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COMPANY LAW

WHAT IS A COMPANY

A company is defined as an association of persons for some common object or objects. Purpose may or may not be economic. For common practice the word company is normally reserved for those associated for economic purposes. Our area of focus remains to only those companies that are registered under the Companies Act , 1956 or under any of the earlier Companies Acts.

DEFINITION OF A COMPANY

Section 3(1)(i) of the Act states that a company means a company formed and registered under this Act or an existing company as defined in section 3(1)(ii). Section 3(1)(ii) lays down that an existing company means a company formed and registered under any of the previous Company Law.

DEFINITIONS OF COMPANY GIVEN BY DIFFERENT AUTHORITIES

Lord Justice Lindley A company is an association of many persons who contribute money or monies worth to a common stock and employee it in some trade or business and share the profit and loss arising there from . The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains are members .The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted.

DEFINITIONS OF COMPANY GIVEN BY DIFFERENT AUTHORITIES (cont)

Chief Justice Marshall A corporation is an artificial being , invisible , intangible , existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties which the Charter of its creation confers upon it, either expressly or as incidental to its very existence. Prof Haney A company is an artificial person created by law , having separate entity, with a perpetual succession and common seal.

CHARACTERISTIC FEATURES OF A COMPANY

Incorporated association : The company must be incorporated or registered under the Companies Act. Minimum number required for this purpose is seven in case of a public company and two in the case of a private company An association of more than 10 persons in the case of banking business and 20 persons in other commercial activities , if not registered as a company or under any other law, becomes an illegal association

CHARACTERISTIC FEATURES OF A COMPANY (cont)

Legal Entity distinct from its members :Unlike partnership, the company is distinct from the person who constitute it. It is capable of enjoying rights and of being subjected to duties which are not the same as those enjoyed or borne by its members. The subscribers as members are not liable, in any shape or form except to the extent and in the manner provided by the Act.

CHARACTERISTIC FEATURES OF A COMPANY ( Historical Cases)

Kondoli Tea Company Ltd., ILR [1886] Salomon v A Salomon & Co Ltd [1897] AC

CHARACTERISTIC FEATURES OF A COMPANY (cont)

Limited Liability : A company may be a company limited by shares or a company limited by guarantee. In a company limited by shares, the liability of members is limited to the unpaid value of shares. In a company limited by guarantee, the liability of members is limited to such amount as the members may undertake to contribute to the assets of the company, in the event of its being wound up.

CHARACTERISTIC FEATURES OF A COMPANY (cont)

Perpetual Succession :A company is a juristic person with a perpetual succession. It never dies nor does its life depend on the life of its members. It is not in any manner affected by insolvency, mental disorder or retirement of any of its members. It is created by a process of law and can be put to an end only by a process of law. Perpetual succession therefore means that a companys existence persists irrespective of the change in the composition of its membership

CHARACTERISTIC FEATURES OF A COMPANY (cont)

Common Seal : A company has no physical existence. It must act through its agents and all such contracts entered into by its agents must be under the seal of the company. The common seal acts as the official signature of the company.

CHARACTERISTIC FEATURES OF A COMPANY (cont)

Transferability of shares : The capital of a company is divided into parts , called shares. These shares are subject to certain conditions , freely transferrable, so that no shareholder is permanently or necessarily wedded to a company. When the joint stock companies were established the great object was that the shares should be capable of being easily transferred.

CHARACTERISTIC FEATURES OF A COMPANY (cont)

Separate Property : Company is a legal person distinct from its members. It is capable of owning , enjoying and disposing of property in its own name. Although its capital assets are contributed by its shareholders, they are not the private and joint owners of its property. The company is the real person in which all its property is vested and by which it is controlled , managed and disposed off.

CHARACTERISTIC FEATURES OF A COMPANY (cont)

Capacity to Sue A company can sue and may be sued in its corporate name. It may also inflict or suffer wrongs. It can do or in fact have done to it most of the things which may have been done by or to a human being.

Types of Companies
Classification according to the mode of incorporation : Chartered Company incorporated by a charter granted by the monarch. Statutory Company created by a special Act of the Legislature. Registered Company registered under Companies Act,1956.

Types of Companies (cont)


Classification according to the liability of its members: Limited companies 1.limited by shares 2.limited by guarantee Share company - Liability of the shareholders to creditors of the company is limited to the capital originally invested. A shareholder's personal assets are protected in the event of not being able to pay up, but money invested in the company will be lost. Guarantee company - This type of Company does not have share capital but is guaranteed by its "members", who agree to pay a fixed amount in the event of the company's liquidation. These companies do not have share capitals, the working funds are obtained from donations, fees, subsidies , etc. Unlimited company Does not have any limit on the liabilities of its members. Members are liable to the full extent of their assets in case of the company becoming insolvent. The creditors should petition the court which will then direct the members to contribute to pay up the debts.

