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Earliest understanding of the word company was probably dated in the early 13th century, the merchant guilds of that period were loosely structured institutions and groups of the merchants. 16th and 17th centuries - process of incorporation was introduced and the government granted trade monopolies through royal charters. Later through specific charters regulation was brought in with regard to the subscribed fund and stock holdings in the company.
Incorporation of each such business unit with a fresh charter each time was a cumbersome procedure, the first legislative activity on company regulation was in 1720. ± Bubble Act ± companies prohibited from functioning unless th incorporated as a legally recognized entity. 1834 ± Trading Companies Act replaced Bubble Act. Limited personal liability of members based upon their share in the company. 1844 ± Joint Stock Companies Act. Registrar of Companies established . Shares become transferable.
Company law in India
Company laws in India closely followed the English law and regulations. 1850 ± first companies Act was enacted. - Registration of companies and transferability of shares. 1857- amendment legislation ± registration with or without limited liability - Later this right was also extended to the banking and insurance companies 1956 ± Companies Act, a consolidated version for the regulation of company affairs. 2000 ± amended to include measures for good governance ± minimum paid-up capital requirement, protecting small depositors, director¶s responsibility statements etc.
Company law history in India«..
- Introduction of shelf-prospectus with regard to the bookbuilding activities of financial companies. 2001 ± amendment with regard to buy-back of shares upto 10% of the paid-up capital of the company by its board of directors. 2002 ± amendments with regard to the constitution of the company law tribunal and company law appellate tribunal, and an appeal from there shall be preferred in the Supreme Court. - Rehabilitation and revival fund. - Failure to file balance-sheet, acting against the interests of the security of the country and a sick industry beyond any viable revival in future, shall be grounds for winding-up.
Companies act. An association of many persons who contribute money to a common stock utilized for trade or business and who share the profit from such trade or business. (Lord Lindley) . Such common stock is called the capital and the contributors to it are members. 1956 defines a company as an entity registered according to the legislation.CHARACTERISTIC FEATURES OF A COMPANY A voluntary association of persons come together for carrying on business and sharing the profits therefrom.
. having separate entity with a perpetual succession and common seal.FEATURES«.Perpetual succession. and . (Prof.Hanes) The derivations from this definition are: . . .Common seal.Transferability of shares.Limited or specified liability of its members. . .Incorporation or registration.Separate property. .It is a separate legal entity. An artificial person created by law.
who has to individually take the entire liability. so it can be sued and sue in its own name. .The company is not an agent of the subscribers nor is it their trustee. . it has its own rights and duties.A company is a separate legal entity. .Being a separate entity.A shareholder¶s liability is not the same as that of a partner. distinct from its members. .Features «« A company differs from partnership in the following ways: .
Also a separate legal entity would entail a better definition of the rights and liabilities of the company as well as its members.Legal entity of the corporation The concept of artificial person has been adopted to position the company as a separate entity. Artificial person is any such instrumentality created by law for a specific purpose. company as a separate legal entity was visualized. . To bring in a difference from partnership and show a much better structured institution.
and 20 in case of banking companies. and a person because it is vested with rights and obligations.34(2) says that on registration it becomes a body corporate by the name contained in the memorandum of association. If an association of ten persons. Sec. . is not registered.Corporate personality A company is to be registered or incorporated under the legislation with a minimum of seven members and two if it¶s a private company.(Section 11) Its called an artificial person. then its an illegal association. because it¶s a creation of law.
Solomon&Co. or is it a trustee for them. . even if the business remains the same after incorporation with the same people managing the show on the same lines.. except to the extent and in the manner provided by the Act´ ± Lord Macnaughten in Solomon Vs.Corporate personality ³a company is at law a different person altogether from the subscribers«. still it is not an agent of the subscribers or the promoters. Ltd.(1877)AC 22. Nor are the subscribers liable in any manner or form.
Bacha F.Guzdar V. . yet the same income was received by the plaintiff as dividend and hence could not be treated in the same manner as company.Corporate personality Lee V. The CIT. Lee Air Farming Ltd. (1960) 3 All ER 429 PC ± held there was a valid contract of service between Lee and the company and Lee. was therefore a worker of the company. Bombay (AIR 1955 SC 74) -though the income in the hands of the company was partly agricultural. So his wife was entitled to compensation under the WC Act.
