Amity Business School: MBA, Semester 2 Legal Aspects of Business Ms. Shinu Vig

MBA, Semester 2
Legal Aspects of Business

Ms. Shinu Vig
Amity Business School
The Companies Act, 1956

The Act defines the word Company as a company
formed and registered under the Act.
Characteristics of a Company:

1. Independent corporate existence.
(Salomon v. Salomon and Co. Ltd.)
2. Perpetual succession.
3. Common Seal
4. Limited liability.
5. Transferability of shares.
6. Separate property
7. Power to sue and to be sued.


Classification of Companies:

The two basic types of companies which may be
registered under the Act are:
Private Companies
Public Companies

Private Companies [Sec 3(1)(iii)]:
Private company is a company which has a minimum
paid-up capital of one lakh rupees and by its articles:
i. Restricts the rights of its members to transfer shares.
ii. Limits the number of its members to fifty
iii. Prohibits any invitation to the public to subscribe to its
shares and debentures
iv. Prohibits any invitation or acceptance of deposits from
persons other than its members, directors or their
relatives.

A private company can be formed by merely two
members.
Public Companies [Sec 3(1)(iv)]:
A Public company is a company which:
i. Is not a private company
ii. Has a minimum paid up capital of Rs.5 lakh
iii. Is a private company which is a subsidiary of a
public company
A public company shall have atleast 7 members
but there is no restriction with regard to the
maximum number of persons.

Listed Public Company: It means a public
company which has any of its securities listed on
a recognised stock exchange.
MCA 21 Project:
MCA21 project is designed to fully automate all processes
related to the proactive enforcement and compliance of
the legal requirements under the Companies Act, 1956.
MCA portal is the single point of contact for all MCA
related services, which can be easily accessed over the
Internet by all users.

The re-engineered electronic forms, also called e-Forms,
are capable of helping people in the process of filing the
information electronically. These e-forms are required to
be signed digitally through Digital Signature Certificates
(DSC).

Formation of a Company:
The process of formation of a company may be divided
into three parts:
1. Promotion
2. Incorporation/ Registration
3. Floatation

Promotion: It is the process of conceiving an idea and
developing it into a project to be accomplished by the
incorporation and floatation of a company. The persons
who take the necessary steps to accomplish these
objectives are called promoters.
Steps involved in incorporation
i. Acquire DIN and DSC
ii. Ascertaining availability of name by filing e-form 1A
iii. Preparation of Memorandum of Association (MOA) and
Articles of Association (AOA).
iv. Other documents to be filed with the ROC:
e-form 18 Notice of the situation of the registered
office of the company.
e-form 32 Particulars of the directors, manager or
secretary.
e-form 1 - Statutory declaration
v. Payment of Registration fees
vi. Certificate of Incorporation

Floatation:
After a company has received its certificate of
incorporation, it is ready for floatation i.e. it can go ahead
with raising capital sufficient to commence business.
In case of private companies capital is obtained from
friends and relatives by private arrangement.
In case of public companies capital can be raised in
either of the following two ways-
i.By issuing Prospectus- If public is to be invited to
subscribe to its capital.
ii.By issuing Statement in lieu of prospectus- If capital is
to be arranged privately.

Certificate of Commencement of Business:
A private company can commence business immediately
after the certificate of incorporation has been obtained.

In case of Public companies it is necessary to obtain a
certificate of commencement of business. This
certificate can be obtained only after floatation of the
company.

Memorandum of Association (MOA):
It is the charter of the company. It tells the objects of the company and
the utmost possible scope of its operations beyond which its actions
cannot go. If anything is done beyond this scope, that will be ultra
vires (beyond powers of) the company and so void.

It enables the shareholders, creditors and all those who deal with the
company to know what its powers are and what are its range of
activities.

MOA must be subscribed by atleast 7 persons in case of a public
company and by atleast 2 persons in case of a private company, who
shall sign the memorandum in the presence of atleast one witness.

Contents of Memorandum of Association (MOA):

MOA is divided into following clauses:
i. Name Clause
ii. Registered Office Clause
iii. Objects Clause
iv. Liability Clause
v. Capital Clause
vi. Association or Subscription Clause

Articles of Association (AOA):

They contain the regulations relating to the internal
management of the company. They define the duties,
rights, powers and authority of the shareholders and the
directors in their respective capacities and of the
company.

They are subordinate to and are controlled by
memorandum. Articles cannot supersede the objects as
set out in the memorandum of association.

Contents of Articles of Association (AOA):
i. Share capital and its alteration
ii. Rights of shareholders
iii. Allotment of shares, calls and forfeiture of shares
iv. Transfer and transmission of shares
v. Exercise of borrowing powers; issue of debentures
vi. General meetings, notice, quorum, proxy, poll
vii. Number, appointment, duties of directors
viii. Dividends-interim and final
ix. Accounts and audit; keeping of books
x. Winding up

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

The persons issuing the prospectus are bound to make
true disclosures and not to omit material facts. A false
statement or omission of facts gives rise to civil as well as
criminal liability.

Contents of a Prospectus:

1. General information
2. Capital structure of the company.
3. Terms of the present issue
4. Particulars of the issue
5. Company management & project
6. Certain prescribed particulars
7. Outstanding litigations
8. Management perception of risk factors

Initial Public Offer (IPO):
When an company makes a fresh issue of securities for the
first time to the public it is called IPO. This paves the way
for listing and trading of securities on Stock Exchanges.

