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Company law


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Background of Company Law in England, …

Background of Company Law in England,
Background of Company Law in India,
Definition of Company,
Nature & Characteristics,
Features of Company,
Lifting the corporate veil,
Types of Companies,
Formation of a Company,
Memorandum & Article of Association,
Share & Share Capita,
Company Management & Director,
Borrowing Powers,
Debentures & Charges,
Accounts & Auditors,
Prevention of oppression & Mismanagement,
Winding up,

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  • Entry of names in the Register of ICAI -Any person who, at the commencement of this Act, is engaged in the practice of accountancy in any Part B State and who, although not possessing the requisite qualifications to be registered as an accountant under the Auditor's Certificate Rules, 1932, fulfils such conditions as the Central Government may specify in this behalf;
  • Proper books of account shall not be deemed to be kept with respect to the matters specified therein,- (a) if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions; and(b) If such books are not kept on accrual basis and according to the double entry system of accounting.]
  • Transcript

    • 1. Dr. Tabrez Ahmad,, 1
    • 2. Dr. Tabrez Ahmad,, 2
    • 3. Agenda Background of Company Law in England Background of Company Law in India Definition of Company Nature & Characteristics Features of Company Lifting the corporate veil Types of Companies Formation of a Company Memorandum & Article of Association Prospectus Share & Share Capita Company Management & Director Meetings Borrowing Powers Debentures & Charges Accounts & Auditors Prevention of oppression & Mismanagement Winding up Dr. Tabrez Ahmad 3
    • 4. Background of Company Law inEngland The history of modern company law in England began in 1844 when the Joint Stock Companies Act was passed. The Act provided for the first time that a company could be incorporated by registration without obtaining a royal charter or sanction by a special Act of Parliament. The office of the Registrar of the Joint Stock Companies was created. But the Act denied to the members the facility of limited liability. Dr. Tabrez Ahmad 4
    • 5. Cont… The English Parliament in 1855 passed the Limited Liability Act providing for limited liability to the members of a registered company. The Act of 1844 was superseded by a comprehensive Act of 1856 which marked the beginning of a new era in company law in England. This Act introduces the modern mode of creating companies by means of memorandum and articles of associations. Dr. Tabrez Ahmad 5
    • 6.  The first enactment to bear the title of companies Act was the companies Act 1862. By these Acts some of the modern provisions of a company were clearly laid down. First of all two documents memorandum of association and Article of association formed the integral part of the limited liability company. Company could be formed with liability limited by guarantee. Provisions of winding up was also introduced Thus the basic structure of the company as we know had taken shape. Dr. Tabrez Ahmad 6
    • 7.  Sir Francis Palmer described the Act of 1862 as the “ magna carta of cooperative enterprises” . The liability of the directors of a company was introduced by the Director’s Liability Act , 1890, and the compulsory audit of the company’s accounts was enforced under the Companies Act, 1900. The concept of private company was introduced for the first time in the companies Act, 1908. The companies Act 1948 which was the principal Act in force in England was based on the report of a Committee under Lord Cohen. Dr. Tabrez Ahmad 7
    • 8.  Another outstanding feature of the 1948 Act was the emphasis on the public accountability of the company. Generally recognised principles of accountancy were given statutory force and had to be applied in the preparation of balance sheet and profit and loss account. For the first time the shareholders in general meeting were given power to remove a director before the expiration of his period of office. The independences of auditors vis-à-vis the directors were strengthened. Dr. Tabrez Ahmad 8
    • 9.  The 1948 Act was amended by the Companies ( Amendment ) Act 1967. The Amending Act was based upon the report and recommendations of the Jenkins Committee presented in 1962. The Act abolished the exempt private company, and required all limited companies to file accounts, but empowered certain limited companies to re-register as unlimited to avail of this requirement Dr. Tabrez Ahmad 9
    • 10.  The 1976 Act strengthened the requirements of public accountability and those relating to the disclosure of interests in the shares of the company. The Companies Act 1980 was a major measure of company law reform in England. It gave effect to the Second EEC Directive on Company Law Harmonisation of December 13, 1976 in the UK and introduced other reforms. Dr. Tabrez Ahmad 10
    • 11.  The Companies Act 1981 gave effect in the UK to the provisions of the Fourth EEC directive on Company Law Harmonisation of July 25, 1978 and introduced other important changes. At present, the whole of the existing statute law relating exclusively to companies has been consolidated in the Companies Act 1985. Dr. Tabrez Ahmad 11
    • 12. Development of Indian CompaniesAct Company Law in India as indicated earlier, is the cherished child of the English parents. Our various Companies Acts have been modeled on the English Acts. Following the enactment of the Joint Stock Companies Act, 1844 in England, the first Companies Act was passed in India in 1850. It provided for the registration of the companies and transferability of shares. The amending act of 1857 conferred the right of registration with or without limited liability. Dr. Tabrez Ahmad 12
    • 13.  Subsequently this right was granted to banking and insurance companies by an Act of 1860 following the similar principle in Britain The Companies Act of 1856 repealed all the previous Acts Dr. Tabrez Ahmad 13
    • 14. Definition General Definitions: 1)A Company is a form of business organization in which the funds of a large number of investors are managed by a few persons for the purpose of earning profits which are shared by all the investors. 2)It is an association of persons formed to achieve the common goal set by their Board of Directors. Dr. Tabrez Ahmad 14
    • 15.  As per companies Act 1956.(Sec3(1)(i)) It means a business organization formed as per the companies Act 1956to achieve following objectives a) To encourage the investors to do their investments. b) To ensure proper Administration c) To prevent Malpractices d) To allow for investigation if required. Dr. Tabrez Ahmad 15
    • 16. Company-Its Nature and Characteristics Artificial person being invisible, intangible, existing only in the contemplation of law. Being the creation of law, it possesses only the properties conferred upon it by its charter. Among the most important of these are the individuality and immortality. Within the limits of powers conferred by the charter, it can do all acts as a natural person may do. Dr. Tabrez Ahmad 16
    • 17.  The word ‘company’ is derived from the Latin ( com= with or together; panis = bread), and originally referred to an association of persons who took their meals together. It may be assumed- since human nature does not change- that in the leisurely past, no less than in the speedy present, merchants took advantage of festive gatherings, to discuss business matters. Now a days business matters have become most complicated and cannot be discussed at length on festive gatherings. Dr. Tabrez Ahmad 17
    • 18. Cont… In a popular parlance, company denotes an association of like minded persons formed for the purpose of carrying on same business or undertaking. Though an association may be brought into existence for multifarious purposes, in company law it figures predominantly as a business association with a large and fluctuating membership formed for acquisition of gain. There may also be non-profit trading concerns like a club or a society. In Smith v Anderson, ( 1880) 15 Ch. D. 247, it was observed that “ a company, in a broad sense may mean an association of individuals formed for some purpose.” Dr. Tabrez Ahmad 18
    • 19.  A company may be incorporated or unincorporated A company is a corporate body and a legal person having status and personality distinct and separate from that of the members constituting it. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality, and so turn it into a corporation. ( The word corporation is derived from the Latin term ‘corpus’ which means ‘body’) Dr. Tabrez Ahmad 19
    • 20.  Accordingly corporation is legal person created by the process other than natural birth. It is for this reason something called artificial legal person. As a legal person this corporate being is capable of enjoying many of the rights and incurring many of the liabilities of a natural person- a human being. But the company is not merely a legal institution. It is rather a legal device for the attainment of any social or economic end. It is therefore a combined political, social, economic and legal institution. Dr. Tabrez Ahmad 20
    • 21. Cont… The legal status and position of company has been aptly described by the Supreme Court in the case of Tata Engineering and Locomotive Company Ltd. v State of Bihar, AIR 1965 SC 40 at page 46 provides:“ The corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members; Dr. Tabrez Ahmad 21
    • 22.  it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or share holders is limited to the capital invested by them; similarly the creditors or the members have no right to the assets of the corporation. This position has been well established ever since the decision in the case of Solomon v Solomon & Co. ( 1897) A.C 22 which was pronounced in 1897 and indeed it has always been the well recognised principle of common law”. Dr. Tabrez Ahmad 22
    • 23. BRIEF STRUCTURE OF THECOMPANIES ACT, 1956 Section 1–Short Title, Extent and Commencement Section 2–Definitions Section 3 to 658–Other Provisions Dr. Tabrez Ahmad 23
    • 24. Applicability of the Act Being a Central Government Act it is applicable to all the states of India including Union Territories. The provisions of this Act are applicable to all the class of companies in India. The provisions are also applicable to all the companies incorporated out of India but they have established places of business in India. Dr. Tabrez Ahmad 24
    • 25. Objectives : To conduct the business smoothly with the help of limited liabilities & with limited shares. To serve the community by providing Quality products & services at reasonable cost. Dr. Tabrez Ahmad 25
    • 26.  To earn the profit & distribute it among all the investors & Board of Directors in proportionate with their investments. To grow the business with the help of share capital & Ideas so that the part of it is contributed towards national prosperity. To create an employment opportunities for qualified and eligible person. Dr. Tabrez Ahmad 26
    • 27. Essential Features of a Company Registration- Should be registered under the Companies Act. Distinct Person- Separate legal entity. Perpetual succession- Never dies. Easy transfer of shares. Limited liability. Artificial person but not a citizen. Dr. Tabrez Ahmad 27
    • 28. Continued… Common Seal. Capacity to sue and be sued. Share holders are actual owners of Company Number of persons are as per MOA Separate Property Dr. Tabrez Ahmad 28
    • 29.  Separation of ownership and Management Authority to raise share capital in large scale. To comply Statutory Requirements on regular basis Company is a Corporate Body Dr. Tabrez Ahmad 29
    • 30. Company is not a citizen Company though a legal person is not a citizen either under the Constitution of India or under the Citizenship Act. This has been the conclusion of a special bench of the Supreme Court in State Trading Corpn. Of India Ltd. v CTO AIR 1963 SC 1811. Dr. Tabrez Ahmad 30
    • 31. In R. C Cooper v Union of India AIR 1970 1 SCC564 , also known as the Bank Nationalization case, the Supreme Court held that where the legislative measures directly touch the company of which the petitioner is a shareholder, he can petition on behalf of the company, if by the impugned action, his rights are also infringed. In that case, the court entertained the petition under Art. 32 of the constitution at the instance of a director and shareholder of a company and granted relief. It is, therefore, to be noted that an individual rights is not lost by reasons of the fact that he is a shareholder of the company. Dr. Tabrez Ahmad 31
    • 32. Bennet Coleman Co. v Union of India AIR1973 SC 106 It is now clear that the fundamental rights of share holders as citizens are not lost when they associate to form a company. When their fundamental rights as shareholders are impaired by state action their rights as shareholders are protected. The reason is that the shareholders rights are equally and necessarily affected if the rights of the company are affected. Dr. Tabrez Ahmad 32
