By:-Vinay Golchha

1

1/24/2014
 Membership In a Company.
 Share capital
 Shares
 Company Management
 Meetings and proceedings
 Borrowing powers, De...
 Members (Section 41): A company when incorporated is an artificial person. It

is a constitution of natural persons call...
 A company
 A registered co-operative society
 A Non-Resident Indian [NRI]
 A Minor
 HUF
 Registered Trade Union
 S...
 Membership By Subscription
 Membership By Application & Registration
By Application & Allotment
II. By Transfer
III. By...
 Cessation Of Membership By Act Of The Parties
I.

Transfer Of Shares

II.

Shares are Forfeited

III. Redeemable Prefere...
 To receive notices of all general

meetings.

 To attend & vote at general

meetings, appoint directors &
auditors.

 ...
 Company With Unlimited Liability – Liable for full debt of the company,

during the period he was a member.
 Company li...
 Name, address & occupation.
 Shares held by each member, distinguishing each share by its number, and

the amount paid ...
 Every company having more than 50 members shall keep an

index in the form of a „Card-index‟ of the names of the members...
Foreign Registers
 A company which has a share capital or which has issued debentures may

keep in any State or country o...
 Share Capital means the capital raised by a company by the

issue of shares. The word ‘Capital’ in connection with a
com...
2 Classes of Shares [Sec 86 as amended in 2002] A. Equity Share [Sec 85(2)]
 "Equity Share Capital means all share capita...
B. Preference Shares [Sec 85(1)]
 Preference shares capital is that part of share capital which

fulfills following two c...
A. From Promoters
 Private companies cannot invite general public to subscribe its share

capital.
 Public companies can...
B. From Public
 By issuing a prospectus.

 By an offer for sale or by deemed prospectus:
 Company offers/agrees to allo...
C. From Existing Shareholders
 By issue of right shares to existing shareholders [Sec 81] allotted in

proportion to thei...
 A Share is evidenced by a share certificate (sec.84). A share

certificate is issued by a company under its common seal....
Types Of Share
Preference Shares is a stock which may have any combination of features
not possessed by common stock inclu...
Preference Shares
1/24/2014

20

Redeemable Preference
Shares

Non-Convertible
Preference Shares

Convertible Preference
S...
 Companies may issue shares at premium irrespective of the fact

whether the shares are listed or not.
 No restriction i...
 If premium is received in kind, an amount equal to premium amount

must be transferred to Securities Premium Account.
 ...
 Called Right Shares.
 May be issued at any time after two years from incorporation or

one year from first allotment, w...
 Give shareholders 15 days to decide.
 The notice must state the shareholder's right to renounce the offer in

whole or ...
 When company accumulates large distributable profits it convert it

into capital.
 Divide the capital among the existin...
 A prospectus shall be filed with Registrar.
 No allotment of shares shall be made to public unless the minimum

subscri...
 A share is a movable property, transferable in the manner provided by the

articles.
 A share holder has a statutory ri...
 Where shares pass by operation of law from one person to another.
 For example, by holder‟s insolvency, or lunacy or by...
 The articles generally give powers to Board of Directors to forfeit shares as

under:
I.

If a member fails to pay any c...
 A dividend is a payment made by a corporation to its shareholders, usually

as a distribution of profits . When a corpor...
 “ The Directors are the Brain of a Company”
 "A director includes any person occupying the position of director by

wha...
 A public company having a paid up capital of Rs.5 crore or above may

have a director from amongst small shareholders.
...
 First Directors - May be named in the Articles or subscriber to the memorandum

shall be first directors.
 Rotational D...
 Public companies must have at least three directors. [Section 252]
 The Act does not lay down any qualification, but it...
 According to Sec 274 a person shall not be capable of being appointed as

director if:
 Found to be of unsound mind;
 ...
 Not defined in the Act but reference to be found in Sections 198, 309, 311 and

