MODULE III - COMPANY LAW

7. COMPANY AND ITS FORMATION

What is a company
In general parlance a company means a group of people who have
come together for some common purpose eg to carry on business, for social
service, etc

Governing Law : In India, company form of organizations are governed by

The Companies Act, 1956. It contains provisions for bringing a company
into existence, working of a company, legal obligations of a company,
stakeholders of a company, management of a company, dissolution of a
company, etc

Definition of a company : A company means ‘ a company formed and

registered under the provisions of the Companies Act’.
A company is an incorporated association which is artificial, having an
independent legal existence, with a perpetual succession, a common seal, a
common stock capital comprised of transferable shares and carrying limited
liability in relation to its members.

Characteristics of a company

1. Separate legal entity (independent corporate existence) : A company

formed and registered under the Companies Act is a legal entity. It has an
independent corporate existence. It is a creation of law. Company comes into
existence by law and can be dissolved only by law.
Company is an artificial entity. It has no natural or physical
existence but has a legal existence. It can do all things that a person can do
legally except those which require physical existence.
The principal of separate legal entity was illustrated in cases like
Soloman vs Soloman and Co Ltd, Lee vs Lee Air Farming Ltd, etc

2. Perpetual succession : A company is an artificial legal person and

therefore it does not have death. It can be put an end to only by law. Its
existence is not affected by the death of its members or stakeholders. It has
perpetual succession.
3. Common Seal : Since company is and artificial person, it cannot sign its
name on transactions entered into by it. Common seal is used as a substitute
for signature. Every company has a common seal with its name engraved on
it and is put on all documents constituting contracts between company and
third parties.

4. Limited liability : Members of a limited company have limited liability.

Their liability is limited to the extent of the unpaid value on the shares held
by them. If the shares are fully paid up, their liability is nil. Irrespective of
the liability of the company, members liability is limited. Even if the assets
of the company are insufficient to meet the liabilities, members cannot be
called upon to pay anything more than the unpaid value on their shares.

5. Transferability of shares : The shares of a company are freely transferable.

They can be sold or purchased in the share market. This provides liquidity to
the investors but at the same time does not result in reduction of the share
capital of the company. Shares of private company are not freely
transferable.

6. Separate property : As a legal person, company can purchase, own, hold,

enjoy, sell and dispose of property in its own name. No member of a
company can claim company’s property as his own.

7. Capacity to sue and be sued : As a legal person, company can sue and also
be sued in its own name. It can file suits against others in a court of law and
at the same time others can also file suits against company.

8. Professional management : Companies are managed by professionals and

experts.

9. Better finances : Since public companies can raise money through public,
it can have better finances for its operations.
KINDS OF COMPANIES

Companies can be classified into different kinds based on different criteria

as follows

1 On the basis of constitution (as per Companies Act)

A : Private company – A private co means a co which by its articles
(i) Restricts the right to transfer its shares
(ii) Limits the number of its members to 50 (excluding members
who are or in the employment of the co)
(iii) Prohibits any invitation to the public to subscribe for the shares
or debentures of the co
(iv) prohibits any invitation or acceptance of deposits from persons
other than its members, directors or their relatives

A private co must have a paid-up capital of at least Rs 1 lakh.

A private co must have a minimum of 2 members.
Name of a private co must end with the words ‘pvt ltd’.

B : Public company – A public co means a co which is not a private co.

A public co must have a minimum capital of at least Rs 5 lakhs.

A public co must have a minimum of 7 members.
Name of a public co must end with the words ‘ltd’.

2. On the basis of liability of members

A : Limited company – A co where the liability of the members is
Limited. The liability is limited by shares where the liability is limited
to the extent of unpaid value on the shares and it is limited by guarantee
where the liability is limited to the extent of the sum guaranteed by the
member.

B : Unlimited company – A co where the liability of the members is

Unlimited. Their liability continues till all the debts of the co are paid.

