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LEGAL AND BUSINESS ENVIRONMENT
18MBA24
By:
Dr.LAKSHMINARAYANA REDDY.K
MBA, M.Phil, Ph.D
Module 2
• Corporate Incorporation and Management:
• Definition of company, characteristics, types of company,
lifting of corporate veil (i) Incorporation of company (ii)
Memorandum and Articles of Association (iii) Doctrine of
Ultra Vires (iv) Doctrine of Indoor Management and
constructive notices Management-
(i) Directors: Appointment, Removal, Position, Powers and
Duties of Directors.
(ii) Auditor and audit Committee: Its Role.
Directors – qualification and Appointment, Liabilities and
duties.
• Mini case Presentation and Discussion on Saloman v/s A
Soloman & Company Ltd.
Introduction
• The word company is derived from a Latin word companies it
means a group of persons who took their need together. In
India law relating to companies is contained in the companies
Act 1956 and now 2013.
• Company means an association of 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
arising there form.
• A company is an incorporated association, which is an artificial
legal person, having separate legal entity with a perpetual
succession, a common seal, a common capital comprised of
transferable shares and carrying limited liability.
Definition
• Section 3(1)(i) of the companies act defines
company as, “A company means a company
formed and registered under this act or an existing
company”.
• „Existing Company‟ means a company formed and
registered under any of the previous Company
Laws.”
• “Company” is derived from two words:
“com”- group and “panies”- bread.
Therefore, it means group that eat their
bread together.
CHARACTERISTCS OF A COMPANY
• Incorporated association
• Artificial legal person
• Separate legal entity
• Perpetual existence
• Common seal
• Limited Liability
• Transferability of shares
• Separate Property
• Capacity to sue and be sued
CHARACTERISTCS OF A COMPANY
- Incorporated association
Co must be incorporated or registered under the Companies
Act
- Artificial legal person
Company does not possess physical attributes of natural
person but it is clothed with many of the rights of natural
person. A co may acquire and dispose property, enter in to
contract, it may be fined for the contravention of provisions of
companies act.
- Separate legal entity
A co is a distinct person possessing its own identity. It is
separate legal entity, independent from its members, though
controlled by the Board of Directors.
- Perpetual existence
Co have perpetual existence, its life does not depend
upon the death, retirement or insolvency of its
members. Law creates it and law alone can dissolve it.
- Common seal
Co has separate legal existence under its own common
seal. It can enter in to contract with its members,
directors or outsiders. the use common seal legally
binds the co with others.
- Limited Liability
The liability of members for the debts of the company is
limited to the extent of amount unpaid on their shares.
No share holders can be called to pay more than face
value of the shares held. In case of limited liability co.
- Transferability of shares
The shares of public company are freely transferable
and members can dispose their shares whenever they
like with our seeking the permission form the Co.
- Separate Property
Co can own enjoy and dispose off property in its own
name.
- Capacity to sue and be sued
Company can sue and be sued in its corporate name.
Types of Companies
1. Companies can be classified on the basis of
incorporation: Charted companies, Statutory companies,
Registered companies.
2. Companies can be classified on the basis of number of
members: Private company & Public company.
3. Companies can be classified on the basis of Liability of
members: Limited company, Company limited by
guarantee, Unlimited company.
4. Companies can be classified on the basis of Liability of
control: Holding companies & Subsidiary companies.
5. Companies can be classified on the basis of Liability of
ownership: Government companies, Foreign companies,
One man or Family company.
According to the mode of Incorporation
- Charted companies
Incorporated under special Royal charted issued by the King
or Queen, Powers and actions are governed by Charter. Ex.
East India Co., Bank of England.
- Statutory companies
It is formed under special statutory Act of the parliament or
state legislature. Co intending to carry on some business of
national importance are formed by this way. Governed by
act of parliament. ex. RBI, SBI, Industrial Finance
corporation, LIC,
- Registered companies
A co registered under the Companies Act of 1956.
Kinds of registered company on the basis of Number of
members
- Private companies
A private co means a company which has a minimum paid
up capital of one lakh rupee or such higher paid-up capital
as may be prescribed and by its articles-
-restricts the right to transfer its shares, if any.
-limits the number of its member to fifty, excluding
members who are or were in the employment of the
company
-Prohibits any invitation to the public to subscribe for any
shares or debenture of the company or to accept deposits
from other than its members.
- Public companies
A public company means a company which
- Is not a private company
- Has minimum paid up capital of Rs. five lakh or
higher as may be prescribed
- Does not restrict the transfer of share.
- Does not limit the maximum number of members
- Can invite for subscribing public for share and
debentures and deposits.
Kinds of companies on the basis of Liability of members
- Companies limited by shares
Co having the liability of its members limited by the
memorandum to the amount if any, unpaid on the shares
respectively held by them.
- Companies limited by guarantee
A co having the liability of its members limited by its
memorandum to such amount as the members may
respectively thereby undertake to contribute to the assets of
the company in the event of its being wound up. Ex. Sports
association, cultural associations.
- Unlimited companies
A company having no limit on the liability of its members is
an unlimited company .
Kinds of companies based on control
- Holding companies
If a Co. holds more than 50% of the shares of another
Co. Or controls the composition of its board of
directors, the former co. is called the holding
company and the latter company is called its
subsidiary.
- Subsidiary companies
A co shall be deemed to be a subsidiary of another if;
Other co controls the majority of composition of its
board of directors, Other company holds more than
half in the nominal value of its equity shares
Kinds of companies based on Ownership
- Government companies
one in which not less than 51 percent of the share
capital is held by the central govt. or by any state govt. or
by two or more of them together.
