Elements of company law
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Elements of company law



Elements of company law

Elements of company law



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Elements of company law Presentation Transcript

  • 1. DEFINITION OF A COMPANY: A company is a voluntary association of person formed for some common purpose, with capital divisible in parts known as shares, and with a limited liability. It is a creation of law and is some times know as artificial person created by law, i.e. it is regarded by the law as a person just as a human being. But it has no physical existence. As per the Companies Act, 1956, a company is defined as ‘a company means a company formed and registered under this Act or an existing company as defined in section 3 (1) (ii)’.
  • 2. CHARACTERISTICS OF COMPANY The main characteristics of the company • Separate legal entity • Perpetual succession • Limited liability • Separate property • Transferability of shares • Common seal • Capacity to sue and be sued
  • 3. Types of company: Private Company [section 3(1)(iii)] A private company means a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed, and by its articles: (a) restricts the right to transfer its shares, if any; (b) limits the number of members to fifty not including: (i) person ho are in the employment of the company, and (ii) person who, having been formerly in the employment and have continued to be members after the employment ceased: (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of the company; and
  • 4. (d) Prohibits any invitation or acceptance of deposits from person other than its members, directors or their relatives : • • Provided that where two or more persons hold one or more shares in a company jointly, they shall be counted as a single member: there should be at least two persons to form a private company. A private company can therefore be registered with a minimum of 2 members and can not have more than 50 members (excluding employee and ex-employee members. A private company must have at least 2 directors. The word “ private limited” must be added at the end of its name by a private limited company.
  • 5. Public company [section 3 (1) (iv)] Public company means a company which a) Has a minimum paid up capital of five lakh rupees or such higher paid capital as may be prescribed and b) is not a private company • The minimum number of person required to form a public company is 7. there is no restriction on maximum number of members in a public company, • A public company must have at least 3 directors.
  • 6. Government companies : Section 617 defines a “Government company” as any company in which not less than fifty one percent of the paid up share capital is held by the a) Central Government, or b) by any state Government or Governments, c) partly by the Central Government or partly by one or more state Governments. A Subsidiary of a Government Company is also treated as a Government company.
  • 7. • Government companies are public sector companies, so their audit assumes special relevance. Hence, the companies Act makes separate provision for their audit. • The auditor of a Government company is appointed or reappointed by the Comptroller and Auditor General of India
  • 8. Foreign Companies: A foreign company is a company which is incorporated in a country outside India under the law of that other country and has established a place of business in India. Section 591 to 602 of the Act deal with such companies. Foreign companies are two classes namely : a) b) Companies incorporated outside India, which has established a place of business in India after April 1, 1956; and Companies incorporated outside India, which established a place of business in India before that date and continue to have an established place of business in India.
  • 9. Section 592 of the companies Act lays down that every foreign company which establishes a place of business in India must, with in 30 days of the establishment of such place of business, file with the Registrar of companies at New Delhi and also with the Registrar of Companies of the State in which such place of business is situated.
  • 10. Holding and Subsidiary companies [Section 4] “Holding and subsidiary” companies are relative terms. A company is a holding of another if the other is its subsidiary. According to section 4 of the company Act, 1956 a company shall be deemed to be a subsidiary of another, if and only if : a) That other controls the composition of its Board of Directors; or b) That other holds more than half of the nominal value of its equity share capital. c) The first mentioned company is a subsidiary of any company which is that other’s subsidiary.
  • 11. 1. 2. 3. To illustrate, company A is subsidiary of a company B if, but only if: Company B (holding company) controls the composition of the board of directors of company A (subsidiary); or Company B (holding company) controls more than 50% voting power of company A (subsidiary); If company A (the subsidiary) is a subsidiary of the company C which is subsidiary of company B, then company A is a subsidiary of Company B. If company D is the subsidiary of company A, then D will be the subsidiary of company C and also of company B
  • 12. Formation of company
  • 13. Incorporation of company Before a company is formed, certain preliminary decisions are necessary, e.g. whether it should be a private company or public company, what its capital should be, and whether it is worthwhile forming a new company or taking over the business of an already established concern. All these decision are taken by certain persons known as ‘promoters’. They do all the necessary preliminary work incidental to the formation of a company.