3. On the basis of control

A : Government company – A co in which not less than 51% of the
paid up share capital is held by the central Govt or any State Govt or
Govts or partly by central and State Govts. It also includes a co which
is a subsidiary of a Govt Co.
 B : Holding and Subsidiary Companies – A co which controls another
co is called a holding co and the co that is so controlled is called the
subsidiary co.
A co is said to be subsidiary of another co if
(i) that other co controls the composition of board of directors or
(ii) that other co holds more than half of the nominal value of equity
share capital
(iii) that other co controls more than half of the total voting power of
the co or
(iv) it is a subsidiary of co which is that other’s subsidiary

4. On the basis of incorporation

A : Statutory companies – A co incorporated by means of a special
Act of Parliament or State Legislature.
Eg – Life Insurance Corporation of India, Unit Trust of India

B : Registered companies – Cos registered under the Companies Act.

Such cos come into existence on incorporation and registration as per
the provisions of the Act.

C : Foreign Company – A co which is registered in a country other

than India but has a place of business in India.

5. Non-profit Organisations – Co formed for the purpose of promotion of

arts, science, commerce, religion, education, etc

INCORPORATION OF A COMPANY

A company can be brought into existence as per the provisions of the

Companies Act, 1956. The registering authority is the Registrar of
Companies (every state in India has an office of the ROC).
The proposed company has to take name availability from the ROC by
filing e-form 1A and then proceed to incorporate the company.

The following is the procedure to get a co incorporated.

1. Application – it has to be made to the ROC of the State in which the
business office of the co is to be situated by filing form No 1 and
Forms 18, 32 and 29 through e-filing.
2. Documents – The application has to be accompanied by the following
documents
a. Memorandum of Association -3copies
b. Articles of Association -3 copies
c. Name approval letter
d. Relevant Forms viz form No 18, 32, 29
e. A declaration that the provisions of the Act have been complied
with
f. Registration fees
g. Stamp duty
3. Certificate of Incorporation – On verifying that the documents are in
order, the ROC issues this certificate. The date mentioned in this
certificate is the date of birth for the co.
4. Certificate of commencement of business – Public Cos are required to
obtain this additional certificate from ROC to commence business.
Private cos can commence business immediately on incorporation.

MEMORANDUM OF ASSOCIATION

MOA is one of the basic documents of the co. It is the charter of

the co and sets out the constitution of the co. It defines the powers and
limits of the co. It defines its relation with the outside world and the
scope of its activities.
MOA contains the following clauses
1. Name clause – Every co must be registered with a name and this
clause contains the name of the co. The persons who constitute the co
can choose any name they desire for the co but the Central Govt
should not opine that the name is undesirable.
Name of public limited co must end with the words ‘limited’
and name of private limited co must end with the words ‘pvt ltd’.

2. Registered office clause – This clause specifies the name of the

State where the registered office of the co is situated.

3. Objects clause – It specifies the objectives and purposes of the co. It

gives an idea to the prospective investors about the purpose of the co
and it also enables outsiders dealing with the co to ascertain its
powers. It separately specifies the main objects, incidental objects and
other objects.
 4. Liability clause – It states whether the liability of the members is
limited or unlimited.

5. Capital clause – It states the authorized or nominal capital of the co,

the different kinds of shares and the nominal value of each share.

6. Subscription clause – this clause provides that those who have agreed
to subscribe to MOA, signify their willingness to associate and form a
co. At least seven subscribers are needed for a public co and two for a
private co.

Doctrine of ultra-vires (beyond the powers) - The objects clause of the

MOA defines the scope of activities of the company. It authorizes the
company to do certain things and carry on certain business. The company
cannot do anything which is beyond the objects clause i.e it cannot take up
any activity which is not defined in the MOA. Any act done or activity
undertaken beyond the MOA is called ‘ultra-vires’ and is not binding on the
company.

Doctrine of constructive notice – Every person who deals with the

company is deemed to have constructive notice of the MOA and AOA of the
company. He is not protected against ‘ultr-vires’ acts. He takes the risk for
all such acts of the company. Hence outsiders need to be very careful while
dealing with companies.