No member can claim ownership of company¶s property.company can be sued and sue in its own name. (Macaure V. .) . even if he held almost the entire share capital. and receive dividends. Separate property ± shareholders are not part owners of the undertaking (Bacha Guzdar¶s case) ± only have a right to vote. Ltd. John) . during existence or winding up.82 ± Companies Act) . attend meetings.No insurable interest in the company's property.. . Northern Assurance Co. as it has a common seal which is its official signature.shares are transferable (Sec.Corporate personality«. (RF Perumal V.
personal liability. it comes to notice that there was an intent to defraud creditors while carrying on company¶s business. . members¶ liability extends beyond their shares¶ nominal or face value and continues till the debt is completely paid off. the liability of the members is limited to the nominal value of shares held by them. .If the liability is unlimited. with knowledge of such fact .Personal liability also exists when during winding up.Where the company is limited by shares. . in case the company operates without the statutory minimum.Liability of the company Company having seperate existence. . members are not liable for the company¶s debts.
.where the company is acting as an agent of its members.where a company has been started for the purpose of taxevasion or circumvention of tax obligations. . Instances when seperate entity is overlooked: .Lifting the corporate veil Advantages of incorporation allowed only when used for honest and lawful purposes. then the members become liable for its acts. whether there is an express agreement to this effect or if its implied from the facts of a particular case. otherwise the corporate personality is set aside to look at the identity of persons responsible for misuse and fraud on company's name and personality.
(1996) .where the company's existed for a fraudulent purpose.seperate accounts not filed by subsidiaries... .ltd. . .membership falls below the statutory minimum.prospectus includes a fraudulent misrepresentation. .incorporation is against public interest or public policy.Skipper construction co.for investigation of accounts and during winding-up.the company was formed by the members to avoid their contractual obligations..where incorporation was used to further an illegal or improper purpose.. (DDA v. . . .personal liability if the negotiable instrument does not carry company's name.. . .Corporate veil.
limited by guarantee. companies limited by liability± may be limited either by shares or by guarantee or by both. such company is known as share company.Classification of companies Registered company ± brought into existence by registration of documents of formation. .limited by shares. where members guarantee for a specified amount payable at the time of winding up. . where the liability of the members is limited by the amount of unpaid shares held by them. and . such company is known as a guarantee company.
Classification..it can invite public subscription to its shares via the prospectus ± and also arrange capital through private sources.private company -minimum membership is two and minimum paid-up capital is one lakh rupees. . then no prospectus issued. can be either private or public company. to meet the debt needs of the company. . Personal fortune of members can be called by the liquidator at the time of winding up.public company minimum paid-up capital of 5 lakh rupees . Unlimited companies ± not having any limit on the liability of its members.... .free transfer of shares . A limited and an unlimited company. -limited rights to members and no prospectus issued for calling public deposits.
A private company need not maintain an index of members.Classification.. A private company can commence business immediately after incorporation. but the public companies must hold statutory meetings and also file reports with the Registrar of Companies. Difference with regard to appointment and functioning of directors..... A private company has a privilege to issue any kind of shares and allow disproportionate voting rights. Private companies ± no statutory meetings. No restrictions with regard to managerial remuneration. ..
.to mention shareholders' limited liability . . and .explains the rights and powers of the shareholders.Contains details of the shareholdings of the members and the basic details of the company.Declaration as to the authorized share capital divided into fixed accounts. . can know the viability of their transaction from the memorandum.anyone dealing with the company.clarifies the objects of the company .Memorandum of association A charter containing the fundamental conditions for registration of the company It defines and confines the powers of the company It explains the objects of formation of the company. with the word limited added at the end of the name.main objects and other objects.
any member can apply for an injunction against the company Acts of directors in excess of authority can be ratified by a general body meeting. and Anything done outside the express or implied objects is ultra vires. such acts are null and void ab initio. ultra vires clause A company exists only for the objects which are expressly stated in the memorandum or are incidental to the specified objects. Lendors of ultra vires loan are secured as creditors.Memorandum. provided there is such a provision in the memorandum.. Memorandum can be altered only in the prescribed .. Where a company embarks upon an ultra vires act.
to carry on some business which under existing circumstances may be combined with existing business to restrict or abandon any of the objects specified in the memorandum. Change has no effect on the rights and liabilities of the company.special resolution of the General meeting and approved by the central government.23) CHANGE OF OFFICE ± within the same city. a special resolution of the shareholders at a general meeting. . a board of directors resolution submitted to the registrar of companies.to enlarge or change the local area of its operation . copy of the resolution sent to the Registrar of the company within 30 days. OBJECTS CLAUSE ± special resolution confirmed by Government.to attain its main purpose by new or improved means . Change of city. approved by the Government and reported to the Registrar. board of directors are best positioned to decide the business economics( SC in Dalmia cements case) .(S. to carry on its business more economically and efficiently.Alteration of the memorandum NAME .
to increase its authorised share capital by such amount as it thinks expedient by issuing fresh shares.to amalgamate with any other company or body of persons A certified copy of the central government order together with a printed copy of the altered memorandum to be filed with the registrar within three months of the passing thereof.Sec. ....Alteration.to consolidate its share structure. . Increase in the liability can be made by way of subscribing for more shares or by any other method Sec.to sell or dispose of the whole or any part of the undertaking .94 capital clause can be altered by a resolution passed in the general meeting: . and .members' liability can be increased with written approval.38 . ....