  • 14. • Commencement of business A private company or a company having no share capital may commence business and exercise its various powers immediately after it is incorporated. Once it has received its Certificate of Incorporation, nothing further is required. A public company, on the other hand, must obtain a certificate to commence business from the Registrar before it can commence its business or exercise its borrowing power. In order to obtain this certificate, the company must comply with section 149 of the companies Act. If the company has issued a prospectus than section 149(1) applies and if it has not issued a prospectus, Section 149 (2) applies
  • 15. “ commence any business” does not mean merely the business for which the company was started but it includes the power of borrow and any transaction including sale, and purchase of property, etc. [kishangarh Electric supply Co. Ltd.v. United State of Rajasthan, Air 1960 Raj. 49 ]. But commencement of “business” does not include taking of preliminary steps, entering into provisional contracts and allotment of shares.
  • 16. The certificate is conclusive evidence that a company is entitled to commence business. once a certificate of commence business has been issued to a company a writ cannot be issued to cancel the certificate of a company under the companies act, 1956[Muluk Mohammed v. capital stock Exchange Kerala Ltd (1991) 72 Com Cases 333 (ker)].
  • 17. Mode of forming incorporated company (section 12) Any 7 or more persons (2 or more in case of private company) associated for any lawful purpose may form an incorporated 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 be1). A company limited by shares, or 2). A company limited by guarantee, or 3). An unlimited company. Companies limited by shares are the most popular.
  • 18. • • • • Documents o be filed with the Registrar: before a company is registered, it is essential 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. The memorandum of association duly signed by the subscribers. The Articles of Association, signed by the subscribers to the memorandum of association. The Agreement, if any, List of Directors who have agreed to become first directors of the company and their written consent to act as directors.
  • 19. • A declaration stating that all the requirements of the companies Act and other formalities relating to registration have been complied with. Such declaration shall be signed by any of the following persons : viz a) An advocate of the Supreme Court or of a High Court. b) an attorney or a pleader entitled to appear before High Court. c) a secretary or a chartered accountant in whole time practice in India, who is engaged in the formation of the company. d) a person named in the Articles as a director, manager or secretary of the company.
  • 20. Certificate of incorporation When the requisite document are filed with the Registrar, the registrar shall satisfy himself that the statutory requirements regarding registration have been duly complied with. In exercising this duty, the registrar is not required to carry out any investigation. 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’. i.e. of the formation of the company.
  • 21. Memorandum of association
  • 22. • • • • The memorandum of association is a document, which contains: The fundamental rules regarding the constitution and activity of the company. It is the basic document, which lays down how the company is going to be constituted and what work it shall undertake. The purpose of memorandum is to enable the members of the company, its creditors and the public to know that its powers are and what is the range of its activity. The memorandum contains rules regarding the capital structure, the liability of the members, the object of the company and all other important matters relating to the company.
  • 23. • In other words the memorandum defines and confines the power of the company. alterations to the memorandum of association are possible only after certain formalities are completed.
  • 24. Contents of Memorandum of Association: Memorandum of Association is divided into following clauses: • Name clause • Registered office clause • Objects clause • Capital clause • Liability clause • Subscription clause.
  • 25. Articles of Association
  • 26. Articles of association is a document which contains• The rules regarding the internal management of the company. • In order to run the administration of a company smoothly, it is essential to have set of rules, which will be followed by everyone working with the company. These rules are incorporated in the articles of association. • The articles are subordinate to the Memorandum in importance. Therefore rules are made in conformity of the objects outlined in the Memorandum.