- Foreign companies
Co incorporated outside India, but having a place of
business in India.
- One man or Family company
Where one man holds practically the whole of the share
capital of a co and takes few more dummy members to
meet the statutory requirements of the minimum
number of persons
Lifting/ Piercing /Shooting of Corporate Veil/ covering –
Concept
• The corporate veil is the term given to the imaginary barrier that
separates the company from those who direct it and from those who own
it.
• Piercing the corporate veil or lifting the corporate veil is a legal
decision to treat the rights or duties of a corporation as the rights or
liabilities of its shareholders.
• The chief advantage of incorporation is, of course, the separate legal
entity of the company and limited liability. But in reality, it is the persons
who form the association that carry out the business on behalf of the
incorporated corporation.
• To Determine the Character of the Company, To Protect Revenue or Tax.
If trying to avoid a Legal Obligation, Forming Subsidiaries to act as
Agents, A company formed for fraud or improper conduct or to defeat the
law
Stages in formation of company :
- Promotion
- Incorporation or Registration
- Capital Subscription
- Commencement of Business
Promotion
• It is the first stage in the formation of a company.
• In this stage the idea of carrying on a business is
conceived by a person or a group of persons called
promoters. They make detailed investigation about the
workability of the idea, amount of capital required,
operating expense etc,.
• Before a company an be formed, there must be some
persons who have an intention to form a company and
who take the necessary steps to carry that intention into
operation. Such persons are called promoters.
• The promoter is the person who brings a company into
existence.
Incorporation or Registration
• A company is said to be incorporated when it is registered with the
registrar under the companies act.
• The certificate of incorporation is the birth certificate of the company.
• A company comes into existence from the date mentioned in the
certificate.
• The application shall be accompanied by the following documents:
1. Memorandum of association
2. Articles of association
3. A statement of nominal capital
4. A notice of address of the registered office of the company.
5. A list of directors and their consent to a act signed by them
6. A declaration that all the requirements of the act have been complied
with.
STEPS INVOLVED IN INCORPORATION OF COMPANY
Obtain approval for the proposed name of the Company from the ROC
Draw the Memorandum and Articles of Association
Get the appropriate persons to subscribe to the Memorandum
(a minimum of 7 for a public company and 2 for a private company)
Pay the Registration Fee to the ROC
Receive Certificate of Incorporation
Obtain a certificate of commencement of business from the ROC
in case of a public company
END
FORMATION AND INCORPORATION
OF COMPANIES
Raising of capital/ Capital Subscription
• After incorporation a company can raise capital by
issuing shares. A private company cannot issue shares to
public.
• In case of public company a copy of prospectus is filed
with the registrar and it will be issued to the public. Those
who are intended in purchasing share are required to
send their application money to company's banker.
• On the last date fixed for the receipt of application if the
company has received application equal to minimum
subscription the directors will start with allotment of
shares.
Commencement of Business
• A private co can commence the business immediately
on receipt of certificate of incorporation.
• Public co has to obtain the certificate to commence
the business from ROC after :
1. Minimum subscription has been Allotted.
2. Directors have taken up and paid for their qualifying
shares.
3. Statutory declaration and prospectus or statement in
lieu of Prospectus has been filed.
Memorandum of Association
• The Memorandum of Association or MOA is the legal
document that has to be filed with the registrar of
companies at the time of incorporation of the company.
• It is often called as a memorandum and is comprised of
fundamental conditions.
• Memorandum of Association serves as the constitution of
the company that defines all the rules and regulations that
must be complied by every company.
• It is mandatory for every company that wants to get
registered as a private/public limited to prepare the
memorandum of association. is of which a company
operates.
MEMORANDUM OF ASSOCIATION
- Fundamental document of the company.
- Charter which defines powers.
- Lays down the objects and areas of operations of company.
- Regulates the relationship of the company with outsiders.
PURPOSE
- Inform prospective share holders about the usage of money and the
risk involved in making the investment.
- Outsiders who deal with the co should be made aware of the objectives
and the contractual relation into which they should contemplate.
CLAUSES/ CONTENTS OF MEMORANDUM :Sec 13
1. Name Clause – Name of the company
2. Situation Clause – Location of Registered office
3. Object Clause – Main and other objects
4. Capital Clause – Amount of capital with which it is
registered and its division in to number of shares.
5. Liability Clause – Liability of members limited to
the face value share
6. Association or Subscription Clause – Contains the
declaration by the subscribers to the memorandum
ALTERATION OF MEMORANDUM
• Alteration of a name clause
• Alteration of registered office clause
• Alteration of object clause
• Alteration of liability clause
• Alteration of capital clause
Articles of Association
• Articles of association are a document that specifies the
regulations for a company's operations and defines the
company's purpose. The document lays out how tasks are
to be accomplished within the organization, including the
process for appointing directors and the handling of
financial records.
• Articles of Association is an important document of a Joint
Stock Company. It contains the rules and regulations or
bye-laws of the company.
• They are related to the internal working or management of
the company. It plays a very important role in the affairs of
a company.
• It deals with the rights of the members of the company
between themselves.
Contents of Articles of Association
1. Classes of shares, their values and the rights attached to each of them.
2. Calls on shares, transfer of shares, forfeiture, conversion of shares and
alteration of capital.
3. Directors, their appointment, powers, duties etc.
4. Meetings and minutes, notices etc.
5. Accounts and Audit, Appointment of and remuneration to Auditors.
6. Voting, poll, proxy etc., Dividends and Reserves
7. Procedure for winding up.
8. Borrowing powers of Board of Directors and managers etc.
9. Minimum subscription.
10. Rules regarding use and custody of common seal.
11. Rules and regulations regarding conversion of fully paid shares into
stock.