387 suggesting that director and manager...
General Meetings Of Shareholders :
 Statutory Meeting under Section 165;
 Annual General Meetings under Section 166;
 E...
 Companies limited by guarantee and share shall, within one month and

not more than six months from the date of commence...
 Every company must, in each calendar year, hold an annual general

meeting so specified in the notice calling it, provid...
 In case of difficulty in holding meeting the Registrar may extend time

by not more than 3 months.
 Application for ext...
 Every AGM called after giving 21 days notice must be held on a

day other than a public holiday.
 Should be held on a w...
 Ordinary business relating to:

 Consideration of accounts, Balance Sheet and report of board

and auditor;

 Declarat...
 Every general meeting of company with exception to Statutory Meeting

and AGM is called an Extraordinary General Meeting...
 The board shall on requisition of members holding 1/10th of the paid

up capital or voting right, forthwith call an EGM....
 If, for any reason it is impracticable to call an EGM, the CLB may, either

of its own or on an application of any direc...
 A meeting of the Board of directors shall be held at least once in every three

months and at least four such meetings s...
 Failure would make the officer in default punishable with a fine

extending up to Rs 1000.
 The notice should contain t...
Proper
Authority

Notice Of
Meeting

Quorum
For
Meeting

Chairman
Of The
Meetings

Minutes
Of
Meetings

1/24/2014

48
 Ultra Vires
Invalid excess of authority or power
exercised by an entity. Since

 Intra Vires
Within the legal power or ...
 A type of debt instrument that is not secured by physical assets or collateral.

Debentures are backed only by the gener...


Proper and accurate compilation of financial information of a corporate and its disclosure, in a
manner that is standar...


With consolidation of financial statements by holding companies on mandatory
basis, the provisions requiring attaching ...


Maintenance of Records Outside the Country :
The companies should have an option to keep records outside the country
pr...
 A company in a broad sense is a group of persons who have come

together or who have contributed money for some common p...
 Majority rule is hallmark of democracy. It equally applies to corporate democracy and

is not free from pitfalls and abu...
The provisions of the Companies Act regarding a scheme of „Compromise‟ or
„Arrangement‟ are mainly applicable to those com...
Section 391 lays down that ;
 Where a compromise or arrangement is proposed :
I. Between a company & its creditors .
II.
...
 The term Reconstruction implies the formation of a new company

to take-over the Assets of an existing company with the ...
 Winding up or liquidation of a company represents the last stage in its life. It

means a proceeding by which a company ...
I.

Winding up by the court i.e. compulsory winding up (Sections. 433 to 483)

II.