Subordinate to and are controlled by the memorandum. rights. powers and authority of the shareholders and the directors in their respective capacities and the conduct of business affairs. signed by the subscribers to the memorandum.rules regarding allotment. and cannot supersede the memorandum and its objects. Registered by a public limited company.Articles of association Regulations that govern the management of its internal affairs and the conduct of its business Define the duties. Articles shall contain: . company's lien on shares. and the classes of the shares . . -the capital.the rights of the shareholders. Not to exceed the powers given by the memorandum or be in conflict with the memorandum . forfeiture and transfer and transmission of shares.the business of the company.
unlawful or against public policy Must be for the benefit of the company as a whole. but contraventions may be ratified by members at a later date.Steel Bros. Keeshaw Leese &Co. Co.A. Ltd 1901 1 Ch. original and also as altered periodically. (Borland Trustees V. even if it adversely affects a single member(Sidebottom Vs.) A registered memorandum and articles bind the member as if each of them has signed individual covenants. and even the trustees of the members are bound by the articles in their dealings with the company. The articles bind the members to each other.279) Directors to act within the confines of powers given in Articles. 1920 Ch. Loss resulting from such contraventions to be made good from their personal fortune and directors can be made .Limitations on alteration Not in conflict with the Companies Act or any other law. Nothing illegal.154 C.
Ramamurthy(AIR 1934) . In other words. he has constructive notice. and can be inspected by any person. . has notice of the company's affairs.Doctrine of constructive notice When registered. Actual notice is not necessary. the Memorandum and the Articles of Association become public documents. every person dealing with the company is presumed to have read these two documents and hence. Any person contemplating to do business with the company is presumed and has means to ascertain information about the company.Kotla Venkataswamy V.
Bank of Liverpool(1924 1 KB 775) . For acts ordinarily outside his powers.Doctrine of indoor management This doctrine allows the people dealing with the company to presume that the officers of the company are acting under their authorized powers.Tourquand 1856 6 E&B 327) The doctrine does not apply where the outsider has knowledge of the irregularity and still acts upon it. or has not consulted the documents at all.Underwood V.(Royal British Bank V. forgery.L. It is the other side of the constructive notice doctrine. Outsiders dealing with the company need not inquire into the regularity of the internal proceedings. No application to matters void ab initio ± fraud.(A. the person dealing with him must do a proper check and then act. He cannot claim benefit of the doctrine otherwise.
the right to transfer the shares according to the procedure laid down in the articles. the right to receive dividend.the liability of the member in the company to pay calls on shares until fully paid up. numbered properly and distinctly. but it is not a negotiable instrument. the stock doesn't. . A share in the hands of the shareholder actually signifies a bundle of rights and liabilities.2(46) ± a share in the capital of the company . A share has a nominal value with a distinctive number.Shares Sec. . vote at meetings.an interest of a member in the company. . and have a share in the surplus assets of the company. in the event of winding up of the company.
public or private. . can issue only stock. A share is also different from the stock.. and a certificate being the documentary evidence of the specified number of shares issued under the common seal..Shares. A share is different from a share certificate... a share being a percentage of a holding in the capital of the company. Share cannot be transferred in fractions. share being the individual unit and stock being the aggregate volume of such individual units. a stock can be transferred in any kind of fractions Shares can be issued by any company. stocks can be in different denominations. which is limited by shares. while the public limited company. Shares are of equal denomination...
each having different voting rights and rights as to dividend PREFERENCE SHARES .A share which carries a preferential right in respect of dividends at a fixed rate or a fixed amount. .preference shares . and . Preference shareholders get priority over the equity shareholders.a preferential right in regard to repayment of capital at the time of winding up.equity shares . It can be a participating share in the .Classes of shares Different types of shares carry different rights and liabilities.cumulative convertible preference shares Company law 2000 amendment limited the shares to two classes only. equity share capital and preference share capital.
complying to the Articles. A share issued as redeemable preference share. the accumulated arrears get paid out whenever profits are available. Preference shareholders vote only on matters relating to preference shares. . If it doesn't have this right then its non-cumulative preference share.Preference shares If the share carries a right to payment of arrears in dividend from future profits. can be redeemed on the resolution of the board of directors. If not then it is a irredeemable preference share. its a cumulative preference share.