12. Lien on shares.
Alteration in Article of Association
• Any Company which intended to make any change to the Article of
Association (AOA) of its company, will have to comply with the
provisions of Section- 14 of Companies Act, 2013 and any other
applicable provisions of the Act and applicable rules.
• Company can alter its Article by way of addition, deletion,
modification, substitution, or in any other way, only if it wants.
• STEPS FOR ALTERATION IN ARTICLE OF ASSOCIATION:
1. STEP – I: Convey Board Meeting of Directors: (As per section
173 and SS-1)
2. STEP – II: Held Board Meeting: (As per section 173 and SS-1)
3. STEP- III: Issue Notice of General Meeting: (Section 101)
4. STEP- IV:
5. STEP- V: Filing of form with ROC: (Section 117) Hold General
Meeting: (Section 101)
DOCTRINE/PRINCIPLE OF ULTRA VIRES
• The Doctrine of Ultra Vires is a fundamental rule of Company Law. It
states that the objects of a company, as specified in its Memorandum of
Association, can be departed from only to the extent permitted by the
Act.
• The term Ultra Vires means „Beyond Powers‟. In legal terms, it is
applicable only to the acts performed in excess of the legal powers of
the doer.
• The purpose of this doctrine is to helps the shareholders , creditors and
every third person dealing with the company to ensure that their
investment are not diverted to unauthorized objects.
• Since the Doctrine of Ultra Vires limits the company to the objects
specified in the memorandum, the company can be:
1. Restrained from using its funds for purposes other than those specified
in the Memorandum
2. Restrained from carrying on trade different from the one authorized.
Doctrine of Indoor Management
• In simple words, the doctrine of indoor management means that a
company's indoor affairs are the company's problem. Therefore, this rule
of indoor management is important to people dealing with a company
through its directors or other persons.
• The doctrine of indoor management is an exception to the earlier doctrine
of constructive notice. It is important to note that the doctrine of
constructive notice does not allow outsiders to have notice of the internal
affairs of the company.
• This is based on the landmark case between The Royal British Bank and
Turquand. In simple words, the doctrine of indoor management means
that a company‟s indoor affairs are the company‟s problem.
• Therefore, this rule of indoor management is important to people dealing
with a company through its directors or other persons. They can assume
that the members of the company are performing their acts within the
scope of their apparent authority.
Exceptions to DOIM
• The outsider has actual or constructive
knowledge of an irregularity.
• The outsider behaves negligently.
• Forgery.
Doctrine of Constructive Notice/ Knowledge
• Constructive notice. ... In companies law the doctrine of
constructive notice is a doctrine where all persons dealing with
a company are deemed (or "construed") to have knowledge of
the company's articles of association and memorandum of
association.
• The doctrine of indoor management is an exception to this rule.
• Every outsider dealing with a company is deemed to have notice
of the contents of the Memorandum and the Articles of
Association.
• These documents, on registration with the Registrar, assume the
character of public documents. This is known as 'constructive
notice' of Memorandum and Articles.
• The Memorandum and the Articles are open and accessible to
all. It is the duty of every person dealing with a company to
inspect these documents and see that it is within the powers of
the company to enter into the proposed contract.
Director
• Any person in accordance with whose direction and
instructions the Board of directors of a company is
accustomed to act shall be deemed to be a director of
the co.,
• A director is an individual who guides, directs, conducts,
governs, manages or superintends the policy and affairs
of the company.
• Only an individuals can become director not a body
corporate.
• Section 252 provides that every public company (other
than a public company which has become such by virtue
of Section 43-A) must have at least 3 directors and every
private company must have at least 2 directors.
• The directors of a company collectively are referred to as
the "Board of directors" or Board".
Appointment of Directors
• The appointment of directors is accordingly
regulated by the Act . Directors may be appointed in
the following ways:
1. By the articles as regard first directors (Section 254).
2. By the company in general meeting (Sections 255 to
257, 263, 264).
3. By the directors (Section 260, 262, 313).
4. By third parties (Section 255)
5. By the principle of proportional representation
(Section 265).
6. By the central government (Section 408).
Disqualifications of Director
The circumstances in which a person cannot be appointed as a director of a
company are enumerated in section 274. According to this section; a person
cannot be appointed as a director of a company, if
(a) He has been found to be of unsound mind by a competent court and the
finding is in force; (b) He has an undercharged-insolvent; (c) He has
applied to be' adjudicated as an insolvent and his application is pending;
(d) He has been convicted of an offence involving moral turpitude and
sentenced to imprisonment for not less than e months and a period of 5
years has not elapsed since the expiry of his sentence;
(e) He has not paid any call in' respect of shares of the company held by him
for a period of six months from the last day fixed for the payment. .
(f) He has been disqualified by an order of the court or Tribunal under
section 203 of an offence in relation to promotion, formation or
management of the company of fraud or misfeasance in relation to the
company.
Removal of Directors
A director may be removed from his office;
(1) By the shareholders (Sec.284);
(2) By the central government (Sec. 388 B to 388 E): A director can
be removed from office under advice from Central Government.
The Central Government chooses to use this power on the
recommendation of the Company Law Board/National Company
Law Tribunal.
(3) By the Tribunal1 (Sec. 402).: The Company Law Board or the
National Company Law Tribunal may remove a director from the
board. If found guilty of any inappropriate conduct like fraud,
harassment, oppression or any other justifiable cause, he will be
removed. The terminated director cannot assume the position of
director in any other company for the next five years.