Voluntary winding up (Sections. 484 to...
1/24/2014

61
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Companies law part 2

  1. 1. By:-Vinay Golchha 1 1/24/2014
  2. 2.  Membership In a Company.  Share capital  Shares  Company Management  Meetings and proceedings  Borrowing powers, Debentures & charges  Accounts & auditors.  Prevention of oppression & miss management  Compromises arrangements & reconstructions.  Winding Up. 1/24/2014 2
  3. 3.  Members (Section 41): A company when incorporated is an artificial person. It is a constitution of natural persons called members of a company.  Who are the members of a company? (1) Subscribers to the memorandum of a company and entered as members in the Register of Members; (2) Every other person who agrees in writing to become a member of a company and whose name is entered in its Register of Members; (3) Every person holding equity share capital and whose name is entered as beneficial owner in the records of the depository. 1/24/2014 3
  4. 4.  A company  A registered co-operative society  A Non-Resident Indian [NRI]  A Minor  HUF  Registered Trade Union  Shareholding in joint names 1/24/2014 4
  5. 5.  Membership By Subscription  Membership By Application & Registration By Application & Allotment II. By Transfer III. By Succession IV. Agreement to be in Writing I.  Membership By Beneficial Ownership  Membership By Qualification Shares 1/24/2014 5
  6. 6.  Cessation Of Membership By Act Of The Parties I. Transfer Of Shares II. Shares are Forfeited III. Redeemable Preference Shares are Redeemed. IV. Surrender Of Shares  Cessation Of Membership By Operation Of Law I. Insolvency II. Death III. Sale Of Shares IV. Winding Up Of Company 1/24/2014 6
  7. 7.  To receive notices of all general meetings.  To attend & vote at general meetings, appoint directors & auditors.  To receive copies of accounts of company.  Entitled to a copy of report of a statutory meeting.  To inspect the minutes of proceedings of any general meeting.  To inspect the register, index of members, debenture holders.  To receive share certificate.  To receive dividends in case of preference shares.  To make an application to the Central Government for ordering investigation into the affairs of the company.  Board of Directors fail to convene the same.  To present a petition to the Court for winding up of company  To transfer his shares.  Priority to have shares offered if there is increase of capital by the company. 1/24/2014 7
  8. 8.  Company With Unlimited Liability – Liable for full debt of the company, during the period he was a member.  Company limited By Shares – Liable for the nominal value of the shares.  Company limited By Guarantee – Liable to Contribute the amount guaranteed. 1/24/2014 8
  9. 9.  Name, address & occupation.  Shares held by each member, distinguishing each share by its number, and the amount paid on those shares.  Date at which each member was entered in the register.  Date on which any person cease to be member. 1/24/2014 9
  10. 10.  Every company having more than 50 members shall keep an index in the form of a „Card-index‟ of the names of the members of the company.  The index, shall at all times, be kept at the same place as the register of members.  On payment of a fee of Re. 1 for each inspection, any member may make extracts from any register or acquire a copy of any register. 1/24/2014 10
  11. 11. Foreign Registers  A company which has a share capital or which has issued debentures may keep in any State or country outside India a branch register of members or debenture holders resident in the State or country. Annual Returns  Every company has to file every year  with the Registrar annual returns containing certain particulars. Shall give the particulars as on the date of holding the annual general meeting. 1/24/2014 11
  12. 12.  Share Capital means the capital raised by a company by the issue of shares. The word ‘Capital’ in connection with a company is used in Several Senses:I. II. III. IV. V. VI. Nominal, Authorised or Registered Capital. Issued & Subscribed Capital. Called-up Capital. Un-called Capital. Paid-up Capital. Reserved Capital. 1/24/2014 12
  13. 13. 2 Classes of Shares [Sec 86 as amended in 2002] A. Equity Share [Sec 85(2)]  "Equity Share Capital means all share capital which is not preference share capital."  The equity shareholders receive dividend out of profits declared in AGMs.  Dividend declared only after depreciation allowance and payment of preference shareholders.  Voting right is in proportion to paid-up equity capital. 1/24/2014 13
  14. 14. B. Preference Shares [Sec 85(1)]  Preference shares capital is that part of share capital which fulfills following two conditions: I. Carries preferential right with respect to dividend- fixed amount or at fixed rate; and II. Carries preferential right with respect to repayment of capital on winding up. 1/24/2014 14