  • 27. Contents of articles of association Articles of association usually have the following contents: • Share capital, types of share, rights of shareholder, and meeting of shareholder. • Calls on share • Procedure for forfeiture of shares • Provisions regarding transfer and transmission of shares • Issuing of shares at premium or discount • Quorum at a meeting • Directors, their appointment etc. • Removal of director
  • 28. • Remuneration of manager, Secretary and Managing Director • Dividend and bonus shares • Provisions regarding Accounts and audit • Borrowing powers • Winding up
  • 29. MEETINGS
  • 30. COMPANY MEETINGS: The corporate system of business organization is essentially democratic in structure. Officials acting under the orders of the Board of Directors, which is the executive head of the company, carry on the business of the company. But the directors are elected to the Board by the shareholder of the company and must abide by the wishes of the shareholders as expressed in resolutions passed in meeting convened for the purpose. The shareholders are subjects to the provision of Memorandum of Association and Articles of Association, the final authority as regards the affairs of the company.
  • 31. Types of meeting: the following are the types of company meeting. 1. Shareholders Meetings • Statutory meeting • Annual General Meeting • Extraordinary General Meeting 2. Creditors Meetings 3. Debenture holders Meetings 4. Board Meetings Provision of company law regarding these meeting are discussed in the following paragraphs.
  • 32. Share holders meeting: a) Statutory meeting: Every public company limited by shares and every company limited by guarantee and having a share capital, must within a period of not less than one month and not more than six months from the date at which the company is entitled to commence business, hold a general meeting of members to discuss a report by directors, Known as statutory report, which contains particulars relating to the formation of a company.
  • 33. Statutory Report This is the report drafted by director and certified as correct by at least two of them [including managing director where there is one] A copy of the report must be sent to every member at least 21 days before the date of the meeting. A copy is also to be sent to the registrar for registration. Statutory report must contain certain particulars.
  • 34. Annual General Meeting: • A meeting known as an annual general meeting is Required to be held by every company, public or private, limited by shares or by guarantee, with or without share capital or unlimited company every year. • The first annual general meeting of a company may be held within a period of not more than 18 months from the date of its incorporation. • Subject to this provision, a company must hold any annual general meeting each year. • Not more than 15 months shall elapse between the date of one annual general meeting and the next
  • 35. • The Registrar may for any special reason, extend the time of holding an annual general meeting [other than the first annual general meeting] by a period not exceeding 3 months. • Every annual general meeting shall be called during business hours, on a day which is not a public holiday, at the registered office of the company or at some other place within the town or village where the registered office is situated. • A general meeting may be called by giving not less than 21 days notice in writing.
  • 36. • Extraordinary General Meeting: Any meeting of shareholder other than statutory meeting is an extraordinary general meeting. Who may call extraordinary general meeting 1. By Board of Directors 2. By shareholders subject to fulfillment of certain provisions 3. By Company Law Board
  • 37. • Requisites Of A Valid Meeting: • Proper Authority: The proper authority to convene a general meeting (whether statutory, annual general or extraordinary) of a company is a Board of Director.
  • 38. • Notice of meeting: A proper notice of the meeting should be given to the members and all others who are entitled to attend the meeting • Length of notice A general meeting of a company may be called by giving not less than 21 days notice in writing to the members. • Contents of notice Every notice of a company calling a meeting shall specify the place and the day and hour of the meeting. It shall also contain a statement of the business to be transacted at the meeting.
  • 39. • (1) (2) (3) (4) Ordinary business and Special business: (Section 173) The notice shall contain a statement of the business to be transacted at the meeting. The business may be ordinary business or special business. Ordinary business : in the case of an annual general meeting, the following business is deemed as ordinary business, business relating toThe consideration of the accounts, balance sheet and the reports of the Board of Directors and auditors, The declaration of dividend, The appointment of directors in place of those retiring The appointment of auditor and the fixing of their remuneration.
