BBA IV Sem

Subject- Business Law

Subject Code- BBA 210

Unit IV

Lec-35- The Companies Act 1956

Joint Stock Company

In a partnership firm the number of partners cannot exceed 20. So there is a limit to the
contribution of capital. Secondly, even if the partners could contribute a large amount of
capital, they would hesitate to do so considering the risk involved in business and their
unlimited liability. Therefore, a company form of business organisation came into
existence. A company form of business orgnisation is known as a Joint Stock Company.
It is a voluntary association of persons who generally contribute capital to carry on a
particular type of business, which is established by law and can be dissolved only by law.
Persons who contribute capital become members of the company. This form of business
has a legal existence separate from its members, which means even if its members die,
the company remains in existence. This form of business organisation generally requires
huge capital investment, which is contributed by its members.
The companies in India are governed by the Indian Companies Act, 1956. The Act
defines a company as an artificial person created by law, having a separate legal entity,
with perpetual succession and a common seal.
Essential Characteristics of Joint Stock Company
1) Legal formation
No single individual or a group of individuals can start a business and call it a joint stock
company. A joint stock company comes into existence only when it has been registered
after completion of all formalities required by the Indian Companies Act, 1956.
2) Artificial person
Just like an individual, who takes birth, grows, enters into relationships and dies, a joint
stock company takes birth, grows, enters into relationships and dies. However, it is called
an artificial person because its birth, existence and death are regulated by law and it does
not possess physical attributes like that of a normal person.
3) Separate legal entity
Being an artificial person, a joint stock company has its own separate existence
independent of its members. It means that a joint stock company can own property, enter
into contracts and conduct any lawful business in its own name. It can sue and can be
sued by others in the court of law. The shareholders are not the owners of the property

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 owned by the company. Also, the shareholders cannot be held responsible for the acts of
the company.
4) Common seal
A joint stock company has a seal, which is used while dealing with others or entering into
contracts with outsiders. It is called a common seal as it can be used by any officer at any
level of the organisation working on behalf of the company. Any document, on which the
company's seal is put and is duly signed by any official of the company, becomes legal
document. For example, a purchase manager may enter into a contract for buying raw
materials from a supplier. Once the contract paper is sealed and signed by the purchase
manager, it becomes valid. The purchase manager may leave the company thereafter or
may be removed from the job or may have taken a wrong decision, yet for all purposes
the contract is valid till a new contract is made or the existing contract expires.
5) Perpetual existence
A joint stock company continues to exist as long as it fulfils the requirements of law. It is
not affected by the death, lunacy, insolvency or retirement of any of its members. For
example, in case of a private limited company having four members, if all of them die in
an accident the company will not be closed. It will continue to exist. The shares of the
company will be transferred to the legal heirs of the deceased members.
6 Limited liability
In a joint stock company, the liability of a member is limited to the extent of the value of
shares held by him. While repaying debts, for example, if a person owns 1000 shares of
Rs. 10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is, even
if there is liquidation of the company, the personal property of the shareholder cannot be
attached and he will lose only his shares worth Rs. 10,000.

Types of Companies
1) Private Limited Company
These companies can be formed by at least two individuals having minimum paid up
capital of not less than Rs. one lakh. As per the Companies Act, 1956 the total
membership of these companies exceed from 50 to 200. The shares allotted to its
members are also not freely transferable between them. These companies are not allowed
to raise money from the public through open invitation. They are required to use “Private
Limited” after their names.
2) Public Limited Company
A minimum of seven members are required to form a public limited company. It must
have minimum paid–up capital of Rs 5 lakhs. There is no restriction on maximum
number of members. The shares allotted to the members are freely transferable. These
companies can raise funds from general public through open invitations by selling its

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 shares or accepting fixed deposits. These companies are required to write either ‘public
limited’ or ‘limited’ after their names.
3) Government Company
In these companies the Government (either state or central government or both) holds a
majority share capital i.e., not less than 51%. However, companies having less than 51%
share holding by the government can also be called Government companies provided
control and management lies with the government. Examples of government companies
are :Mahanagar Telephone Nigam Limited, Bharat Heavy Electricals Limited.
4) Indian Company
A company having business operations in India and registered under the Indian
Companies Act, 1956 is called Indian Company. An Indian company may be formed as a
public limited, private limited or government company.
5) Foreign Company
A foreign company is a company formed and registered outside India having business
operations in India.
6) Multinational Companies
Foreign companies are coming to India to produce goods and services and/or to sell their
products. Similarly Indian companies are also extending their business operations across
the boundaries of our country. Simply speaking, a multi-national company is one which
is registered as a company in one country but carries on business in a number of other
countries by setting up factories, branches or subsidiary units. Such a company may
produce goods or arrange services in one or more countries and sell these in the same or
other countries. For example, in India, Hyundai, Coca Cola, Nestle, Sony, McDonald’s
etc. are multinational companies.

Difference between a public company and a private company

1. Minimum number of members

The minimum number of persons required to form a public company is seven, whereas in a
private company this number is only two.

2. Maximum number of members

There is no limit on the maximum number of member in a public company, but a private
company cannot have more than fifty members excluding past and present employees.

3. Commencement of Business

A private company can commence its business as soon as it is incorporated. But a public
company shall not commence its business immediately unless it has been granted the certificate
of commencement of business.

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4. Invitation to public

A public company by issuing a prospectus may invite public to subscribe to its shares whereas a
private company cannot extend such invitation to the public.

5. Transferability of shares

There is no restriction on the transfer of share in case of public company whereas a private
company by its articles must restrict the right of members to transfer the share.

6. Number of Directors

A public company must have at least three directors whereas a private company may have two
directors.

7. Statutory Meeting

A public company must hold a statutory meeting and file with the registrar a statutory report. But
in a private company there are no such obligations.

8. Restrictions on the appointment of Directors

A director of a public company shall file with the register a consent to act as such. He shall sign
the memorandum and enter into a contact for qualification shares. Two-thirds of the directors of
a public company must retire by rotation. These restrictions do not apply to a private company.

9. Managerial Remuneration

Total managerial remuneration in case of public company cannot exceed 11% of net profits, but
in the case of inadequacy of profit a minimum of Rs. 50, 000 can be paid. These restrictions do
not apply to a private company.

10. Name

A private company has to use words ‘private limited’ at the end of its name. But a public
company has to use only the word ‘Limited’ at the end of its name.

BBA IV Sem

Subject- Business Law

Subject Code- BBA 210

4
 Unit IV

Lec-36: Joint Stock company

Formation of Joint Stock Company
Formation of a joint stock company involves a lengthy legal procedure. Its registration
with the Registrar of Companies is obligatory, before it can commence its business. The
following stages are involved in the formation of a Joint Stock Company.
Stage –I Promotion
Stage- II Incorporation
Stage- III Raising of Capital
Stage- IV Commencement of Business
Stage-I Promotion
The stage of conceiving an idea and its working up is termed as promotion. This involves
ascertaining as to whether all the basic requirements such as land, building, raw material,
machine, equipments etc. are available or not.

