "shareholders" means "members" (if applicable).

Definition
Corporate governance is defined as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes'.

Principles
Rights and equitable treatment of shareholders Interests of other stakeholders Role and responsibilities of the board Integrity and ethical behavior Disclosure and transparency

Issues involving corporate governance principles include:

Internal controls and internal auditors The independence of the entity's external auditors and the quality of their audits Oversight and management of risk Oversight of the preparation of the entity's financial statements Review of the compensation arrangements for the chief executive officer and other senior executives The resources made available to directors in carrying out their duties The way in which individuals are nominated for positions on the board Dividend policy

Mechanisms and Controls

Internal corporate governance controls
Monitoring by the board of directors Internal control procedures and internal auditors Balance of power Remuneration

External corporate governance controls

Competition Debt covenants Demand for and assessment of performance information (especially financial statements) Government regulations Managerial labour market Media pressure Takeovers