COMPANY LAW FOR ENTREPRENEURS by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE / CSE PARTICIPANTS mobile : 91+9414430763
My words.... Here I present a few basic questions on company law. I wish that more people should become entrepreneurs. An ordinary Indian entrepreneur wishes to remain an honest entrepreneur and contribute to the development of nation but we have to strengthen those institutions which truly promote entrepreneurship, not just degree granting institutions. Let us work together to promote knowledge, wisdom, social development and education. We believe in free education for all, free support for all, entrepreneurship opportunities and training for all. Let us work together for these goals. ... I alone cant do much, I need support of perosns like you .......... ...
Which company must have a company secretary ? Section 383A of the Companies Act, 1956 as amended by the Companies (Amendment) Act, 1988 : - every company having a paid-up share capital of not less than the prescribed amount (presently rupees 2 crores) must have a whole-time secretary who should be a member of the ICSI
Is a company having paid up capital below 2 Crore also required to have a company secretary ? Section 383A as amended by the Companies (Amendment) Act, 2000: - No, but every company, which is having a paid-up share capital of ten lakh rupees or more, has to file with the Registrar a certificate from a secretary in whole-time practice in prescribed form and in prescribed time as to whether the company has complied with all the provisions of the Act and a copy of such certificate shall be attached with Board’s report referred to in Section 217
What is the penalty on violation of sec. 383 ? five hundred rupees for every day
Who is a company secretary ? Section 2(45) of the Companies Act, 1956, a secretary means a company secretary within the meaning of Clause (c) of Sub-section (1) of Section 2 of the Company Secretaries Act, 1980 and includes any other individual possessing the prescribed qualifications
Is section 25 company also required to have a company secretary ? Yes, but the secretary of a Section 25 Company need not be a person who is a member of ICSI.
What is the judgement inBarnett v. The South London Tramways Co. (ibid). A company secretary cannot participate in the management of the company’s affairs
Can a secretary negotiate contracts on behalf of the company No
Can a company secretary borrow money in the company’s name? No
Can a company secretary call meetings of members ? No
Can a company secretary strike a name off the Register of Members, without authority by the Board of directors, No
Can a company secretary bind the company by contract? No ; Houghton (J.C.) & Co. v. Nothard, Lowe and Wills (1928) A.C. I.H.C.
What was the judgement by Lord Denning in the Court of Appeal on 26th May, 1971in the case of Panorama Development (Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd. A company secretary is certainly entitled to sign contracts connected with the administrative side of a company’s affairs, such as employing staff and ordering cars and so forth. All such matters now come within the ostensible authority of a company secretary
What should be the qualities of a company secretary as per Sir Edwin Stockton at the Secretaries Conference held at Buxton in 1927: “ The secretary must have sound education and be well informed. He should have specialised knowledge of the profession or business in which he is engaged and be piercing enough to master the technique of his business and its know-how. He should be in a position to adapt himself to situations and changing conditions and keep himself abreast of all legislations and judge made law that may affect or is to affect the industry.”
Can a director be appointed as a company secretary ? Appointment of a person who is a director as a secretary in the company would fall within the ambit of Section 314 and would require approval of the company by special resolution.
Can a company have more than 1 company secretary ? Yes
Can an MD remove a company secretary ? No In the case of Haryana Seeds Development Corporation Ltd. v. J.K. Aggarwal, Company Secretary (1989) 65 Comp. Cas. 95, the Punjab and Haryana High Court held that where the articles so provide, it will not be within the jurisdiction of the managing director of the company to remove the secretary in exercise of the power delegated to him by the Board of directors to suspend or remove secretaries,
When can a company secretary be removed without notice ? 1. for wilful disobedience of any lawful order of the company [Spain v. Arnott, (1817) 2 Stark 256]. 2. for misconduct and for speculating on the stock exchange [Pearce v. Foster, (1886) 17 Q.B.D. 536, 541]. 3. for incompetence or permanent disability. Harmer v. Cornelius (1858)
What can a company secretary do ? 1. All functions which he is required to perform under various enactments like the Companies Act, the MRTP Act, the Income Tax Act, FEMA, Excise Customs Act, Customs Tariff Act etc. 2. All acts which the Board of directors specifically direct him to perform. 3. All acts which are essential to enable him to discharge his duties smoothly as the administrative head in his department.