  • 40. Special business: in the case of an annual general meeting, any business other than the ordinary business and in the case of any other meeting, all business, is deemed special. For E.g. (1) Removal of director (2) Issue of right/bonus share, (3) Election of a person (other than retiring director) as Director. Explanatory statement. Where any special business is to be transacted at a meeting of a company, the notice shall specify its nature.
  • 41. • Quorum of Meeting (Sec 174 ) Quorum means the minimum number of members who must be present in order to constitute a valid meeting and transact thereat. The Quorum is generally fixed by the articles if the articles of the company do not provide for a large quorum the following rules apply: Five member personally present incase of public company and two incase of any other company shall be quorum for a meeting of the company
  • 42. • Chairman of the meeting ( Sec 175) A chairman is necessary is to conduct a meeting. He is the presiding officer of the meeting. Unless the Articles of a company otherwise provide, the members personally present at the meeting shall elect one of themselves to be the chairman of the meeting on a shoe of hands. if the poll is demanded on the election of the chairman, it shall be taken forthwith.
  • 43. Minutes of the meeting: Minutes are a record of what the company and director do in meetings. • Minutes of proceeding of meetings: Every company shall keep a record of all proceedings of every general meeting and of all proceedings of every meeting of its Board of Directors and of every committee of the Board. • Minutes Books: the book in which the record of the proceedings of a meeting is kept is known as the minute book.
  • 44. • Numbering of pages: The pages of every minute book shall be consecutively numbered. • Signing of minutes: Each page of the minute book which records proceedings of a board meeting shall be initialed or signed by the chairman of the same meeting or the next succeeding meeting • Fair and Correct Summary The minutes of each meeting shall contain a fair and correct summary of the proceedings at the meeting, so that the absentee shareholders may be in a position to form some reliable idea of what transpired at these meetings.
  • 45. • Evidentiary value of Minutes Minutes of meetings kept in accordance with the provisions of Sec 193 shall be evidence of the proceedings recorded therein and shall be conclusive of the facts stated therein
  • 46. • Proxies (Section 176) A member entitled to attend and vote at a meeting may vote either in person or by Proxy. A proxy is an a authority to represent and vote for another person at a meeting. It is also an instrument appointing a person as proxy. The person so appointed is also called a proxy.
  • 47. • Voting and Poll The motions proposed in a general meeting of a company are decided on the votes of the members of the company. The members holding any equity share capital therein have the right to vote on every motion placed before the company. The voting may be: 1.by a show of hands, or 2.by taking a poll
  • 48. • Resolutions: The Question which generally come for consideration at the general meeting of the company are presented in the form of proposals called motions. A motion may be proposed by the chairman of the meeting or by any other member of the company. • Kinds of Resolutions: 1. Ordinary Resolution [Section 189(1)] 2.Special Resolution [Section 189(2)]
  • 49. Prospectus
  • 50. • Definition Sec.2 (36) defines a prospectus as “any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposit from the public or inviting offers from the public for the subscription or purchase of any share in or debentures of, a body corporate.” in simple Words, any document inviting deposits from the public or inviting offers from the public for the subscription of share or debenture of a company is a prospectus.
  • 51. • Prospectus to be in writing • Invitation to public • Offer to the public
  • 52. • Registration of prospectus A prospectus can be issued by or on behalf of the company only when a copy thereof has been delivered to the Registrar for registration. The registration must be made on or before the date of publication thereof. The copy must be signed by every person who is named therein as director or proposed director of the company, or by his agent authorized in writing.
  • 53. • 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. • Information memorandum Information memorandum means a process under taking 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.
  • 54. • Red herring prospectus: Is a prospectus which does not have details of either price or number of share being offered or the amount of issue. This means that in case price is not disclosed, the number of share and the upper and lower price bands are disclosed. On the other hand an issuer can state the issue size and the number of shares are determined later. An RHP and Draft Offer Document can be filed with the ROC Without the Price Band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior to an opening of an issue.