Members holding equity shares with differential rights to dividend. diversification of existing projects.for modernization. It is decided at the AGM upon the recommenation of the BofD after accounting for the depreciation and transfer of a minimum amount to the reserves.added by the 1985 Min. working capital requirements.quantum of CCPs not to exceed equity shares. CCPs.face value of Rs. shall be entitled to bonus and rights issue of the same class. Equity shareholders' voting rights are decided upon the proportion of the paid-up capital held by them. Notification ± to be issued for setting up new projects. capital exp.Equity shares No fixed rate of dividend.100 each. .listed on the stock exchs. Of Fin. . voting or otherwise. . .
. and issued in accordance with SEBI regulations. Non-voting shares ± they carry no voting rights.. . Issue at par ± issued at face value Issue at premium ± issued at rate above face value Issue at discount ± issued at a discount of not more than 10% and only after one year of commencement of business.. directors at a discount or for a consideration other than cash for providing know-how or making available IPRs or value additions etc. Sweat-equity shares ± equity shares issued to employees. normally held by the promoters and directors. Included by the 1999 Company Law Amendment.Other classes. Deferred or founders' shares ± issued only by a private company.. They are issued after a special resolution passed by the company in a general meeting.
subject to SEBI guidelines. Rights shares . ALTERATION OF SHARE CAPITAL(S. when the company wants to increase its subscribed capital.Capitalize profits by issuing fully paid-up shares to the members. thereby transferring the capital from the profit and loss account to the share capital.to sub-divide shares into smaller amount.Bonus Shares & Rights Shares Bonus shares . but the proportion of paid and unpaid remains the same . can be issued two years after incorporation or one year after initial allotment of shares.to increase its authorized share capital -to consolidate its share capital base .Existing members have a right to be offered shares.94) .to convert fully paid-up shares into stock and vice versa .
. Where there is reduction of capital the company has to apply to the Company Law Appellate Tribunal Buy-back of shares by the company . Statutory minimum capitalization of profits and depreciation to be accounted for before dividend rate is decided upon.To pay off paid up capital on the understanding that it may be called again Write off or cancel capital which has been lost or is not represented by available assets.Reduction of share capital Reducing the liability of the members with regard to the uncalled capital By returning excess capital .to cancel shares allotted but not picked up by the members ± dimunition of share capital DIVIDENDS ± paid from current year profits only ± in cash terms only.
Such a report is also sent to the registrar. Extraordinary GM ± all meetings other than AGMs are called EGMs. Annual General Meeting ± to be held by every company.Every member entitled to attend and vote shall have a right to appoint a PROXY . .Meetings and resolutions Statutory meetings ± held only by a public company having share capital. for transacting special business that may arise in between two AGMs.Notice should be given to every member and clear and explicit agenda to be circulated to the members . with a 21 day notice sent to every member along with a statutory report. AGM shall not be held on a holiday except under exceptional circumstances.
Ordinary resolution ± approved by a simple majority of the members voting at a general meeting. declaration of dividend. resolutions and amendments Motion indicates a proposition made by any member at a meeting and such a motion shall be put to discussion and approval before the meeting.Motions. matters approved through ordinary resolution relate to alteration of authorized share capital. A motion when passed with or without any amendments or changes is a resolution A person proposing a motion shall make it in writing and endorse such motion. election of directors . He is called the mover of the motion.
. change in company name and reduction of share capital. change of registered office outside the State. Special resolution ± it needs a 21 day notice and a 3 times majority.. alteration of Articles. His ruling on such matters is final. Minutes of the record shall be maintained in a clear manner by the secretary of the company.. Resolution requiring special notice ± in matters of removal of directors before their term expires. matters relating to alteration of objects clause. who shall index the minutes. A point of order deals with the conduct or procedure of the meeting.Resolutions. The chairman has to give his ruling ordecision on a point of order at once..
audit and dividends s. S. or an officer of the central government.209.statutory regulation of book-keeping. and a statement from the director that the rules have been complied with and the statement is fair and true and accompanied by sufficient care and caution. debentureholders. auditor's and board's reports must be sent to every shareholder. open for inspection by members.Accounts.219 ± 21 days before the meeting the BS and the P&L account. official receiver or assignee of an insolvent member and the auditor of the company. Default with compliance of the above rule will lead to imprisonment of six months and a fine. representatives of such shareholders. Every company shall include a statement of the director's responsibility in the preparation of accounts. as well as by the Registrar of Companies. .