  15. 15. A. From Promoters  Private companies cannot invite general public to subscribe its share capital.  Public companies can raise the necessary capital by private placement without inviting the general public to subscribe. (not made to more than 49 persons at a time) 1/24/2014 15
  16. 16. B. From Public  By issuing a prospectus.  By an offer for sale or by deemed prospectus:  Company offers/agrees to allocate shares to a financial institution or an Issue House for sale to public.  The issue house publishes a document called an Offer For Sale at a price higher than what its holder/s had paid or at par.  The document is deemed to be a prospectus u/s 64(1).  By placing of shares:  A broker or an underwriter finds persons who wish to buy shares.  The broker acts merely as an agent.  No need to issue a prospectus. 1/24/2014 16
  17. 17. C. From Existing Shareholders  By issue of right shares to existing shareholders [Sec 81] allotted in proportion to their existing holding. E.g.. 2 shares for every lot of 5 shares.  Companies are required to issue Letter Of Offer to the existing shareholders of the company. 1/24/2014 17
  18. 18.  A Share is evidenced by a share certificate (sec.84). A share certificate is issued by a company under its common seal.  Stock is the aggregate of fully paid-up shares ,consolidated & divided for the purpose of convenient holding into different parts. It may be transferable or split up into fractions of any amount, without regards to the original face value. 1/24/2014 18
  19. 19. Types Of Share Preference Shares is a stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument. Equity Shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares. *Sweat Equity Shares are equity shares issued by a company to its employees or directors at a discount, or as a consideration for providing know-how or a similar value to the company. 1/24/2014 19
  20. 20. Preference Shares 1/24/2014 20 Redeemable Preference Shares Non-Convertible Preference Shares Convertible Preference Shares Non-Participating Preference Shares Participating Preference Shares Non-Cumulative Preference Shares Cumulative Preference Shares
  21. 21.  Companies may issue shares at premium irrespective of the fact whether the shares are listed or not.  No restriction in Companies Act on issue at premium, the only restriction is on the utilization of premium amount.  Premium cannot be treated as profit as such the amount not available for distribution as dividend.  Premium amount must be kept in separate account called Securities Premium Account. 1/24/2014 21
  22. 22.  If premium is received in kind, an amount equal to premium amount must be transferred to Securities Premium Account.  Premium to be used only for the following purposes as mentioned in Section 78(2):  For issuing fully paid bonus shares;  For writing off preliminary expenses;  For writing off commission, discount expenses on issue of debentures; and  For providing for premium payable on redemption of Redeemable Preference Shares or debentures. 1/24/2014 22
  23. 23.  Called Right Shares.  May be issued at any time after two years from incorporation or one year from first allotment, whichever is earlier.  Must be offered to the existing shareholders in proportion to their holding.  For listed company, information on quantum and proportion shall be supplied to the concerned stock exchange.  Company must give notice of offer and the number of shares offered to existing shareholders. 1/24/2014 23
  24. 24.  Give shareholders 15 days to decide.  The notice must state the shareholder's right to renounce the offer in whole or in part in favour of some other person.  The board may dispose of the shares in a manner beneficial to the company.  Condition of issue of shares to persons other than existing shareholders.[Section 81 (1A)]: I. Pass a special resolution in general meeting, and II. In case of ordinary resolution Central Govt.'s approval must be obtained. 1/24/2014 24
  25. 25.  When company accumulates large distributable profits it convert it into capital.  Divide the capital among the existing shareholders in proportion to their entitlement.  Members do not have to pay for such shares.  Bonus issue is a machinery for capitalizing distributable profits.  Must be sanctioned in the AGM on the recommendation of the board.  Bonus shares is not income and hence not taxable. 1/24/2014 25
  26. 26.  A prospectus shall be filed with Registrar.  No allotment of shares shall be made to public unless the minimum subscription amount stated in the prospectus is raised and received by the company.  Application for shares should be made in prescribed form.  No allotment shall be made until the beginning of the 5th day after a date on which prospectus is issued.  Companies intending to offer must make an application to one or more stock exchanges for permission.  The whole of the application money should have been paid and received by company in cash.  All moneys received shall be deposited in a Scheduled Bank until the certificate to commence business is obtained. 1/24/2014 26