Position of Directors
• It is not easy to explain the position that a director holds in
a corporate enterprise. A director is not a servant of any
master.
• He is the controller of the company‟s affairs.
• Director of a company is neither an employee nor a
servant to the company. They are professional people who
were hired by the company to direct its affairs.
1. Director As Agent
2. Director As Trustee
3.Director As Organs Of Corporate Body/ Managing
Partner
Powers/ Rights of Directors
• Articles of association contain a list of the powers
which may be exercised by directors and their
limitations.
• Companies Act provided certain powers to be
exercised by the Board of directors by means of
resolutions passed at meetings.
• To make calls on shareholders, to issue debentures,
to barrow money, to invest the funds and to make
loans.
Duties of the Directors
1) Fiduciary duties: The directors occupy a fiduciary position and
must therefore; exercise their powers in good faith and for the
benefit of the company as a whole.
2) Duty of care and skill, diligence: Directors should carry out their
duties with reasonable care and exercise such degree of skill
and diligence as is reasonably expected of persons of their
knowledge and status. He is not bound to bring any special
qualifications to his office.
3) Duty to attend board meetings,
4) Duty not to delegate,
5) Duty to disclose interest, and
6) Statutory duties.
• to make calls on shareholders in respect of moneys unpaid on their
shares.
• to issue shares; , to issue debentures or any instrument in the nature
of redeemable capital;, to borrow moneys otherwise than on
debentures;, to invest the funds of the company;, to make loans;, to
approve bonus to employees.
• to authorize a director or the firm of which he is a partner or any
partner of such firm or a private company of which he is a member
or director to enter into any contract with the company for making
sale, purchase or supply of goods or rendering services with the
company.
• to approve annual or half-yearly or other periodical accounts as are
required to be circulated to the members; and to incur capital
expenditure on any single item or dispose of a fixed asset in
accordance with the limits as prescribed by the Commission from
time to time.
• to undertake obligations under leasing contracts
exceeding one million rupees;, to declare interim
dividend;
• Sale or lease of the company‟s undertaking.
• Extension of the time for payment of a debt due by a
director.
• Investment of compensation received on acquisition of
the company‟s assets in securities other than trust
securities.
• Borrowing of money beyond the paid-up capital of the
company.
Liabilities of Directors
• Liability to third parties
• liable for irregular allotment, return the application
money if it fails to allot shares, misstatement of
prospectus.
• Liability to the company
• liable for ultra vires act ex. Payment of dividend out of
capital.
• Liability for negligence
• liable for breach of trust, statutory duties and
misconduct.
Auditors
• Under Companies Act, 2013 sections 138 to 148 deals with
accounts, audit, and auditors.
• The term is sometimes synonymous with “comptroller”.
• In latin language the word is „audire‟ which means „to hear‟. The
word „audit‟ has derived from „audire‟ and the person appointed
to examine the accounts came to be known as the auditor.
• An auditor is an independent professional person qualified to
perform a review.
• An auditor is someone who is responsible for examining the
accounts and financial statements which are required by the
company, after which it becomes reliable.
• The auditor of a statutory organization may also have specific
statutory duties under the Act governing such organization.
Appointment of Auditor Under Companies Act 2013
• As per section 139, it is a prime requirement for every
company that it shall at the first Annual General
Meeting appoint an auditor who is either an individual or a
firm.
• It is important to note that the term Appointment includes
reappointment.
• The manner and procedure of selection of auditors by the
members of the company will be such as prescribed. It is
compulsory that before such appointment of the auditor is
made, the written consent from him to such appointment,
and also a certificate from him stating that the
appointment, if made, shall be on par with the
conditions/norms as may be prescribed, shall be obtained.
• Tenure/Period- 5 years.
• Government Company- In a Government company, within a
period of 180 days from the commencement of the
Qualifications and Disqualifications of Auditors
(Section 141 of Companies Act 2013)
• Qualification: A qualified Chartered Accountant is
appointed as Auditor of the Company. Where a firm
is appointed as an auditor of a company, only the
partners who are chartered accountants shall be
authorized to act and sign on behalf of the firm.
• Disqualification: An officer or employee of the
company; If the director is relative to that person or
is in the employment of the company’s a director; A
person who is a partner, or who is in employment, of
an officer or an employee of a Company; A person
who has been convicted by a court of an offense
involving fraud.
Powers/ Rights/ Roles of Auditor
• Company auditor has rights to access the books and records of
the company. He can refer to any book.
• Company auditor has right to get explanations from company
staff. If such explanations are not received he qualifies his report.
• Company auditor has right to receive notice of general meetings.
He can attend the general meetings.
• Company auditor has right to visit branches. But there should be
no separate auditors to those branches and it should be a home
branch.
• Company auditor has right to seek legal and technical advises.
But, in his report, he should express his own opinion but not that
of experts concern.
• Company auditor has right to claim remuneration. His
remuneration will be fixed by appointing authority and it will
be paid by company.
• Company auditor has right to refuse to commence the
audit. Till making the records up to date, he cannot start
his work.
• Company auditor has right to question the board. Board
also should give explanation to him.
• Company auditor has right to qualify his report. If he
comes across any dis-satisfactory point, he can mention
the same in his report.
• Company auditor has right of indemnity/Security. He can
reimburse expenses incurred by him in connection with
conduction of audit work.
Duties/ Responsibilities of Auditor
• Section 227: Duty to give report.
• Section 165: Duty to certify statutory report.