Position of promoters in a company

The formation of a company is a lengthy process. It involves several stages. The first stage in the
process of formation is the promotion. At this stage the idea of carrying on a business is
conceived by a person or by a group of persons called promoters. For incorporating a company
various formalities are required to be carried out. The promoters perform these functions and
bring the company into existence. The promoters acquire and invest the initial capital for the
company. Once all the formalities are completed, the promoters hand over the authority to the
directors. A promoter can be a person or a registered company as well.

Legal Position of Promoters

The promoters of a company decide the scope of its business activities. They negotiate, if
necessary, for the purchase of an existing business. They instruct the solicitors to prepare the
necessary documents and secure the services of directors. They provide the registration fees and
carry out other duties involved in the formation of a company. They also make arrangements for
advertising and circulating the prospectus, and placing the capital.

A promoter is not an agent of the company which he promotes because a company cannot have
an agent before it comes into existence. But certain fiduciary duties, like an agent, have been
imposed on him under the Companies Act. As such he is said to be in a fiduciary position (a
position full of trust and confidence) towards the company and the original allottee of shares.
Consequently, a promoter must make full disclosure of the relevant facts, including any profit
made to the shareholders of the company.

He must not make any secret profits out of the transactions he makes on behalf of the company.
It is to be observed that it is not the profit made by the promoter which the law forbids, but the

5
non-disclosure of it. If full disclosure is made to an independent Board of Directors or to the
shareholders, the profit is permissible.

Promoters have in their hands the creation and molding of the company. They have the power of
defining how, and when, and in what shape and under what supervision, it shall start into
existence and begin to act as a trading corporation.

Stage-II Incorporation
A sole proprietorship or partnership firm can be formed to carry out its business even
without any registration. But a company cannot be formed or permitted to run its business
without registration. In fact, a company comes into existence only when it is registered
with the Registrar of Companies. For this purpose the promoter has to take the following
steps:
(a) Approval of name
It has to be ensured that the name selected for the company does not match with the name
of any other company. For this, the promoter has to fill in a “Name Availability Form”
and submit it to the Registrar of Companies along with necessary fees. The name must
include the word ‘Limited’ or ‘Private limited’ at the end. Once it is approved, the
promoter can proceed with other formalities for the incorporation of the Company.
(b) Filing of documents
After getting the name approved the promoter makes an application to the Registrar of
Companies of the State in which the Registered Office of the company is to be situated
for registration of the company. The application for registration must be accompanied by
the following documents.
i) Memorandum of association (MOA)
The Memorandum of Association is the principal document in the formation of a
company. It is called the Charter of the company. It contains the fundamental conditions
upon which the company is allowed to be incorporated or registered. It defines the
limitations and the powers of the company.
The Memorandum of Association usually contains the following six clauses:
Name Clause: It contains the name by which the company will be established. The
approval of the proposed name is taken in advance from the Registrar of the companies.
Situation Clause: It contains the name of the state in which the registered office of the
company will be situated. The exact address of the company’s registered office may be
communicated within 30 days of its incorporation to the Registrar of Companies.
Objects Clause: It contains detailed description of the objects and rights of the company,
for which it is being established. A company can undertake only those activities which
are mentioned in the objects clause of its memorandum.

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Liability Clause: It contains financial limit upto which the shareholders are liable to pay
off to the outsiders on the event of the company being dissolved or closed down.
Capital Clause: It contains the proposed authorised capital of the company. It gives the
classification of the authorised capital into various types of shares, (like equity and
preference shares) with their numbers and nominal value. A company is not allowed to
raise more capital than the amount mentioned as its authorised capital. However, the
company is permitted to alter this clause as per the guidelines prescribed by the
companies Act.
Subscription Clause: It contains the name and address of at least seven members in case
of public limited company and two members in case of a private limited company, who
agree to associate or join hands to get the undertaking registered as a company.
ii) Articles of association (AOA)
The Articles of Association of a company contains the various rules and regulations for
the day to day management of the company. It covers various rights and powers of its
members, duties of the management and the manner in which they can be changed. It
defines the relationship between the company and its members and also among the
members themselves. The rules given in the AOA must be in conformity with the
Memorandum of Association.
Articles of Association of a company generally contain rules and regulations with regard
to the following matters:
Preliminary contracts
Use and custody of common seal
Allotment, calls on shares
Transfer and transmission of shares
Forfeiture and re-issue of shares
Alteration of share capital
Issue of share certificates and share warrants
Conversion of shares into stock
Procedure of holding and conducting company meetings
Voting rights
Qualification, appointment, remuneration and power of Directors
Borrowing powers and methods of raising loans
Payment of dividends and creation of reserves
A company can register its own Articles of Association or adopt Table A, which contains
a model set of rules as given in the Schedule I of the Companies Act.
iii) Payment of filing and registration fees
Along with the above documents, necessary filing fees and registration fees at the
prescribed rates are also to be paid. The Registrar will scrutinise all the documents and if
he finds them in order, he will issue a Certificate of Incorporation. The moment the

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 certificate is issued, the company comes into existence. So this certificate may be called
as the Birth Certificate of a Joint Stock Company.
Stage-III Raising of capital or subscription of capital
After the company is incorporated, the next stage is to raise the necessary capital. In case
of a private limited company, funds are raised from the members or through arrangement
from banks and other sources. In case of a public limited company the share capital has to
be raised from the public. This involves the following:
(a) Preparation of a draft prospectus and get it inspected by SEBI to ensure that all
information given in the prospectus fully complies with the guidelines laid down by SEBI
in this regard.
(b) Filing a copy of the prospectus with the Registrar of Companies.
(c) Issue of prospectus to the public and inviting the public to apply for shares as
prescribed in the prospectus.

(d) If the minimum subscription has been received, shares should be allotted to the applicants
as per SEBI guidelines and file a return of allotment with the Registrar of Companies.