  27. 27.  A share is a movable property, transferable in the manner provided by the articles.  A share holder has a statutory right, in the absence of restrictions in the articles, to transfer shares to any person without consent of anybody.  A private company with share capital may restrict the right to transfer its shares by its articles. Transfer of shares is less strict in a public company. 1/24/2014 27
  28. 28.  Where shares pass by operation of law from one person to another.  For example, by holder‟s insolvency, or lunacy or by death and inheritance.  The person to whom shares are transmitted shall make an application to the company for transmission of shares in his name.  In case if the company refuses to register transmission, right of appeal arises in the same manner as in case of transfer.  No instrument of transfer is required 1/24/2014 28
  29. 29.  The articles generally give powers to Board of Directors to forfeit shares as under: I. If a member fails to pay any call or installment of a call II. Any other circumstance which the articles may provide.  The articles may also provide that the failure by a member to fulfill any engagement with any other member would forfeit his share.  Power of forfeiture is not inherent in a company and therefore this power exists only when it is given by the articles. 1/24/2014 29
  30. 30.  A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits . When a corporation earns a profit or surplus, it can either re-invest it in the business (called retained earnings), or it can distribute it to shareholders.  Rules I. II. III. IV. V. VI. VII. To be paid only out of Profit Resolution at the AGM Payment of Dividend in Proportion to paid-up capital Establishment of Investor Education & Protection Fund To be paid to Registered Shareholder Unpaid Dividend to be transferred to Unpaid Dividend Accounts Penalty for Defaulting Director 1/24/2014 30
  31. 31.  “ The Directors are the Brain of a Company”  "A director includes any person occupying the position of director by whatever name called." [Section 2(13)]  Only individual, and not a body corporate, association or firm, shall be appointed as director. [Section 253]  "An individual who direct, control, manage, superintend the affairs of the company in the form of the board of directors.“  Every Public Company shall have at least 3 Directors &  Other Company (Private Company) at least 2 Directors. 1/24/2014 31
  32. 32.  A public company having a paid up capital of Rs.5 crore or above may have a director from amongst small shareholders.  Shareholders not less than 1/10th (or 100) of the total shareholders may elect suo-moto or upon a notice served at least 14 days before the AGM.  Listed company shall elect small shareholder's director through postal ballot while an unlisted company on the recommendation of the majority of small shareholders.  He is treated as director for all purposes but cannot be appointed as MD or whole-time director.  No individual can hold office of Small Shareholder's Director at the same time in more than 2 companies. 1/24/2014 32
  33. 33.  First Directors - May be named in the Articles or subscriber to the memorandum shall be first directors.  Rotational Directors - Two third of the total directors are liable to retire by rotation every year and are eligible for re-appointment in the General Meeting. [Section 256]  Directors By Third Parties.(Financial institutions or Banks)  Directors nominated by the Central Govt. u/s 408 are not liable to retirement.  Directors By Directors – As Additional Directors, In Casual Vacancy & As Alternative Directors.  Directors By Proportional Representation 1/24/2014 33
  34. 34.  Public companies must have at least three directors. [Section 252]  The Act does not lay down any qualification, but it lays down disqualifications.  Directors are the agent of the company.  A single director has no authority to bind the company unless such powers are delegated to him by the board.  To some extent directors are also trustee of the company's properties.  Barring directors in the whole time employment, directors are not in the employment of the company and are not entitled to any remuneration beyond what is allowed by the Act, i.e. sitting fees.  They are not also required to hold any shares in the company on whose board they serve.  A director can hold an office or place of profit in the company in addition to his usual directorship. [Section 314] 1/24/2014 34
  35. 35.  According to Sec 274 a person shall not be capable of being appointed as director if:  Found to be of unsound mind;  An un-discharged insolvent;  Applied to be adjudicated as an insolvent;  Convicted of any offence involving moral turpitude and sentenced for not less than six months and a period of 5 years has not elapsed.  Disqualified by an the Order Of Court. 1/24/2014 35