• Section 240: Duty to assist government inspector.
• Section 58 (A) and 58 (B): Duty with regard to public
deposits.
• Section 62 and 63: Duty to certify prospectus.
• Section 227 (1A): Duty to conduct an inquiry with
regard to matters mention in the section.
• Section 305: He should attach the report at the time of
winding., etc….
Liabilities of Auditor
• Liability for Negligence.
• Liability under Companies Act.
• Liability under Consumer Protection Act.
• Liability for Unaudited Statements.
• Liability for Negligence of Assistants.
THANKING YOU

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Legal & Business Environment- Module 2

  • 1. LEGAL AND BUSINESS ENVIRONMENT 18MBA24 By: Dr.LAKSHMINARAYANA REDDY.K MBA, M.Phil, Ph.D
  • 2.
  • 3. Module 2 • Corporate Incorporation and Management: • Definition of company, characteristics, types of company, lifting of corporate veil (i) Incorporation of company (ii) Memorandum and Articles of Association (iii) Doctrine of Ultra Vires (iv) Doctrine of Indoor Management and constructive notices Management- (i) Directors: Appointment, Removal, Position, Powers and Duties of Directors. (ii) Auditor and audit Committee: Its Role. Directors – qualification and Appointment, Liabilities and duties. • Mini case Presentation and Discussion on Saloman v/s A Soloman & Company Ltd.
  • 4. Introduction • The word company is derived from a Latin word companies it means a group of persons who took their need together. In India law relating to companies is contained in the companies Act 1956 and now 2013. • Company means an association of 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 arising there form. • A company is an incorporated association, which is an artificial legal person, having separate legal entity with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability.
  • 5. Definition • Section 3(1)(i) of the companies act defines company as, “A company means a company formed and registered under this act or an existing company”. • „Existing Company‟ means a company formed and registered under any of the previous Company Laws.” • “Company” is derived from two words: “com”- group and “panies”- bread. Therefore, it means group that eat their bread together.
  • 6. CHARACTERISTCS OF A COMPANY • Incorporated association • Artificial legal person • Separate legal entity • Perpetual existence • Common seal • Limited Liability • Transferability of shares • Separate Property • Capacity to sue and be sued
  • 7. CHARACTERISTCS OF A COMPANY - Incorporated association Co must be incorporated or registered under the Companies Act - Artificial legal person Company does not possess physical attributes of natural person but it is clothed with many of the rights of natural person. A co may acquire and dispose property, enter in to contract, it may be fined for the contravention of provisions of companies act. - Separate legal entity A co is a distinct person possessing its own identity. It is separate legal entity, independent from its members, though controlled by the Board of Directors.
  • 8. - Perpetual existence Co have perpetual existence, its life does not depend upon the death, retirement or insolvency of its members. Law creates it and law alone can dissolve it. - Common seal Co has separate legal existence under its own common seal. It can enter in to contract with its members, directors or outsiders. the use common seal legally binds the co with others. - Limited Liability The liability of members for the debts of the company is limited to the extent of amount unpaid on their shares. No share holders can be called to pay more than face value of the shares held. In case of limited liability co.
  • 9. - Transferability of shares The shares of public company are freely transferable and members can dispose their shares whenever they like with our seeking the permission form the Co. - Separate Property Co can own enjoy and dispose off property in its own name. - Capacity to sue and be sued Company can sue and be sued in its corporate name.
  • 10. Types of Companies 1. Companies can be classified on the basis of incorporation: Charted companies, Statutory companies, Registered companies. 2. Companies can be classified on the basis of number of members: Private company & Public company. 3. Companies can be classified on the basis of Liability of members: Limited company, Company limited by guarantee, Unlimited company. 4. Companies can be classified on the basis of Liability of control: Holding companies & Subsidiary companies. 5. Companies can be classified on the basis of Liability of ownership: Government companies, Foreign companies, One man or Family company.
  • 11. According to the mode of Incorporation - Charted companies Incorporated under special Royal charted issued by the King or Queen, Powers and actions are governed by Charter. Ex. East India Co., Bank of England. - Statutory companies It is formed under special statutory Act of the parliament or state legislature. Co intending to carry on some business of national importance are formed by this way. Governed by act of parliament. ex. RBI, SBI, Industrial Finance corporation, LIC, - Registered companies A co registered under the Companies Act of 1956.
  • 12. Kinds of registered company on the basis of Number of members - Private companies A private co means a company which has a minimum paid up capital of one lakh rupee or such higher paid-up capital as may be prescribed and by its articles- -restricts the right to transfer its shares, if any. -limits the number of its member to fifty, excluding members who are or were in the employment of the company -Prohibits any invitation to the public to subscribe for any shares or debenture of the company or to accept deposits from other than its members.
  • 13. - Public companies A public company means a company which - Is not a private company - Has minimum paid up capital of Rs. five lakh or higher as may be prescribed - Does not restrict the transfer of share. - Does not limit the maximum number of members - Can invite for subscribing public for share and debentures and deposits.
  • 14. Kinds of companies on the basis of Liability of members - Companies limited by shares Co having the liability of its members limited by the memorandum to the amount if any, unpaid on the shares respectively held by them. - Companies limited by guarantee A co having the liability of its members limited by its memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up. Ex. Sports association, cultural associations. - Unlimited companies A company having no limit on the liability of its members is an unlimited company .