(e) Listing of shares in a recognised stock exchange so that the shares can be traded there.
Preferably, consent of a stock exchange for listing should be obtained before issue of the
prospectus to the public.
Before commencing the business, every public limited company must show that adequate
funds have been raised from the public. So when the company gives the offer to the
public to subscribe its shares, it must ensure that a minimum number of shares must be
subscribed by the investors. This is called minimum subscription, which is 90% of the
total number of shares offered to the public. If the application money received is less than
the minimum subscription, then the company must return all the application money to the
investors. To avoid this risk, the share issuing company may appoint underwriters, who
undertake to buy the shares if these are not subscribed by the public.
Stage IV-Comencement of business
In case of a private limited company, it can immediately start its business as soon as it is
registered. However, in case of public limited company a certificate, known as
‘Certificate of Commencement of Business’, must be obtained from the Registrar of
Companies before starting its operation. For this purpose it has to file a statement with
the following declarations to the Registrar of Companies.
(a) That a prospectus has been filed with the Registrar of Companies.
(b) That the shares have been allotted upto the amount of the minimum subscription.
(c) That the Directors have taken up or purchased the minimum number of shares
required to qualify themselves to be Director.
(d) That no money is liable to become refundable to the applicants by reason of failure to
obtain permission for shares to be traded in a recognised stock exchange.

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 (e) A statutory declaration by a Director or the Secretary of the company stating that the
requirements relating to the commencement of business have been duly complied with.

The Registrar of Companies will scrutinise all these documents and if he is satisfied that
the process of securing the minimum prescribed capital has been done honestly and
efficiently and the minimum prescribed capital has been obtained from the public, then he
shall issue a Certificate of Commencement of Business.

BBA IV Sem

Subject- Business Law

Subject Code- BBA 210

Unit IV

Lec-37: Memorandum of Association and articles of association-Difference

1. IMPORTANCE
Memorandum of Association: Memorandum is the fundamental charter of a company.
It has primary importance in the formation of company.
Article of Association: Articles are subsidiary to the charter. It has a secondary
importance in the formation of company.

CONSTITUTION
Memorandum of Association: It is a constitution of the company.
Article of Association : It contains rules which govern the administration of the
company.

3. OBJECTS
Memorandum of Association: It lays down the objects of the company.
Article of Association: It contains the procedure of achieving objects.

4.ALTERNATE

Memorandum of Association: It is not alterable but it can be amended by special resolution

and sanction of the court or central Govt.

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Article of Association: Article of association can be altered by a special resolution.

5. RELATION

Memorandum of Association : Its nature is like the contract between the company and
outsiders like bankers and creditors.

Article of Association : It maintains relation between the company and the persons inside the
company.

6. Working area

Memorandum of Association: It has definite area.

Article of Association : It has no definite working area. It is used in other purposes also.
Alteration in Memorandum of Association

Joint Stock Companies Act made no provisions for the alteration of a memorandum. Amended
Companies Act 1862 permitted a company to change its name and its authorized share capital,
but forbade any other alteration. Subsequent acts have extended the range of alteration that may
be made. The CA Act 1985 S.2 (7) provides: A company may not alter conditions contained in
the memorandum except in the case in the mode and to that extent, for which express provision
is made by this Act.

Alteration of Name Clause

Alteration of the name of a company can be effected by two methods.

By special Resolutions and Permission of the government: The section provides that the name
of a company may be changed at any time by passing a special resolution at a general meeting of
the company and with the written approval of the central government.

After the alteration of name of the company, the registrar should write the new name in the place
of old name. Accordingly the certificate of newly incorporated company should be issued. With
the change of the name of the company the power and responsibilities are not changed.

Alteration of Registered Office Clause

A company may change the situation of its registered office for the smooth running of its
business and the realization of its objects.

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If the registered office of the company is to be shifted from one place to another in the same city
or town, the board of directors must pass a resolution to that effect and give the name address of
its registered office to the ROC within 30 days after the date of the change of address.

If the company wants to shift its registered office from one town to another in the state, it shall
pass a special resolution to that effect at its general meeting and send the notification to the
registrar within 30 days. It shall give the new address of its registered office to the registrar.

Sometimes the company shifts from one state to another. This kind of shifting is a much more
complicated affair. In the first place, a special resolution is required and in the second,
confirmation by the Company Law Board can confirm the alteration.

Alteration of Object Clause

It is very difficult to alter the objects In the first place, the company has to call a general meeting
of its members and pass a special resolution and file a certified copy of the resolution with the
central government.

After this, the application for proposed alteration is filed with the central government. The
application shall be scrutinized by the government before confirming the alteration.

A certified copy of the order of the central government shall be filed by the company with the
ROC along with the printed copy of the altered memorandum within three months from the date
of the order. The registrar shall register the same and certify the registration within one month of
the date of filing such documents.

Importance of Memorandum

Memorandum is the fundamental document of a company which contains conditions upon which
the company is incorporated. This document is important for the following reasons.

• Memorandum defines the limitations on the powers of the company established under the
Act.
• The whole structure of the company is built upon memorandum.
• It explains the scope of activities of the company. The investors know where their money
will be spent and outsiders also know the nature of activities the company is authorized to
take up.
• It is a basic document of the company with regard to its constitution
• It is a charter of the company which sets out its written goals.

Doctrine of Indoor Management

The doctrine of indoor management says that outsiders dealing with the company are entitled to
assume that everything had been regularly done so far as its internal proceedings are concerned.

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The Doctrine of indoor management is a presumption on the part of the people dealing with
the company such as the shareholders that the internal requirements with regard to the articles of
association and memorandum of association have been complied with.

The doctrine of indoor management helps in protection of external members from the company
and states that the people are entitled to presume that the internal proceedings are as per the
documents submitted with the registrar of companies. They are not allowed to go into the
procedural aspect.

Exceptions: The doctrine of indoor management is subject to the following exceptions:

1. Knowledge of irregularity: Under the rule of indoor management the benefit cannot be
claimed if a person dealing with a company has the knowledge of the irregularity in its internal
management.
2. Acts are void ab initio and forgery: The doctrine of indoor management will not be used,
where the acts done in the name of company are void ab initio. The doctrine is applicable only to
those irregularities that otherwise might affect a genuine transaction. It does not apply to forgery.
A company cannot be made liable for forgeries done by its officers.
3. No knowledge: A person having no knowledge of Articles of association cannot ask for
protection under the indoor management.

4. Negligence: If the irregularities are discovered by the person dealing with a company, on
making proper inquires, he cannot claim the advantages of the rule of indoor management. No
protection of the rule is possible, where the circumstances surrounding the contracts are so
suspicious as to invite inquiry and the outsiders dealing with the company does not make proper
inquiry.

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. ”Hence any advertisement that intends to offer to the public shares or debentures of
the company for sale is a prospectus.

Objectives:

• It informs about the formation of a new company.

• It serves as written evidence about the terms and conditions of issue of shares or
debentures of a company.
• It induces the investors to invest in the shares and debentures of the company.
• It describes the nature, extent and future prospectus of the company.
• It maintains all authentic records on the issue and makes the directors liable for the
misstatement in the prospectus.

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Contents of a prospectus

A prospectus must contain the necessary information to enable the public to decide whether or
not to subscribe for its shares or debentures. Every prospectus shall state the particulars specified
in part I and II of schedule II.