    • 33. D.C.M Company Ltd. V Union of India and others 1983 5 comp.cas. 674. Court took the similar view on the matter Daimler Co Ltd v Continental tyre co. (1916)2 A.C 307 HL Held that a company will be regarded as having enemy character, if the persons having de facto control of its affairs are resident in an enemy country, or wherever they may be, are acting under instructions from or on behalf of the enemy. Dr. Tabrez Ahmad 33
    • 34. Bacha F. Guzdar v Commr. Income Tax, Bombay, AIR1955 SC 74. Again as a body corporate, the company is entitled to own and hold property in its own name. The property belongs to the company and the members have no direct proprietary rights over the property of the company. It is important to remember that a shareholder is not a part owner of the company or its property; he is only given certain rights by law e.g. to receive dividends or to attend and vote at general meetings. Dr. Tabrez Ahmad 34
    • 35. Types of Companies Royal Charter/ Statutory RegisteredChartered Companies Companies Companies On basis of LiabilityCompanies limited Companies limited Unlimited by shares. by guarantee. companies Public Companies Private Companies Dr. Tabrez Ahmad 35
    • 36. Types of Companies A) On the basis of Liability B) On the basis of Incorporation C) On the basis of Ownership D) Government Companies E) On the basis of Jurisdiction F) On the basis of Control & Shareholding G) One Man Company Dr. Tabrez Ahmad 36
    • 37.  A) On the basis of Liability1)Limited by shares2)Limited by Guarantee3)Unlimited Company B) On the basis of Incorporation1)Chartered Company2)Statutory Company3)Registered Company Dr. Tabrez Ahmad 37
    • 38.  C) On the basis of Ownership1)Private Limited Company2) Public Limited Company D) Government Companies E) On the basis of Jurisdiction1) Foreign Company2) MNC Company Dr. Tabrez Ahmad 38
    • 39.  F) On the basis of Control & Shareholding1) Holding Company2) Subsidiary Company G) One Man Company Dr. Tabrez Ahmad 39
    • 40. A) On the basis of Liability a ) Companies Limited by shares : companies limited by shares are the most commonly found companies. Section 12 (2) (a) implies that where the liability of the shareholders of a company is limited to the extent of the unpaid amount on the shares held by them, the company is known as a company limited by shares. Dr. Tabrez Ahmad 40
    • 41.  In such companies, each share has a fixed nominal or face value which the shareholder is required to pay either at a time or in various installments. Whatsoever may be the liabilities of a company, shareholders are not bound to pay anything more than the face value of the shares held by them. Dr. Tabrez Ahmad 41
    • 42.  Thus, the liability of each of the shareholders of such a company is always limited to the extent of the amount unpaid on his shares. Dr. Tabrez Ahmad 42
    • 43.  b) Companies Limited by Guarantee:- Words ‘Companies limited by Guarantee implies that the liability of members of such company is always limited to a fixed amount agreed by its members to contribute towards the assets of the company. Dr. Tabrez Ahmad 43
    • 44.  Section 12 (2) (b) states that, a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in any event of its being wound up, such company in this Act is termed as a company limited by guarantee Dr. Tabrez Ahmad 44
    • 45.  c. Unlimited companies: it is obvious that where the liability of the members of a company is unlimited, it is called as an unlimited company. Section 12 provides that any seven or more persons in the case of a public company and 2 or more persons in the case of a private limited company can have such liability. Any company registered without limited liability is known as an unlimited company. Dr. Tabrez Ahmad 45
    • 46. The liability of members of such company is unlimited like an ordinary partnership firm and every member of such company is liable for debts of the company in proportion to his interest in the company. An unlimited company may have or may not have a share capital. But if it has a share capital, it may be a public company or a private company Dr. Tabrez Ahmad 46
    • 47. a) chartered companies : chartered companies are also known as Royal charter companies. Suchcompanies are incorporated under the Royal (special) charter granted by the King or the Queen. Such companies as given exclusive powers rights and privileges under the Royal charter. Dr. Tabrez Ahmad 47
    • 48. They have to function in accordance with the termsand conditions of the Royal charter. The East Indiacompany, /Bank of England, The chartered bank ofAustralia are some of the examples of chartered orRoyal companies. However, such companies find noplace in India after independence, since there nomonarchy in India now. Dr. Tabrez Ahmad 48
    • 49.  b) Statutory companies :- Companies which are created by special Acts of Legislature are known as statutory companies. A statutory company can be defined as a company which is incorporated by a special Act passed by whether the Central Legislature or state Legislature and such a company enjoys certain powers, Dr. Tabrez Ahmad 49
    • 50. rights, privileges as laid down in the Act. Thereforesuch companies do not require to have aMemorandum of Association. Companies Act 1956 isapplicable to the statutory companies. Eg.ReserveBank of India. LIC,UTI Dr. Tabrez Ahmad 50
    • 51.  c) Registered companies Under the Act : Registered companies are those companies which are registered or incorporated with the Registrar of companies as per the provisions of the companies act. At present, in India, almost all companies are registered under the companies Act of 1956. Dr. Tabrez Ahmad 51
    • 52. C) On the Basis of ownership A) Private company : Section 3 (i) (iii) defines a private company as follows- ‘Private company” means a company which by its Articles – a) Restricts the rights to transfer its shares, if any, b) Limits the number of its members to fifty and c) Not includes the persons who are in employment of the company; Dr. Tabrez Ahmad 52
    • 53.  d) Persons, who having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and e) prohibits any invitation to the public to subscribe for any shares in or debentures of the company. Thus, the three features i.e. restriction on right to transfer, limit on the number of members and invitation to the public to subscribe as mentioned above are the mandatory provisions of a private limited company words ‘Private Limited” are required to be used at the end of the name of every company. Dr. Tabrez Ahmad 53
    • 54.  Public company ; section 3 (1)(iv) lays down that. ‘Public company means a company which is not a private company.” Thus it can be said that a public company is a company which by its Articles, does not restricts the right to transfer its shares, if any, does not limit the number of its members and further does not Dr. Tabrez Ahmad 54
    • 55. prohibit any invitation to the public to subscribe forany shares in or debentures of the company. Any sevenor more persons can come together and join hands toform a public company. However, there is norestriction on the maximum number of members Dr. Tabrez Ahmad 55
    • 56.  Private company& Public company Differences:- 1.) A private company cannot have less than two members and more than fifty members The minimum number of persons required to form a public company is seven. There is no restriction on the maximum numbers of members in a public company. 2.) A private company cannot invite public to subscribe its share capital neither it can invite the people to buy its debentures A public company invites the public to subscribe to share capital or to purchase the debentures. Dr. Tabrez Ahmad 56
    • 57.  3).In a private company, the right to transfer its shares is restricted by its Articles. Thus, if a private company has a share capital, it imposes certain restrictions on the right of its members to transfer the shares of the company they hold In a public company, its shares are freely transferable. 4). A private company has to add the words “Private Limited” at the end of its name. A Public company has to use the word ‘Limited’ at the end of its name. Dr. Tabrez Ahmad 57
    • 58.  5). A private company enjoys certain privileges i.e. exemption from certain provisions of the Companies Act. of 1956. A Public company does not enjoy any such privileges. 6).Directors of a private company need not file their consent with the Registrar to Act as director or sign an undertaking the take up qualification shares. Dr. Tabrez Ahmad 58
    • 59.  Directors of a Public company have to file their consent with the Registrar to Act as director or sign an undertaking to take up qualification shares. 7). Legal controls on private companies are less. Legal controls, restrictions on public companies are more and strict. 8) In private companies, restrictions on the remuneration of Directors are far less. In public companies, there are restrictions on the remuneration of Directors. The remuneration of Directors cannot be more than 11 % of net profits of the company. Dr. Tabrez Ahmad 59
    • 60.  9). Private Company Directors are allowed to borrow from the private companies Public company Directors cannot borrow from the public companies 10).In the case of a private company, unless the articles of the company provide for a large number, two members personally present are quorum for a meeting of the company. Dr. Tabrez Ahmad 60
    • 61.  In the case of a public company, unless the Articles of the company provide for a large number, five members personally present are quorum for a meeting of the company. (section 174 (1)). 11) A private company is not required to file a prospectus or a statement in lieu of prospectus with the registrar [section 70 (3)]. A public company has to file a prospectus or a statement in lieu of prospectus with the Registrar. Dr. Tabrez Ahmad 61
    • 62. D) Government Company Section 617 of the companies Act of 1956 defines government company’ as follows – i) For the purpose of this Act Government company means any company in which more than fifty one percent of the paid up share capital is held by the central government, or by any State Government, or Governments or partly by others. Dr. Tabrez Ahmad 62
    • 63.  The Central Government and partly by one or more state governments and includes a company which is a subsidiary of a Government company as thus defined” In India, there are many companies in which 100% paid-up share capital or more than 51% of the paid up share capital is provided by the Central or State Government. Dr. Tabrez Ahmad 63
    • 64. E) Based on the Jurisdiction offunctioning The boundaries of the country wherein it is registered, such a company is called a multinational or transnational company Foreign company :- , It can be said that a foreign company is one which is incorporated outside India but has a place of business in India. Dr. Tabrez Ahmad 64
    • 65. (b) MNC:Companies incorporated outside India before/after the commencement of this Act at many places, established a place of business within India and continue their business at established places within India at the commencement of this Act and after. Dr. Tabrez Ahmad 65
    • 66. F) On the basis of control and/orshare holdinga) Holding company :- section 4 (4) of the companies Act of 1956 implies that a company is deemed to be holding company of another if that other is its subsidiary. Thus, a holding company can be defined as a company which has a control over a subsidiary company through anyone of the several methods as explained in section 4(1). Dr. Tabrez Ahmad 66
    • 67. b) Subsidiary company :- A company is asubsidiary of a holding company if a holdingcompany controls the majority composition of itsboard of directors, having an object to control themanagement of the subsidiary or that othercompany i.e. holding company holds the majorityof its shares or the holding company’s subsidiaryhas its own subsidiary, it becomes the subsidiary ofthe first mentioned company Dr. Tabrez Ahmad 67
    • 68. G) Other types of companies:  One Man company :- One man company can be a public or a private company, but it is usually a private company wherein one man holds practically the whole of the share capital of the company. In other words, it can be said that where a single man holds almost all the shares of a company such a company is called as one man company. If one man company satisfies all the conditions and requirements of incorporation as laid down in the companies Act, it becomes a legal personality. Dr. Tabrez Ahmad 68
    • 69.  Generally for formation of one man company in order to meet the statutory requirements, certain persons are invited to become members who may hold a few shares. Such dummy members are usually nominees of the main shareholder who is the de-facto owner of the company and carries on the business with Limited Liability e.g. X and Y register their company as a private company with a share capital of Rs 7,00,000 divided into 70000 shares of Rs. 10/- each. X holds 69,999 shares while Y holds only 1 share. This is nothing but an example of one man Co. company. Dr. Tabrez Ahmad 69