  • 15. Kinds of companies based on control - Holding companies If a Co. holds more than 50% of the shares of another Co. Or controls the composition of its board of directors, the former co. is called the holding company and the latter company is called its subsidiary. - Subsidiary companies A co shall be deemed to be a subsidiary of another if; Other co controls the majority of composition of its board of directors, Other company holds more than half in the nominal value of its equity shares
  • 16. Kinds of companies based on Ownership - Government companies one in which not less than 51 percent of the share capital is held by the central govt. or by any state govt. or by two or more of them together. - Foreign companies Co incorporated outside India, but having a place of business in India. - One man or Family company Where one man holds practically the whole of the share capital of a co and takes few more dummy members to meet the statutory requirements of the minimum number of persons
  • 17. Lifting/ Piercing /Shooting of Corporate Veil/ covering – Concept • The corporate veil is the term given to the imaginary barrier that separates the company from those who direct it and from those who own it. • Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. • The chief advantage of incorporation is, of course, the separate legal entity of the company and limited liability. But in reality, it is the persons who form the association that carry out the business on behalf of the incorporated corporation. • To Determine the Character of the Company, To Protect Revenue or Tax. If trying to avoid a Legal Obligation, Forming Subsidiaries to act as Agents, A company formed for fraud or improper conduct or to defeat the law
  • 18. Stages in formation of company : - Promotion - Incorporation or Registration - Capital Subscription - Commencement of Business
  • 19. Promotion • It is the first stage in the formation of a company. • In this stage the idea of carrying on a business is conceived by a person or a group of persons called promoters. They make detailed investigation about the workability of the idea, amount of capital required, operating expense etc,. • Before a company an be formed, there must be some persons who have an intention to form a company and who take the necessary steps to carry that intention into operation. Such persons are called promoters. • The promoter is the person who brings a company into existence.
  • 20. Incorporation or Registration • A company is said to be incorporated when it is registered with the registrar under the companies act. • The certificate of incorporation is the birth certificate of the company. • A company comes into existence from the date mentioned in the certificate. • The application shall be accompanied by the following documents: 1. Memorandum of association 2. Articles of association 3. A statement of nominal capital 4. A notice of address of the registered office of the company. 5. A list of directors and their consent to a act signed by them 6. A declaration that all the requirements of the act have been complied with.
  • 21. STEPS INVOLVED IN INCORPORATION OF COMPANY Obtain approval for the proposed name of the Company from the ROC Draw the Memorandum and Articles of Association Get the appropriate persons to subscribe to the Memorandum (a minimum of 7 for a public company and 2 for a private company) Pay the Registration Fee to the ROC Receive Certificate of Incorporation Obtain a certificate of commencement of business from the ROC in case of a public company END FORMATION AND INCORPORATION OF COMPANIES
  • 22. Raising of capital/ Capital Subscription • After incorporation a company can raise capital by issuing shares. A private company cannot issue shares to public. • In case of public company a copy of prospectus is filed with the registrar and it will be issued to the public. Those who are intended in purchasing share are required to send their application money to company's banker. • On the last date fixed for the receipt of application if the company has received application equal to minimum subscription the directors will start with allotment of shares.
  • 23. Commencement of Business • A private co can commence the business immediately on receipt of certificate of incorporation. • Public co has to obtain the certificate to commence the business from ROC after : 1. Minimum subscription has been Allotted. 2. Directors have taken up and paid for their qualifying shares. 3. Statutory declaration and prospectus or statement in lieu of Prospectus has been filed.
  • 24. Memorandum of Association • The Memorandum of Association or MOA is the legal document that has to be filed with the registrar of companies at the time of incorporation of the company. • It is often called as a memorandum and is comprised of fundamental conditions. • Memorandum of Association serves as the constitution of the company that defines all the rules and regulations that must be complied by every company. • It is mandatory for every company that wants to get registered as a private/public limited to prepare the memorandum of association. is of which a company operates.
  • 25. MEMORANDUM OF ASSOCIATION - Fundamental document of the company. - Charter which defines powers. - Lays down the objects and areas of operations of company. - Regulates the relationship of the company with outsiders. PURPOSE - Inform prospective share holders about the usage of money and the risk involved in making the investment. - Outsiders who deal with the co should be made aware of the objectives and the contractual relation into which they should contemplate.
  • 26. CLAUSES/ CONTENTS OF MEMORANDUM :Sec 13 1. Name Clause – Name of the company 2. Situation Clause – Location of Registered office 3. Object Clause – Main and other objects 4. Capital Clause – Amount of capital with which it is registered and its division in to number of shares. 5. Liability Clause – Liability of members limited to the face value share 6. Association or Subscription Clause – Contains the declaration by the subscribers to the memorandum
  • 27. ALTERATION OF MEMORANDUM • Alteration of a name clause • Alteration of registered office clause • Alteration of object clause • Alteration of liability clause • Alteration of capital clause
  • 28. Articles of Association • Articles of association are a document that specifies the regulations for a company's operations and defines the company's purpose. The document lays out how tasks are to be accomplished within the organization, including the process for appointing directors and the handling of financial records. • Articles of Association is an important document of a Joint Stock Company. It contains the rules and regulations or bye-laws of the company. • They are related to the internal working or management of the company. It plays a very important role in the affairs of a company. • It deals with the rights of the members of the company between themselves.
  • 29. Contents of Articles of Association 1. Classes of shares, their values and the rights attached to each of them. 2. Calls on shares, transfer of shares, forfeiture, conversion of shares and alteration of capital. 3. Directors, their appointment, powers, duties etc. 4. Meetings and minutes, notices etc. 5. Accounts and Audit, Appointment of and remuneration to Auditors. 6. Voting, poll, proxy etc., Dividends and Reserves 7. Procedure for winding up. 8. Borrowing powers of Board of Directors and managers etc. 9. Minimum subscription. 10. Rules regarding use and custody of common seal. 11. Rules and regulations regarding conversion of fully paid shares into stock. 12. Lien on shares.