  36. 36.  Not defined in the Act but reference to be found in Sections 198, 309, 311 and 387 suggesting that director and managerial personnel are entitled to receive managerial remuneration.  Managerial Remuneration may take the form of monthly payment, say, salary or a specified percentage of net profits or a commission and /or by way of a fee for each meeting of the board, besides any or all of the following:  Rent free accommodation;  Any other amenity provided free of charge or at concessional rate; and  Any insurance, annuity, or gratuity.  Payment received for holding an office/place of profit is not managerial remuneration. [Section 309(1)]  The overall Managerial Remuneration payable not to exceed 11% of the net profit. [Section 198 (1)]  MD and Whole-time directors may be paid a monthly salary or specified percentage of net profit. [Section 309 (3)] 1/24/2014 36
  37. 37. General Meetings Of Shareholders :  Statutory Meeting under Section 165;  Annual General Meetings under Section 166;  Extraordinary General Meetings under Sec 169 :  Convened by directors suo moto between two AGMs.  Convened by directors on requisition. 1/24/2014 37
  38. 38.  Companies limited by guarantee and share shall, within one month and not more than six months from the date of commencement of business, hold a general meeting of the members to be called the Statutory Meeting.  Failure to hold Statutory Meeting renders the company liable to be wound up u/s 433(b).  This provision is not applicable to a private company. [Section 165(10)]  The board shall, at least 21 days before the day on which the meeting is held, forward a report to every member of the company called Statutory Report. 1/24/2014 38
  39. 39.  Every company must, in each calendar year, hold an annual general meeting so specified in the notice calling it, provided that not more than 15 months shall elapse between two AGMs.  First AGM may be held within 18 months from the date its incorporation.  Subsequent AGM should be held on the earliest of the following: [Sec 166 & 210]  15 months from the last AGM;  The last day of the calendar year; or  6 months from the close of the financial year. 1/24/2014 39
  40. 40.  In case of difficulty in holding meeting the Registrar may extend time by not more than 3 months.  Application for extension of time should be made before the due date of holding AGM.  Any delay including extension by RoC, shall make the officer in default punishable with fine extending up to Rs 50,000 and Rs 2,500 for every day of the default.  Delay in completion of audit or annual accounts do not constitute a special reason justifying extension of time for holding of AGM. 1/24/2014 40
  41. 41.  Every AGM called after giving 21 days notice must be held on a day other than a public holiday.  Should be held on a working day, during business hours, at the Registered Office of the company, or  a place within the city, town, or village in which registered office is situated.  An adjourned meeting accidentally comes to be held on a public holiday does not contravenes the provisions of Section 166 (2).  Time of subsequent AGMs may be fixed by the Article or by a resolution in the AGM. 1/24/2014 41
  42. 42.  Ordinary business relating to:  Consideration of accounts, Balance Sheet and report of board and auditor;  Declaration of dividend;  Appointment of director in place of those retiring; and  Appointment and fixing of remuneration of the auditors.  Every other business is a special business. 1/24/2014 42
  43. 43.  Every general meeting of company with exception to Statutory Meeting and AGM is called an Extraordinary General Meeting.  Every business at an EGM is a special business, which arises between two AGMs being urgent, and cannot be deferred to the next AGM.  Usually the Articles contain provisions empowering the board for calling an EGM.  If there are not within India directors capable who are not sufficient in number to form a quorum any director or two members may call an EGM. 1/24/2014 43
  44. 44.  The board shall on requisition of members holding 1/10th of the paid up capital or voting right, forthwith call an EGM.  The requisition shall set the matters for consideration, duly signed and deposited at the registered office of the company.  If the EGM is not called within 21 days of the requisition the meeting may be called on a day not later than 45 days from the date of deposit of requisition:  By requisitionists themselves; or  By 1/10th of the shareholders or members holding 1/10th of voting right. 1/24/2014 44
  45. 45.  If, for any reason it is impracticable to call an EGM, the CLB may, either of its own or on an application of any director or the member:  Order a meeting of the company;  and give such ancillary or consequential directions as the CLB thinks expedient.  A meeting so called shall be deemed to be a meting of the company duly called, held and conducted.  The CLB will interfere very sparingly, and only when the application of a meeting is made bona fide in the larger interest of the company. 1/24/2014 45