Private Company:
It is a company formed by 2 members who are bound by a Memorandum of Association. Such a company must : Prohibit an invitation to the public to subscribe to its shares and debentures. Restrict the rights of its members to transfer shares, so that it remains private. Limit the number of members to 50.

Public Company:
It is a company which raises its capital and other resources from the public. The company should have at least 7 members. Invitation to the public to subscribe to its shares should be done through a prospectus. No provisions that restrict the right to transfer shares, shares and debentures are dealt in only on a stock exchange. No limitation on the maximum number of members.

Holding and Subsidiary Companies


Holding company company which has control over another company. Subsidiary company company which is controlled by another company. A company is said to be a subsidiary to another company if : The other controls the composition of its Board of Directors. The other holds more than half of equity share capital.

Illegal Association
Under the Companies Act, 1956, not more than 10 persons can come together for carrying on any banking business and not more than 20 persons can come together for carrying on any other business, unless the association is registered under the Companies Act or any other Indian law. Any association which does not comply with the above norms is an illegal association. However, this provision does not apply in the following cases : A Joint Hindu Family business comprising of family members only. But where two or more Joint Hindu families come together for business through partnership, the total number of members cannot exceed 10 or 20 as the case may be, but in computing the number of persons, minor members of such family will be excluded. Any association of charitable, religious, scientific trust or organization which is not formed with a profit motive Foreign companies.

Formation of Companies
Before a company is formed certain preliminary decisions are to be taken by its promoters A private company or a public company What its capital should be Form a new company or take over an already established business

Incorporation of Company

Mode of forming incorporated company Any 7 or more persons (2 or more in case of private company) may form an incorporated company. A company so formed may be

A company limited by shares A company limited by guarantee An unlimited company

Incorporation of Company (cont)

Documents to be filed with the Registrar Before a company is registered, it is desirable to ascertain from the Registrar of Companies if the proposed name of the company is approved. Then the following documents are to be filed along with the necessary feesMemorandum of Association the contract document which the various promoters sign to form their association Articles of Association a document that shows the respective rights, responsibilities and duties of the board of directors and general body.

Incorporation of Company (cont)

Agreement, if any, which the company proposes to enter into with an individual for appointment as its managing or whole-time director or manager A list of directors who have agreed to become the first directors of the company A declaration stating that all requirements of the Companies Act relating to registration have been complied with. This can be obtained by an advocate of high court or supreme court, CA

Incorporation of Company (cont)


Certificate of Incorporation If the registrar is satisfied as to the compliance of requirements, he registers the Memorandum, the articles and other documents and issues a CERTIFICATE OF INCORPORATION i.e. the formation of the company. The certificate of incorporation given to a company specifies It is a conclusive evidence that all the requirements of the Companies Act have been complied with in respect of registration Date born by the certificate of incorporation is the date of birth of the company, i.e. the date on which the company came into existence. Ex. Jubilee Cotton Mills vs Lewis

Incorporation of Company (cont)


Effects of Registration
When a company is registered and a certificate of incorporation is issued by the registrar, it has three important consequences The company becomes a distinct legal entity The company acquires a perpetual succession i.e. the members may come and go, but it goes on for ever, unless it is wound up The shareholders have a right to share in the profits of the company. Similarly any liability is not the liability of individual shareholder NOTE: A private limited company can commence business immediately after its incorporation whereas a public company has to obtain a certificate to commence business before it actually commences its business.

Promoter
A promoter is a person who does the preliminary work incidental to the formation of company i.e. necessary steps to incorporate the company, provide it with share and loan capital and acquire the business or property which it is to manage Functions of Promoter: Decides the name of the company Settles the details of the companys Memorandum and Articles Nomination of directors, bankers, auditors and the registered office of the company Registration of company Issue of prospectus (where a public issue is necessary)

Promoter (cont)
Fiduciary position of a promoter A promoter stands in a fiduciary relation to the company which he promotes. The fiduciary position of a promoter may be summed up as followsNot to make profit at the expense of the company To give benefit of negotiations to the company To make a full disclosure of interest or profit Not to make unfair use of position He should see to it that the prospectus issued contains the necessary information and does not contain any misleading statements

Promoter (cont)
Remuneration of promoters A promoter may take remuneration for his services in any of following ways

He may be given a option to buy a certain number of shares in the company at par. He may take a commission on the shares sold. He may be paid a lump sum by the company.

Promoter (cont)
Pre-Incorporation or Preliminary Contract The promoters of a company usually enter into contracts to acquire some property or right for the company which is yet to be incorporated. Such contracts are called as preliminary contract. Company is not bound by pre-incorporation contract Company cannot enforce such contracts Promoters are personally liable for any losses Company cannot ratify such contracts

Promoter (cont)
Provisional Contracts These are the contracts entered into by a public company after its incorporation but before it is issued the certificate to commence business. If the company is unable to obtain the required certificate, the provisional contract automatically elapses If it gets the certificate, the provisional contract becomes binding on the company