What are the duties of a company secretary ? To act as : 1. as an agent of the Board of directors, i.e. as a liaison or link between the Board on the one hand and the executive and staff, shareholders, customers and general public on the other; 2. as an officer-in-charge of secretarial work; 3. as a chief business executive or chief administrative officer
What are the registers that a company secretary is required to maintain ? 1. Register of investments held by company in name of its nominee (Section 49). 2. Register of charges (Section 143). 3. Register and index of members (Section 150). 4. Register and Index of Debentureholders (Section 152). 5. Register of contracts in which directors are interested (Section 301). 6. Register of directors, manager and secretary (Section 303). 7. Register of directors’ shareholdings (Section 307). 8. Register of Loans and Investments (Section 372A). 9. Register of renewed and duplicate certificates
What are the documents that a company secretary is supposed to sign ? requiring authentication by the company (Section 54). Prospectus statement in lieu of prospectus (Section 70). Annual Return (Section 161). Balance Sheet of the company (Section 215).
When does floating charge christalise ? 1. when the company goes into liquidation; 2. when the company ceases to carry on the business; 3. when the creditors or the debenture holders take steps to enforce their security e.g. by appointing receiver to take possession of the property charged; 4. on the happening of the event specified in the deed.
What is a share warrant ? It is a document which a public company issues in conformity with statutory requirements, under the common seal of the company and slates that the holder of the warrant is entitled to certain number of shares specified therein. Share warrant is a bearer document and the title to the shares specified therein can be transferred by mere delivery of the share warrant. To that extent, it is a negotiable instrument.
What is the provision of sec. 114 about share warrant ? Share warrant can be issued only if the company is so authorized by its articles and permission of the Central Government has been obtained. Further, share warrants to bearer can be issued only in respect of fully paid shares. Dividend coupons are attached to the share warrants providing for the payment of future dividends on the shares specified in the warrants.
Is stamp duty required on transfer of share warrant ? No stamp duty is payable on transfer of a share warrant whereas stamps duly is payable on transfer of shares specified in a share certificate.
Is the holder of a share warrant a member of the company ? The holder of a share certificate is a member of the company but the holder of a share warrant is not a member unless the Articles otherwise provide.
Can A share warrant be transferred by mere delivery? Yes
Is a share warrant a negotiable instrument? Yes
Can the holder of a share warrant present a petition for winding up of the company. No The holder of a share warrant cannot do so.
Mr. Rai purchased share in open market. There was misstatement in the prospectus. Can he sue directors for damages? Rai cannot sue the directors to recover damages for the misstatement. He must have relied on the statement in the prospectus in applying for shares. If a person purchases shares in open market, the prospectus ceases to be operative.
Mr. Rai purchased partly paid up shares. At the time of winding up is he liable to contribute as contributory? Yes, he is liable to pay the unpaid amount on the shares.
If the name of a member in registr of member is incorrect, what can a member do ? The aggrieved parties may apply to the Company Law Board (Tribunal) under sub-section (2) or (4) of Section 111 against refusal or for rectification of the register of members for default in making an entry of his name in the register. The time of filing such appeal is 4 months from the date of lodgments of transfer application. There is no limitation period provided for making an application for rectification of register of members, under subsection (4). The company is also punishable under sub-section (12) with a fine upto Rs.500 per day.
What is the difference between dividend payment in share and share warrant ? Dividend is paid to the holder of a share certificate by the issue of a dividend warrant in his favors but dividend due on a share warrant is advertised in newspapers and is payable to the holder of the dividend warrant on presentation of the relevant coupon attached to the share warrant.