    • 70. Dr. Tabrez Ahmad 70
    • 71. Pre-incorporation contract Dr. Tabrez Ahmad 71
    • 72. PromotersBefore a company can be formed ,there must be some persons who have an intension to form a company and who take the necessary steps to carry that intention into operation. The promoters of a company decide the scope of its business activities. they provide a registration fees and carry out other duties involved in the formation of company. Dr. Tabrez Ahmad 72
    • 73. ShareholdersThe term members refer to a person whose name appears on the register of the company. On the other hand ,the term ‘shareholders’ refer to a person who holds shares in a company.Section-41 of the companies act defines a member as:1-the subscriber of the memorandum of a company shall be deemed to have agreed to become members of the company and on its registration shall be entered as member in its register of members. Dr. Tabrez Ahmad 73
    • 74.  2-Every other person who agrees in writing to become a member of a company and whose name is entered in its register of member shall be a member of the company. 3-Every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository shall be deemed to a member of the concerned company. Dr. Tabrez Ahmad 74
    • 75. Difference between Shareholder &Member1-A holder of a share warrant is a shareholder but not a member as his name is struck off the register of members immediately after the issue of such share warrant.2-A registered shareholder is a member but a registered member may not be a shareholder, because the company may not have a share capital.3-The transferor or the deceased person is a member so long as his name is on the register of members whereas he cannot be termed a shareholder.4-similarly a shareholder by transfer is not a member until his name is entered in the company’s register of company Dr. Tabrez Ahmad 75
    • 76. Definition of Memo:The purpose of the memorandum is to enable the members of the company, its creditors, and the public to know what its powers are and what is the range of its activities. The memorandum contains rules regarding the capital structure, the liability of the members, the objects of the company, and all other important matters relating to the company. Definition of Articles: The Articles of Association is a document which contains rules, regulations and bye-lawsregarding the internal management of the company. Articles must not violate any provision of the memorandum or any provision of the Companies Act. Relationship: Lord Cairns in Riche, described the relationship between thememorandum and the articles in this language: "The memorandum is as it were, the area beyond which the actions of the company cannot go; inside the area, the shareholders may make suchregulations for their own government as they think fit". The Articles are subordinate to Memorandum. The Memorandum must be read in conjunction with the Articles. The terms of the Memorandum cannot be modified or controlled by the Articles. Dr. Tabrez Ahmad 76
    • 77. Constitution of a Company Memorandum of Association Articles of Association Dr. Tabrez Ahmad 77
    • 78. Public Documents:The Memo and Articles are public documents, which may be inspected by anybody at the office of the Registrar of Companies.Differences:1. The distinction between the memorandum and the articles of association can be summed up as follows:2. The memorandum is determining the company‟s constitution and objectives; the articles are rules regarding internal management.3. Any rule in the articles contrary to the memorandum is invalid.4. Articles can be altered easily, the memorandum can be altered only after the adoption of certain formalities.5. Certain clauses of memo cannot be altered without the sanction of the Central Government and of the Court e.g., the object clause and the liability clause. Other clauses can be altered easily e.g., the name clause. Articles can be altered by passing a special resolution.6. The memo defines the powers of the company and the relationship between the company and the members and-also non members, Articles define and regulate the relationship between the company and the members.7. Acts beyond the powers of memo (ultra vires) are void Such an act cannot be ratified by the members. But acts done by a company beyond the articles can be ratified by the shareholders provided they are within (intra vires) the powers of Memo.8. If an act is within the powers given by the memo (intra vires the memo) but contrary to some provision of the articles (ultra vires the articles) the members can change the articles and ratify the act. Dr. Tabrez Ahmad 78
    • 79. The form and contents of the Memorandum:The Act lays down that the memorandum of a association of every company shall contain the following particulars :1. Name Clause;2. Situation Clause;3. Objects Clause;4. Area of Operation Clause;5. Liability Clause;6. Capital Clause;7. The Association and Subscription ClauseForm and contents of the Articles:The Articles of Association contain rules, regulations and bye-laws regarding the internal management of companies. An unlimited company, a company limited by guarantee and a private company limited by shares must file their articles of association at the time of registration of the company. Dr. Tabrez Ahmad 79
    • 80. Form of Articles:The Articles shall:a) be printed ;b) be divided into paragraphs numbered consecutively ; andc) be signed by each subscriber of the memorandum of association, in the presence of at least one witness who shall attest the –signature.Contents of Articles:Articles usually contain provisions in respect of the following matters :(1) share capital, rights of shareholders, payment of commissions, share certificates;(2) lien on shares;(3) calls on shares;(4) transfer of shares;(5) transmission of shares;(6) forfeiture of shares;(7) conversion of shares into stock;(8) share warrants;(9) alteration, of capital;(10) general meetings and voting rights of members;(11) appointment and remuneration of directors, board of directors, managers and secretary;(12) dividends and reserves;(13) accounts and audit and borrowing powers;(14) capitalisation of profits; and(15) winding up. Dr. Tabrez Ahmad 80
    • 81. Alteration of the Memorandum:For the purpose of alteration, the provisions of the memo can be divided into two classes : (i) provisions the inclusion of which is made compulsory by the Act (e.g., the name, objects, place of registered office etc.) (ii) other provisions which the organisers of the -company have thought it desirable to include.Provisions coming under the first category are called "Conditions contained in the Memorandum". The "conditions" can be altered in the manner stated below:1.Change of name: A company may change its name by special resolution provided the Company Law Board/Company Law Tribunal approves of the change When the name is validly changed, the Registrar shall enter the new name in the Register of companies and shall issue a fresh Certificate of Incorporation. Change of name does not affect the rights and obligations of the company and pending suits by or against the company. Dr. Tabrez Ahmad 81
    • 82. 2. Change of Object:The object clause of the memo can be changed for the purpose of enabling the company, for example : (a) to carry on its business more economically or more efficiently; (b) to attain its main purpose by new or improved means ; (c) to enlarge or change the local area of its operation;The following procedure must be adopted for changing the object clause : (i) A special resolution must be passed. (ii) A petition must be filed to the Company Law Board/Company Law Trubinal for confirmation of the change. (iii) Notice must be given to all persons whose interests will be affected by the change. (iv) The consent of the creditors of the Company must be obtained or other claims paid off or secured; etc.3. Change in the location of the registered office from one State to anotherThe procedure to be adopted is the same as in the case of alteration of object.The alteration must be registered with the Registrar of Companies of the State in which the registered office of the Company was originally situated and also the Registrar of the State to which the office is being transferred. Dr. Tabrez Ahmad 82
    • 83. 4. Alteration of the Capital ClauseAlteration of the capital clause can be done in the following methods (i) Alteration, including Increase of Capital: (ii) Reduction of Capital (iii) Variation of Shareholders Rights (iv) Creation of Reserve Capital.Alteration of the Articles Of Association:Although alteration of articles is permitted, there are certain restrictions on the nature and extent of the alterations that can be made, for example: Articles can be altered by special resolution only. If the articles of the company prescribed a different procedure, e.g., an ordinary resolution, it will not be followed. Confirmation by the Court is not necessary. No change is permitted which will violate the provisions of the Companies Act. No change is permitted which is contrary to the conditions contained in the Memorandum of Association of the Company. The alterations must not contain anything illegal. The liability of the members or any class of members, cannot be increased without their consent. But any alteration made bona fide, in the interests of the company as a whole, is valid and binding even though the private interests of some members may be affected. Dr. Tabrez Ahmad 83
    • 84. The legal effects of the Memorandum:The Contractual Powers of a CompanyA Company or a Corporation is a legal person capable of suing and of being sued. But the contractual powers of a company are limited in two ways : (i) natural possibility and (ii) legal possibility.Forms of Contracts and Deeds of a Company The Doctrine of Ultra Vires The Memorandum of Association determines the constitution and the powers of the Company. The important rules concerning the legal effects of the memorandum can be summed up as follows, for example: The terms of the memorandum constitute a binding contract between the Company and the members. All acts done by the directors or members beyond the powers given in the memo, are ultra vires and not binding on the Company. The members cannot ratify ultra vires acts, even by an unanimous resolution. If an act is within the powers given by the memo (intra vires the memo) but contrary to some provision of the articles (ultra vires the articles) members can change the articles and ratify the act. Directors entering into ultra vires contracts may be liable to the third party for breach of warranty of authority. Dr. Tabrez Ahmad 84
    • 85. Legal effect of the Articles:Binding Contract The articles constitute a binding contract between the company and its members. The articles come within the definition of public documents. All persons dealing with the company are presumed to know the provisions of the articles. So if anything is done contrary to or beyond the provisions of the articles, the company is not bound.Doctrine of indoor management:The Doctrine of indoor management does not apply in certain cases :(a) Void Acts Where the act is void ab initio, the company is not bound, e.g., forgery.(b) Knowledge of irregularityWhere the person dealing with the company has notice, actual or constructive, that the prescribed procedure has not been complied with the company is not bound.(c) Lack of authorityIf an agent of a company makes a contract with a third party and if the act of the agent falls outside the ordinary authority of the agent, the company in not liable Dr. Tabrez Ahmad 85
    • 86. Perform for Statutory Declaration “FORM NO. 1” The companies Act .1956Declaration of compliance with requirements of the companies Act, 1956 on Application for Registration of a company. PURSUANT TO SECTION 33 (2)NAME OF THE COMPANY : M/SPRESENTED BY : Robin KR. CHARTERED ACCOUNTANT.…(NAME OF CA)….partner of…(NAME OF CA FIRM& ITS ADDRESS) ...,do solemnly and sincerely declare that I am a CA in whole time practice in India ,who is engaged in the formation of the company “M/S, ------------ PRIVATE LIMITED”And that all the requirements of the companies Act, 1956 and the rules there under in respect of matter precedent to the registration of the said company& incidental thereto have been complied with& I make this solemn declaration conscientiously believing the same to be true.PLACE : NEW DELHI (NAME OF CA )DATED : Dr. Tabrez Ahmad CHARTERED ACCOUNTANTS 86
    • 87. INCORPORATION1. The memorandum of association duly stamped, signed &witnessed. In case of a public company, at last seven members mustsigned it. For a private company however the signature of twomembers are sufficient. The signatories must also give information about theiraddress, occupation and the number of share subscribed bythem.2. The articles of Association duly stamped and witnessed as incase of the Memorandum. However, as stated earlier, a publiccompany may adopt table A, which is a model set of Articles,given in the companies Act. In that case a statement in lieu ofthe prospectus is submitted, instead of Article of Association. Dr. Tabrez Ahmad 87
