What is a company?As per Sec 3(1)(i):“Company means:-A company formed and registered under this Act, or-An existing company, formed and registered under any previous company law.”“A company means an association of many persons -who contribute money or money’s worth to a common stock and employ it in some common trade or business. -who share the profits or lose arising there from.” -Lord Justice Lindlay
Features of a companySeparate Legal EntityLimited Liability ( either by share or guarantee)Perpetual SuccessionArtificial personCommon sealTransferability of sharesSeparate PropertyCapacity to sueTermination of existenceSeparate management
Types of CompaniesClassification on the basis of incorporation Statutory companies Registered companiesClassification on the basis of liability Limited Company ( Limited by share or by guarantee) Unlimited companyClassification on the basis of ownership Government Company Foreign CompanyClassification on the basis of number of members Private Company Public Company• Classification on the basis of control Holding company Subsidiary company
Types of CompaniesStatutory Companies: Formed under Special Statutory Act of Parliament or State Legislature. For e.g., RBI, SBI, IFCI, etc.Registered Companies: Are registered under the Companies Act. These companies have MoA and AoA for internal & external regulations.
Types of CompaniesLimited CompanyLimited by SharesLimited by Guarantee not having share capitalLimited by guarantee having share capitalUnlimited Companyno limit on the liability of the members.Members cannot be directly sued by the creditors.When the company is wound up, members to discharge theliability.
Types of CompaniesGovernment Company 51% of the paid up share capital by government.The share can be held by the central government or state government. Partly by central and partly by two or more governments.Foreign CompanyA company incorporated outside India, but having a place of business in India.
Private Company minimum of two personsminimum paid up capital of 1 lakh or moreThe maximum number of members to be fiftyRights to transfer the shares are restrictedProhibits any invitation to the public to subscribeIt prohibits acceptance of deposits from persons other than its members, directors or their relatives.Two or more are holding one or more shares in a company jointly, to be treated as a single member.
Public CompanyA Public company means a company- > Which is not a private company > Which has a minimum paid-up capital of Rs 5 lakh or such higher paid-up capital, as may be prescribed > Which is a private company and is a not a subsidiary of a company, which is private company. >It includes- any company which is a public company with a paid up capital of less than 5 lakh, then it has to enhance its paid up capital as per the statutory requirement
Conversion of CompanyThe Act provides for conversion of public company into a private company and vice versaA private company is converted into a public company either by default or by choice in compliance with the statutory requirements.Once the action for conversion takes place then, a petition can be filed with the central government with the necessary documents for its decision on the matter of conversion
Registration and IncorporationAssociation of persons or partnership or more than 20 members ( 10 in case of banking) can register to form a company under the Companies Act, 1956The contract entered into by this illegal association is void and cannot be validated. Its illegality will not affect its tax liability or its chargeabilityThe certification of incorporation is the conclusive evidence, that all the requirements for the registration have been complied with in respect of registration.
Procedure for incorporation ofCompany.Application for availability of namePreparation of MOA and AOASelection and finalization of MOA and AOA- Its printing, stamping and signingPreparation of other necessary documentsFilling of the required documents for Registration to obtain certificate of incorporation and Certificate of commencement of business
Memorandum of AssociationIt is the charter of the companyIt contains the fundamental conditions upon which the company can be incorporatedIt contains the objects of the company’s formationThe company has to act within objects specified in the MOAIt defines as well as confines the powers of the companyAny thing done beyond the objects specified in the MOA will be ultra vires. Their transactions will be null and voidThe outsider have to transact looking into the MOA
Conditions of the MOAIt should be printedDivided into paragraph and numbers consecutivelySigned by at least seven persons or two in case of public and private company respectively.The signature should be in the presence of a witness, who will have to attest the signatureMembers have to take shares and write the number of shares taken with full address
The Compulsory Clauses in MOAThe Name ClauseThe Registered Office ClauseThe Object ClauseThe Liability ClauseThe Capital ClauseThe Association or Subscription Clause
“Doctrine of Ultra Vires” The powers exercisable by the company are to be confined to the objects specified in the MOA. If the company acts beyond the powers or the objects of the company that is specified in the MOA, the acts are considered to be of ultra vires. Even if it is ratified by the all the members, the action is considered to be ineffective. Even the charitable contributions have to be based on the object clause. ( A Lakshmanaswami Mudaliar V. LIC of India)
The consequences of the ultra vires transactions are as follows:a) Injunctionb)Directors’ personal liability.c) If a property has been purchased and it is an ultra vires act, the company can have a right over that property.d)The doctrine to be used exclusively for the companies’ interest.e) But the others cannot use this doctrine as a tool to attack the company
Articles of AssociationIt is the companies bye- laws or rules to govern the management of the company for its internal affairs and the conduct of its business.AOA defines the powers of its officers and also establishes a contract between the company and the members and between the members inter seIt can be originally framed and altered by the company under previous or existing provisions of law.