  46. 46.  A meeting of the Board of directors shall be held at least once in every three months and at least four such meetings shall be held in one year.  As long as four meetings are held in a calendar year, the interval between two meetings may be more than three months.  Listed companies are required to hold at least four board meetings in a year with a maximum time gap of four months between two meetings. (LA Clause 49)  Notice of every meeting of the board shall be given in writing to every director for the time being in India, and at his usual address in India to every director. 1/24/2014 46
  47. 47.  Failure would make the officer in default punishable with a fine extending up to Rs 1000.  The notice should contain the time date and place of meeting.  There is no provision for minimum days for giving notice. It is generally prescribed by the Articles.  If the notice of the meeting is not given to even one director the meeting and any resolution passed thereat would be invalid.  Notice of the adjourned meeting should be given to the directors who did not attend the original meeting. 1/24/2014 47
  48. 48. Proper Authority Notice Of Meeting Quorum For Meeting Chairman Of The Meetings Minutes Of Meetings 1/24/2014 48
  49. 49.  Ultra Vires Invalid excess of authority or power exercised by an entity. Since  Intra Vires Within the legal power or authority or a person or official or body etc. the powers exercised by any officer of an organization are limited by the constituting or vesting instrument (such as MOA), any act outside those limitations is ultra vires. 1/24/2014 49
  50. 50.  A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital.  Kinds Bearer II. Registered III. Secured IV. Unsecured V. Redeemable VI. Irredeemable VII. Convertible VIII.Non-Convertible I. 1/24/2014 50
  51. 51.  Proper and accurate compilation of financial information of a corporate and its disclosure, in a manner that is standardized and understood by stakeholders, is central to the credibility of the corporates and soundness of investment decisions by the investors. The preparation of financial information and its audit, therefore, needs to be regulated through law with stringent penalties for non-observance.  The present statute provides for a mechanism for development of Accounting Standards. We understand that Accounting Standards for the use of Indian corporate sector, taking into account International Accounting Standards, are being developed through the instrumentality of the National Advisory.  The Committee took note of the contribution made by the ICAI and the NACAS in development of proposals for Accounting Standards and took the view that the existing institutional mechanism for formulating and notifying Accounting Standards under the Companies Act, 1956 may be retained. Committee on Accounting Standards (NACAS). Holding-Subsidiary Accounts and Consolidation .  The Committee took the view that consolidation of financial statements of subsidiaries with those of holding companies should be mandatory. The Committee discussed the question of the manner of maintenance of accounts of entities other than companies but controlled by companies registered under the Act. (CONT.) 1/24/2014 51
  52. 52.  With consolidation of financial statements by holding companies on mandatory basis, the provisions requiring attaching the accounts of subsidiary companies with those of holding companies, for circulation to shareholders in accordance with the provisions of the present Companies Act should be done away with.  Further, the Committee took the view that the holding companies should be required to maintain records relating to consolidation of financial statements for specified periods. Presentation of consolidated financial statements by the holding company should be in addition to the mandatory presentation of individual financial statements of that holding company.  At present, Section 209 (4A) of the Act requires companies to preserve the books of accounts, together with the vouchers relevant to any entry in such books of account, in good order, relating to a period of not less than 8 years immediately preceding the current year. The Committee felt that the rules may provide for preservation of books of account and records of the company for a period of 7 years to bring it in harmony with Income Tax Act.  In order to bring about more transparency and uniformity in the maintenance of accounts, the Committee felt that the companies should continue to be mandated to maintain their books of accounts on accrual basis and double entry method of book keeping. (CONT.) 1/24/2014 52