As per sec. 292(1), which powers of directors can be exercised in board meetings only? 1. powers to make calls on shareholders in respect of money unpaid on their shares; 2. power to authorise the buy-back as per the provisions of Section 77A; 3. power to issue debentures; 4. power to borrow moneys otherwise than on debentures; 5. power to invest the funds of the company; and 6. power to make loans.
Which powers can the board delegate ? power to issue debentures; power to borrow moneys otherwise than on debentures; power to invest the funds of the company
What should the resolution state, when the board delegates its powers (mentioned in the last slide)>? the total amount outstanding any one time up to which the money may be borrowed by the delegate under clause (c); [Section 292(2)]. the total amount up to which the funds of the company may be invested and the nature of the investment which may be made by the delegate under clause (d); [Section 292(3)]. the total amount up to which loans may be made by the delegate, the purpose for which the loans may be made, and the maximum amount of loans which may be made for each such purpose in individual cases under clause (e) [Section 292(4)]
Can a lender assume that the directors have the right to borrow ? Yes Shri Krishna Rathi v. Mondal Bros & Co. (P) Ltd., (1967) 1 Comp LJ 10: (1967) 37 – the judgement was : Strangers dealing with a company are entitled to assume that a director or manager was authorised to borrow, even if in fact not so authorised.
Can every company borrow? A trading company has an implied power to borrow, even though the memorandum of association does not contain an authority to borrow. In the case of non-trading company, however, there must be express power to borrow. [Badger Mansell v. Viscount Cobham, Re, (1905) 1 Ch 568, 574].
Can a company give its books of accounts as security ? No, a company cannot give by way of security books and registers which it is bound to keep under the Companies Act.
Can directors borrow by a resolution for a purpose which is ultra vires ? No Where the borrowing is ultra vires the memorandum or contrary to the law, even the shareholders cannot ratify the act.
What is ‘rati habitio mandato aequiparature’? Subsequent ratification of an act is equivalent to a prior authority to perform such act.
What was the decision of supreme court in Maharashtra State Mining Corpn. v. Sunil [(2006) 70 SCL 351 (SC)]? In this case MD dismissed an employee without authority, however, the board later approved the action of MD thus the act of MD was validated.
What powers of the board can be used only by unanimous vote? 1. the power to appoint or employ a person as its managing director under Section 316 or manager under Section 386 if he is managing director or manager of one and not more than one other company. 2. the power to invest in shares or debentures of any other body corporate under Section 372A.
What powers of the board can be used only after the permission of the general meeting? sell, lease or otherwise dispose of the whole, or substantially the whole of the company remit, or give time for the repayment of, any debt due by a director invest, otherwise than in trust securities, the amount of compensation received by the company in respect of the compulsory acquisition borrow money, where the moneys to be borrowed, together with the moneys already borrowed by the company exceeds capital + reserves contribute to charitable and other funds not directly relating to the business of the company or the welfare of its employees amounts exceeding fifty thousand rupees, or five percent of its average net profits (sec. 349,350)
What was the judgement in Cochin Malabar Estates & Industries Ltd. v. P.V. Abdul Khader (2003) 114 Com. Cases 777 (Ker.)? A decision was taken by the Board of directors to sell the immovable property of the company. They also obtained sanction of the general body of shareholders. An individual shareholder was not allowed to question the wisdom of the decision. The Court cannot at the instance of a single shareholder upset the decision taken by the Board
Is a mortgage required to be permitted by general meeting? Section 293(1)(a) : general mortgage is not required to be permitted, but if it is an usufructuary mortgage the said section would be attracted and permission is required from general meeting
Can a company take hire purchase / lease without general meeting permission? Yes Hire purchase and leasing transactions are not covered by clause (d) of Section 293(1), as they do not amount to “borrowing”.