  • 55. • Abridged Prospectus: The Companies Act 1956 defines ‘abridge prospectus’ to mean a memorandum containing such salient features of a prospectus as may be prescribed. It contains all the salient features of a prospectus. It accompanies the application form the public. • Offer document Offer document means prospectus in case of public issue or offer for sale and letter of offer in case of right issue, which (offer document) is filed with the registrar of companies (ROC) and Stock Exchange. An offer document covers all the relevant information to help an investor to make his/her investment decisions.
  • 56. • The Golden Rule as to framing of prospectus: The Golden Rule as to framing of prospectus was laid down by V.C. Kindersley in New Brunswick & Canada Rly. & Land co. v.Muggeridge,(1860) 1 and Sm. 363 in the following words: those who issue prospectus holding out to the public the great advantages which will accrue to persons who will take a share in a proposed undertaking, and inviting them to take share on the faith of the representations therein contained, are bound to state every thing 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,
  • 57. 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 share.”
  • 58. DOCTRINE OF ULTRA VIRES A company has the power to do all such things as are1. authorized to be done by the companies Act, 1956; 2. essential to the attainment of its objects specified in the memorandum; 3. reasonably and fairly incidental to its objects[ Foster vs. London Chatham & Dover Co., (1895) 1 Q.B 711].
  • 59. • Every thing else is ultra vires the company. ‘Ultra’ means ‘beyond’ and ‘vires’ means ‘powers’ The term 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-1. Investors of the company so that they may know the objects in which their money is to be employed; and 2. Creditors by ensuring by the company’s funds are not wasted in unauthorized activities.
  • 60. • Ultra vires act is void. If an act is ultra vires the company, it does not create any legal relationship. Such act is absolutely void and even the whole body of share holders cannot ratify it and make it binding on the company. It is not necessary that an act to be considered ultra vires must be illegal; it may or may not be [Anand Prakash vs. Asst. Registrar, A.I.R. (1968) All. 22]. The leading case on the point is: Ashbury Rly. Carriage & Iron Co. Ltd. v. Richie, (1875) L.R. 7 H.L.653. A company was incorporated with the following objects:
  • 61. a) to make, Sell, or lend on hire, railway carriage and wagons ; b) to carry on the business of mechanical engineers and general contractors; c) to purchase, lease ,work and sell mines, minerals, land and buildings, • The company entered into contract with Riche for the financing of construction of a railway line in Belgium. The question raised was whether that contract was covered with in the meaning of ‘general contractors’ the House of Lords held that the contract was ultra vires the company and void so that not even the subsequent assent of the whole body of share holders could ratify it.
  • 62. The main feature and facet of the doctrine of Ultra vires is of that a company being a corporate person should not be mulcted (fined or punished) for its own acts or acts of its agents, if they are beyond its powers and privileges [Bhidani vs. Bank of Baroda, (1957) 27 Comp. Cas.233]. Where the company exceeds its authority, the act is good to the extent of the authority and bad as to the excess but if the excess cannot be separated from the authority conferred on the company; by the memorandum, the whole transaction would be affected by the Doctrine of Ultra vires and would be void. But there is nothing to prevent a company from protecting its property the leading case on the point is:
  • 63. • National Telephone Co. vs. St. Peter Port Constable, (1900) A.C.317. A telephone company put up telephone wires in a certain area. The company had no power in the memorandum to put up wires there. The defendant cut them down. Held; The company sue for damage to the wires. • Whether a particular act on the part of the company is with in its powers is a question of facts and decided on the construction of the terms of the Memorandum
  • 64. • Ultra vires the Directors. If an act or transaction is ultra vires the directors (i.e. beyond their powers, but with in the powers of the company), the share holders can ratify it by a resolution in a general meeting or even by acquiescence provided they have knowledge of the facts relating to the transactions to be ratified, If an act is within the powers of the company, any irregularities may be cured by the consent of the share holders [Express Engg. Works Ltd. Re (1920) 1 Ch.466]. • Ultra vires the articles. If an act or transaction is ultra vires the articles, the company can ratify it by altering the articles by a special resolution. Again if the act is done irregularly, it can be validated by the consent of the share holders provided it is with in the powers of the company.
