1. Company Law
Dr. V. K. Jain
M.Com., M.Phil., LL.M. Ph.D. (Tax), FCS
Practising Company Secretary
2. Companies Act 1956
Why Study Company Law?
– Most popular form of business organisation.
Why……….?
– It provides an organisational framework
– It is a means to an end
– It offers several advantages over other forms of business
organisations
– A company is a person in Income-tax
– More than 60% of income-tax revenue comes from corporate
assesses.
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3. How many companies are there in India?
There has been tremendous growth of companies in the nineties due
to the new economic policy of liberalisation, the new scheme of
taxation of partnership firms, the expanding capital market etc.
As a result the number of companies increased manifold from about
1.25 lacs in 1980 to around 9 lacs by January 2012.
Mumbai ROC has around 2,40,000 companies while Delhi ROC has
around 2,25,000.
There are around 10,000 listed companies.
4. 1850 The first Companies Act was passed in India in the year
1850. Thereafter the Companies Act, 1866 was enacted,
followed by the Companies Act 1913 which was replaced by
the present Companies Act, 1956.
The Companies Act 1956 has been amended several times. The
Companies (Amendment) Act, 1999, 2000 & 2002 has drastically
amended the Companies Act, 1956, to respond to the changed
economic environment and liberalisation and globalisation
policies of the Government.
A new Companies Act is in the offing and the new company law
bill has already been presented before the Parliament.
5. Ministry of Corporate Affairs
In 2004 a new Ministry of Company Affairs (renamed Ministry
of Corporate Affairs since 9th May 2007) was created for the
first time under the charge of an independent Minister.
MCA-21 – This is the biggest e- governance initiative taken by
the Ministry of Corporate Affairs in 2006. All manual filing of
returns and documents have been abolished and e-filing has
been introduced.
6. Meaning of a Company
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MEANING OF A COMPANY
Separate Legal Entity Transferable Shares
Limited Liability Separate Property
Perpetual Succession Common Seal
REGISTERED OR INCORPORATED UNDER THE COMPANIES
ACT WHERE BY IT AQUIRES CERTAIN ATTRIBUTES
FOR SOME COMMON PURPOSE VIZ. BUSINESS,
CHARITY, RESEARCH ETC.
A COMPANY IS AN ASSOCIATION OF PERSONS
7. Non-corporate form of business enterprises-
Sole proprietorship
Joint Hindu Family (HUF)
Partnership
Corporate Form of business enterprises –
Co-operative organisation – Can be converted into
a Producer company.
Company
Limited Liability Partnership (LLP)
8. By a company is meant an association of many persons
who contribute money or money’s worth to a common stock and
employ it in some trade or business, and
who share the profit and loss (as the case may be) arising there
from.
The common stock so contributed is denoted in money and is the
capital of the company.
The persons who contribute it, or to whom it belongs, are
members.
The proportion of capital to which each member is entitled is his
share.
The shares are always transferable although the right to transfer
is often more or less restricted. (Lord Justice Lindley)
9. On the basis of its
characteristics, a company
can be defined as
“ an incorporated association,
which is an artificial person
created by law, having a
separate entity, with a
perpetual succession and a
common seal ”. (Haney)
10. Characteristic Features of a Company 1
Separate Legal entity
– Solomon v Solomon & Co. Ltd
Limited liability of members
Perpetual Succession
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11. Characteristic Features of a Company 2
Separation of ownership from management
Transferable shares
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12. Characteristic Features of a Company 3
Separate Property
Common Seal
Capacity to sue and being sued
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13. Lifting the Corporate Veil
Fictional veil between the company & its members
Lifting the veil means disregarding the corporate entity and
paying regard to the realities behind the legal form
When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the
law will disregard the separate legal entity and look behind
the real persons who are in control of the company.