  53. 53.  Maintenance of Records Outside the Country : The companies should have an option to keep records outside the country provided financial information in compliance with the Companies Act is available within the country and written notice is given to the Registrar of the place where the records are kept. However, such a Company should be obligated to produce the records that are kept outside the country, if and when required to do so as specified in the Rules.  Cash Flow Statement To Be Made Mandatory : World over, the importance of Cash Flow Statement is being specifically recognized. At present, the listed companies are mandated to include a Cash Flow Statement in the Annual Report and the Standards of Accounting prescribed by ICAI also requires in specified cases a Cash Flow Statement to be submitted along with the Balance Sheet and Profit & Loss Account with a view to make Cash Flow Statement mandatory. The Committee felt that there was a need to include the definition of the term Financial Statement in the Act, to include Profit & Loss Account, Balance Sheet, Cash Flow Statement and Notes on Accounts. Financial Year.  The Companies Act at present does not contain any provision relating to the minimum period of a Financial Year. The Concept Paper has defined the Financial Year with the minimum period of six months. The Committee dwelt on the subject and came to the conclusion that the first financial year should begin from the date of incorporation and end on the immediately succeeding 31st March and the subsequent Financial Years should also end on 31st March every year. 1/24/2014 53
  54. 54.  A company in a broad sense is a group of persons who have come together or who have contributed money for some common purpose and have incorporated themselves into distinct legal entity. Company is the amalgamation of two distinct words- “com” and “pain”, the former meaning with/together and the later meaning “bread”. The whole scheme of the Companies Act, 1956 is to ensure proper conduct of the affairs of the company in public interest and preservation of image of country in public interest. 1/24/2014 54
  55. 55.  Majority rule is hallmark of democracy. It equally applies to corporate democracy and is not free from pitfalls and abuse. Corporate democracy is more vulnerable to it because it is reckoned with the number of shares and not with number of individuals involved.  The rule of majority has been made applicable to the management of the affairs of the company. The members pass resolution on various subjects either by simple or threefourth majority. Once resolution is passed by majority it is binding on all members. As a resultant corollary, court will not ordinarily intervene to protect the minority interest affected by resolution. However there are exceptions to this rule- Prevention of Oppression and mismanagement being one such ground. The requisite number of members to make an application before the Tribunal is :  In case of Company having share capital: 100 members or 1/10th of total number of its members, whichever is less or member/s holding not less that 1/10th issued capital. The applicants should have paid all calls and other sum due on their shares.  In case of Company not having a share capital: not less than 1/5th of total number of the members. In case of joint shareholding they will be counted as only one member. 1/24/2014 55
  56. 56. The provisions of the Companies Act regarding a scheme of „Compromise‟ or „Arrangement‟ are mainly applicable to those companies which are liable to be wound up under the act [sec.390(a)].It is to be remembered that these provisions are applicable to foreign company incorporated outside India but doing business in India and a government company also because they are liable to be wound up under the act . These provisions would also equally apply to concern which is in winding up . By providing these provisions , the law intends to provide a kind of substitute for winding up and There by Save a company from going in to liquidation . 1/24/2014 56
  57. 57. Section 391 lays down that ;  Where a compromise or arrangement is proposed : I. Between a company & its creditors . II. between a company and its members .  The compromise or Arrangement will then binding on : I. All the creditors or classes of creditors . II. All the members or classes of members . III. The company IV. In the case of company which is being wound up on the liquidators and contributories 1/24/2014 57
  58. 58.  The term Reconstruction implies the formation of a new company to take-over the Assets of an existing company with the idea that the persons interested and the nature of business substantially remains the same.(Section – 394)  The term Amalgamation is taken to mean as the union of two or more companies, so as to form a third entity or one company is absorbed into another company. (Section – 395) 1/24/2014 58
  59. 59.  Winding up or liquidation of a company represents the last stage in its life. It means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realised assets and the surplus if any ,is then distributed among the members in proportion to their holdings in the company.  The two terms winding up and liquidation are used interchangeably. 1/24/2014 59
  60. 60. I. Winding up by the court i.e. compulsory winding up (Sections. 433 to 483) II. Voluntary winding up (Sections. 484 to 521) A. Members voluntary winding up B. Creditors voluntary winding up III. Winding up subject to Supervision of Court. 1/24/2014 60
  61. 61. 1/24/2014 61

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