  • 65. ILLEGAL ASSOCIATION (SECTION-11) A company, association, or partnership consisting more than 10 persons for the purpose of carrying on the banking business and of more than 20 persons for the purpose of carrying on any other business with the object of earning profits can be legally formed only when it is registered under the companies Act 1956, or is formed in pursuance of some other Indian law or is a Joint Hindu family carrying on business on such. If the number of members of an association or partnership exceeds this statutory limit and is not registered under the companies Act, it is an illegal association and has no legal existence.
  • 66. • An association of more than 20 persons which exists not for acquisition for gain but for some other purpose such as the promotion of art, charity, religion, science, etc, does not require registration. CONSEQUENCES OF AN ILLEGAL ASSOCIATION 1. PERSONAL LIABILITY. Every member of an illegal association is personally liable for all liabilities incurred in the business and is punishable with fine which may extend to Rs.10,000.
  • 67. 2. CONTRACTS. (a) An illegal association cannot enter in to any contract nor can it sue any member or outsider, not even if the company is subsequently registered. (b) It cannot sue or be sued for debts due to it or from it in carrying on its business for it cannot contract debts, or enter into any contracts. (c) No member of the association can sue any other member in respect of any matter connected with the association (d) the members cannot either Individually or collectively bring an action to enforce any contract which they may have purported to make on behalf of the association, or to recover any debt given to the association.
  • 68. 3. WINDING UP. An illegal association cannot be wound up under companies either at a instance of creditor, or a member or the association itself. The tribunal will do nothing in relation to it that will amount to its recognition In fact the tribunal does not even entertain a petition for its winding up, for if it did, it would be indirectly according to recognition to the illegal association.
  • 69. Directors
  • 70. • Powers of Directors General powers of the Board: the Board of Director of a company is entitled to exercise all such powers and to do all such acts and things as the company is authorised to exercise and do. This means the powers of the Board of directors are Co-extensive with those of the company. This proposition is, however, subject to two conditions: First, the Board shall not do any act which is to be done by the company in general meeting. Second, the Board shall exercise its powers subject to the provisions contained in the companies Act, or in the Memorandum or the Articles of the company or in any regulation made by the company in general meeting. But no regulation made by the company in a general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made.
  • 71. • Powers to be exercised at Board meeting: The Board of directors of the company shall exercise the following powers on behalf of the company by means of resolutions passed at the meetings of the Board, viz., the power toa) Make calls on shareholder in respect of money unpaid on their shares: b) Issue debentures: c) Borrow money otherwise than on debentures (say, through public deposits) d) Invest the fund of the company e) Make loans The Board may, by a resolution passed at a meeting, delegate the last three powers to a committee of directors or the manager or any other principal officer of the company, but the board shall specify the limits of such delegation.
  • 72. • Powers to be exercised with the approval of company in general meeting: The board of directors of a public company, or of a private company which is a subsidiary of a public company, shall exercise the following powers only with the consent of the company in general meeting (say, under amalgamation scheme): • To sell lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company. • To remit or give time for repayment of any debt due to the company by a director except in the case of renewal or continuance of a advance made by the banking company to its directors in the ordinary course of business. • to invest the amount of compensation received by the company in respect of the compulsory acquisition of any undertaking or property of the company.
  • 73. • To borrow moneys where the moneys to be borrowed (together with the moneys already borrowed by the company) are more. Than the paid up capital of the company and its free reserves (that is to say reserve, not set a part for any specific purpose, e.g. balance in the share premium account, general reserve, profit and loss account, capital redemption account). The amount of temporary loans raised from banks in the ordinary course of business is excluded. • To contribute to charitable and other funds not directly relating to the business of the company or the welfare of its employees.