Upto how much political contribution can be made without general body permission? Section 293A(2) permits Non-Government Companies which are in existence for not less than three financial years, to make contributions, directly or indirectly, in any financial year, to any political party or for any political purpose to any person, amounts not exceeding five percent of their average net profits determined in accordance with provisions of Sections 349 and 350 during the three immediately preceding financial years.
Can board contribute to national development fund without general body permission? Yes notwithstanding anything contained in Section 293 and 293A or any other provisions of this Act or in the memorandum, articles or any other instrument relating to the company, the board can contribute such amount as it thinks fit to the National Defence Fund or any other Fund approved by the Central Government (sec. 293b)
What is section 295 about ? No company can give loan to its directors (without permission from central government) exemptions : 1. any loan made, guarantee given or security provided:- (i) by a private company unless it is subsidiary of a public company, or (ii) by a banking company; 2. any loan made by a holding company to its subsidiary company; 3. any guarantee given or security provided by a holding company in respect of any loan made to its subsidiary company.
What was the matter of M.R. Electronics Components Limited and Others v. Assistant Registrar of Companies (1986) 3 Comp. L.J. 28 (Mad.)? the directors of a company had given an advance of Rs. 5,000 to the Managing Director’s wife who was employed by the Company on monthly salary. On the ground that the provisions of Section 295 of the Companies Act, 1956 were violated
Can a company give loan to MD for building house without permission from central government ? Yes Ministry of the Corporate Affairs had allowed companies to make house building loans to their Managing Directors and Whole-time Directors without obtaining prior approval of the Central Government under Section 295 of the Companies Act, 1956 on such terms and conditions as are applicable to its officers/employees.
What details must be submitted to government to obtain permission for loan to director ? Board resolution, last 3 annual reports, e-Form 24AB. 1. Working results of the company for the last three financial years. 2. Amount of loan or security or guarantee. 3. Details and justification of the proposal mentioned in the application. 4. Details of the borrowing Company. 5. Controlling and common interest etc, 6. statement that company has not defaulted in payment of any dividend / interest / redemption etc.
Is permission required if a contract is made in which director is interested? In the case of company having a paid-up share capital of not less than rupees one crore, previous approval of the Central Government would be required [proviso to Section 297(1)]. For the previous approval of the Central Government, application shall be made in e-form 24A for any transaction related to : 1. for the sale, purchase or supply of any goods, materials or services; or 2. for underwriting the subscription of any shares in or debentures of the company. In which director is interested.
What is the judgement in Yashovardhan Saboo v. Groz-Beckert Saboo Ltd., (1995) 83 Com Cases 371 at p.413 (CLB)? A director occupies a fiduciary position in relation to a company and he must act bonafide in the interests of the company. If a director makes a contract with the company and does not disclose his interest, he will be committing breach of trust read sec. 299 – liability of directors to disclose thier interest
What is sec. 297 about ? the consent of the Board of directors is required for certain contracts in which particular directors are interested
What are statutory duties of a director ? to attend Board meetings – Section 283(1)(g) not to contract without Board’s consent to disclose interest (Sections 299-300) to make disclosure of Shareholding — Section 308 to convene statutory meeting, annual general meetings (AGMs) and also extraordinary general meetings [Sections 165, 166 & 169]. To disclose receipt from transfer of property — Section 319 To disclose receipt of compensation from transferee of shares — Section 320 to file declaration of Solvency —buy back Section 77A or in the case of a Members’ voluntary winding up (Section 488) To file return of allotments – Section 75 in 30 days
What are general duties of directors? Not to make secret profit to work honestly, sincerely not to misapply company assets. not to compete with the company.
What was the view of court about role of directors in Lagunas Nitrate Co. v. Lagunas Nitrate Syndicate  “If directors act within their powers, if they act with such care is to be reasonably expected of them having regard to their knowledge and experience and if they act honestly for the benefit of the company they discharge both their equitable as well as legal duty to the company.”
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