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14. Under Statutory Provisions
1. Reduction of membership below the statutory minimum (sec. 45)
2. Misrepresentations in prospectus (sec.62 & 63)
3. Failure to return application money (sec. 69)
4. Misdescription of name (sec. 147)
5. Piercing the veil in holding and subsidiary company relationships
6. Company under investigation
7. Fraud during winding up
8. For ultra vires Act
9. For violations of the provisions of other statues
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15. Under judicial decisions
1. Lifting corporate veil in tax matters
2. Lifting corporate veil where company is used for evasion of personal and
statutory obligation
3. Lifting corporate veil for determination of the enemy character of the company
4. Lifting corporate veil in associated companies
5. Lifting corporate veil where company is used to avoid welfare legislation
6. Lifting corporate veil where body corporate is used to commit fraud or improper
conduct
7. Lifting corporate veil for determining technical competence of the company
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17. Body Corporate or corporation is wider than the
term company
It has three distinct attributes:
Separate legal personality
Perpetual succession
Common seal
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18. Body corporate does not include
a corporation sole
a co-operative society
Includes foreign company, PFI, N.Bank, AOP
declared as a Body Corporate by Central
Government. e.g ONGC
Corporation formed under Act of Parliament or State
Legislature.
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19. Is a Company a property of the
shareholders?
No. The company is not the property of its shareholders. All
the property in the name of the company is its separate
property which is controlled, managed and disposed of by
the company in its own name. Thus the company is the
owner of its assets and capital.
Moreover, the company being a separate legal person, it
cannot be construed as property of the shareholders.
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21. Kinds of Companies 1
A. The Companies not covered by the Companies Act, 1956
B. The Companies covered by the Companies Act, 1956
Companies not covered by the Companies Act
Statutory companies
Chartered Companies
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22. Kinds of Companies 2
Companies covered by the Companies Act
– Private Company - Sec 3 (1) (iii)
– Public Company - Sec 3(1)(iv)
These companies may be:
1.Companies with liability limited by shares
2.Companies with liability limited by guarantee iii)
3.Companies with unlimited liabilities (Unlimited
Companies)
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23. Kinds of Companies 3
On the basis of nature, form and functions.
I. Companies not for profit
ii. Government. companies
iii. Foreign companies
iv. Holding and subsidiary companies
v. Producer company
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24. Kinds of Companies 4
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Public Private
Covered by the
Companies Act
Statutory Charted
Not covered by the
Companies Act
Other Companies – On the basis of nature form & functions
1.Companies not for profit
2.Government Companies
3.Foreign Companies
4.Holding & Subsidiary Companies
These companies may be:
1. Companies limited by shares
2. Companies limited by guarantee
3. Unlimited Companies
25. Private Companies
Minimum2
Maximum 50
1. Number of
Members
Restricted
2. Transfer of
Shares
No public Offer
for Shares or
Debentures
3. Invitation
for Public
Subscription
Not allowed from
persons other than
its members,
directors or their
relatives
4. Invitation or
Acceptance of
Deposits
A PRIVATE COMPANY
Means a Company which has a minimum paid-up
Capital of Rs. 1.00 lac
AND
26. Private Companies
Advantages and Privileges of Private Companies
i) Formation
ii) Business
iii) Meetings
iv) Board of Directors
v) Share issue
vi) Miscellaneous
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28. Distinction of a Private Company and a
Public Limited Company
Number of Members
Minimum paid up capital
Number of Directors / Retirement
Transfer of Shares
Public Subscription / Deposits
Commencement of business
Allotment of Shares
Statutory Meeting
Managerial Remuneration
Audit committee
Quorum and interested directorsDr. V. K. Jain 28
29. Other Companies
Government company [Sec 617]
Foreign Companies [Sec 591]
Holding and subsidiary Companies [Sec. 4]
Companies not for profit (or Association not for profit) [Sec
25]
Investment company
Producer company
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30. Government company [Sec 617]
A Government company is a company in which not
less than 51% of the paid up share capital is held.
1. by the Central Government , or
2. by one or more State Government, or
3. partly by Central Government and partly by State
Government.
31. Foreign Companies [Sec 591]
A foreign company is a company, which is incorporated outside India but
has a place of business in India.
It is place of incorporation, which determines the foreign character of a
company. Thus, a company incorporated outside India but having a place
of business in India would be regarded a foreign company even though all
the members might be Indian citizens.
The Companies Act lays down certain special provisions applicable to
foreign companies. A foreign company if it ceases to carry on business in India,
may be wound up as an unregistered company.