ARTICLES OF ASSOCIATION

AOA contain the internal rules and regulations of the co. They define
as to how the management of the internal affairs of the co should be done.
Following are some of the contents of AOA
- Shares and share capital
- Allotment of shares
- Calls on shares
- Transfer and transmission of shares
- General and board meetings
- Directors and their appointment
- Borrowing powers
 - Accounts and audit
- Dividends
- Winding up

OFFER DOCUMENTS

A public co may raise its capital by issuing shares or debentures or

deposits or other securities to the public. Public is invited to subscribe for
the securities through the offer documents viz Prospectus, Advertisement.
A private company cannot issue offer documents to the public since it
cannot raise money from public.

Prospectus
Any document described or issued as a prospectus and includes any
notice, circular, advertisement or other document inviting deposits from the
public or inviting offer from the public for the subscription or purchase of
any shares in or debentures of a body corporate

Every prospectus must meet the following requirements

1. It must be in writing
2. It should be issued by or on behalf of the co
3. It should contain an invitation to the public
4. The invitation should be for making subscription to shares or debentures
in the co.

Every prospectus must be dated. A copy of prospectus signed by every

director or proposed director must be delivered to the ROC on or before the
date of publication. Prospectus must contain the particulars specified in
Schedule II to the Act.

Contents of Prospectus
1. General information
- Name and address of co.
- Stock Exchange where application for listing is made
- Declaration of refund of issue if min subscription not received
- Date of opening and closing of the issue
- Names and address of auditors, lead managers and under writers
2. Capital structure of the company and present issue
- Authorized, issued, subscribed and paid-up
- Size of present issue

3. Details of the issue

- Terms of payment
- How to apply - Forms

4. Details about company management

- History, main objects and present business of the co
- Subsidiaries, if any
- Promoters and their background
- Name and address of manager, managing directors and other
directors

5. Particulars of the issue

- Objects
- Project cost
- Means of financing

6.Details about the project

- Location of project
- Plant, machinery, technology, etc
- Collaborations
- Raw materials and infrastructure facilities
- The products
- Schedule of implementation
- Future prospects

7. Other information
- Outstanding litigations
- Particulars of defaults
- Management perception of risk factors

8. Financial information
- Profits and losses for the preceding 5 years (by auditors)
- Rates of dividend for the said years
Assets charged as security
 9. Statutory and other information
- Min subscription
- Expenses of the issue
- Underwriting comm..
- Details of present issue
- Material contracts

Untrue statements
For any statement contained in the prospectus which is misleading in
form and content, there is both criminal liability on the directors,
promoters and every person who has authorized the issue prospectus.

Statement in lieu of prospectus

When a company wishes to raise money through private placements
without inviting the public, then the co need not issue a prospectus. But it
has to file with ROC a document called statement in lieu of prospectus.
The contents of this document are the same as that of prospectus. The
provisions applicable to this document are the same as are applicable to
prospectus.

Advertisement
When a company invites deposits from the public, the offer document
through which such invitation is made is called advertisement. The
provisions applicable to advertisement except the contents are the same as
that of prospectus.

SHARE CAPATIL

Share capital means the total of all payments made to the co by all the
shareholders on their shares

The following terms are used to denote different portions of capital

1. Nominal or authorized – stated in the MOA

2. Issued - offered for subscription
3. Subscribed - taken up by purchasers
4. Called-up - called by the co
5. Paid-up -actually paid to the co
6. Uncalled, unpaid
 7. Reserve - can be called only in the event of winding up
8. Loan – money borrowed

SHARES, DEBENTURES AND DEPOSITS

A share is a part in the share capital of the company. Generally the nominal
share capital of the co is divided into smaller units called shares.
A share also denotes the interest of a shareholder in a definite portion of the
capital.

Kinds of shares
1. Preference shares – To be called preference share, a share must satisfy
the following two requirements.
a. it carries a preferential right in respect of dividends to be paid a
fixed amount or an amount calculated at a fixed rate
b. it carries a preferential right to be repaid the amount of paid up
capital in the event of winding up of the co

2. Equity shares – shares which are not preference shares

Kinds of preference shares

1. Cumulative/non-cumulative – In case of cumulative shares, the
arrears of dividend not declared in the previous years gets
accumulated till it is paid.
2. Convertible/non-convertible – convertible shares can be converted
into equity shares.
3. Redeemable/irredeemable – redeemable shares are those where the co
has a right to take them back after paying to the holders.
4. Participating/non-participating – Participating preference shares are
those who take their part of the preference dividend and participate
along with the equity shares for the equity dividend.