  • 74. • Every resolution passed by the company in general meeting to borrowed moneys shall specify the total amount up to which moneys may be borrowed by the Board of directors.
  • 75. Liabilities of Directors: 1. Liability to third parties: Under The Act. Liability of the directors to third parties may arise in connection with the issue of a prospectus which does not contain the particulars required by the companies act or which contain material misrepresentations. Directors may also incur personal liabilitya) On their failure to repay application money if minimum subscription has not been subscribed b) On an irregular allotment of shares to an allottee (and likewise to the company ) if loss or damage is sustained c) On their failure to repay application money if the application for the securities to be dealt in on a recognized stock exchange is not made or is refused
  • 76. d) On failure by the company to pay a bill of exchange, hundi promissory note cheque or order for money or goods wherein the name of the company is not mentioned in legible characters
  • 77. Independent of the Act Director, as agents of a company, are not personally liable on contract entered into as a agent on behalf of the company. But there are number of exception to this rule. If a director fail to exclude personal liability, for instance, by signing a negotiable instrument without mentioning the company’s name and the fact that he is signing on a company’s behalf, he is personally liable to the holder of such instrument. He is also personally liable if he acts in his own name.
  • 78. Liability to the company. 1. Ultra vires acts. 2. Directors are personally liable to the company in respects to ultra vires acts and it is not necessary to prove fraud in such a case, e.g when they pay dividend out of capital or when they dissipate the funds of the company in ultra vires transactions. They are liable jointly and severally and inter se, they have a right to rateble contribution. Negligence. A director may incur liability for the negligence in the exercise of his duties. There is no statutory definition of negligence, and as such each case has to be decided after due consideration of the particular facts thereof.
  • 79. • Breach of trust: Directors of a company being in a fiduciary position, hold the position of trustee as regards its money and property which comes into their hand and of the powers entrusted to them by the Articles. They must discharge their duties as such trustees in the best interest of the company. They are liable to the company for any loss resulting from breach of trust. • Misfeasance: Director are liable to the company for misfeasance which means ‘wilful misconduct’ of directors for which they may be sued in Law Court. In case of misfeasance proceeding the directors may apply for relief under section 633.
  • 80. • Liability for breach of statutory duties: There are numerous statutory duties of directors which they must carry out. Most of this duties relate to maintenance of proper account, filing of returns or observance of certain statutory formalities. If they fail to perform to these duties, they render themselves liable to penalties. • Liability for acts of his co-directors. A director is not liable for the acts of his co-directors provided he has no knowledge and he is not a party. His co-directors are not his servants or agents who can by their acts impose liability on him
  • 82. • A Managing director means a director who is entrusted substantial powers of management which would not otherwise be exercisable by him. These powers may be conferred on him by virtue of an agreement with the company or a resolution passed by the company in general meeting or its board of directors or by virtue of its memorandum of association or articles of association. • The term Managing director includes A director occupying a position of managing director, by whatever name called but the power to do administrative acts of routine nature of when so authorised by the board such as the power to affix common seal of the company to any document or to draw or endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument
  • 83. or to singe any share certificate or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management
  • 84. Manager Manager according to section 2 (24), means an individual who has the management of the whole or substantially the whole of the affairs of a company. He is subject to the superintendence, control and direction of the board of directors. ‘Manager’ includes a directors or any other person occupying the position of the manager, by whatever name called and whether under a contract of service or not.
  • 85. • Remuneration to manager the manager of a company may, subject to the overall limit of managerial remuneration, receive remuneration either by way of monthly payment or by way of specified percentage of the net profit of the company. Excepts with the approval of the Central Government, such remuneration shall not exceed in the aggregate 5 per cent of the net profit of the company
  • 87. • ‘Share capital’ means the capital raised by a company by the issue of share. The word ‘capital’ in connection with the company is used in several senses. 1. 2. 3. 4. 5. 6. Authorised or nominal capital. Issued and subscribed capital. Called up capital. Paid up capital. Uncalled capital. Reserve capital.