32. Holding and subsidiary Companies [Sec. 4]
Which holds more than half of the nominal value of the equity share
capital of another company (subsidiary company) For example, if 'H'
company hold 51% of the nominal value of the equity capital of 'S'
company, then 'H' company is said to be a holding company and 'S'
company is a subsidiary company. or,
Which controls the composition of the board of directors of another
company (subsidiary company). The company which is so controlled by
the holding company is known as Subsidiary Company. Control involves
the power to appoint all or majority of the board of directors without the
consent of some other person.
A company shall be deemed to be a subsidiary company of another if it is
a subsidiary of a third company which itself is a subsidiary of the
controlling company.
33. Examples of Holding and Subsidiary
Steel Authority of India (SAIL) – Holding company
- Bhilai Steel Plant – Subsidiary company
- Rourkela Steel Plant – Subsidiary company
- Bokaro Steel Plant – Subsidiary company
Coal India Ltd.
- WCL – Subsidiary company
- BCCL – Subsidiary company
- SCCL – Subsidiary company
34. Companies not for profit (or Association not for
profit) [Sec 25]
It is formed to promote commerce, art, science, religion, charity or any
other useful object.
It prohibits payment of any dividend to its members and applies its
profits or other income in promoting its objects.
It obtains a license from the Central Government to be registered as a
limited company without being required to use the word "limited" or
private limited to their names. (e.g., Institute of Company Secretaries
of India, was originally 'an association not for profit'. Now it is a
statutory body).
35. Investment company
Sec 372 (10) of the Companies Act, 1956 defines an
investment company as a "a company whose
principal business is the acquisition of shares, stocks,
debentures or other securities".
36. Producer company
A producer company is a company which is incorporated under
section 581C of the Companies Act and is engaged in any activity
connected with any primary produce.
such as produce of farmers arising from agriculture, forestry, forest
products, floriculture, etc. and produce of person engaged in
handloom handicraft and other cottage industries.
The name shall include the words “Producer Company Ltd.” as the
last words.
37. Illegal Association [Sec 11]
No company, association or partnership consisting of more than 10
persons for the purpose of carrying on the business of banking and
more than 20 persons for the purpose of carrying on any other
business can be formed unless it is registered under the Companies
Act or is formed in pursuance of some other Indian Law
Exceptions
Associations ‘not for profit-making’
Joint Hindu Family
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38. An association or partnership is an illegal association if all the
following conditions are satisfied :
– The number of persons carrying on business exceeds 20 (10 persons in
case of banking business).
– It is formed for the purpose of earning profits.
– It is not registered under the Companies Act or formed under any
other Indian law (e.g. Cooperative Societies Act ,Trust Act).
– It is not a Joint Hindu Family (i.e., an HUF is not an illegal association
even if he number of members exceed 20 or 10, as the case may be).
Effects of an illegal association
39. Conversion of Companies
Conversion of private company into a public company
– Conversion by default [Sec. 43]
– Conversion by operation of law
– Conversion by choice [Sec. 44]
Conversion of a public company into a Private company
– Defunct Company
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40. Administration of Companies Act - I
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Registrar of Companies
Regional Director
Central Government
( Ministry of Corporate Affairs)
41. Jurisdiction of Courts
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National Company Law Tribunal
National Company Law
Appellate Tribunal
Supreme Court
The jurisdiction of company law board and High Court is sought to be replaced
42. 3. Documents for Incorporation 1
Following documents are to be submitted electronically as
scanned attachment to E-Form No. 1. After submission, a SRN
(Service request number) will be generated by the system
– MEMORANDUM OF ASSOCIATION duly signed by the minimum
number of subscribers, stamped and witnessed
– ARTICLES OF ASSOCIATION, which should be similarly signed, stamped
and witnessed
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43. Documents for Incorporation 2
– A STATUTORY DECLARATION stating that all the provisions of
Companies Act,1956 with regard to registration have been
complied with.Section 33(2). The declaration should be in FORM
NO. 1 on a non-judicial stamp paper of appropriate value. Digital
Signature of the applicant in Form No. 1 on the last page
– The PARTICULARS OF DIRECTORS, etc. in FORM NO. 32. This Form
32 can be filed either at the time of registration of a company or
within 30 days of incorporation.
• Digital Signature of Applicant and Practicing CS, CA, CWA
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44. Documents for Incorporation 3
– NOTICE OF REGISTERED ADDRESS of the company in FORM NO. 18 This Form
can be filed either at the time of registration of a company or within 30 days
of incorporation.