SHARE CERTIFICATE

It is a document issued by a co stating that the person named therein is

the registered holders of a specified no on shares.
 It is prima facie evidence of the title of the member or such hares

It contains the following

- Name of the, address
- Name of shareholder
- No of shares held, nos….from…to
- Date if acquisition
- Value of the shares
- Seal of the co, signature

Shareholder/member

Any person who holds the shares of a co is a shareholder of the co.

Any person whose name appears in the Register of Members of the co is

a member of the co.

Shareholders are the true owners of the co. They enjoy certain rights in
the co. They influences the decisions of the co by voting at the general
meetings.

WHO CAN BE MEMBER

Any person eligible to enter into a contract can be a member.

Acquisition of membership

Membership of a co can be acquired in the following ways

1. By subscribing to the MOA of the co

2. By applying to the shares in response to prospectus and being allotted the
share
3. By purchasing the shares of the co in the open market (transfer of shares)
4. By transmission of shares (in the event of death of shareholder)
5. By estoppels
6. By order of court

Termination of membership
1. Transfer of shares
2. Surrender of shares (before forfeiture)
3. Forfeiture
4. Death, lunacy or insolvency
5. Repudiation of contract ( on account of mis-statement in prosp)
6. Redemption
7. Winding up

Debentures

Debentures form another category of securities of a co which the co

issues to raise money from investors.
Debenture is an instrument issued by the co which acknowledges a debt
due from the co to the person who is named therein.
As per the Act, ‘debenture includes debenture stock, bonds and other
securities of a co whether constituting a charge on the assets of the co or
not’.

Kinds of debentures
1. Registered and Bearer – In registered debentures, the name of the holder
appears on the document as well as in the documents of the co. In bearer
debentures, the name does not appear but the holder of the instrument is
the owner of it.
2. Secured and unsecured – Secured debentures are those which are
secured by creating a charge on the assets of the co which can be
realized in the event the co fails to repay the amount.
3. Convertible and non-convertible – Convertible debentures can be
converted into equity shares.
4. Redeemable and irredeemable – redeemable debentures are those where
the co has a right to take back the debentures after paying to the holders.

Debenture-holders –
Investors who invest in the debentures of the co are called debenture-
holders. They stand in the position of creditors of the co. They enjoy the
rights of the creditors.

Deposits –
Deposits is yet another borrowing for a co. Investors who make deposits in
the co are called deposit holders.
The invitation and acceptance of deposits by cos is governed by The
Companies (Acceptance of Deposits) Rules, 1975.
COMPANY MANAGEMENT

Since a co is an artificial person, it cannot take decisions on its own. But it

necessary to take decisions to run the affairs of the co. Co has no mind of its
own to think, no ears to hear, no mouth to speak, ho hands to act, etc. Thus
all the activities of the co must be carried out by some human agency.
The following are the human agencies through whom a co is managed
1. Shareholders
2. Directors
3. Managerial personnel

SHAREHOLDERS
All major decisions for the co are taken by the shareholders of the co.
Shareholders are the owners of the co and hence they decide how the co
should carry on its activities.
Shareholders participation in the management of the co can be seen in
the following
1. Appointment of directors
2. Appointment of auditors
3. Approval and adoption of accounts
4. Declaration of dividend
5. All matters of special business

Shareholders exercise their powers in the following ways

1. By voting at the general meetings
2. By voting on resolutions by circulation
3. By voting on resolutions by postal ballot

DIRECTORS
Directors are the persons who manage, direct, supervise and control the
affairs of the co. All the directors collectively are called as Board of
Directors.
When a co is registered, it is a legal entity. But it has no eyes, ears,
hands, brain of its own. Hence it has to act through some human agency
namely directors. Directors act as the brain, eyes, ears, and hands for the co.
Directors as a body frame the general policy of the co, direct its affairs,
appoint co officers, manage finances, etc.
Directors are neither the servants nor the employees of the co. Directors
act as the
 A. trustees
B. officers
C. agents

No of directors –
Every public co must have at least 3 directors and every private co must
have at least 2 directors.