    • 88. 3. Written consent of the proposed directors to act as director andan undertaking to purchase qualification shares.4. The agreement, if any, with the proposed Managing Director,Manager or whole –time director.5. A copy of the Registrar’s letter approving the name of thecompany.6. A statutory declaration affirming that all legal requirements forregistration have been compiled with. This must be signed by anadvocate of a high court or supreme court or a signatory to theMemorandum of Association or a Chartered Accountant orcompany secretary in whole time practice in India.7. Documentary evidence of payment of registration fees. Dr. Tabrez Ahmad 88
    • 89. SPECIMEN OF CERTIFICATE OF INCORPORATIONI hereby certify that …………………(name of the company) is this dayincorporated under the companies Act 1956, and that the company islimited. Given under my hand at Delhi, this seventh day of November, twothousand and five. Fees: Deed Stamp Rs. ………………………. Stamp Duty on Capital Rs. ……………………….. Sd/- SEAL Registrar of companies DelhiCorporate Identity Numberof company : 1012 of 2013 Dr. Tabrez Ahmad 89
    • 90. EFFECT OF THE CERTIFICATE OFINCROPORATIONA company is legally born on the date printed on the certificateof Incorporation .It becomes a legal entity with perpetual succession on suchdate.Some interesting examples showing the impact of theconclusiveness of the certificate of Incorporation are as under:(a) Documents for registration were filed on 16th January.Certificate of Incorporation was issued on 18th January But thedate mentioned on the certificate was 16th January . It wasdecided that the company was in existence and the contractssigned on 16th January were considered valid. Dr. Tabrez Ahmad 90
    • 91. (b) A person forged the signatures of other on the Memorandum.The Incorporation was still considered valid.CAPITAL SUBSCRIPTION(i) SEBI Approval(ii) Filling of prospectus(iii) Appointment of Bankers, Brokers , Underwriters(iv) Minimum subscription(v) Application to stock Exchange(vi) Allotment of shares Dr. Tabrez Ahmad 91
    • 92. COMMENCEMENT OF BUSINESSFor commencement of business these following documents arerequired1. A declaration that share payable in cash have beensubscribed for and allotted up to the minimum subscriptionmentioned in the prospectus;2. A declaration that every director has paid in cash, theapplication and allotment money on his shares in the sameproportion as others;3. A declaration that no money is payable or liable to becomepayable to the applicants because of the company to eitherapply for or obtain permission to deal in its security on stockexchange;4. A statutory declaration that the above requirements havebeen compiled with. Dr. Tabrez Ahmad 92
    • 93. CERTIFICATE OF COMMENCEMENT OF BUSINESS(specimen)I hereby certify that ………… ltd. Of……………which was incorporatedunder The companies Act, 1956, on the …………day of……….201…….and which has this day filed a statutory declaration inthe prescribed form that the conditions of commence business . Given under my hand at…………this day of………. Twothousand……… SEAL Registrar Joint Stock Companies ……………….(state) Dr. Tabrez Ahmad 93
    • 94. .Prospectus:A prospectus means any document described or issued asprospectus and includes any notice, circular,advertisement or other document inviting deposits fromthe public or inviting offers from the public for thesubscription or purchase of any shares in or debentures ofa body corporate.The persons issuing the prospectus are bound to maketrue disclosures and not to omit material facts. A falsestatement or omission of facts gives rise to civil as well ascriminal liability. Dr. Tabrez Ahmad 94
    • 95. Contents of a Prospectus:General informationCapital structure of the company.Terms of the present issueParticulars of the issueCompany management & projectCertain prescribed particularsOutstanding litigationsManagement perception of risk factors Dr. Tabrez Ahmad 95
    • 96. Shares: A share means “a share in the share capital of the company.” The share capital of a company is divided into a number of indivisible units of specified amount. Each of such unit is called a ‘share’. Dr. Tabrez Ahmad 96
    • 97. Share Capital: The term share capital is used in following different senses: Nominal/ Authorised/ Registered Capital Issued Capital Subscribed Capital Called-up Capital Paid-up capital Dr. Tabrez Ahmad 97
    • 98. Types of Shares:Preference shareA preference share is one which carries: A preferential right in respect of dividends at afixed rate, A preferential right in regard of repayment ofcapital on Equity shareEquity share means a share which is not apreference share. The rate of dividend is notfixed. Dr. Tabrez Ahmad 98
    • 99. Shareholders:Shareholder/ member is a person who holds the sharesof the company and whose name appears on the‘register of members’ of the company.Rights of shareholders:Right to receive notices of general meetings and toattendRight to receive dividends when declaredRight to transfer shares, subject to restrictions, if any.Right to inspect registers and records of the company.Right to share in assets of company on its dissolution Dr. Tabrez Ahmad 99
    • 100. Debentures: A debenture means a document acknowledging aloan made to the company and providing for thepayment of interest on the sum borrowed until thedebenture is redeemed.It provides for the repayment of principal and interestat specified date/ or dates. It generally creates a charge on the assets of thecompany. Dr. Tabrez Ahmad 100
    • 101. The directors are the brain of the Co. It includes any personoccupying the position of director – by whatever name he iscalled. Only individuals can be directors.NUMBER OF DIRECTORS : Public Co - Minimum 3directors, Private Co 2 directors. Maximum as per AOA.NUMBER OF DIRECTORSHIPS : A person cannot be adirector of more than 15 Cos. (Exclude: P ltd, un Ltd,Alternate directorship).FIRST DIRECTORS : Normally AOA names them. If not,then subscribers to MOA, AOA shall determine. Dr. Tabrez Ahmad 101
    • 102. APPOINMNET BY THE COMPANY : 2/3 rds of the total number of directors shall be liable to retire by rotation and out of this 1/3rd shall retire at every AGM.They are eligible for reappointment.1/3 of the directors can be permanent directors. If new directors are to be appointed: 14 days notice in writing, Rs.500 deposit and consent to act as director to be given by them. The Co. to inform its members at least 7 days before meeting. Separate and ordinary resolution to be passed for each appointment. When a director who has to retire by rotation at the AGM and if NO AGM is held, he CANNOT continue in the office after the last day on which AGM should have been held.In (P) Ltd Co. directors need NOT retire by rotation. Dr. Tabrez Ahmad 102
    • 103. 2 DIRECTORS Cont..APPOINTMENT OF DIRECTORS BY DIRECTORS : ADDITIONAL DIRECTORS : Shall hold the office up to next AGM. If AGM is NOT held with in the time limit, director to vacate on the due date of AGM.CASUAL VACANCY : If a director vacates before the his term expires, the Board can fill the vacancy – to hold office only up to the date up to which the originally appointed can hold office.ALTERNATE DIRECTOR : To act as director in the place of a director during his absence for a period of at least 3 months. Dr. Tabrez Ahmad 103
    • 104. APPOINTMENT BY THIRD PARTIES : AOA may permit some times appointment of directors by Banks, Financial Institutions etc..APPOINTMENT BY PROPORTIONAL REPRESENTATION : This ensures representation of the minority shareholders on the Board.APPOINTMENT BY CENTRAL GOVT. : If deem fit in public interest the CG may appoint directors. They need not have qualification shares and need not retire by rotation.In (P) Ltd Co. directors can be appointed only in general meetings. Dr. Tabrez Ahmad 104
    • 105. 3. REMUNERATION / POWERS / DUTIES MANAGERIAL PERSONNEL : MD, whole time & part time directors, and Managers. MAXIMUM REMUNERATION : 11 % of net profits to be computed as laid down. It does not include fees for Board meetings. No remuneration, if profits are nil or inadequate unless permission of CG is obtained. Dr. Tabrez Ahmad 105
    • 106.  POWERS OF DIRECTORS : The Board of directors can exercise all such powers and to do all such acts which are authorised. The powers are exercised by passing resolution in the Board meetings.  EXCEPTIONS : In the AGM the shareholders can intervene and act : if directors act mala fide, if all the directors are interested in any transaction, deadlock in management, powers which are not expressly confirmed on the directors. DUTIES OF DIRECTORS :  1) FIDUCIARY DUTIES : Exercise powers honestly and bona fide for the benefit of the Co.,  2) must not make secret profit.  3) Duties of care skill and diligence  4) OTHER DUTIES: attend meetings, disclose interest etc.. Dr. Tabrez Ahmad 106
    • 107. DISQULIFICARION & REMOVAL DISQUALIFICATIONS: Persons of unsound mind, un discharged insolvents, persons applied to be adjudicated as insolvent, convicted by a Court involving moral turpitude and 5 years not elapsed, if calls are unpaid, disqualified by Court, such a person is already director in a public Co., which has NOT filed the annual accounts and annual returns continuous 3 years or failed to repay FD or interest, failed to redeem debenture etc... REMOVAL : Can be removed by shareholders: special notice must be given, such director can make representation, By Central Govt. for fraud, not managed in accordance with sound principals, defrauded the creditors. By Company Law Board/NCLT- for prevention of oppression or mismanagement. Dr. Tabrez Ahmad 107
    • 108. RESIGNATION: There is NO provision in the Act relating to resignation. The provisions of AOA has to be followed. Resignation once made cannot be normally withdrawn, resignation orally tendered at a general body meeting is effective, normally effective from the date of resignation.VACATION: STATUTORY: Fails to get qualification shares within 2 Months, unsound mind, adjudicated as insolvent, convicted by a court on certain grounds, fails to pay calls, absents himself from 3 consecutive Board meetings. Acceptance of salary without previous consent. Dr. Tabrez Ahmad 108
    • 109. POSSITION OF A DIRECTOR DIRECTOR AS AGENT: A company is an artificial person acts through its directors. In the eye of law they are the agents. However they have certain independent powers and they need not consult the shareholders on all maters. Directors are NOT personally liable as agents provided they act within the scope of their authority and do NOT make contracts in personal names. PERSONAL LIABLITY: Companies contract made in their personal name, co. name used incorrectly, when they exceed their powers. DIRECTORS AS EMPLOYEES: They are not employees or servants of the co. However if they enter into a contract of service they can be treated as employees. Directors as officers: They can be treated as officers and are liable to certain penalties if the provisions of the Act is not complied with. DIRECTORS AS TRUSTEES: They are the trustees of Companies money & property. They are the trustees for the powers entrusted to them. We can say that they are quasi trustees only as they are not the owners and their functions and duties are not of trustees. TRUE POSITION IS THAT OF A FIDUCIARY RELATIONSHIP. Dr. Tabrez Ahmad 109
    • 110. POWERS Board of Directors1. The directors‟ powers are normally set out in the articles. The shareholders cannot control the way in which the Board of directors act provided its actions are within the powers given to the Board.2. Section 291 of Companies Act, General Powers Board is entitled to exercise all such powers and do all such acts and things, subject to the provisions of the Companies Act, as the company is authorized to exercise and do. However, the Board shall not exercise any power which is required whether by the Act or by the memorandum or articles of the company or otherwise to be exercised or done by the company in general meeting.3. Power of the individual directors – Unless the Act or the articles otherwise provide, the decisions of the Board are required to be the majority decisions only. Individual directors do not have any general powers. They shall have only such powers as are vested in them by the Memorandum and Articles. Dr. Tabrez Ahmad 110
    • 111. POWERS Board of Directors4. Section 292(1) provides that the Board of directors of a company shall exercise the following powers on behalf of the company and it shall do so only by means of resolution passed at meeting of the Board:a. the power to make calls on shareholders in respect of money unpaid on their shares;b. the power to authorize the buy-back referred to in the first proviso to clause (b) of sub-section (2) of section 77A;c. the power to issue debentures;d. the power to borrow moneys otherwise than on debentures;e. the power to invest funds of the company; andf. the power to make loan. Dr. Tabrez Ahmad 111