Part I of schedule II- matters to be specified

1.General information like name and address of the registered office of the company, the main
objects of the company, capital structure of the company, Rating from CRISIL or any rating
agency for the issue of shares/debentures

2. The number and classes of shares and the nature and extent of the interests of the holders in
the property and profits of the company.

3. The number of redeemable preference shares to be issued and the details of such shares.

4. The number of shares fixed by the articles as the qualification shares for the director.

5. Names, descriptions and addresses of directors, or proposed directors or managing directors or

the managers.

6. Where shares are offered to the public, the particulars as to

a. The minimum amount which in the opinion of the directors must be raised by the issue of
shares, and

b. The amount to be provided from other sources.

7. The time of the opening of the subscription list.

8. The amount payable on application and allotment,

9. Particulars of the premium paid or payable on shares.

10. If any such issue is underwritten, names of the underwriters and the opinion of the directors
as to the financial position of the underwriters.

11. The names and addresses of the vendors of any property acquired or to be acquired by the
company which is to be paid for out of the proceeds of the issue.

12. The amount or rate of the brokerage or underwriting commission paid.

13. Preliminary expenses and the person by whom it is paid or payable.

14. The names and addresses of the auditors of the company.

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15. Full particulars of the nature and extent of interest of the directors or promoters in the
promotion of the company or in the property acquired by the company.

16. Voting rights of different classes of shareholders.

17. If any reserves or profits of the company have been capitalized, the particulars of the same.

Part II of schedule II – Reports to be set out.

1. Report of the auditors of the company with respect to :

a. Profits and losses and assets and liabilities of the company;

b. The dividend paid by the company in each of the five years preceding the prospectus.

c. The profits and losses of the subsidiary company, if any.

2. A report of the profits and loss and assets and liabilities for each of the five financial years
preceding the issue of the prospectus of any business intended to be purchased with the proceeds
of this issue.

3. If the proceeds of the issue are to be applied in the acquisition of shares in another company, a
report about such company.

When prospectus is not required to be issued

1. When shares or debentures are offered to existing shareholders or debenture holders.

2. When the issue relates to shares or debentures uniform in all respects with shares or
debentures previously issued and dealt in or quoted in a recognized stock exchange.

3. Where shares or debentures are not offered to the public.

Misstatement in prospectus

As per Sec-65, a statement included in a prospectus shall be deemed to be untrue if the statement
is misleading in the form and context in which it is included. Where there is any omission of a
matter from the prospectus and this is made to mislead, the prospectus is deemed to be called as
a prospectus in which an untrue statement is included. The liability accrues where any person
subscribes for any shares or debentures on the faith of the prospectus and he suffers any loss or
damage by reason of untrue statement included therein. If there is any misstatement in
prospectus, there may arise-

1) Civil liability
2) Criminal liability

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 1) Civil liability

Section 62 of the Companies Act, 1956 makes certain person liable to pay compensation to every
person who subscribes for any shares of debentures on the faith of the prospectus for any loss or
damage he may have suffered due to any untrue statement made in the prospectus. These would
include Directors of the company, Promoters, or even the company. Thus, this section deals with
the cases of misstatements of facts in a prospectus.

The provision of the section is to protect the rights of the deceived shareholders who acted upon
the wrong statement given in the prospectus. This tightens up the duties of the directors and
others who are related to the issue of the prospectus. So this section provides for the statutory
civil liability for untrue statement.

Conditions for invoking Section 62:

1) The company had issued a prospectus inviting persons to subscribe for its shares or
debentures.

2) An untrue statement was included in the prospectus.

3) The person who is claiming for the compensation had subscribed for the shares or
debentures offered by the prospectus.

4) Such person has subscribed for the shares or debentures relying upon the untrue statement
contained in the prospectus.

5) Such person has sustained a loss or damage after having subscribed for the shares or
debentures.

Persons liable under Sec- 62:

• every person who is a director of the company at the time of the issue of the prospectus;
• every person who has authorised himself to be named and is named in the prospectus
either as a director, or as having agreed to become a director, either immediately or after
an interval of time;
• every person who is a promoter of the company;
• every person who has authorised the issue of the prospectus;

2) Criminal liability

Sec-63 incorporates the provision for the criminal liability for misstatement in the prospectus.
According to this section every person who has authorised the issue of the prospectus shall be
punishable with imprisonment for a term which may extend to two years, or with fine which may
extend to five thousand rupees, or with both.

Defenses

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Defences available to director or any other person

A director or other person responsible for the prospectus shall not incur any liability if he
puts up the following defences.

(a) as regards any matter not disclosed, he proves that he had no knowledge thereof.
(b) he proves that the prospectus was issued without his knowledge or consent.
(c ) that after the issue of the prospectus and before allotment there under, he on becoming
aware of any untrue statement therein, withdrew his consent to the prospectus and gave
reasonable public notice of the withdrawal.

Defense available to an expert

An expert who has given his consent under Section 58 of the Act shall not be liable if he
proves:
(a) that, having given his consent under section 58 to the issue of the prospectus, he withdrew
it in writing before delivery of a copy of the prospectus for registration;
(b) that, after delivery of a copy of the prospectus for registration and before allotment there
under, he on becoming aware of the untrue statement, withdrew his consent in writing and
gave reasonable public notice of the withdrawal
(c) that he was competent to make the statement and that he had reasonable ground to believe
that the statement was true.

BBA IV Sem

Subject- Business Law

Subject Code- BBA 210

Unit III

Lec-38: The Companies Act, 1956

Shares

The capital of the company can be divided into different units with definite value called shares.
Holders of these shares are called shareholders or members of the company. There are two types
of shares which a company may issue (1) Preference Shares (2) Equity Shares.

(1) Preferences Shares

Shares which enjoy the preferential rights over the equity shares as to dividend and repayment of

16
capital in the event of winding up of the company are called preference shares. The holder of
preference shares get a fixed rate of dividend. Preference shares may be

(a) Cumulative Preference Shares

If the company does not earn adequate profit in any year, dividends on preferences shares may
not be paid for that year. But if the preference shares are cumulative such unpaid dividends on
these shares go on accumulating and become payable out of the profits of the company, in
subsequent years. Only after such arrears have been paid off, any dividend can be paid to the
holder of equity shares. Thus a cumulative preference shareholder is sure to receive dividend on
his shares for all the years out of the earnings of the company.

(b) Non-cumulative Preference Shares

The holders of non-cumulative preference shares no doubt will get a preferential right in getting
a fixed dividend it is distributed to equity shareholders. The fixed dividend is to be paid only out
of the divisible profits but if in a particular year there is no profit as to distribute it among the
shareholders, the non-cumulative preference shareholders, will not get any dividend for that year
and they cannot claim it in the next year during which period there might be profits. If it is not
paid, it cannot be carried forward.