AOAAOA plays a subsidiary part to the MOAAny thing done beyond the AOA will be considered to be irregular and may be ratified by the shareholders.The content of the AOA may differ from company to company as the Act has not specified any specific provisionsFlexibility is allowed to the persons who form the company to adopt the AOA within the requirements of the company lawAny ambiguity and uncertainty in one of them may be removed by reference to the other.
Share CapitalShare: Share is defined as “an interest having a money value and made up of diverse rights specified under the articles of association”.Share capital: Share capital means the capital raised by the company by issue of shares.A share is a share in the share capital of the company including the stock.Share gives a right to participate in the profits of the company, or a share in the assets when the company is going to be wound up.
Other features of a shareA share is not a negotiable instrument, but it is a movable property.It is also considered to be goods under the Sale of Goods Act, 1930.The company has to issue the share certificate.It is subject to stamp duty.The ‘Call’ on Shares is a demand made for payment of price of the shares allotted to the members by the Board of Directors in accordance with the Articles of Association.The call may be for full amount or part of it.
Share Certificate and ShareWarrantShare Certificate: The Share Certificate is a document issued by the company and is prima facie evidence to show that the person named therein is the holder ( title) of the specified number of shares stated therein. Share certificate is issued by the company to the ( share holder) allottee of shares. The company has to issue within 3 months from the date of allotment. In case of default the allottee may approach the central governmentShare Warrant: The share warrant is a bearer document issued by the company under its common seal. As share warrant is a negotiable instrument, it is transferred by endorsement and by mere delivery like any other negotiable instrument.
Types of Capital 1.Nominal, authorized or registered capital means the sum mentioned in the capital clause of Memorandum of Association 2.Issued capital means that part of the authorized capital which has been offered for subscription to members and includes shares allotted to members for consideration in kind also. 3.Subscribed capital means that part of the issued capital at nominal or face value which has been subscribed or taken up by purchaser of shares in the company and which has been allotted Called-up capital means the total amount of called up capital on the shares issued and subscribed by the shareholders Paid-up capital means the total amount of called up share capital which is actually paid to the company by the members.
Kinds of shares >Preference shares- It can be further classified as Participating preferential shares. Cumulative preferential shares Non Cumulative preferential shares >Equity or ordinary shares Shares at premium Shares at discount Bonus shares Right shares SWEAT shares (ESOPS)
Rights of shareholdersVoting Power on Major IssuesOwnership in a Portion of the CompanyThe Right to Transfer OwnershipEntitlement to DividendsOpportunity to Inspect Corporate Books and RecordsThe Right to Sue for Wrongful Acts: In the form of a shareholder class-action lawsuit.
Transfer and Transmission ofsharesAOA provides for the procedure of transfer of shares. It is a voluntary action of the shareholder.It can be made even by a blank transfer –In such cases the transferor only signs the transfer form without making any other entries.In case it is a forged transfer, the transferor’s signature is forged on the share transfer instrument.Transmission of shares is by operation of law, e.g. by death, insolvency of the shareholder etc.
DividendsThe sharing of profits in the going concerns and the distribution of the assets after the winding up can be called as dividendsIt will be distributed among the shares holdersThe dividends can be declared and paid out of:• Current profits• Reserves• Monies provided by the government• It can be paid after presenting the balance sheet and profit and loss account in the AGM
DividendsOther than the equity shareholders, even the preferential shareholders can get the dividends. Rather they are the first ones to get the dividends.Dividends are to be only in cash, if otherwise specified in the AOA.Dividends to be paid by Cheque only.Unclaimed dividend after 30 days of declaration to be transferred to unclaimed dividend account with any scheduled bank.