    • 112. DUTIES Board of DirectorsSTATUTORY DUTIES1. To file return of allotment: Section 75 .2. Not to issue irredeemable preference share or shares or share redeemable after 20 years3. To disclose interest (Section 299-300)4. To disclose receipt of compensation from transferee of shares (Sec.320)5. Duty to attend Board meetings6. To convene statutory, Annual General meeting (AGM) and also extraordinary general meetings [ Section 165,166 &169] Dr. Tabrez Ahmad 112
    • 113. DUTIES Board of DirectorsSTATUTORY DUTIES7. To prepare and place at the AGM along with the balance sheet and profit & loss account a report on the company’s affairs including the report of the Board of Directors (Section 173, 210 & 217).8. To authenticate and approve annual financial statement (Section 215).9. To appoint first auditor of the company (Section 224).10. To appoint cost auditor of the company (Section 233B).11. To make a declaration of solvency in the case of Members’ voluntary winding up (Section 488 Dr. Tabrez Ahmad 113
    • 114. Board of DirectorsGENERAL DUTIES 1. Duty of good faith 2. Duty of Care 3. Duty Not to DelegateLIABILITIES A. Liabilities to the Company • Breach of fiduciary duty • Ultra Virus Act • Negligence • Mala fide Tabrez Ahmad Dr. Acts 114
    • 115. LIABILITIES Board of DirectorsB. Liabilities to third partiesLiabilities under Companies Act Prospectus With regard to allotment Unlimited Liability Fraudulent TradingC. Liability for breach of Statutory DutiesD. Liability for acts of co-directorsE. Criminal Liability Dr. Tabrez Ahmad 115
    • 116. BOARD MEETINGS Number of meetings: Once in every 3 months and 4 such meetings every year. Notice of Meeting: In writing to every director at his usual address – no form of notice prescribed. Quorum: 1/3 rd of its strength, fraction being rounded off as one, or 2 directors whichever is higher. If the interested directors exceeds or is equal to 2/3 rds of the strength then the remaining directors who are not interested and being not less than 2 shall be the quorum. The quorum must be present through out the meeting. If no quorum, meeting shall be adjourned to same day, same time next week. Dr. Tabrez Ahmad 116
    • 117. BOARD MEETINGS….. POWERS TO BE EXERCISED AT MEETINGS: By passing resolutions the powers can be exercised: To make calls, issue debentures, borrow money, invest money, make loan, to fill vacancies, give consent to contracts in which directors are interested, appointment of MD, Manager, etc.. EXCEPTIONS: The shareholders can intervene and act if the Board of directors  act mala fide,  if directors are themselves wrong doers,  incompetence of board,  dead lock in management.. Dr. Tabrez Ahmad 117
    • 118. Dr. Tabrez Ahmad 118
    • 119. • Statutory meetings General • Annual general meetings meetings • Extraordinary meetings • Proper authorityRequisites of • • Notice Quorumvalid meeting • Chairman • minutes • OrdinaryResolutions • special • Requiring a special notice Dr. Tabrez Ahmad 119
    • 120. General Meeting Statutory meetings Annual general meetings Extraordinary meetings Dr. Tabrez Ahmad 120
    • 121. Statutory Meeting {Sec 165}• Every company limited by shares or guarantee and having a share capital has to commence• That’s the first meeting of the shareholders of the company• Only once in a lifetime Dr. Tabrez Ahmad 121
    • 122. Statutory Report  Board of directors to forward it at least 21 days before meeting  Every member to receive the copy  Notice of meeting to clearly say the word “Statutory meeting”  If the report is forwarded later than 21 days every member entitled to attend the meeting has to agree on the due forwarding process Dr. Tabrez Ahmad 122
    • 123. Contents of the Report • Total shares allotted • Cash received • Abstract of the receipts and payments • Directors and auditors • Contracts • Underwriting contract • Arrears of calls • Commission and brokerage Dr. Tabrez Ahmad 123
    • 124. Procedure at the meeting• List of members• Discussion of matters relating formational aspect• Adjournment Dr. Tabrez Ahmad 124
    • 125. ANNUAL GENERAL MEETING• Organize it within every 15 months with the exception of first meeting to be held in 18 months of the making• The meeting must be held in each year• It must not held later than 6 months from the date of balance sheet• Notify in writing 21 days prior to meeting Dr. Tabrez Ahmad 125
    • 126. Importance of general meeting• Consideration of accounts, balance sheet and reports of the board of directors and auditors• Share holders can take decisions relating to business• Declaration of dividends• Appointment of the directors• Appointment and fixed or remuneration of the auditors Dr. Tabrez Ahmad 126
    • 127. Extra-ordinary general meeting• Statutory and the annual meetings are ordinary• This meeting is called to decide upon a serious issue that can not be delayed for the next annual meeting• Board of directors on their own or on the request of members can call meeting and by the company law board Dr. Tabrez Ahmad 127
    • 128. REQUISITES OF A VALID MEETING Proper Authority Proper Notice Who are entitled to notice? Contents of notice Properly Constituted  Chairman  Quorum  Proxy Dr. Tabrez Ahmad 128
    • 129.  Proper Authority Cont…  Annual meeting, statutory meeting or extra ordinary meeting.  Board of directors  Special resolution Proper Notice:-  May be called by giving not less than 21 days in writing to the members. Notice to whom:-  Every member of the company entitled to vote.  The auditors of the company  Persons entitled to any shares on the death or insolvency of members Dr. Tabrez Ahmad 129
    • 130.  Contents of notice:- Cont…  Place and day and hour of meeting.  Special business including in particular the nature of the interest therein of every directors and managers  Any item of business is to accord approval to any documents by the meeting, the time and place at which the document can be inspected Dr. Tabrez Ahmad 130
    • 131.  Properly Constituted Cont… Chairman  He is the most important person, the PILOT of the company and guide the meeting  A meeting cannot be conducted without a Chairman Dr. Tabrez Ahmad 131
    • 132.  Quorum Cont…  Means minimum number of members who must be present in order to constitute a valid meeting and transact business. The quorum is generally fixed by articles  5 members personally present in the case of public company  2 members in case of any other company Dr. Tabrez Ahmad 132
    • 133.  Proxy Cont…  A proxy can only vote on a poll • A member of a private company cannot appoint a proxy • Member not having share capital can not appoint a proxy • Proxy has to be in a written document duly signed by appointer or his/her attorney • Proxy has to be deposited 48 hrs prior to the meeting Dr. Tabrez Ahmad 133
    • 134.  Agenda Cont…  THINGS TO BE DONE in meeting  Agenda prepared for all types of meeting Duties of the chairman  To ensure that the meeting is properly convened  To see the discipline is maintained during the course of the meeting  To ensure that provision of the Act. Articles and Memorandum are strictly observed  To see that no irrelevant discussion is allowed Dr. Tabrez Ahmad 134
    • 135.  Powers of chairman Cont…  To decide point of order is discussion  To decide the order of priority of speakers  To declare the discussion closed  To expel any member who behaves rudely  To sign and date the proceeding of the meeting Dr. Tabrez Ahmad 135
    • 136.  MINUTES Cont…  Minutes indicate the proceedings of the meetings of company.  Its official records of all decision taken various meeting of the company.  A member to get a clear idea about matters discussed in the past  Its documentary evidence and can be submitted in a court as evidence Dr. Tabrez Ahmad 136
    • 137.  Legal provision Cont…  Every company within 30 days of the meeting should make an entry in the minutes book  The minute of each meeting must contain a fair and correct summary of the meeting  The minute also contain the names of the directors and members present in the meeting  The minutes must be sign by the chairman of the company  The confirmed minutes should be kept at he registered office of the company  Members of the company are NOT entitled to inspect the minutes of it’s Board’s meeting Dr. Tabrez Ahmad 137
    • 138.  Types of Minutes Cont…  Minutes of Resolution  Minutes of Narration Dr. Tabrez Ahmad 138
    • 139. Borrowing powers of a companyThe powers of a company are determined by the memorandum and the articles of association. Therefore a company can borrow money, and if so to what extent, are matters depending upon the interpretation of these two documents.Where the memo and the articles give the power to borrow, loans may be taken in any one or more of the following ways: mortgage of immovable properties of the company ; hypothecation or mortgage of movable goods, including stock in trade and, furniture; charge on uncalled capital; floating charge on all the assets of the company; mortgage of book debts; promissory notes, hundies and bills of exchange; debentures and debenture stock: charge on patents, licenses and copyrights and goodwill ; overdrawing the companys banking accounts.Statutory limitations on Borrowing 1. The Companies Act prohibits the directors to borrow money beyond the aggregate of the paid-up capital and its reserves. 2. Limitations as contained in the Memorandum or the Articles ultra-vires Borrowing: Borrowing by a company may be ultra-vires the Company or intra-vires the company but ultra -vires the directors. Dr. Tabrez Ahmad 139
    • 140. DebenturesA debenture is a document which shows on the face of it, that the company has borrowed a certain sum of money from the holder thereof upon certain terms and conditions. The Company Act states that a debenture, "includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.“Characteristics1. Each debenture is numbered.2. Each contains a printed statement of the terms and conditions,3. A debenture usually creates a floating charge on the assets of the companies,4. A debenture may create a fixed charge instead of charge.5. Sometimes debenture holders are given the right to appoint a receiver in case of non- fulfilment of the terms of the debentures by the company.6. Sometimes a series of debentures are issued with a trust deed by which trustees are appointed to whom some or all the properties of the company are transferred by way of security for the debenture holders. Dr. Tabrez Ahmad 140
    • 141. Floating charge and Fixed charge A `charge on a property is created when it is made liable for the payment of money. A charge may be `fixed or `floating. A fixed charge is one which creates a legal interest of a specific property of the company or all the properties of the company. Thus a fixed charge is equivalent to mortgage. The company can sell, lease etc. of the property, subject to the right of the charge holder. The term `floating security and `floating charge means a security or charge which is not to be put into immediate operation, but is to float so that the company is to be allowed to carry on its business. A specific charge fastens on ascertained and definite property or property capable of being ascertained. A floating charge moves with the property which it is intended to affect, until some event occurs or some act is done which causes it to settle and faster on the subject of the charge within its reach and grasp.CharacteristicsA floating charge is an equitable charge. Justice Romer laid down three characteristics of a floating charge viz., (i) it is a charge on a class of assets of a company present and future, (ii) in the ordinary course of the business of a company such assets would be changing from time to time (iii) until some future step is taken by or on behalf of those interested in the charge, the company may carry on the business in the ordinary way by this class of assets. Dr. Tabrez Ahmad 141
    • 142. When a floating charge becomes a fixed charge ?A floating charge becomes a fixed charge when any of the following things occur: (i) a company is wound up (ii) a receiver of the properties of the company is appointed ; (iii) the company fails to pay the interest and the instalment of the principal: and, (iv) the company ceases carrying on its business.When the above occurrences or contingencies happen, a floating charge becomes a fixed charge.Classification of debenturesDebentures may be classified in different ways, some of which are mentioned below: 1. Redeemable Debentures and Perpetual Debentures: 2. Registered Debentures and unregistered or Bearer Debentures : 3. Debenture and Debenture Stock : 4. Mortgage Debenture and Naked Debenture:Convertible debenturesDebentures may be issued subject to the condition that they or a specified part of them, will be exchanged for, or converted into, shares of the company. The remaining part of the issue continues to be debentures at a stated interest. After a debenture is converted into share it does not yield interest but gets dividend according to the decision of the company. Dr. Tabrez Ahmad 142