(c)Irredeemable and Redeemable Preference Shares

In case of irredeemable preference shares, capital raised by issuing shares is not to be repaid to
the shareholders. But in case of redeemable preference shares capital raised through the issue of
redeemable preference shares is to be paid back to shareholders after the expiry of a stipulated
period.

(d) Participating or Non-participating Preference Shares

The preference shares which are entitled to a share in the surplus profit of the company in
addition to the fixed rate of preference dividend are known as participating preference shares.
Those preference shares which do not carry the right of share in excess profits are known as non-
participating preference shares.

(e) Convertible and non convertible preference shares

Preferred stock that includes an option for the holder to convert the preferred shares into a fixed
number of common shares, usually anytime after a predetermined date are known as convertible
preference shares. On the other hand the shares that cannot be converted into other types of
shares are known as non convertible preference shares.

17
(2) Equity Shares

Equity shares get dividend and repayment of capital after meeting the claims of preference
shareholders. There will be no fixed rate of dividend to be paid to the equity shareholders and
this rate may vary from year to year. This rate of dividend is determined by directors and in case
of larger profits it may even be more than the rate attached to preference shares. Such
shareholders may go without any dividend if no profit is made. But they get a right of voting and
participating in every general meeting of the company. In fact they are the owners of the
company.

Allotment of Shares

The allotment of shares is the issuing of new shares to the public or to the existing shareholders
or to third parties. The Directors of a Company may allot shares of the Company, if they have the
authority to do so. Generally shares are allotted for the following purposes.

• To raise money for the Company

• To convert loans to share capital
• To fund a redemption of shares
• To implement a bonus issue of shares

Transfer of Shares

Shareholders have the ability to transfer their shares to existing shareholders or third parties. This
allows shareholders to sell their shares. Some examples are as follows:

• Shareholders want to transfer shares to existing shareholders

• Shareholders want to exit company by transferring to existing or third parties
• Succession Planning (transferring shares to spouse or siblings)
• Company Takeover
• Company Restructuring or putting a group in place

The Memorandum and Articles of Association and shareholders agreements should be reviewed
prior to any transfer for any restrictions on the transfer of shares.

A transfer of shares must be approved by the Directors and the appropriate stamp duty should be
paid to the Revenue Commissioner. The Company should then write up the Register of Members
and Register of Transfers and issue a new share certificate.

Debenture
A debenture is an acknowledgement of debts and written promise by the company to repay the
loans according to the terms laid down in the document. It represents the loan of the company.
It is one of the sources to raise capital and may be issued at any time before winding up.
Debentures are classified into three classes:

1. Registered Debentures and bearer debentures

18
2. Secured and unsecured debentures

3. Redeemable and perpetual debentures

4. Convertible debentures and non convertible

1. Registered debentures and bearer debentures:

Registered debenture is one which is registered in the name of a holder in the books of the
company. It is transferable in the same way as a share. Interest on such a debenture is payable to
the registered holder or the order of the registered holder.

A company may issue debentures payable to the bearer. These are negotiable instruments and the
title to them is, therefore, transferable by mere delivery. In case of bearer debentures, the
company keeps no register of debenture holders in respect of them. The coupons are attached to
the bearer debenture for payment of interest and must be presented for payment to the company’s
bankers when the date of payment arrives.

2. Secured and unsecured debentures:

Debentures issued by a company may be secured or unsecured. Debentures which do not carry
any charge on the assets of the company are unsecured or naked debentures. In such a case the
debenture-holder is an ordinary unsecured creditor of the company.

When some assets or property of the company are charged in favour of the debenture-holder, the
debentures are deemed to be secure.

3. Redeemable and perpetual debentures:

Debentures issued by the company are generally redeemable. A redeemable debenture is one
under which the principal money is paid-off to the debenture-holder on the expiry of the fixed
term. Perpetual debentures are also known are irredeemable debentures. Such debentures are
payable only in the event of a winding up or on some serious default by the company or payable
at a remote period. If debentures are issued as irredeemable or perpetual, there would be no time
within which the company would be bound to pay them.

4.Convertible debentures and non convertible:

In the case of convertible debentures an option is given to the debenture-holders to convert them
into preference or equity shares at a stated rate of exchange after a certain period. In the case of
non convertible debentures, there is no option to the debenture-holders to convert them into
preference or equity shares.

Remuneration of Directors

19
Section 197 of CA 2013 deals with the overall maximum managerial remuneration According to
this section, the total managerial remuneration payable by a public company, to its directors,
including managing director and whole-time director, and its manager in respect of any financial
year shall not exceed eleven per cent of the net profits of that company for that financial year
computed in the manner laid down in section 198 except that the remuneration of the directors
shall not be deducted from the gross profits.

However, a company in general meeting may, with the approval of the Central Government,
authorise the payment of remuneration exceeding eleven per cent of the net profits of the
company, subject to the provisions of Schedule V:

However, the remuneration payable to any one managing director; or whole-time director or
manager shall not exceed five per cent of the net profits of the company and if there is more than
one such directors, remuneration shall not exceed ten per cent of the net profits to all such
directors and manager taken together;

The remuneration payable to directors who are neither managing directors nor whole-time
directors (they are part time director) shall not exceed one per cent of the net profits of the
company if there is a managing or whole-time director or manager and three per cent of the net
profits in any other case.

If, in any financial year, a company has no profits or its profits are inadequate, the company shall
not pay to its directors, including any managing or whole-time director or manager, by way of
remuneration any sum except with the previous approval of the Central Government.

BBA IV Sem

Subject- Business Law

Subject Code- BBA 210

Unit III

Lec-39: The Companies Act, 1956

Who can be appointed as a Director

Under the Companies Act, only an individual can be appointed as a Director; a corporate,
association, firm or other body with artificial legal entity cannot be appointed as a Director.

Number of directors

20
 • Every public company shall have 3 directors and any other company shall have at least 2
directors
• The Maximum number of directors of a company shall be specified in the articles. The
Act does not prescribe any maximum number of directors.
• Public Company: if the maximum No. exceeds 12, prior approval of the CG is required.
• Private Company: no such approval is required even if the no. exceeds 12.

Appointment of directors

1) First directors-If different persons are not named as first director in articles of the company,
the name of directors shall be determined in writing by the subscribers or a majority of them.
Where the articles are silent regarding the appointment of directors, the subscribers of the
memorandum, who are individuals shall be deemed to be the first directors of the company. They
shall hold office until the directors are appointed at the first annual general meeting.