DirectorsThe Legal Status of the directorThe director occupies the position of a: As a Trustee- In relation to the company As Agents- When they act o n behalf of the company As Managing Partner-As they are entrusted with the responsibility of the company Qualification Shares In case there is requirement as per the AOA for the director is bound to buy qualification shares If acts are done by the director prior to he or she being disqualified, the acts are considered to be valid.
DisqualificationsAs per the company law, the followingpersons are disqualified from been appointedas a director:Unsound mindAn undischarged insolventA person who is convicted by the courtWho has applied for being adjudged insolventNot paid for the call on sharesPersons who are already directors in maximum number of companies as per the provisions of the Act orAny other person who has been disqualified by the court for any other reason
Appointment of DirectorsThe appointment can sometimes be by based on the proportional representation like minority shareholders.There can be alternate directors, additional directors, casual directors.The third parties can appoint the directorsOther than the shareholders and the first directors ,the central government and NCLT may also appoint directors.
Duties and Liabilities of the DirectorsFiduciary DutiesTo act honestly and with good faithNot to use confidential information of the company for their own purposeDuty of Care and to act reasonably while acting for the companyStatutory DutiesNot to contract with company, where he/she or his relative has an interest in the contractwhere he/she has a interest, they need to inform the board or seek prior approval while entering into contract, otherwise the contract is voidableDuty to attend and convene meetingsDuty not to delegate
The directors liabilitiesThe liability of the directors can be either civil or criminal.If provided in the MOA, the liability may be unlimited, for a limited company, otherwise it may be altered.Liability may be for breach of fiduciary dutiesThe directors are personally liable for the following: a) Ultra vires acts b) malafide acts c) negligent acts d) liability for the acts of third parties
Criminal LiabilityLiability of the director for any untrue statement in the prospectusInviting any deposits in contravention of the lawLiability for false advertisementFailure to repay the application money, which was excessConcealing the names of the creditorsFailure to lay the balance sheet.Failure to provide information to the auditor etc
Auditor Powers and DutiesPowers of Auditors: To access books of accounts of the company.[227(1)] To seek information and explanation from the officers of the company To visit branches where he is not satisfied with the details given by the branch auditor  To receive notice of AGM To take advice from experts.To receive Branch Audit Report.To sign the audit report based on his opinion.To attend AGM.Right of lien.
Auditor Powers and DutiesReport to the shareholders on:-• Whether proper Books of Accounts were kept and proper returns received from the Branches not visited by him.• Whether necessary information was received during the course of audit .• Whether BS & P& L A/c are in agreement with the Books of Accounts.• Whether BS & P& L A/c are as per Co.’s Act.• Whether the BS & P& L A/c complied with Accounting Standards referred in Sec 211(3C)• Whether Accounts show True & Fair View.• Report on CARO (if applicable)• Qualifications in report.• Directors disqualifications if any.
Auditor Powers and DutiesDuty to inquire into Certain Matters Sec 227(IA)• Loan and advances made by the company.• Book entries.• Sale of investment below cost.• Loan and Advances shown as deposit• Personal expenses.• Shares issued during the year.Sign & submit the Audit Report.Certify Statutory report regarding : • Numbers of shares allotted • Cash received on such allotment • Receipt and Payment Account
Corporate governance Disclosures on Remuneration of Directors:• Section 299 of the Act requires every director of a company to make disclosure, at the Board meeting, of the nature of his concern or interest in a contract or arrangement (present or proposed) entered by or on behalf of the company.• The company is also required to record such transactions in the Register of Contract under section 301 of the Act.Requirements of the Audit Committee:• section 292A of the Act requires every public having paid up capital of Rs 5 crores or more shall constitute a committee of the board to be known as Audit Committee.• The Annual Report of the company shall disclose the composition of the Audit Committee.
Corporate governance Periodic discussions with the auditors about the Internal Control Systems and the scope of audit including the observations of the auditors. If the default is made in complying with the said provision of the Act, then the company and every officer in default shall be punishable with imprisonment for a term extending to a year or with fine up to Rs 50000 or both.Corporate Democracy:• Wider participation by the shareholders in the decision making process• Introduction of section 192A of the Act and the Companies (Passing of Resolution by Postal Ballot), Rules provides for certain resolutions to be approved and passed by the shareholders through postal ballots.