. Where the AGM does not approve the accounts and adjourns. AUDIT .Accounts. the same should be informed to the Registrar..Free and complete access to the books of account.220 ± such BS andP&L account shall be filed with the registrar in triplicate. Entitled to receive notice of the AGM and be heard on any part of the business which concerns him as auditor. vouchers etc. s. Ensure that the company's accounts are a true reflection of its financial status and the BS and P&L account are in line with the books of account... Right to require information and explanation from any officers of the company.
While doing such audit . and he has to submit the report to the central government. .Special audit Central government orders special audit. when.company is being managed in a manner likely to cause serious loss to the financial status to the company .likely to affect the financial solvency of the company Special auditor has all the powers of an auditor.when the affairs of the company are not being managed according to good business practices .
minimum of three directors.can be reappointed for a fresh term with member voting to order a fresh vote. They are appointed by the subscribers to the memorandum.Management of a company Directors are agents of the company. one-third retiring every year by rotation . while two are sufficient for a private company. Directors retire at every AGM. . or the general meeting of the company of the cental government. only then the company's liability arises. cannot contract in their own name. A public company . They are trustees only to the extent of holding the company's money in their hands. unless himself withdrawn or otherwise disqualified. They shall conform to the defined functions. No body corporate can be a director.
filling up casual vacancies (s. disregarding the private companies.262) .non-profit organisations etc. Fails to obtain the prescribed share qualification within the stipulated time.Directors Directors can also be appointed by the B of D. financial institutions.alternate directors Appointment by the central government ± on the suggestion of the tribunal. . if its necessary to protect the interests of the company or the shareholders or in public interest. he stands disqualified. Can be a director in not more than 20 companies at the same time. can appoint directors. Even third parties like lenders.additional directors. . .
. A whole-time director cannot be in such role in more than one company. MANAGING DIRECTOR ± Maximum term of five years. or is convicted by court for the offence of moral turpitude. Disqualified if he is an undischarged insolvent or has at any time been adjudged insolvent. Liability to the company ± breach of fiduciary duty. negligence. No other remuneration from the company other than directorial remuneration. . breach of trust and misfeasance. Central government can remove a director if such person is not acting in the interests of the company or under good business principles. The term of the whole-time director is not tenured.. any time suspended payments to his creditors. Conviction in offences bars a person from acting as a director. ultra-vires acts. except if he is the managing director. No compensation for loss of office..Directors.
Tribunal need not act if such winding up is agianst public interest.just and equitable Where the substratum of the company has gone ± the company has failed its objects Complete deadlock in the management .inability to pay debts .Winding up Compulsory winding up Voluntary winding up winding up by a tribunal When there is a special resolution that it be wound up by tribunal.reduction in membership . .failure to commence business .
. Where the tribunal is of the opinion that the company be wound up (added by the 2002 Amendment Act). Where the requirments of an investigation demand winding up. Where a private company is in substance a partnership. Where the majority has adopted an oppressive attitude towards the minority. Company has acted against the sovereignity and interests of the country. Company was formed for fraudulent or illegal purposes.. .Winding up. Default in filing BS with the registrar for five consecutive years... The business of company could not carried further without loss.
the official liquidator Statement of affairs to be filed on the winding up of the company Petition to be made to the tribunal which will decide and order a possible winding up. and can make any interim orders also before it makes a winding up order. Tribunal sends the intimation to the official liquidator and the Registrar with a certified copy.a combination of creditors and contributors .contributors .the creditor's petition .the Company .. ..registrar .. Who may petition ..Winding up..any person authorized by the central government .
.Create a committee of inspection .Any sale without tribunal's permission after the order is void Any floating charge created. with government's permission is void.. Liquidator can order inspection of books . The powers of the directors are exercised by the official liquidator Limitation period ceases to run in favour of the company Any dispositon of property done after the winding up order stands void .. Registrar makes a note in his record and in the official gazette Order of winding up is deemed to be a notice of discharge to the officers and employees of the company.Adjustment of contributories' payments .Winding up... The interests of the creditors and all the contributors.
all powers of the BofD are transferred to him. . On the appointment of a liquidator. Power to order public examination of the promoters.. after the winding up resolution stand void.if the general meeting of the company so approves by an ordinary resolution Company must cease to carry on business except for the beneficial winding up process All transfer of shares and alterations in the status of members..Winding up.... directors and such other officials of the company Power to summon persons suspected of having the property of the company Power to arrest a contributory intending to abscond Power to order dissolution of the company Voluntary winding up .