QUALIFICATION OF DIRECTORS
The following are the qualifications to be a director
1. He must be an indivisual
2. He must hold the qualification shares(only if AOA of the co specify)

The Companies Act(Sec274) lays down certain disqualifications for a

person to be appointed as a director of a co, viz

1. if he has been found to be of unsound mind by court

2. if he an undischarged insolvent (or an application is pending)
3. if he has been convicted of an offence involving moral turptitude and
sentenced for not less than 6 months and 5 years has not elapsed
4. if he has not paid the calls on the shares of the co
5. if order passed by a court disqualifying him
6. if such person is already a director of a public co which
a) has not filed annual accounts and annual returns for 3
continuous years
b) has failed to repay its deposits or interest thereon due date or
pay dividend

Additional grounds – A pvt co can in its AOA provide for additional

grounds of disqualification

Restriction on appointment – No person shall hold office at the same time as

director in more than 15 cos.
This provision does not apply in following cases
- Private co
- Unlimited co
- Sec 25 cos(non profit organizations )
- Alternate directorships
Appointment of directors –
Directors are appointed in the following ways
1. By the Articles (first directors) – the First directors may be named in
the AOA
2. By the shareholders (subsequent directors) – In a public co, only one-
third of the directors can be non-retiring. The remaining two-third
have to retire by rotation and their posts shall be filled by votingby
the shareholders at the AGMs.
3. By the directors (additional directors, alternate directors) – In case
where the post of a director falls vacant or to appoint director hold
office till next AGM or to appoint alternate directior
4. By third parties ( nominee directors)
- By Financial Institutions – Which have lent financial assistance
to the co
- By Central Government – in case of oppression,
mismanagement, investigation, etc.

Kinds of directors

1. Managing director – a director who is entrusted with substantial

powers of management which would not otherwise be exercisable by
him.
2. Whole time director (Executive director) – a director in the whole
time employment of a co and handling the day-to-day affairs of
management of the co.
3. Non-executive director – a director who is not in the whole time
employment of the co.
4. Alternate director – a director appointed in place of a director who is
out of India for a period of more than 3 months
5. Additional director – a director who is appointed in addition to the
existing directors
6. Nominee director – a director appointed by the Central Govt in
events like oppression, mismanagement, etc or a financial institution
which has lent loan to the co.

REMOVAL OF DIRECTORS
1. By shareholders - by passing a resolution at the GM
2. By Central Govt – in case of fraud, mismanagement, negligence
3. By court- in case of oppression, mismanagement
 VACATION OF OFFICE

Office of a director shall become vacant if

1. he fails to obtain qualification shares within 2 months
2. found to be of unsound mind by court
3. adjudged insolvent
4. convicted by a court for not less than 2 months for an offence
involving moral turptitude
5. falls to pay calls on shares
6. absents himself for 3 consecutive meetings of BOD without obtaining
leave of absence
7. fails to disclose internet as required u/s 299
8. becomes disqualified by court u/s 203

MANAGER

Manager means an indivisual who, subject to the superintendence,

control and direction of the Board of Directors, has the management of the
whole or substantially the whole of the affairs of a co. A co may have either
a manager or a managing director at the same time.
Manager is appointed by the Board of Directors of the co. No person
can be appointed as Manager if he is already the Manager or Managing
Director of another co.

MANAGING DIRECTOR

He is a member of the BOD who is entrusted with the management of the

whole or substantially the whole of the affairs of the co.

CHAIRMAN

He is the person who presides over the meetings of the co, i.e chairman of
general meetings, chairman of Board meetings, Chairman of committee
meetings. He plays an important role in the smooth and proper conduct of
the meetings.
COMPANY MEETINGS

Since co is an artificial person, it cannot take decisions for itself. Decisions

to manage the affairs of the co must be taken by some human agencies viz
the shareholders and directors.
For the shareholders and directors to take decision, it is necessary that
they meet at a place to agree on the same matter. Hence the importance of
company meetings.