    • 143. Rules relating to debenturesThe Companies Act lays down the following rules regarding debentures:1. No debenture holder is to have any voting rights in company meetings.2. If there is a trust deed securing the issue of. debentures, every debenture holder can have a copy of it on payment of a small fee.3. The trustees in a trust deed securing the issue of debentures must exercise due care and diligence in the performance of their duties. Any provision in the deed exempting them from liability on this account is void.4. Debenture may be irredeemable, or redeemable on the happening of a contingency.5. Redeemable debentures can be reissued unless there is any provision to the contrary.6. An agreement to take a debenture can be specifically enforced.7. Debts of the company, which by the Act receive preferential payment in case of winding up, shall have priority over the claims of the debenture holders.8. Full particulars regarding the issue of debentures in series must be sent to the Registrar.9. There are certain limits on the amount of commission and brokerage that can be paid for the sale of debentures.10. Transfer of Debentures.11. Register and Index of Debenture Holders. Dr. Tabrez Ahmad 143
    • 144. Rights and remedies of debenture holdersIf the Company fails to pay the interest or principal on the due date or fails to comply with any of the terms and conditions under, which the debenture was issued, the debenture holder can adopt any of the following remedial measures:1. He may file a suit for the recovery of money by sale of the assets which were charged for the payment of the money.2. He may file an application for the appointment of a receiver by the court.3. He may appoint a receiver if the terms of the debenture entitled him to do so.4. The trustees may sell the properties charged, if such a power is given to them under the terms of the debenture.5. He may apply to the court for the foreclosure of the companys right to redeem the properties charged for the payment of the money.6. He may present petition for the winding up of the company. Dr. Tabrez Ahmad 144
    • 145. Differences between shareholders and debenture holders1. A shareholder has a proprietary interest in the company. A debenture holder is only a creditor of the company.2. Every share is included in the capital of the company. Debenture is a loan to the company.3. Debentures generally have a fixed or floating charge upon the assets of the company. Shares do not have any charge on the asset of the company4. A debenture holder is entitled to a fixed interest. Equity shareholder is entitled to dividends depending on and varying with the profits earned.5. A shareholder has voting rights. A debenture holder cannot have voting rights.6. Debentures may be redeemable. Shares are not redeemable.7. Debenture holders get priority over shareholders when assets are distributed upon winding tip. Dr. Tabrez Ahmad 145
    • 146. Registration of mortgages and chargesThe Companies Act provides that all charges and mortgages of the kinds mentioned below, must be registered with the Registrar of Companies by filing with him all particulars concerning them together with a copy of the deed by which the charge or mortgage is created :1. (a) a charge for the purpose of securing any issue or debentures; (b) a charge - on uncalled share capital of the company; (c) a charge on any immovable property, whether situate, or any interest therein; (d) a charge on any book debts of the company; (e) a charge, not being a pledge, on any movable property of the company; (f) a floating charge on the undertaking or any property of the company including stock-in- trade; (g) a charge on calls made but not paid; (h) a charge on goodwill, on a patent or licence under a patent, on a trade mark, or on a copyright or a licence under 3 copyright.2. A charge created out of India comprising solely property situate outside India with particulars and instrument or copy.3. A charge created in India but comprising property outside India.4. Charges on properties acquired subject to charge.- Dr. Tabrez Ahmad 146
    • 147. Time: All the charges listed above must be registered within 30 days of its creation Consequences of failure to register charges If a charge or mortgage is not registered in accordance with the aforesaid provisions, the following consequences ensue : 1. The charge becomes void as against other creditors and the liquidator in case of winding up (i.e., the charge holder loses priority). 2. The debt becomes immediately payable. 3. The officers of the company concerned are liable to punishment. 4. When a charge becomes void for non-registration no right of lien can be claimed on the documents of titles. Dr. Tabrez Ahmad 147
    • 148. Dr. Tabrez Ahmad 148
    • 149. Company AuditTable of Content Basic Provisions relating to authentication, circulation, Adoption and filing of annual Accounts Appointment of Auditor Re-Appointment of Auditor Ceiling on Number of Audit Qualifications and Disqualifications of Auditor Removal Of Auditor Rights of Auditor Duties of Auditor Dr. Tabrez Ahmad 149
    • 150. Basic Provisions relating to authentication, circulation,Adoption and filing of annual Accounts of Company Authentication of Annual Accounts :-The Balance Sheet (BS) and Profit & Loss account (P &L A/c) duly considered, approved and signed should be handed over to the Company‟s Auditors for their report thereon {Sec 215(3)} Profit & Loss A/c must be annexed to the Balance Sheet and the Auditor‟s report must be attached thereto {Sec 216} Circulation of Annual accounts:- A copy of BS, P& L A/c, Director Report & every other documents required to be annexed or attached there to shall be sent to every member of the company , not less than 21 days before the meeting. {Sec 219} Adoption of Account (including Balance Sheet, Profit & Loss A/c and directors report thereon) in AGM {Sec 210} BS & P &L A/c shall be filed with the Registrar of the Companies together with all documents which are required by the Companies to be attached/annexed thereto within 30 days of AGM. {Sec 220} Dr. Tabrez Ahmad 150
    • 151. Appointment of Auditor First Subsequent Auditor Auditor Section 224(5) Section 224(1) Dr. Tabrez Ahmad 151
    • 152. Sec. 224(5) Appointment & Removal of First Auditor Appointed by BOD within 1 month of registration of the company. ` Sec 224(5) If BOD fails to appoint, the company may appoint at a General Meeting. Holds office until the conclusion of first AGM. Thus, he will continue in office until the next annual general meeting is actually held and concluded. Members at any GM may remove such auditor and appoint another one in his place, of whose nomination special notice has been given to the members of the company not less than fourteen days before the date of the meeting. Proviso to section 224(5) Appointment of first auditors through the MOA & AOA -not a valid appointment. The first auditors are under no obligation to inform the Registrar. Dr. Tabrez Ahmad 152
    • 153. S. 224(1)Appt. of Subsequent Auditor Appointed at each AGM to hold office until the conclusion of next AGM. Sec 224(1) Intimation to the auditor within 7 days. Auditor to file form 23B to ROC within 30 days, whether he has accepted or refused to accept the appointment. Sec 224(1A) Appointment of auditor is mandatory in the AGM for the ensuing year. Before any appointment or re-appointment of auditor or auditors written certificate shall be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment or re-appointment, if made, will be in accordance with the limits specified in sub-section (1B).] Requirement of a valid peer review certificate for appointment of statutory auditors- Clause 41(1) (h) of Listing Agreement CIR/CFD/DIL/1/2010 Dr. Tabrez Ahmad 153
    • 154. What if Company Fails to appoint Auditor inAGM? Where at an annual general meeting no auditors are appointed or re-appointed, the Central Government may appoint a person to fill the vacancy. Sec 224(3) Company to give notice to Central Govt within 7 days after AGM that no auditor has been appointed. Sec 224(4) Delay in giving such notice does not affect the jurisdiction of the Central Govt. Powers of Central Govt. - Delegated to Regional Director. Dr. Tabrez Ahmad 154
    • 155. Section 224(6) Casual Vacancy BOD may fill any casual vacancy. Sec 224(6)(a) Vacancy caused by resignation - filled by the company in GM. Such Auditor holds office till conclusion of next AGM. Sec 224(6)(b) Where an auditor refuses to accept appointment or re- appointment- Deemed to be no appointment - CG If one of the two joint Auditors resigns before the completion of the tenure - Casual Vacancy by resignation - GM If there is a complete change in the constitution of the firm of Auditors i.e. all the earlier partners retire and new partners joins - Casual Vacancy.- By Board Dr. Tabrez Ahmad 155
    • 156. Appointment by Special ResolutionSection 224A Where not less than 25% of subscribed share capital is held by -Public Financial Institution/ Govt.Company/ Central Govt./ State Govt. -any institution established under State/ Provincial Act in which State Govt.holds not less than 51% of subscribed share capital. -Nationalised bank/ Insurance company DCA through its circular has clarified that the above three clauses are not mutually exclusive. It would apply to all cases of shareholding in any combination. DCA-Circular No.14 of 2001 dated 16-07-2001 Dr. Tabrez Ahmad 156
    • 157. Appointment by Special ResolutionSection 224A Material date for 25% holding of subscribed share capital - date of AGM at which Special Resolution is to be passed and not the date of notice of meeting. DCA-Circular No.2/76[1/1/76-CL-V] dated 5-6-1976 Irrespective of the circumstances in which a nationalized bank is holding shares, if the name of the bank is entered in the register of members of the company, such holding of shares will have to be taken into account for the purposes of sec 224A. DCA-Circular No.18/74 dated 12-12-1974 Dr. Tabrez Ahmad 157
    • 158. Appointment by Special ResolutionSection 224A Certified copy of the special resolution so passed shall be filed with the Registrar within 30 days of passing, in Form No. 23. If, after notice of the annual general meeting is issued in the usual course and before the holding of meeting, it happens that the holdings of the public financial institutions have reached 25% of the total subscribed share capital, then the meeting has to be adjourned and after issuing notice under this section, necessary special resolution is to be passed for appointing the auditor(s). If Company omits or fails to pass special resolution- it shall be deemed that no auditor or auditors had been appointed by the company at its annual general meeting and Central Govt. will appoint auditors to fill the vacancy in term of Section 224(3) Dr. Tabrez Ahmad 158
    • 159. ICAI Recommendations It would not be sufficient for the incoming Auditor to accept a certificate from the management of the Company that provisions of Companies Act with respect to Appointment has been complied with. If the Company is unwilling to allow the incoming Auditor to verify the relevant records, Auditors should not accept the Audit Assignment Incoming Auditor Should verify the following:- (i) Whether a member of the Company has given special notice of the resolution as required u/s 225(1) at least 14 days before the date of the GM. A True copy of the Certificate should be obtained (ii) Whether this special notice has been sent to the members of the company as required u/s 190(2) at least 7 days before the date of GM (iii) Whether this special notice has been sent to the retiring auditors forthwith as u/s 225(2) (iv) Whether representation received from the retiring Auditors, if any has been sent to the members of the company as required u/s 225(3) (v) Whether the representation received from the retiring Auditor has been considered at the GM and the resolution, proposed by the special notice, has been properly passed at the GM. Incoming Auditors should also communicate with the outgoing Auditor in writing before accepting the audit assignment. Dr. Tabrez Ahmad 159
    • 160. Appointment of Auditor of Govt. Companies(sec 619) Appointed or re-appointed by the C&AG Submits a copy of report to C&AG who have the right to comment on upon, or supplement the audit report in such manner as he may think fit. Any such comments or supplement to the audit report shall be placed before the AGM as audit report. Dr. Tabrez Ahmad 160
    • 161. Lets Summarize Appointment of an Auditor SHARE BOD C. Govt. HOLDERS (a) Subsequent (a) First Auditor Auditor (a) Auditor of (b) Casual Vacancy Govt. Co.’s (b) Casual by resignation (b)Auditor not Vacancy other than resignation (c) First Auditor appointed by Dr. Tabrez Ahmad not appointed by SH BOD 161
    • 162. Branch Auditor- Section 228 Where a company, whether a public or a private limited, has a branch office, its accounts should also be audited. Auditor may be the Company‟s Auditor or some other person qualified to be appointed as Auditor. If the branch is situated in a country outside India, a person who is duly qualified to act as auditor of the branch in accordance with the laws of that country. Where Branch Auditor is different from Company‟s Auditor, he is appointed by the Company in GM or BOD are authorised to appoint him in consultation with Company‟s Auditor. Same powers as Company‟s Auditor. Central Government may make rules providing for the exemption of any branch office from the provisions of this section to the extent specified in the rules. Dr. Tabrez Ahmad 162