2) Appointment by company-Appointment of subsequent directors is made at every annual

general meeting of the company. Section 255 provides that not less than two-thirds of the total
number of directors of a public company shall be rotational directors, i.e. liable to retire by
rotation and shall be appointed by the company in general meeting. The remaining directors, not
exceeding 1/3 of the total number, may be appointed on non rotational basis. In other words, not
more than one-third of the total number of directors can act as non-retiring directors i.e not
subject to retirement by rotation.

At every subsequent annual general meeting, out of the 2/3 directors liable to retire by rotation,
one-third must retire. If the number is not three or a multiple of three, then the number nearest to
one-third must retire from office. The directors to retire by rotation at every annual general
meeting must be those who have been longest in office since their last appointment.

The company may fill up the vacancy by appointing the retiring director or some other person
thereto. If the place of the retiring director is not so filled, and the meeting has not expressly
resolved not to fill the vacancy, the meeting shall stand adjourned. If at the adjourned meeting
also the vacancy is not filled, and the meeting has not expressly resolved not to fill the vacancy,
the retiring director shall be deemed to have been re-appointed at the adjourned meeting.

3) Appointment of directors by directors

(i) As additional directors- If the Articles specifically so provides, the Board has the discretion,
where it feels it necessary to appoint Additional Directors who will hold office until the next
AGM. However, the number of Directors and Additional Directors together shall not exceed the
maximum strength fixed in the Articles for the Board.

(ii) Casual vacancies: Where a Director appointed at the AGM vacates office before his or her
term, the resulting vacancy may, subject to the Articles, be filled by the Board. Such person so
appointed shall hold office up to the time which the Director who vacated office would have held
if he or she had not so vacated such office.

21
(iii) Alternate Director: If so authorized by the Articles or by a resolution passed by the
company in general meeting, the Board may appoint an Alternate Director to act for a Director
("Original Director"), who is absent for whatever reason for a minimum period of three months
from the State in which the meetings of the Board are ordinarily held. Such Alternate Director
will hold office until such period that the Original Director would have held his or her office.
However, any provision for automatic re-appointment of retiring Directors applies to the
Original Director and not to the Alternate Director.

4) Appointment by third parties-The articles may give right to debenture-holders, financial

corporations or banking companies who have advanced loans to the company to nominate
director on the board of the company. The number of directors so nominated should not exceed
one-third of the total strength of the board. They are not liable to retire by rotation.

5) Appointment by the central government-According to section 408 of the companies act, the
central government has the power to appoint directors for the purpose of prevention of
oppression and mismanagement. It provides that the central government may appoint such
number of directors on the board of the company as it may think fit to effectively safeguard the
interest of the company, its shareholders, or public interest. Such an appointment shall be for a
period not exceeding three years, and shall be made on the application of not less than 100
member or members holding not less than 1/10th of the voting power of the company. Such
directors will not be required to hold any qualification shares, not they shall be liable to retire by
rotation.

Disqualification of directors

A person shall not be capable of being appointed director of a company, if

(a) he has been found to be of unsound mind

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a Court of any offence involving moral turpitude and
sentenced in respect thereof to imprisonment for not less than six months, and a
period of five years has not elapsed from the date of expiry of the sentence;

(e) he has not paid any call in respect of shares of the company held by him,
whether alone or jointly with others, and six months have elapsed from the last
day fixed for the payment of the call; or

(f) an order disqualifying him for appointment as director has been passed by a
Court in pursuance of section 203 and is in force, unless the leave of the Court has
been obtained for his appointment in pursuance of that section.

22
 (g) such person is already a director of a public company which, -
(i) has not filed the annual accounts and annual returns for any continuous three financial years
commencing on and after the first day of April, 1999; or
(ii) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due
date or pay dividend and such failure continues for one year or more :

BBA IV Sem

Subject- Business Law

Subject Code- BBA 210

Unit IV

Lec-40-41: The Companies Act, 1956

Meetings

A company is an association of several persons. Decisions are made according to the view of the
majority. Various matters have to be discussed and decided upon. These discussions take place at
the various meetings which take place between members and between the directors.

Kinds of Company Meetings: Broadly, meetings in a company are of the following types :-

1. General Meetings :These are meetings where the members / shareholders of the
company meet and discuss various matters. Member’s meetings are of the following
types :-
A. Statutory Meeting: Statutory meeting is held only once in the lifetime of the
company. Such a meeting must be held within a period of not less than one month
or within a period not more than six months from the date on which it is entitled
to commence business. The following matters are discussed in this meeting:-
• Floatation of shares / debentures by the company
• Modification to contracts mentioned in the prospectus

The purpose of the meeting is to enable members to know all important matters pertaining to the
formation of the company and its initial life history. The matters discussed include which shares
have been taken up, what money has been received, what contracts have been entered into, what
sums have been spent on preliminary expenses, etc.

The Board of Directors must prepare and send to every member a report called the "Statutory
Report" at least 21 days before the day on which the meeting is to be held. The report should be
certified as correct by at least two directors, one of whom must be the managing director. A list
of members showing their names, addresses and occupations together with the number shares

23
held by each member must be kept in readiness and produced at the commencement of the
meeting and kept open for inspection during the meeting.

Contents of Statutory Report must provide the following particulars:- (a)The total number of
shares allotted (b) The total amount of cash received by the company in respect of all shares
allotted. (c) An abstract of the receipts and payments and balance of cash and bank accounts in
hand. (d) Any commission or discount paid or to be paid on the issue or sale of shares or
debentures (e) The names, addresses and occupations of directors, auditors, manager and
secretary (f) Particulars of any contracts to be submitted to the meeting for approval and
modifications done or proposed.(g) If the company has entered into any underwriting contracts,
the extent, if any, to which they have not been carried out and the reasons for the failure.(h) The
arrears, if any, due on calls from every director and from the manager.(i) The particulars of any
commission or brokerage paid or to be paid, in connection with the issue or sale of shares or
debentures to any director or to the manager.

B. Annual General Meeting: Every company must in each year hold an annual general meeting.
Not more than 15 months must elapse between two annual general meetings. A notice of at least
21 days before the meeting must be given to members. The notice must state that the meeting is
an annual general meeting. The time, date and place of the meeting must be mentioned in the
notice. The notice of the meeting must be accompanied by a copy of the annual accounts of the
company, director’s report on the position of the company for the year and auditor’s report on
the accounts. The AGM must be held on a working day during business hours at the registered
office of the company or at some other place within the city, town or village in which the
registered office of the company is situated.

The following matters constitute ordinary business at an AGM :-

• Consideration of annual accounts, director’s report and the auditor’s report

• Declaration of dividend
• Appointment of directors in the place of those retiring
• Appointment of and the fixing of the remuneration of the statutory auditors.