  • 30. Alteration in Article of Association • Any Company which intended to make any change to the Article of Association (AOA) of its company, will have to comply with the provisions of Section- 14 of Companies Act, 2013 and any other applicable provisions of the Act and applicable rules. • Company can alter its Article by way of addition, deletion, modification, substitution, or in any other way, only if it wants. • STEPS FOR ALTERATION IN ARTICLE OF ASSOCIATION: 1. STEP – I: Convey Board Meeting of Directors: (As per section 173 and SS-1) 2. STEP – II: Held Board Meeting: (As per section 173 and SS-1) 3. STEP- III: Issue Notice of General Meeting: (Section 101) 4. STEP- IV: 5. STEP- V: Filing of form with ROC: (Section 117) Hold General Meeting: (Section 101)
  • 31.
  • 32. DOCTRINE/PRINCIPLE OF ULTRA VIRES • The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects of a company, as specified in its Memorandum of Association, can be departed from only to the extent permitted by the Act. • The term Ultra Vires means „Beyond Powers‟. In legal terms, it is applicable only to the acts performed in excess of the legal powers of the doer. • The purpose of this doctrine is to helps the shareholders , creditors and every third person dealing with the company to ensure that their investment are not diverted to unauthorized objects. • Since the Doctrine of Ultra Vires limits the company to the objects specified in the memorandum, the company can be: 1. Restrained from using its funds for purposes other than those specified in the Memorandum 2. Restrained from carrying on trade different from the one authorized.
  • 33. Doctrine of Indoor Management • In simple words, the doctrine of indoor management means that a company's indoor affairs are the company's problem. Therefore, this rule of indoor management is important to people dealing with a company through its directors or other persons. • The doctrine of indoor management is an exception to the earlier doctrine of constructive notice. It is important to note that the doctrine of constructive notice does not allow outsiders to have notice of the internal affairs of the company. • This is based on the landmark case between The Royal British Bank and Turquand. In simple words, the doctrine of indoor management means that a company‟s indoor affairs are the company‟s problem. • Therefore, this rule of indoor management is important to people dealing with a company through its directors or other persons. They can assume that the members of the company are performing their acts within the scope of their apparent authority.
  • 34. Exceptions to DOIM • The outsider has actual or constructive knowledge of an irregularity. • The outsider behaves negligently. • Forgery.
  • 35. Doctrine of Constructive Notice/ Knowledge • Constructive notice. ... In companies law the doctrine of constructive notice is a doctrine where all persons dealing with a company are deemed (or "construed") to have knowledge of the company's articles of association and memorandum of association. • The doctrine of indoor management is an exception to this rule. • Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum and the Articles of Association. • These documents, on registration with the Registrar, assume the character of public documents. This is known as 'constructive notice' of Memorandum and Articles. • The Memorandum and the Articles are open and accessible to all. It is the duty of every person dealing with a company to inspect these documents and see that it is within the powers of the company to enter into the proposed contract.
  • 36. Director • Any person in accordance with whose direction and instructions the Board of directors of a company is accustomed to act shall be deemed to be a director of the co., • A director is an individual who guides, directs, conducts, governs, manages or superintends the policy and affairs of the company. • Only an individuals can become director not a body corporate. • Section 252 provides that every public company (other than a public company which has become such by virtue of Section 43-A) must have at least 3 directors and every private company must have at least 2 directors. • The directors of a company collectively are referred to as the "Board of directors" or Board".
  • 37. Appointment of Directors • The appointment of directors is accordingly regulated by the Act . Directors may be appointed in the following ways: 1. By the articles as regard first directors (Section 254). 2. By the company in general meeting (Sections 255 to 257, 263, 264). 3. By the directors (Section 260, 262, 313). 4. By third parties (Section 255) 5. By the principle of proportional representation (Section 265). 6. By the central government (Section 408).
  • 38. Disqualifications of Director The circumstances in which a person cannot be appointed as a director of a company are enumerated in section 274. According to this section; a person cannot be appointed as a director of a company, if (a) He has been found to be of unsound mind by a competent court and the finding is in force; (b) He has an undercharged-insolvent; (c) He has applied to be' adjudicated as an insolvent and his application is pending; (d) He has been convicted of an offence involving moral turpitude and sentenced to imprisonment for not less than e months and a period of 5 years has not elapsed since the expiry of his sentence; (e) He has not paid any call in' respect of shares of the company held by him for a period of six months from the last day fixed for the payment. . (f) He has been disqualified by an order of the court or Tribunal under section 203 of an offence in relation to promotion, formation or management of the company of fraud or misfeasance in relation to the company.
  • 39. Removal of Directors A director may be removed from his office; (1) By the shareholders (Sec.284); (2) By the central government (Sec. 388 B to 388 E): A director can be removed from office under advice from Central Government. The Central Government chooses to use this power on the recommendation of the Company Law Board/National Company Law Tribunal. (3) By the Tribunal1 (Sec. 402).: The Company Law Board or the National Company Law Tribunal may remove a director from the board. If found guilty of any inappropriate conduct like fraud, harassment, oppression or any other justifiable cause, he will be removed. The terminated director cannot assume the position of director in any other company for the next five years.