    • 163. Central Govt. may either Appoint C.A. or Company’s AuditorSpecial Auditor Same powers as Company’s Auditor (Sec 233A) Makes his report to Central Govt. Dr. Tabrez Ahmad 163
    • 164. Qualifications of an AuditorSec 226 A Chartered Accountant who is a member of ICAI and holding certificate of practice and Should practice in India (“Practicing C.A.”) A Partnership firm of Practicing C.A.‟s Holder of Certificate under part „B‟ States Act, 1956 Sec 226(2) It is to be noted that The Auditors Certificate Rules were published in 1932 whereby government authorities sought to regulate the accountancy profession. Dr. Tabrez Ahmad 164
    • 165. Who can not be appointed as Auditor?Section 226(3) A Body Corporate An Officer or Employee of the Company A Person who is a Partner, or in the employment, of an Officer or Employee of the Company. A Person who is indebted / Guarantor to the Company for an amount exceeding Rs.1000. A Person holding any security of that Company after a period of one year from the date of commencement of the Companies Amendment Act 2000. (security means instrument carries voting right) Disqualified by subsidiary company, then disqualified by holding company also and vice versa Dr. Tabrez Ahmad 165
    • 166. Who can not be appointed as Auditor?Section 226(3) If an auditor, after his appointment, becomes subject to any disqualification mentioned above, he shall be deemed to have vacated as such. Statutory auditor can not be internal auditor. DCA-Circular No.5/77[1/1/76-CL-V]dated 8-4-1977 Dr. Tabrez Ahmad 166
    • 167. Ceiling on Number of AuditSection 224(IB) Should not be in „FULL TIME EMPLOYMENT‟ Auditor of max 20 Companies – only 10 can be Large Companies Large Companies - paid up capital of or exceeding 25 lacs In a Firm of Auditors, the limit of 20 Companies is per Partner. As per Companies(Amendment)Act,2000, Private Companies will not be taken into account for counting the limit of 20 Companies. However, as per ICAI notification, a person can carry out the audit of Max 30 companies including Private Companies. Dr. Tabrez Ahmad 167
    • 168. Ceiling on Number of Audit Joint audit assignments - to be counted as one company. Branch Audits – not included DCA-Circular No.21 of 75 dated 24-9-1975 Guarantee companies having no share capital – also excluded DCA-Letter No.8/12/(224)/74-CL-V dated28-9-1974 Foreign companies audit - not included DCA-Circular No.21 of 75 dated 24-9-1975 Dr. Tabrez Ahmad 168
    • 169. Removal of Auditor Removal of Auditor Subsequent 1st Auditor Auditor In Between In BetweenAfter Term After Term Term Term No In GM with No reappointment In GM reappointm approval of ent C. Govt. Dr. Tabrez Ahmad 169
    • 170. Removal of Auditor Special notice required from any member atleast14 days before the date of the GM - Section 225(1) Ordinary resolution at AGM required but notice would be special Days would be exclusive of the day on which the notice is served or deemed to be served and the day of the meeting. Auditor can be removed before expiry of his term by Company in GM after previous approval of Central Govt (powers delegated to Regional Director). Section 224(5) Prior approval of Central govt. require before actually removing an Auditor. Though resolution for removal can be passed before. Dr. Tabrez Ahmad 170
    • 171. Removal After Expiry of the term Section 224(1) Subject to the provisions of sub-section (1B) and section 224A at any annual general meeting,] a retiring auditor, by whatsoever authority appointed, shall be re-appointed, unless- (a) he is not qualified for re-appointment; (b) he has given the company notice in writing of his unwillingness to be re-appointed; (c) a resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be re-appointed; or (d) where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with. Dr. Tabrez Ahmad 171
    • 172. Rights of an Auditor : Sec 227 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[228] To receive notice of AGM[231] To make any representation which the co. can send to all its shareholders or read out at the GM.To take advice from experts.To receive Branch Audit Report.To sign the audit report.To receive remuneration.To attend AGM.To speak at AGM.To be indemnified.Right of lien. Dr. Tabrez Ahmad 172
    • 173. Duties of an Auditor Report 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. Dr. Tabrez Ahmad 173
    • 174. Duties of an Auditor Duty 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. Dr. Tabrez Ahmad 174
    • 175. Duties of an Auditor Sign & submit the Audit Report. Certify the Prospectus regarding : • Rate of Dividend paid for the last 5 years • Profits & Losses for the last 5 years • Assets & Liabilities of the company Certify Statutory report regarding : • Numbers of shares allotted • Cash received on such allotment • Receipt and Payment Account Comply with the Directives of the ICAI and that of Central Govt. Dr. Tabrez Ahmad 175
    • 176. Dr. Tabrez Ahmad 176
    • 177. Meaning of oppression  According to the Dictionary meaning of the word,  any act exercised in a manner burdensome, harsh & wrongful.  The term „oppression‟ has been explained by Lord Cooper as, “The essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely.” Dr. Tabrez Ahmad 177
    • 178. Co. A Purchase the asset of the co.Director By taking loan from the co. for the same 20% not 80% Supported Supported The Directors Dr. Tabrez Ahmad 178
    • 179. Meaning of Mismanagement When the affairs of the company are being conducted in a manner prejudicial to the public interest or the companys interest.OR When by a reason of material change in the management or control of he company the affairs of the company are likely to be conducted in a manner prejudicial to the public interest or the companys interest. Dr. Tabrez Ahmad 179
    • 180. Estate Tea & PlantationCo. Sold by Director at low price W/O Approval by shareholder under Sec. 293(1) & W/O giving adequate Notice (under sec. 173) & other Info. Tea Plantation Co. Malayalam Plantation (India) Ltd.Dr. Tabrez Ahmad 180
    • 181. • A member who must sign application given in sec 397 &398.• With share capital:- at least 100 members or onetenth members.•Without share capital:- one fifth of the total no ofmembers. Dr. Tabrez Ahmad 181
    • 182. Who can’t apply………. A member whose calls or other sums due on their shares have not been paid. A holder of a letter of allotment of a partly paid share. A holder of a share warrant. A transferee of shares who has not lodged the shares for transfer to the company Dr. Tabrez Ahmad 182
    • 183. Condition of relief Existence of alternative relief Oppression of majority Oppression qua members Dr. Tabrez Ahmad 183
    • 184. • Not calling a gen. meeting & keeping the shareholder in dark• Non maintenance of statutory records & not conducting affairs of the co. in accordance with the Co‟s Act• Depriving a member of the right to dividend Dr. Tabrez Ahmad 184
    • 185. Contd.. Transfer of share held by Company to some shareholders otherwise than by making an offer to all If sale of asset is made by a Co. to some of its directors & simultaneously giving them loan to purchase the same Issue of further shares benefiting a section of the share holders Dr. Tabrez Ahmad 185
    • 186. Acts Not Held As Oppressive An unwise, inefficient careless conduct of a director Not declaring dividend when Co. is making loss Non-holding of the meeting of the director Failure to maintain proper records of the Co. Dr. Tabrez Ahmad 186
    • 187. Prevention of Mismanagement Sec. 398 provides for relief in case of mismanagement by majority A requisite no of members of the Co. may apply to NCLT for appropriate relief on the ground of mismanagement of the Co. Dr. Tabrez Ahmad 187
    • 188. Acts Held as Mismanagement(Under Sec. 398) Serious in fight between the directors Illegal constitution of the board of directors Gross neglect of interest of the Co. by sale of its only assets Dr. Tabrez Ahmad 188
    • 189. Contd.. Diversion of the fund to benefit the majority Operation of bank A/C by an unauthorized person Advance of loans without execution of a document Continuation of managing director in office after the expiry of his term. Dr. Tabrez Ahmad 189
    • 190. Contd.. Sale of assets at low price & with out compliance with the Act Violation of statutory provisions & those of articles Violation of the condition of the Co’s memorandum Dr. Tabrez Ahmad 190
    • 191. Acts not held as Mismanagement Building up of reserves Merely because company incurs loss, it can not be that it is mismanaged Removal of secretary by majority decision of the board of directors unless it is shown that the removal has prejudicially affected the interest of the Co. or the public interest Dr. Tabrez Ahmad 191
    • 192. Contd.. Removal of the Director & termination of the works manager’s service Arrangement with creditors in Co.’ bona fide interest Dr. Tabrez Ahmad 192
    • 193. The caseGirdhar Gopal Aar Gee Board Gupta and Versus. Mills Pvt. Ltd.Ors.(Appellant and s.) Ors.(Respond ents.) 2nd Feb 2009, Supreme Court of India Dr. Tabrez Ahmad 193
    • 194.  Dr. ARIJIT PASAYAT, J. 1. Leave granted. 2. Challenge in this appeal is to the judgment of a Division Bench of the Delhi High Court dismissing the appeal filed by the appellants as not maintainable. Challenge in the appeal was to the judgment of a learned Single Judge of High Court. Two appeals were disposed of by a common order dated 7.2.2005. 3. Background facts in a nutshell are as follows: M/s Aar Gee Board Mills was incorporated as private limited company in which two groups hold the shares. One group is led by Girdhar Gopal Gupta (hereinafter referred to as `Gupta Group) and other by Guru Charan Dass (hereinafter referred to as `Garg Group). The company was incorporated with authorized share capital of Rs.20 lacs (20,000 equity shares of Rs.100/- each). At the time of incorporation, the Gupta Group subscribed 1722 equity shares and the Garg Group was allotted 1662 equity shares. Dr. Tabrez Ahmad 194
    • 195.  The shareholding between the two groups was accordingly in the ratio of 50.9% : 49.1%. This company purchased a sick unit from UPFC in the year 1985 consisting of land at GT Road Industrial Area Ghaziabad measuring 7215 sq. yards along with the plant and machinery. The company operated the aforesaid unit for few years after its purchase. However, in 2 October 1994 this unit had to be closed down. Reasons were stated to be non-installation of water treatment plant for pollution control and non payment of Government dues. Both the groups alleged non cooperation and mis-management against each other. Dr. Tabrez Ahmad 195
    • 196. AllegationsIllegal allotment of 9507 equity sharesAppointment of Mr. Parmanand, brother of Mr. Guru Charan Dass Garg asthe Additional Director with effect from 20th October, 1994, return inrespect of which was also filed with the Registrar of Companies on 20thAugust, 1998Removal of Mr. Girdhar Gopal Gupta and Mr. Ram Narain Gupta as directorsfrom the company on 16th September, 1998 without notice of any Boardmeeting. Dr. Tabrez Ahmad 196
    • 197. Decision The appeal is dismissed.Dr. Tabrez Ahmad 197
    • 198. Foss Vs Harbottle Case It is a case of Victoria Park Company Richard Foss and Edward Starkie Turton were two minority shareholders Claimant alleged that property of the company had been misapplies, wasted and various mortgages were given. Dr. Tabrez Ahmad 16-198
    • 199. Judge Observed and In effect thecourt established rules:1) Proper plaintiff rule2) Majority rule principle3) Company is a separate entity Dr. Tabrez Ahmad 199
    • 200. Exceptions to the rule in Foss Vs.Harbottle • ULTRA VIRES AND ILLEGALITY  An act which is ultra vires the company or illegal • ACTIONS REQUIRING A SPECIAL MAJORITY • INVASION OF INDIVIDUAL RIGHTS Company members right to vote may not be interfered Any interference leads to a personal right of a member to sue in his own name to enforce his right Lord Jessel MR  FRAUDS ON THE MINORITY An exception to the rule in Foss Vs Harbottle Dr. Tabrez Ahmad 200
    • 201. when there are serious disputes, one groupapproaches the CLB u/s 397/398 or NCLT allegingoppression and mismanagement. Notice to be given to Central Government ofapplications under sections 397 and 398The Company Law Board can pass any orders undersection 397/398 and section 402 of Companies Act,1956 based on facts and circumstances of the casewith the intention of regulating the affairs of theCompany and putting an end to the matterscomplained of finally. Dr. Tabrez Ahmad 201
    • 202. Effect of alteration of memorandum or articles ofcompany by order under section 397 or 398.Addition of respondents to application under section397 or 398Powers of Government to prevent oppression ormismanagement.Earlier, there used to be much emphasis ontechnical issues under section 397/398 of theCompanies Act, 1956 rather the object of theprovision now a days its objective Dr. Tabrez Ahmad 202