  • 88. • Types of share A) Preference shares. Preference shares, with reference to any company limited by shares, are those which have two characteristics. • They have a preferential right to be paid dividend during the lifetime of the company • They have a preferential right to the return of capital when the company goes into liquidation.
  • 89. B) Equity shares. equity share, with a reference to any company limited by share, are those which are not a preference share. i) with voting rights, or ii) with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed. C) Sweat equity share. The expression sweat equity share means equity share issued at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property right or value additions.
  • 90. • Kinds of preference shares. 1. 2. 3. 4. 5. 6. 7. Cumulative preference shares. Non-cumulative preference shares. Participating preference shares. Non-Participating preference shares. Convertible preference shares. Non-Convertible preference shares. Redeemable preference shares.
  • 91. Winding up of Companies
  • 92. • the main purpose of winding up of a company is to realize the assets and pay the debts of the company expeditiously and fairly in accordance with the law. However, the purpose must not be exploited for the benefit or advantage of any class or person entitled to submit petition for winding up of the company it may be noted that on winding up, the company does not cease to exist as such except when it is dissolved. The administrative machinery of the company gets changed as the administration is transferred in the hands of the liquidator. Even after commencement of the windingup, the property and assets of the company belong to the company until dissolution takes place. On dissolution the company ceases to exist as a separate
  • 93. Entity and becomes incapable of keeping property, suing or being sued. thus in between the winding up and dissolution, the legal status of the company continues and it can be sued in the court of law
  • 94. • Winding up and Dissolution The terms winding up and dissolution are sometimes erroneously used to mean the same thing. But according to the company act 1956 the legal implication of these two terms are quite different and there are fundamental difference between them as regards the legal procedure involved. The main points of distinction are given below. • Winding up is the first stage in the process whereby assets are realised, liability are paid off and the surplus, if any, distributed among its members. Dissolution is the final stage whereby the existence of the company is withdrawn by the law.
  • 95. • The liquidator appointed by the company or the court carries out the winding up proceeding but the order for dissolution can be passed by the court only. • Liquidator can represent the company in the process of winding up. This can be done till the order of dissolution is passed by the court. Once the court passes dissolution orders the liquidator can no longer represent the company. • Creditors can prove their debts in the winding up but not on the dissolution of the company.
  • 96. • Modes of Winding Up 1. By the Court i.e. compulsory winding up. 2. Voluntary winding up, which may be either. i) members voluntary winding up. ii) creditor’s voluntary winding up. 3. Winding up subject to the supervision of the court.
  • 97. • Winding Up by The Court. Winding up by the court or by the compulsory winding up is initiated by an application by way of petition to the appropriate Court for a winding up order. A winding up petition has to be resorted to only when other means of healing an ailing company are of absolutely no avail. • Voluntary Winding Up. The companies are usually wound up voluntarily as it is an easier process of winding up. It is altogether different from a compulsory winding. In voluntary winding up the company and its creditors are left to settle their affairs without going to a court, although they may apply to the court for directions or orders, as and when necessary
  • 98. • Members voluntary winding up. When the company is solvent and is able to pay its liabilities in full, it need not consult the creditors or call their meeting. Its directors, or where they are more than two, the majority of its may, at a meeting of the board make a declaration of solvency verified by an affidavit stating that they have made full enquiry into the affairs of the company and that having done so they have formed an opinion that the company has no debts or that it will be able to pay its debts in full within such period not exceeding 3 year from the commencement of the winding up as may be specified in the declaration.
  • 99. • Creditor’s voluntary winding up. Where a declaration of solvency of the company is not made and delivered to the registrar in a voluntary winding up it is a case of creditor’s voluntary winding up