• Digital Signature of Applicant and Practicing CS, CA, CWA
– POWER OF ATTORNEY signed by all the subscribers, authorising one or more
persons to act as their representative(s) to make amendments and/or
alterations in memorandum and articles of association and other forms and
papers filed before ROC, for incorporation and also to collect the certificate
of incorporation
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45. Documents for Incorporation 4
Under the new MCA-E Governance System the soft copy of all the
above documents is to be filed electronically through the MCA
website.
The registration fees is paid through challan
in the authorised Bank or through credit card.
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49. In the case of a public company having share
capital, in addition to the above, written consent
of all those persons who have agreed to act as
directors is required to be given
CERTIFICATE OF INCORPORATION:
After scrutinizing the documents and on being
satisfied that they are in order, the R.O.C. issues
the certificate of incorporation.
By post at the company’s registered office
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50. The certificate of incorporation is conclusive as to all
the requirements of the Act with respect to
registration and matters precedent and incidental
thereto having been duly complied with
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52. 4. Company Documents
4.1 Memorandum of Association
4.2 Articles of Association
4.3 Prospectus
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53. 4.1. Contents of Memorandum
The basic conditions, as per section 13 are as follows :-
Name Clause
Situation Clause (Domicile clause or Registered office clause)
The objects clause of the memorandum of association of a company is split up as
follows:
– main objects of the company
– objects incidental or ancillary to the attainment of main object &
– any other objects
Liability Clause
The Capital Clause
Subscription Clause
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54. 4.2. Doctrine of Ultra Vires
The word ‘ultra’ means beyond and the word ‘vires’ means the
powers. Ultra vires, therefore, means beyond the powers. Any
act beyond the objects stated in the memorandum is ultra vires
the company and thus void.
Effects of ultra vires transactions:
- Ultra vires contracts are void ab initio
- Injunction:
- Personal liability of Director
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55. 4.2. Articles of Association
What you should know :
4.1 Meaning of Articles and its relationship with memorandum
4.2 Contents of Articles of Association
4.3 Alteration of Articles
4.4 Binding effects of Articles
4.5 Doctrine of constructive notice
4.6 Doctrine of Indoor Management
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56. 56
What you should know :
5.1 Prospectus: What it is and why it is issued?
5.2 Various methods of raising of share capital
5.3 What are the statutory requirements for the issue of
prospectus?
5.4 Contents of prospectus
5.5 Statement in lieu of prospectus
5.6 Shelf prospectus
5.7 Information memorandum (book building)
5.8 Is there any liability f or mis-statement in prospectus?.
5.9 What is the requirement to be satisfied for listing of
shares with SEBI?
4.3. Prospectus
57. 57
What it is and why it is issued?
Means any document, described or issued as a
prospectus and includes any notice, circular
advertisement or other document inviting deposits from
the public or inviting offers from the public for the
subscription or purchase of any shares, or debentures
of, a body corporate.
Prospectus Invitation to offer
Application for shares Offer
Allotment of shares Acceptance of the offer,
resulting in a binding contract.
59. 5. Allotment of Shares
Allotment may be defined to mean the
appropriation by the Board of Directors of the
company out of the previously unappropriated
capital of the company of a certain number of
shares to persons who have made
applications for shares.
Allotment results in a binding contract ,since it
amounts to acceptance of offer
60. Allotment to be valid :
should be made by proper authority, namely, the board of
directors or a committee authorised by the Board.
should be against application in writing,
should not be in contravention of any other law and
must be made within a very reasonable time and
communicated to the applicant.
61. Restrictions on Allotment
Besides, an allotment to be valid must comply with the
provisions of -
section 60 ( registration of prospectus on or before
the date of its publication ),
section 69 ( application money to be not less than
5% of the nominal amount of the share, moneys to
be kept deposited in separate bank account,
minimum subscription ),
section 70 ( Statement in lieu of prospectus to be
filed at least three days before the allotment)
62. Restrictions on allotment (cont.)
section 73 ( listing of shares on one or more
recognised stock exchange (s) and refund of
the moneys in case listing is refused, refund
of over-subscription within 78 days of the
closing of the issue).