C.Extraordinary General Meeting: Every general meeting (i.e. meeting of

members of the company) other than the statutory meeting and the annual general
meeting or any adjournment thereof, is an extraordinary general meeting. Such
meeting is usually called by the Board of Directors for some urgent business
which cannot wait to be decided till the next AGM. An explanatory statement of
the special business must also accompany the notice calling the meeting.

The Articles of Association of a Company may contain provisions for convening an

extraordinary general meeting. Eg. It may provide that "the board may, whenever it thinks fit,
call an extraordinary general meeting"

24
 2. Class Meeting: Class meetings are meetings which are held by holders of a particular
class of shares, e.g., preference shareholders. Such meetings are normally called when it
is proposed to vary the rights of that particular class of shares. At such meetings, these
members discuss the pros and cons of the proposal and vote accordingly.
3. Other Meetings:
A. Meeting of debenture holders: A company issuing debentures may provide for the
holding of meetings of the debenture holders. At such meetings, generally matters
pertaining to the variation in terms of security or to alteration of their rights are discussed.
B. Meeting of creditors: Sometimes, a company, either as a running concern or in the event
of winding up, has to make certain arrangements with its creditors. Meetings of creditors
may be called for this purpose.

Requisites of a valid meeting

The following conditions must be satisfied for a meeting to be called a valid meeting :-

1. It must be properly convened. The persons calling the meeting must be authorised to do
so.
2. Proper and adequate notice must have been given to all those who are entitled to attend
the meeting.
3. The meeting must be legally constituted. There must be a chairperson. The rules of
quorum must be maintained and the provisions of the Companies Act, 1956 and the
articles must be complied with.
4. The meeting must be conducted in accordance with the regulations governing the
meetings.
5. A meeting without the minimum quorum is invalid and decisions taken at such a meeting
are not binding. The articles of a company may provide for a quorum without which a
meeting will be construed to be invalid. Unless the articles of a company provide for
larger quorum, 5 members personally present (not by proxy) in the case of a public
company and 2 members personally present (not by proxy) in the case of a private
company shall be the quorum for a general meeting of a company.

Quorum refers to the minimum number of members who must be present at a meeting in
order to constitute a valid meeting.

BBA IV Sem

Subject- Business Law

25
Subject Code- BBA 210

Unit IV

Lec-42: The Companies Act, 1956

Proxy
A member may appoint another person to attend and vote at a meeting on his behalf. Such other
person is known as "Proxy". A member may appoint one or more proxies to vote in respect of
the different shares held by him, or he may appoint one or more proxies in the alternative, so that
if the first named proxy fails to vote, the second one may do so, and so on.

The member appointing a proxy must deposit with the company a proxy form at the time of the
meeting or prior to it giving details of the proxy appointed.

Resolution

Resolutions mean decisions taken at a meeting. A motion, with or without amendments is put to
vote at a meeting. Once the motion is passed, it becomes a resolution. A valid resolution can be
passed at a properly convened meeting with the required quorum. There are broadly three types
of resolutions :-

1. Ordinary Resolution : An ordinary resolution is one which can be passed by a simple

majority of votes i..e.(votes cast in favour of the resolution exceed votes cast against it).
Generally this resolution is used for ordinary routine business of the company. For
example, to declare the dividend, to appoint the auditors, permission to the shares at
discount, to fix the remuneration of auditors. etc.
2. Special Resolution : The resolution which is passed by the majority of the shareholders
not less than three fourth is called special resolution. A copy of special resolution must be
filed with the registrar office within fifteen days. This resolution is used for special
purposes like, transfer the registered office from one province to other, To change the
Article of Association, To change the name of the company, To reduce the share capital
etc.
3. Resolution requiring Special Notice: There are certain matters specified in the
Companies Act, 1956 which may be discussed at a general meeting only if a special
notice is given regarding the proposal to discuss these matters at a meeting. A special
notice enables the members to be prepared on the matter to be discussed and gives them
time to indicate their views on the resolution. This is termed as resolution requiring
special notice.

Legal Position Directors of a Company

Directors are the persons appointed by the company to direct and manage the affairs of the
company. They are described sometimes as agents, sometimes as trustees and sometimes as
managing partners.

26
The directors hold an extremely important position in the administration and management of a
Company. The directors actually work in different capacities at different times to ensure that the
company is run in a legal and an efficient manner.

Directors are viewed as agents of the company for the conduct of business of the company. A
company cannot act by itself; it acts only through its directors. Directors act on behalf of the
company. The directors cannot be held personally liable for any default of the company. Like
agents, directors should conduct business of the company with care, skill and diligence possessed
by them. They are accountable for all of company’s assets under their control, and the profits
from assets of the company.

Directors are also described as trustees of the company as they stand in fiduciary capacity
towards the company. Their acts and dealings must be for the benefit of the company. They must
exercise their powers honestly in the interest of the company and all the shareholders and not
their own interest.

However, in the legal sense directors are not trustees. A trustee is the legal owner of the trust
property and contracts in his own name. Directors, on the other hand, are paid agents or officers
of the company and conduct business for the company. Directors of a company have fiduciary
relationship with the company as well as the shareholders.

BBA IV Sem

Subject- Business Law

Subject Code- BBA 210

Unit IV

Lec-43: The Companies Act, 1956

Prevention of operation and mismanagement

Oppression

The oppression of small/minority shareholders takes place by majority shareholders who control
the company.

Mismanagement

Mismanagement is not uncommon in companies. It means mismanagement of resources by

following means:

1. Absence of basic records of the company.

2. Drawing considerable expenses for personal purposes by directors/management of the
company.

27
 3. Not filing documents with the Registrar of Companies relating to compliances under the
Companies Act, 1956.
4. Misuse of companies finances.
5. Sale of assets at very low prices
6. Violation of provisions of law and memorandum or article of association of the company.
7. Making Secret Profits
8. Diverting company funds for personal use of directors
9. Continuation in office by director beyond the specified term and not holding any
qualification shares.

The acts of mismanagement may not necessarily be of majority but can be by any person in the
day to day management of the company.

Legal Aspects-Oppression and mismanagement is governed by section 397 and 398 of the
Companies Act, 1956. It plays a crucial role in prevention of the oppression and
mismanagement. To protect the interest of minority shareholders, the Companies Act, 1956
defines certain rights as enumerated below:

The Rights of shareholders

Special resolution is required for changing the registered office from one state to
Section 17:
another and for changing the objects of the company.

Section 21
Changes of name of company require a special resolution.
& 22

Section 31 Alteration of articles can be done through a special resolution.

Issue of shares at discount should be authorized by the resolution of the general

Section 79
meeting.

Section79 Issue of sweat equity shares should be authorized by special resolution in general
A meeting.

When further shares are offered to persons other than the existing shareholders, a
Section 81
special resolution should be passed to that effect.