    • 203. Principal of Majority ruleMajority must prevail is the fundamental principle of company law. Except the power vested in board of directors the overall power are exercised through general meeting and question relating to management are decided either by a simple majority or special majority of the votes of shareholders. Dr. Tabrez Ahmad 203
    • 204. Who can be called a minorityThe group of shareholder who are not a part of the majority can be called the minority. It can be single dissident shareholder or group of a shareholder. Dr. Tabrez Ahmad 204
    • 205. Protection of minority rightsProtection under common law-1-any act which is ultra virus of the company2-any act which is fraud on minority3-any act which amounts to oppression of minority or mismanagement of the company4-any act which amounts to breach of duty by directorsProtection under company act 1956-1-Variation of class rights2-Reconstruction and amalgamation3-Investigation into affairs of the company4-prevention of oppression and mismanagement Dr. Tabrez Ahmad 205
    • 206. Dr. Tabrez Ahmad 206
    • 207. Winding Up.   Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members.  Modes of Winding up - A company may be would up in any one of the three ways, (I) compulsory winding up ie., by Court (s.433) (Ii) voluntary winding up; (s 484) (ii) voluntary winding up subject to the supervision of the Court.(s 522)  Dr. Tabrez Ahmad 207
    • 208. 2.Winding up by the Court / Compulsory Winding up Section 433 provides that a company may be wound up by the Court : (a) if the company has, by special resolution, so resolved ; (b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting, where applicable; but petition should be filed within 14 days. (c) if the company within a year from its incorporation, or does not commence its business suspend its business for a whole year, (d) if the number of members is reduced- in the case of a public company, below 7, and in the case or a private company, below 2; Dr. Tabrez Ahmad 208
    • 209. Compulsory winding up(cont) (e) if the company is unable to pay its debts ;(s 434)A company shall be unable to pay its debts :A If a creditor to whom the company owes more than Rs 500 then due, has served on the co. a demand in writing and the co. has within 3 weeks thereafter neglected to pay or secure or compound the sum to the reasonable satisfaction of the Creditor.B. if an execution or other process issued on a decree or order of any court in favour of Creditor has not been satisfied by the Company.C . If is proved to the satisfaction of the court that the company is unable to pay its debts including contingent and prospective liabilities. Dr. Tabrez Ahmad 209
    • 210. Compulsory winding up(cont)(f) if the Court is of the opinion that it is just and equitable that the company should be wound up.When the company can be winded up on “just and equitable” basis:A) when there is a dead lock in the management.B) when the company was found for fraudulent or illegal purposes.C) when the principal shareholders have adopted an aggressive policy towards the minorities.D) when the company is a “bubble”.E) When the business of the company carried except at loss.F) when the private company is in essence or substance a Partnership.G) Requirements for investigation. Dr. Tabrez Ahmad 210
    • 211. Who may petition ? The company itself by the passing of a special resolution. Any creditors, including any contingent or prospective creditors. Any combinations of creditors, company or contributories acting jointly or separately. The registrar or any person authorised by the central government as per S.243. The official liquidator Central authority Dr. Tabrez Ahmad 211
    • 212. Procedure for winding up Date of commencement of winding up - date on which the petition is presented to court. As such, Until winding up order is made , the company will have to comply with the requirements of the companies Act as are required if company not wound up. However in case if voluntary winding up, the winding of the company is deemed to have commenced at the time of the passing of the resolution. Hearing of Petition. - notices issued to all concerned parties. Before hearing the petition the provisional liquidators are appointed to safe guard the assets of the company. Intimation to Official Liquidator /ROC. On hearing the petition the court may dismiss it, with or without costs, adjourn the hearing conditionally or unconditionally, make any interim order that it thinks fit, make an order for winding up the company with or without costs or any other order that it thinks fit. Dr. Tabrez Ahmad 212
    • 213. Consequences of Winding up order : the court must, as soon as the winding up order is made, cause intimation thereof to be sent to the official liquidator and the registrar(S444). The petitioner and the company must also file with the registrar within 30 days a certified copy of the order.(S445(1)). In case the certified copy is not filed the petitioner is fined (S445). the registrar should take the minutes in his book and notify in the official Gazette that such order has been made(S445(2)). The order for winding up is deemed to be a notice of discharge to the officers and the employees except when the business is continued. Dr. Tabrez Ahmad 213
    • 214.  and suits against the company are stayed, unless the court gives leave to continue or commence proceedings. all power of the board of directors cease and the same are then exercised by th liquidator.(s491,s505) . on the commencement of the winding up the limitation ceases to run in favour of the company. any disposition of the property of the company and any transfer of shares in the company are then void. the official liquidator, by virtue of his office becomes the liquidator of the company and takes possession and control of the assets of the company.(S536(2)) Dr. Tabrez Ahmad 214
    • 215.  any distress or execution put in force without the court orders are void.(S537(a)) any type of sale or floating charge created within the period of proceedings are void.[S534] Statement of affairs to be made to the liquidator Order of Dissolution by the Court -thereafter the company has no existence Dr. Tabrez Ahmad 215
    • 216. Voluntary winding upVoluntary Winding up - Winding up by the members or creditors without any intervention of the Court is called voluntary winding up. as per section 484, a company may be wound up voluntarily by Ordinary resolution or by Special resolution. ------------------------------------------------------------------------------ By passing an ordinary resolution in general meeting a. where either the time fixed by the articles for the duration of the company has expired OR b. the event specified in the Articles has occurred on which the company is to be dissolved. Dr. Tabrez Ahmad 216
    • 217. Voluntary winding up (cont) In any other case, the company may resolve to be wound up voluntarily by passing a special resolution in general body meeting of shareholders. A voluntary winding up is deemed to commence from the time the resolution for voluntary winding up is passed. when the company has passed the resolution for voluntarily winding up, it must within 14 days, give notice in official gazette and also in some newspapers Dr. Tabrez Ahmad 217
    • 218. Consequences of Voluntary Winding-up A voluntary winding up is deemed to be commence at the time when the resolution for voluntary winding up is passed. The company ,from the commencement of the winding up, must cease to carry on its business except so far as may be required to secure a beneficial winding up. The transfer of shares and alterations in the status of members, made after commencement becomes void. A resolution to wind up voluntarily operates as notice of discharge to the employees of the company. On the appointment of the liquidator all the powers of the board of directors shall cease except after the permission of the registrar. Dr. Tabrez Ahmad 218
    • 219. Types of voluntary winding upTypes of Voluntary Winding up - Voluntary winding up may be of two types, namely, a) Members’ voluntary winding up ; b) Creditors’ voluntary winding up.Members’ Voluntary Winding up - Members‟ voluntary winding up is possible only in case of solvent companies.1) DECLARATION OF SOLVENCY (S448)– The directors must enquire whether the company will be able to able to pay all its debts within the period of 3 years. In order to be effective, this declaration must be made within 5 weeks immediately preceding the date of passing of the winding up resolution by the members; delivered to the Registrar for filing ; and must be accompanied by a copy of the report of the auditors of the company on the accounts and balance sheet. Dr. Tabrez Ahmad 219
    • 220.  Appointment and remuneration of liquidators: (S492)the company in general meeting must: a) appoint one or more liquidators b)fix the remuneration any remuneration so fixed cannot be increased in any circumstances whatever, whether with or without the sanction of the court. No liquidator shall charge of his office unless his remuneration is fixed. Board’s power to cease: (S491)on the appointment of the liquidators all the powers of the directors cease but their powers may continue if the general body or the liquidator sanctions it. Notice of the appointment of the liquidator to be given to the registrar(S493):within 10 days of his appointment .otherwise Rs.1000 fine per day. Dr. Tabrez Ahmad 220
    • 221.  Power of liquidator to accept shares, etc., as consideration of sales of property of the company(S497): Duty of liquidator to call creditors meeting in case of insolvency: S495 if the liquidator finds that the company will not be able to pay its debts he should tell it to the creditors with all records. Duty of liquidator to call general meeting at the end of each year(S496):In case the winding takes more then one year the liquidator must call a general meeting and tell the acts and winding operations done by him. Final meeting and dissolution(S497): the liquidator must(a)make up an account of the winding up showing how the company has been disposed of(b)call the general meeting of the company for laying the account before it as well as explanations. Dr. Tabrez Ahmad 221
    • 222. Creditors Voluntary Winding Up Creditors’ voluntary winding up - Where the Board of directors does not file a declaration as to solvency of the company, the voluntary winding up is called „ the Creditors „ voluntary winding up. - if the members and creditors nominate two different persons as liquidators, creditors‟ nominee shall become the liquidator of the company. - Besides, in the case of creditors‟ winding up, if the creditors so wish , a „ committee of inspection „ may be appointed to work along with the liquidators. Dr. Tabrez Ahmad 222
    • 223.  Notice to registrar: A company of any resolution passed at the creditors meeting must be filed with the registrar within 10 days of the passing thereof. otherwise fine of 500 Rs per day(S501). Appointment of liquidator: (S502) the creditors and the members at their respective first meeting may nominate a person to be liquidator but should take the board of directors into considerations. Committee of inspection(S503): The creditors at their first or any subsequent meeting, appoint a committee of inspection of not more than 5 members. Fixing of liquidator’s remuneration(S505): the remuneration of the liquidator is fixed by the committee of inspection. Dr. Tabrez Ahmad 223
    • 224.  Board’s power to cease on appointment of liquidator(S505): all the powers of the directors should go to the liquidator. Duty of liquidator to call meeting of company and creditors at the end of each year[S508]: within 3 months from the end of the year. Final meeting and dissolution [S509] Dr. Tabrez Ahmad 224
    • 225. Voluntary winding up under supervision of the court A voluntary winding up may be effected under supervision of the Court where an application to that effect is made by a creditor or a contributory or the company or the liquidator and the Court makes an order that the voluntary winding up should continue subject to the supervision of the Court. Dr. Tabrez Ahmad 225
    • 226. Such an order is passed by the Court where(i) the resolution for winding up was obtained by fraud, or(ii) the rules relating to the winding up order have not been observed, or(iii) the liquidator is prejudicial or is negligent in collecting the assets.The Court is also empowered under the section 527 to make an order for compulsory winding up superseding the order of winding up under its supervision. Dr. Tabrez Ahmad 226
    • 227. Contributorythe term „ contributory „ is defined under section 428 to mean every person liable to contribute to the assets of a company in the event of its being wound up.The expression includes the holder of any shares which are fully paid up. A past member shall however be not liable to contribute if he ceased to be a member for one year or more before the commencement of the winding up. Dr. Tabrez Ahmad 227
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