Minimum subscription of 90% is to be
received in case of public / right issue.
63. Effect of irregular Allotment.
Sec 60 default- Fine upto 50,000.
Sec 69/70 default- allotment voidable
Sec 73 default- allotment Void.
RETURN AS TO ALLOTMENT.
64. 6. Buy back of Shares
What is buy back ?
It is the offer of the company to the shareholders to
purchase their shares
Why buy back ?
-To Improve shareholder value
- As a defence mechanism
- Management signalling.
65. A. Pre- conditions for buy- back.
Authorised by the Articles.
Upto 25% of the total paid-up capital and free reserves.(net
worth)
Debt-net worth ratio is not more than 2:1 after buy-back.
Shares for buy-back are fully paid up.
If the buy-back is for more than 10% of the paid-up capital, a
special resolution through postal ballot has to be passed. For
less than 10%, board resolution will do.
66. B. Restrictions for buy-back No buy back
- through any subsidiary.
-through any investment company.
-if default subsists in int.payments etc…
-non complaince of sec. 159,207,and 211.
67. C. Sources of funds for buy-back [section
77A(1)
Buy-back may be out-of
• (I) its free reserves
• (ii) the securities premium account
• (iii) the proceeds of any shares/securities
Capital Redemption Reserves Account : If buy-back is
out of free reserves a sum equal to nominal value of
shares so purchased shall be transferred to capital
redemption reserves account Section 77AA
68. D. Procedure of buy-back of shares
• Before buy-back
1. The buy-back is authorised by its Articles
2. A special resolution is passed in
General Meeting authorising the buy-back
3. Details of buy back in notice of the meeting.
4 Declaration of solvency : to be filed in SEBI/ROC
5. Buy back to be completed within 12 months of
passing special resolution.
69. E. Procedure after the buy back.
1 Verification and payment.
2 Extinguishment of securities
3. Public adv. of completion of buy-back. (Applicable to a listed
company).
4. Return of buy-back. to ROC, SEBI within 30 days of such
completion
5. Register of BUY-back.
6. Cooling period. Prohibition of new issue of shares within
24 months of buy-back (except bonus, conversions)
7. Penalty for default
70. 7. Calls on Shares.
A call may be defined as a demand by the company for payment of
part of the issue price of shares or debentures which has not been
paid.
A call to be valid must be made by the directors duly appointed and
duly qualified; against a resolutions passed at the meeting of the
Board of directors
Besides, it must be made on uniform basis and bonafide in the interest
of the company.
-Notice of call must specify the exact amount and the time of
payment.
71. 8. Forfeiture of Shares.
A company’s articles usually contain a provision to forfeit shares
of a member who fails to pay his calls due. Forfeiture to be valid
must be
in accordance with the articles and
against a proper notice,
directors must pass a resolution forfeiting the shares bonafide in the
interest of the company.
A forfeiture has the effect of termination of membership. However, a
person whose shares have been forfeited continues to remain liable
as a past member in case liquidation takes place within one year
forfeiture.
72. 9. Surrender of Shares
A company may accept surrender of shares as an
alternative to forfeiture where its articles so permit.
However, surrender of shares shall be valid only where
their forfeiture is otherwise justified.
In any other circumstances, surrender of shares cannot
be accepted without sanction of the court since it would
amount to reduction of capital.
73. 10. Nomination of Shares/ debentures(Sec
109A)
The nomination should be made in prescribed from No.
2B.
The form should be signed by all holders and should be
dated. It should be signed by two witnesses.
Nominee may either register his name
or directly transfer the securities.
74. 11. Transfer of Shares (Sections 108 to
112)
1 Right to transfer shares
2. Procedure of transfer of shares
3. When can company refuse transfer of shares
4. Forged transfer and blank transfer
5.Transmission of shares
6. Transfer of shares under the depositories system
75. 12. Membership
1. Definition of a member
2. Member v. Shareholder
3. Modes of acquiring membership
4. Who may become a member?
5. Termination of membership
6. Rights of a member
7. Liabilities and duties of a member
8. Variation of the rights of a member
76. 13. Management of a Company
1. WHO MANAGE THE COMPANY ?
One of the important features of a company is that there is separation of
ownership from management.