Company SecretaryA company having a paid up share capital of two crore rupees or more but less than five crore rupees may appoint any individual who is a member of the Institute of Company Secretaries of India as a whole-time secretary to perform the duties of a secretary under the Companies Act, 1956.Advises Board of Directors on the kind of practices to be adopted in corporate governance.She/he is the one who represents the company for internal and external stakeholdersThe secretary appointment is generally governed by the company’s articles of association
CS roles and dutiesmake sure that the procedure for appointment of directors is followed properly.should ensure that all statutory and regulatory requirements are properly complied with.They should advise the company and its board of Directors on business ethics and corporate governance.should also ensure that the interest of the stakeholders are safeguarded.is responsible for organizing board meetings
CS roles and dutieshas to ensure that Annual General Meetings (AGM) are held as per the Companies Act and the companies’ Article of Association.responsible for issuing notices of meetings, distribution of proxy forms.Has to ensure that the Memorandum and Articles of Association is properly complied with.has to make sure that company complies with the requirements of SEBI if company is listed on any of the Stock exchanges of India.
CS roles and dutiesresponsible for maintaining the statutory registers regarding the members, company charges, directors and secretary, directors’ interests in shares and debentures, interests in voting shares and debenture holders.Ensure the payment of dividends and interest. They have to keep an eye on register of members in case any stakeholder is aiming at taking over the company.Has to play a key role in implementing acquisitions, disposals and mergers. They have to make sure that proper documentation is in place and proper commercial evaluation is done.
Classification of MeetingsGeneral meetings a) Statutory meetings ( which happens only once in the lifetime of the company) b) EGM- Convened to transact some special or important decision to be taken c) AGM-it can be conducted based on the provisions given in the Articles or by passing a resolution in one AGMClass meetings- This is the meeting of the shareholders- which is convened by the class of shareholders based on the kind of shares they hold.Board Meetings- This is conducted for the smooth running of the company
A meeting may be convened by the director, requisitionist, or the NCLTNotice to be given by the secretary after the time and place have been fixed by the directorsEven the shareholders can call a meeting as an extraordinary general meeting (EGM)The NCLT can call an Annual General Meeting (AGM)
Oppression of minority shareholdersShareholders elect the board of directors in a corporation. Once elected, the directors set the corporations bylaws, elect officers and act as supervisors for the corporation.This means that the people who run the business are often elected by majority shareholders. Meanwhile, minority shareholders may not even be able to elect themselves to the board of directors.
By controlling the board of directors, and, thus, the officers of a corporation, majority shareholders often have outright decision-making power.Some majority shareholders use this power to oppress minority shareholders by: - Squeezing-out / freezing-out minority shareholders - Refusing to declare dividends - Reducing profits and dividends (by increasing spending, etc.) - Denying minority shareholders the right to inspect corporate records - Diluting minority shareholders interest by issuing more stock - Moving business assets out of the business - Terminating the minority shareholders employment with the corporation
Winding upIt is the process whereby the life of the company is ended and its property is administered for the benefit of its creditors and members.During this process a liquidator is appointed to take control of the company. The liquidator will be responsible for the assets, debts and final distribution of the surplus to the members.It is the process for discharge of liabilities and returning the surplus to those who are entitled for it.But even a company which is making profit can be wound up is the special feature of winding up , which is different from that of the process of insolvency.
How can be company bewound up?By passing a special resolution[sec:433(a)]If there is a default in holding the statutory meeting[sec:433(b)]Failure to commence the business [sec:433(c)]If there is reduction in the membership of the minimum number of members as per the statutory requirement[sec:433(d)]If it not able to pay its debts[sec:433(e)]
Modes of winding upCompulsory winding up/winding up by the tribunal(secs.433 to 483)• under the supervision of the court Compulsory winding up may happen for ‘just and equitable’ reasons also. The just and equitable grounds can be like loss of substratum , where there is dead lock in the management, etcVoluntary winding up:(secs.484 to 483) ( Members voluntary winding up and creditors voluntary winding up)• Voluntary winding up subject to the supervision of the court.
Winding up procedureA petition for winding up has to be filed by the concerned person to the prescribed authorityLiquidator to be appointed to safeguard the property of the companyThen the court will hear the matter and pass necessary orders. It can dismiss the petition or pass an order of winding up
Dissolution of the companyWhen the company ceases to exist as a corporate entity for all practical purposes it is said to have been dissolved.Dissolution has to be declared by the court.It will not be extinct and will be kept under suspension for 2 Years.The order has to be forwarded by the liquidator to the Registrar of the Companies within 30 days from the date of the order of dissolution.