Further Public Offer (FPO):
When an already listed company makes a fresh issue of
securities to the public it is called Further Public Offer.

Rights Issue:
When an issue of securities is made by a company to its
shareholders existing as on a particular date fixed by the
company (i.e. record date), it is called a rights issue. The
rights are offered in a particular ratio to the number of
securities held as on the record date.

Bonus issue:
When a company makes an issue of securities to its
existing shareholders as on a record date, without any
consideration from them, it is called a bonus issue. The
shares are issued out of the Companys free reserve or
share premium account in a particular ratio to the number
of securities held on a record date.

Shares:
A share means a share in the share capital
of the company.

The share capital of a company is divided
into a number of indivisible units of specified
amount. Each of such unit is called a
share.

Share Capital:

The term share capital is used in following different senses:
i. Nominal/ Authorised/ Registered Capital
ii. Issued Capital
iii. Subscribed Capital
iv. Called-up Capital
v. Paid-up capital

Types of Shares:
Preference share
A preference share is one which carries:
i. A preferential right in respect of dividends at a fixed rate,
and
ii. A preferential right in regard of repayment of capital on
winding up.

Equity share
Equity share means a share which is not a preference
share. The rate of dividend is not fixed.

Shareholders:
Shareholder/ member is a person who holds the shares of
the company and whose name appears on the register of
members of the company.

Rights of shareholders:
i. Right to receive notices of general meetings and to attend
and vote at those meetings.
ii. Right to receive dividends when declared
iii. Right to transfer shares, subject to restrictions, if any.
iv. Right to inspect registers and records of the company.
v. Right to share in assets of company on its dissolution.

Debentures:

A debenture means a document acknowledging a loan
made to the company and providing for the payment of
interest on the sum borrowed until the debenture is
redeemed.
It provides for the repayment of principal and interest at
specified date/ or dates.
It generally creates a charge on the assets of the
company.

Directors:
A Director is a member of a Board appointed to direct the
affairs of a company. Only an individual can be appointed
as a director. Every public limited company shall have
atleast 3 directors and other companies shall have
atleast 2 directors.

Appointment of Directors: Directors may be appointed-
i. By provision in the Articles
ii. By shareholders in general meeting
iii. By the Board of Directors
iv. By Central Government
v. By third parties

General Powers vested in the Board of Directors:
The Board of Directors is entitled to exercise all such
powers and to do all such acts and things as the company
is authorised to exercise and to do.

In the exercise of its powers the Board is subjected to the
provisions of the Companies Act, the memorandum and the
articles and any regulations, not inconsistent with them,
made by the company in general meeting.

Minimum No. of Directors:
Private Companies- 2 directors
Public Companies- 3 directors

Kinds of Company Meetings:
I. Shareholders meetings:
i. Statutory meeting
ii. Annual General Meeting
iii. Extraordinary General Meeting
II. Board meetings
III. Meetings of the Board Committees
IV. Meetings of debenture holders
V. Meetings of creditors for winding up.

Statutory Meeting (Sec 165):

It is required to be held only by a public company.
It must be held within a period of not less than 1 month
and not more than 6 months from the date at which the
company is entitled to commence business.
Atleast 21 days before the day of meeting, a notice of the
meeting is to be sent to every member stating it to be a
Statutory meeting.

Annual General Meeting (AGM) (Sec 166):
It must be held by all companies in each calendar
year and not more than 15 months shall elapse
between two meetings. 21 days notice is required.
The business to be transacted at such meeting may
comprise of :
a. Ordinary Business- It relates to following matters:
i. Consideration of final accounts
ii. Declaration of dividend
iii. Appointment of directors in place of those retiring
iv. Appointment of auditors
b. Special Business

Extra-ordinary General Meeting (EGM) (Sec 169):

All general meetings other than AGMs are called
EGMs.
EGM is convened for transacting some special or
urgent business that may arise in between two
AGMs.
All business transacted at such meetings are called
special business.
EGM can be called any time by giving a 21 days
notice.

Matters relating to General Meetings:
Notice: A notice of atleast 21 days must be given in writing to every
member.

Proxy: Every member of company entitled to attend and vote at a
meeting has the right to appoint another person, whether a member or
not, to attend and vote for him. Such a person is called proxy. The
instrument appointing a proxy shall be lodged with company atleast 48
hrs before meeting.

Quorum:
Public companies- 5 members personally present.
Private companies- 2 members personally present.

Board Meetings:
Must be held at least once in every 3 months.
At least 4 such meetings must be held in every
calendar year.

Quorum: One-third of the total strength of the
directors or two directors, whichever is higher.

Chairman: The Chairman for the meetings of the
Board of Directors may either be named in the
Articles or he may be elected by the directors.

Winding Up of Companies:

Winding up of companies is the process whereby its life is
ended and its property administered for the benefit of its
creditors and members. An administrator, called a
liquidator is appointed and he takes control of the
company, collects its assets, pays its debts and finally
distributes any surplus among the members in proportion to
the contribution made by them to the company.

Modes of Winding Up:

A. Compulsory Winding up by the Court
B. Voluntary Winding up
- Members Voluntary Winding up
- Creditors Voluntary Winding up
C. Voluntary Winding up under the supervision of the
Court

Amity Business School: MBA, Semester 2 Legal Aspects of Business Ms. Shinu Vig

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