Company meetings are of the following kinds

1. Shareholders’ meetings ( general meetings )
-Statutory meeting
-Annual general meeting
-Extra-ordinary general meeting
- class meeting
2. Directors’ meetings
-Board meeting
-Board committee meeting
3. Creditors’ meetings
4. Meeting of contributories

STATUTORY MEETING

Every public co limited by shares or guarantee and having a share

capital must hold a general meeting of the shareholders called the statutory
meeting. It is the first meeting of the shareholders of the co.
The object of holding this meeting is give the first hand information to
the shareholders about what is being done to the money they have invested
and also the state of affairs of the co from incorporation till the day of
meeting.
A report called as the ‘statutory report’ must be prepared by the
directors of the co and sent to the shareholders and also a copy of it must be
filed with the ROC. The statutory report shall contain the details of shares
allotted, total cash received, receipts and payments of the co, particulars of
contracts, details of the managerial personnel.

ANNUAL GENERAL MEETING

Every co shall in each year hold a general meeting of the shareholders.

Not more than 15 months should elapse between two AGMs. AGM must be
held on a working day during business hours and at the registered office of
the co.
The matters that are discussed at the AGM are appointment of directors
and auditors, adoption of accounts, declaration of dividend and any other
special items of business.
Annual report must be prepared and sent to the shareholders before the
AGM. It contains the annual accounts, Directors’ report, Chairman’s
message, Auditor’s report, etc

EXTRA-ORDINARY GENERAL MEETING

Any meeting of the shareholders that is held between two AGMs is
called EGM. When a matter requires to be decided by a general meeting but
is very urgent and cannot be waited till the next AGM, EGM is held.

BOARD MEETING
Since BOD are the persons who manage the affairs of the co, it is
necessary that they meet frequently to take policy decisions for the co. A
meeting of the BOD of the co is called board meeting.
BOD of a co must meet at least 4 times in a year.

COMMITTEE MEETING
Board committees are smaller groups of Board members which are
entrusted specific areas of management. Such committees meet to discuss
and decide matters entrusted to them.

REQUISITES OF VALID MEETING

The following are the requisites for a meeting to be valid

1. Proper authority
Every meeting must be called by the proper authority. BOD is the proper
authority to call meetings.

2. Notice of meeting
Proper and adequate notice of the meeting must be given. Notice calling
the meeting must clearly state the time, date and place of the meeting. It
must be given at least 21 days before the meeting in case of GMs. In case
of Board meeting there is no time restriction.

4. Chairman
At the meeting proper person must be there as the chairperson.
5. Quorum
Quorum must be present. For a GM, the quorum is 5 for public co and 2
for private co. For a board meeting, the quorum is 1/3rd of the strength or 2
whichever is less

6. Voting
All decisions taken at the meeting must be put to vote and should be
carried only if the requisite majority votes in favour of the proposal.

7. Resolutions
Decisions taken at the meeting are passed by means of resolution and
recorded in the Minutes Book.
A resolution is a proposal which is passed by the requisite majority.
a. Ordinary resolution – which requires simple majority i.e 50%+
b. Special resolution – which requires special majority i.e 75%+
c. Resolution requiring special notice – which requires special notice of 14
days as per ACT or AOA of the co.
d. Resolution by circulation – Only directors or their committees can
circulate a resolution (to ass directors) and get it passed by majority.

8. Minutes
Proceedings of company meetings are called ‘minutes’. Minutes are the
conclusive proof for a company having taken decisions. Hence an outside
dealing with a company may ask for a copy of the extract of the minutes of
a meeting authorizing the implementation of any decision of the company.
- Pages must be consecutively numbered.
- Each page must be dated and signed by the Chairman of the
meeting( same meeting in case of AGM and succeeding meeting in
case of Board meeting)
- Minutes to be recorded within 30 days of meeting
- To be kept a registered office of the co and for inspection of members.

9.Proxy
A member entitled to attend a meeting has the right to appoint a proxy to
attend meeting on his behalf . Directors cannot appoint proxies.