An equity shareholder has a right to vote on every resolution placed before the
Section 87 company and his voting right on a poll is in proportion to his share of the paid up
equity capital.

Section 94 Alteration of share capital requires consent of shareholders in general meeting.

28
Section
Reduction of share capital requires passing of a special resolution.
100

The shareholders who are against the reduction of share capital and who did not
Section
vote in favour of the resolution under section 100 can apply to the court for
107
cancellation of reduction (not less than ten per cent shareholders).

Share allotment letters and share certificates should be delivered to the

Section
shareholders within three months of allotment and within two months of the
113
registration of transfers.

The register of member, index of registers, certificates, documents, etc. can be

kept away from the registered office within the same city etc. if it is so approved by
Section
the special resolution. The index, registers, returns, etc. should be open to the
163
inspection of any member or debenture holder or any other person and extracts can
be taken there from.

Section The annual general meeting should be held in each year and the gap between two
166 such meetings should not exceed fifteen months.

Section
Members are entitled to notice of every meeting of the company.
172

Section A member can inspect the minutes of proceedings of general meeting and he is
196 entitled to be furnished within a week with a copy of minutes on payment of a fee.

Section The balance sheet and profit and loss account should be laid before the annual
210 general meeting.

Section Board’s report should be attached to every balance sheet laid before the annual
217 general meeting.

A copy of every balance sheet and profit and loss account, auditor’s report,
Section
board’s report should not less than 21 days before the annual general meeting be
219
sent to every member.

Section Auditor’s (other than first and casual auditors) should be elected by members at
224 annual general meetings.

Section Members holding not less than one tenth of total voting power or not less than 200

29
235 members may appeal to the Company Law Board for investigation of the affairs of
the company.

Section Not less than two thirds of the total number of directors of a public company
255 should be appointed at general meetings.

Section
The board of directors can be increased or reduced by an ordinary resolution.
258

Section
Special notice shall be required of any resolution to remove a director.
284

Section
The register of directors can be inspected by any member.
304

Section The remuneration payable to directors including the managing and wholetime
309 directors by public companies is subject to the approval of members.

Legal Remedies

Section 397and 398 of the Companies Act 1956 covers the remedies for preventing oppression
and mismanagement:

Section 397

1. Any members of a company who complain that the affairs of the company are being
conducted in a manner prejudicial to public interest or in a manner oppressive to any member
or members may apply to the Company Law Board for an order under this section.

2. If, on any application under sub-section (1) the Company Law Board is of opinion that the
company’s affairs are being conducted in a manner prejudicial to public interest or in a manner
oppressive to any member or members, the Company Law Board may take suitable action.

Section 398

Members of company who complain-

(a) That the affairs of the company are being conducted in a manner prejudicial to public
interest or in a manner prejudicial to the interests of the company, or

(b) That a material change (not being a change brought about by, or in the interests of, any

30
creditors including debenture holders, or any class of shareholders of the company) has taken
place in the management of control of the company whether by an alteration in its Board of
Directors, or managers or in the ownership of the company’s shares or if it has no share capital
in its membership, or in any other manner whatsoever and that by reason of such change, it is
likely that the affairs of the company will be conducted in a manner prejudicial to public
interest or in a manner prejudicial to the interest of the company.

The members may apply to the Company Law Board for an order under this section, provided
such members have a right so to apply in virtue of section 399.

If, on any application the Company Law Board is of opinion that the affairs of the company are
being conducted as aforesaid or that by reason of any material change as aforesaid in the
management or control of the company, it is likely that the affairs of the company will be
conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or
preventing the matters complained of or apprehended, make such order as it thinks fit.

BBA IV Sem

Subject- Business Law

Subject Code- BBA 210

Unit IV

Lec-44: The Companies Act, 1956

Appointment of Managing Directors

A Managing Director must be an individual and can be appointed for a maximum term of five
years at a time.

A person who is already a Managing Director / Manager of a public company or a private

company subsidiary of a public company can become the Managing Director / Manager of only
one other company (whether private or public) with the prior unanimous approval of the Board
of such company. However, no such restrictions are applicable to a Manager or a Managing
Director of "pure" private companies.

In case of a public company or a private company that is a subsidiary of a public company, if

the appointment is not in accordance with Parts I and II of Schedule XIII of the Companies Act,
such appointment must be approved by the Central Government.

Qualifications of directors

The Companies Act does not prescribe any qualifications for Directors of any company. The
Companies Act does, however, limit the specified share qualification of Directors which can be

31
prescribed by a public company or a private company that is a subsidiary of a public company,
to be five thousand rupees Rs. 5,000

In addition to the qualifications for membership in the Board provided for in the Corporation
Code, Securities Regulation Code and other relevant laws, the Board may provide for
additional qualifications which include, among others, the following:

1. At least a college graduate or, in the absence of such college degree or formal
education, with sufficient experience in managing a business;
2. At least twenty-one (21) years old;
3. Shall have been proven to possess integrity and probity;
4. Shall be prudent.
5. Practical understanding of the business of the corporation;
6. Membership in good standing in relevant industry, business or professional
organizations; and
7. Previous business experience.

Advantages and disadvantages of incorporation of a company

1) Limited liability – The owners of the corporation (the shareholders) are generally not
liable for the debts and obligations of the corporation unless they have provided a
personal guarantee.
2) Perpetual existence – The existence of the corporation is not affected by a change in
the people that own or manage the corporation. The shareholders, directors and officers
may retire or sell their shares, but the corporation continues in existence.
3) Capital acquisition – Corporations can issue various classes of shares (in addition to
other debt instruments such as bonds in order to raise capital. This is an attractive
feature to investors because it allows for partial ownership of the corporation.
4) Tax advantages – There are tax advantages also, such as lower income tax rates and the
carrying forward of losses from previous years to offset profits in subsequent years.
5) Mergers & acquisitions – A corporation can merge or amalgamate with another
corporation.
6) Professional management- A company is capable of attracting professional managers.
It is due to the fact that being attached to the management of the company gives them
the status of business or executive class.

Disadvantages of Incorporating

1) Start-up costs – a corporation is more expensive to form and organize than other
methods of carrying on business.
2) Record keeping requirements – A corporation is required to maintain corporate
records, elect directors, hold directors and shareholders’ meetings, and provide
shareholders with financial information, among other duties.

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3) Annual filings – corporations are required to file annual government returns.
4) Double taxation of dividends – Income generated by a corporation is taxed at both the
corporate level and shareholder level. A corporation must pay taxes on its income and
the shareholders must pay taxes on the dividends (the profits they receive from the
corporation).
5) Formality - Incorporation requires a number of formalities to be complied with both as
to the formation and administration of affairs.

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