The shareholders do not directly manage. Instead, they elect some
persons from among themselves as their representative to act on
behalf of the company. Such persons are known as directors.
The power to manage however is not entrusted to any single director
but to all the directors, collectively called the Board of Directors.
77. 14. Company meetings
A. Shareholders Meetings
Statutory Meeting.
Annual General Meeting.
Extra Ordinary General Meeting.
Meetings of a class of Members.
B. Directors Meetings
I) Meetings of the Board of Directors.
ii) Meetings of the Committee of Board of Directors.
C. Creditors Meetings
I) Debentures holders Meeting.
ii) Other Creditors Meeting.
78. 15. Statutory Registers / Books to be
maintained by a company
49(7) Register of investments - where investments of the company in shares or
securities are not held in its own name.
58A Register of Deposits (Read with rule 6 of the Companies (Acceptance of
Deposits) Rules, 1975.
136 Copy of every instrument creating any charge requiring Registration.
#143(1) Register of charges.
#150(1) Register of members.
#151(1) Index of Members, where their number is more than fifty.
#152(1) Register of Debenture holders.
#152(2) Index of Debenture holders where their number is more than fifty.
157-158 Foreign Register of members and debenture holders.
# To be open for public inspection.
79. #159-160 Copies of Annual Return.
193-196 Minutes Books of Proceedings of General Meetings and of meetings
of the Board of Directors of Committees of the Board.
209(1) Books of account and Cost Records
301 Register of contracts, Companies and Firms in which the Directors of the
Company are interested.
302 (6) All contracts entered into by the Company for the appointment of a
Manager or Managing Director.
#303(1) Register of directors, manager and secretary.
307 Register of shareholding or debenture holdings of Directors and Manager.
370(IC) Register of loans made and guarantees given or securities provided
to Companies under the same management.
372(6) Register of all investments made by the Company in the shares of
any other body corporate or bodies corporate
80. Filing of Returns with the Registrar of
Companies
Periodical Returns: There are three important
periodical returns. These are:
– Annual Return under section 159 or 160
– Balance Sheet and Profit and Loss Account, under
section 220; and
– Compliance Certificate under section 383A.
81. Filing of Returns with the Registrar of
Companies
Returns on occurrence of certain events: These include:
– Return as to allotment in e-form no. 2 (sec. 75)
– Return of directors in e-form no. 32 (sec. 303)
– Return as to Alteration of Memorandum, which requires confirmation
of CLB in e-form no. 21.
– Return as to Alteration of Share Capital in e-form no. 5 (sec. 94)
– Return of Charges in e-form no. 8 and 17 (sec. 125 and 127)
– Return of Resolutions and Agreements in e-form no. 23 (sec. 192)
– Return of Foreign Companies in e-form no. 44 / 49 (sec. 592 / 593)
82. Annual Return [sec.159 to 162]
Every company having a share capital shall file with the Registrar of companies
an annual return within 60 days from the date of holding of the Annual General
Meeting.
Contents:
Name and registered office address
Capital structure of the company
Directors/ Secretary Information (Past and Present)
Details of shares/debentures held at date of AGM
Details of shares transfers since last date of AGM
Indebtedness of the company
Equity share capital breakup
83. Books of Account
Section 209 of the Companies Act requires every company
to maintain proper books of account with respect to
receipts and payments,
sales and purchases,
assets and liabilities,
Cost accounting records if applicable.
Books of account to be kept at the Registered office.
84. What do you mean by Proper Books
of Accounts?
Books which give true and fair view of the state of affairs of the company
The books of account explain the transactions; &
The books of account are kept on accrual basis and according to the
double-entry system of accounting.
The accounts are prepared as per accounting standards.
85. Authentication of Accounts
Every B/S and P&L a/c is required to be
signed, on behalf of the Board of directors, by
its manager or secretary, if any, and by not
less than two directors of a company one of
whom must be the managing director where
there is one.
86. Board’s Report
At the Annual General Meeting one of the matters to be
considered is the report of the Board of Directors.
Section 217(1) requires that a report of Board of Directors
should be attached to the balance sheet laid before the
AGM. While drafting the Directors’ report the provisions of
Companies (Disclosure of Particulars in the Report of Board
of Directors) Rules, 1988 and Companies (Particulars of
Employees) Rules, 1975 should be complied with.