  • 40. Position of Directors • It is not easy to explain the position that a director holds in a corporate enterprise. A director is not a servant of any master. • He is the controller of the company‟s affairs. • Director of a company is neither an employee nor a servant to the company. They are professional people who were hired by the company to direct its affairs. 1. Director As Agent 2. Director As Trustee 3.Director As Organs Of Corporate Body/ Managing Partner
  • 41. Powers/ Rights of Directors • Articles of association contain a list of the powers which may be exercised by directors and their limitations. • Companies Act provided certain powers to be exercised by the Board of directors by means of resolutions passed at meetings. • To make calls on shareholders, to issue debentures, to barrow money, to invest the funds and to make loans.
  • 42. Duties of the Directors 1) Fiduciary duties: The directors occupy a fiduciary position and must therefore; exercise their powers in good faith and for the benefit of the company as a whole. 2) Duty of care and skill, diligence: Directors should carry out their duties with reasonable care and exercise such degree of skill and diligence as is reasonably expected of persons of their knowledge and status. He is not bound to bring any special qualifications to his office. 3) Duty to attend board meetings, 4) Duty not to delegate, 5) Duty to disclose interest, and 6) Statutory duties.
  • 43. • to make calls on shareholders in respect of moneys unpaid on their shares. • to issue shares; , to issue debentures or any instrument in the nature of redeemable capital;, to borrow moneys otherwise than on debentures;, to invest the funds of the company;, to make loans;, to approve bonus to employees. • to authorize a director or the firm of which he is a partner or any partner of such firm or a private company of which he is a member or director to enter into any contract with the company for making sale, purchase or supply of goods or rendering services with the company. • to approve annual or half-yearly or other periodical accounts as are required to be circulated to the members; and to incur capital expenditure on any single item or dispose of a fixed asset in accordance with the limits as prescribed by the Commission from time to time.
  • 44. • to undertake obligations under leasing contracts exceeding one million rupees;, to declare interim dividend; • Sale or lease of the company‟s undertaking. • Extension of the time for payment of a debt due by a director. • Investment of compensation received on acquisition of the company‟s assets in securities other than trust securities. • Borrowing of money beyond the paid-up capital of the company.
  • 45. Liabilities of Directors • Liability to third parties • liable for irregular allotment, return the application money if it fails to allot shares, misstatement of prospectus. • Liability to the company • liable for ultra vires act ex. Payment of dividend out of capital. • Liability for negligence • liable for breach of trust, statutory duties and misconduct.
  • 46. Auditors • Under Companies Act, 2013 sections 138 to 148 deals with accounts, audit, and auditors. • The term is sometimes synonymous with “comptroller”. • In latin language the word is „audire‟ which means „to hear‟. The word „audit‟ has derived from „audire‟ and the person appointed to examine the accounts came to be known as the auditor. • An auditor is an independent professional person qualified to perform a review. • An auditor is someone who is responsible for examining the accounts and financial statements which are required by the company, after which it becomes reliable. • The auditor of a statutory organization may also have specific statutory duties under the Act governing such organization.
  • 47. Appointment of Auditor Under Companies Act 2013 • As per section 139, it is a prime requirement for every company that it shall at the first Annual General Meeting appoint an auditor who is either an individual or a firm. • It is important to note that the term Appointment includes reappointment. • The manner and procedure of selection of auditors by the members of the company will be such as prescribed. It is compulsory that before such appointment of the auditor is made, the written consent from him to such appointment, and also a certificate from him stating that the appointment, if made, shall be on par with the conditions/norms as may be prescribed, shall be obtained. • Tenure/Period- 5 years. • Government Company- In a Government company, within a period of 180 days from the commencement of the
  • 48. Qualifications and Disqualifications of Auditors (Section 141 of Companies Act 2013) • Qualification: A qualified Chartered Accountant is appointed as Auditor of the Company. Where a firm is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorized to act and sign on behalf of the firm. • Disqualification: An officer or employee of the company; If the director is relative to that person or is in the employment of the company’s a director; A person who is a partner, or who is in employment, of an officer or an employee of a Company; A person who has been convicted by a court of an offense involving fraud.
  • 49. Powers/ Rights/ Roles of Auditor • Company auditor has rights to access the books and records of the company. He can refer to any book. • Company auditor has right to get explanations from company staff. If such explanations are not received he qualifies his report. • Company auditor has right to receive notice of general meetings. He can attend the general meetings. • Company auditor has right to visit branches. But there should be no separate auditors to those branches and it should be a home branch. • Company auditor has right to seek legal and technical advises. But, in his report, he should express his own opinion but not that of experts concern.
  • 50. • Company auditor has right to claim remuneration. His remuneration will be fixed by appointing authority and it will be paid by company. • Company auditor has right to refuse to commence the audit. Till making the records up to date, he cannot start his work. • Company auditor has right to question the board. Board also should give explanation to him. • Company auditor has right to qualify his report. If he comes across any dis-satisfactory point, he can mention the same in his report. • Company auditor has right of indemnity/Security. He can reimburse expenses incurred by him in connection with conduction of audit work.
  • 51. Duties/ Responsibilities of Auditor • Section 227: Duty to give report. • Section 165: Duty to certify statutory report. • Section 240: Duty to assist government inspector. • Section 58 (A) and 58 (B): Duty with regard to public deposits. • Section 62 and 63: Duty to certify prospectus. • Section 227 (1A): Duty to conduct an inquiry with regard to matters mention in the section. • Section 305: He should attach the report at the time of winding., etc….
  • 52. Liabilities of Auditor • Liability for Negligence. • Liability under Companies Act. • Liability under Consumer Protection Act. • Liability for Unaudited Statements. • Liability for Negligence of Assistants.