COMPANY LAW

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INTRODUCTION
The law relating to companies in India is contained in the Companies Act, 1956, as amended up-to-date. The latest amendment to the Act was made in 2006 by the Companies (Amendment)Act,2006
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DEFINITION OF A COMPANY 

Lord Lindley has described the company as An association of many persons who, contribute money or money s worth to a common stock and employ it in some trade or business; and who share the profit and loss (as the case may be) arising there from. The common stock so contributed is denoted in money and is the capital of the company.
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Shares are always transferable although the right to transfer them is often or more restricted . 4 . are members.. or to whom it belongs. The persons who contribute it.Contd. The proportion of capital to which each member is entitled is his share.

On the other hand. 3. a member may act as agent or trustee or employee for the company 2. A company is not an agent or trustee of the members. A company is a separate entity from the members who constitute it. 5 . in a particular case.Chief characteristics of a company 1. It is not a mere aggregate of the shareholders A member may be a creditor of the company also.

There need not be any equilibrium or equitable distribution of shares amongst different members of the company. Solomon had £20. Mr.000 shares. In Solomon s case. Such a type of company is known as one-man company 6 . whereas all other members has one share each.4.

The shareholder is not part-owner of the company or its property. Northern Assurance Co. Ltd. 7 ..g. -to receive dividend. e.   He is only given certain rights by law. Macaure v. Thus the property of the company belongs to the company and not the shareholders e..g.5. -to attend and vote at the meeting of the shareholders.

The court applying principle if separate legal entity held. 8 . He insured the company s timber in his personal name. the insurance company was not liable. He had also advanced substantial amount to the company.Macure held all except one share of a timber company. one timber being destroyed by fire his claim was rejected for want of insurable interest.

status. 9 . This is possible because it has personality. A company is an artificial legal person and enjoys all the rights and is subjected to the obligations as in the case of a natural person. name and common seal of its own.6.

This makes the life of the company independent of the lives of its members and enjoys what is known as perpetual succession 8.7. The shares in the share capital of the company are transferable. 10 . The liability of its shareholders may be made limited to the unpaid value of the shares held by them.

9. can act only through natural persons 11 . has nationality and a domicile. A company is not a citizen and has no fundamental rights under the constitution 11. being an artificial person. A company. A company being a person. 10.

12. A company can sue, can be sued, can enter into contracts, can open a bank account and can exercise all the powers incidental to the attainment of its objects given in its Memorandum of Association. 13.There are some distinct situations in which the principle of separate entity of the company as laid down in Salmon s case is ignored. technically., this is known as lifting of the corporate veil.
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Types of companies
I.

According to the mode of incorporation

II. On the basis of Liability III.Private or Public company

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I.CLASSIFICATION OF COMPANIES ON MODE OF INCORPORATION
According to the mode of incorporation Companies can be classified into three categories
1. 2. 3.

Chartered company Statutory company Registered company
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Companies with unlimited liability or 3. Classification on the basis of liability 1. Limited both by shares and guarantee.II. 15 .Companies with limited liability 2.

Companies with limited liability a.  His personal assets cannot be called upon for the payment of the liabilities of the company 16 . Companies limited by shares  The liability of the members of a company is limited to the amount unpaid on the shares.1.

 The liability of its members is limited by a stipulated sum mentioned in the memorandum. 17 . Companies limited by guarantee:  The liability of the members of the company is limited to a fixed amount which the members undertake to contribute to the assets of the company in the event of its being wound up.b.

  Usually companies limited by guarantee are not formed for the purpose of profit but for the promotion of art science. 18 . culture. charity etc. They may not have a share capital..

c.e. -the guarantee which may become effective in the winding up of the company and -the liability to pay up to the nominal amount of his share 19 . i. A company limited by shares as well as by guarantee  Such a company raises its initial capital from its share holders  Every member of such a company is subjected to two fold liability.

20 . in the event of its being wound up. to the full extent of their fortunes to meet the obligations of the company.2.Companies with unlimited liability:  It is a company not having any limit on the liability of its members  The members of such a company are liable.

III. A private company A public company 21 . Classification on the basis of number of members 1. 2.

if any.1.100000 or such higher paid up capital as may be prescribed It restricts the right to transfers its shares. This restriction is meant to preserve the private character of the company 22  . PRIVATE COMPANY  A company which has a minimum paidup capital of Rs.

  Limits the number of its members to 50 not including its employee members Prohibits any invitation or acceptance of deposits from persons other than its members. directors or their relatives 23 .

as may be prescribed Is a private company which is a subsidiary of a company. which is not a private company 24  . A public company  Has a minimum paid-up capital of Rs.2.5 lakh or such high paid-up capital.

 Private Company which is a subsidiary of public company signifies that :  A private company which is a subsidiary of a public company will be treated as a public company from the date of commencement of the Companies Act 2000. The company over which control is exercised is called the Subsidiary company 25  .

whereas a public company requires a minimum paidup capital of Rs.DISTINCTION BETWEEN A PUBLIC COMPANY AND A PRIVATE COMPANY 1. In case of a private company minimum number of persons to form a company is two while it is seven in the case of a public company. . A private company may be formed by a paid-up capital of Rs.5 lakhs 26 2.100000.

whereas in case of public company the shares are freely transferable. 27 . In private company the right to transfer of shares is restricted. In case of a private company the maximum number must not exceed fifty whereas there is no such restrictions on the maximum number of members in case of a public company 4.3.

5. A private company cannot issue prospectus, while a
public company may, through prospectus invite the general public to subscribe for its shares and debentures. 6. A private company cannot accept deposits from the public whereas a public company, may subject to the provisions of the sections 58A, 58AA, 58AAA and 58B accept deposits from the public.

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7. A private company can commence business immediately after receiving the certificate of incorporation, while a public company can commence business only when it receives a certificate to commence business from the Registrar of Companies.
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8. A private company need not hold a statutory meeting
but a public company must hold a statutory meeting and file a statutory report with the Registrar. 9. The directors of a private company are not required to file with the Registrar written consent to act as director or sign the memorandum of association or enter into a contract for their qualification shares

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Directors of a private company may be appointed by a single resolution. 11. but is not so in case of a public company.10. Directors of a private Company are not required to retire by rotation. but it is not so in case of a public company 31 .

12. but in case of a public company if the number of directors is to be more than twelve then the approval of the Central Government is necessary 32 . The number of directors in a private company may be increased to any extent without the permission of the Central Government.

13. A public company enjoys no such privileges. 33 . a private company enjoys some special privileges. In addition to the above. In a private company there are no restrictions on managerial remuneration 14.

issued and subscribed. uncalled capital and reserve capital of the company 34 .SHARE CAPITAL    It is the capital raised by the company by the issue of shares It is the capital of a company The word capital is used in several senses: it may mean authorized. called-up capital. paidup.

 Authorized or nominal capital: It is the nominal value of the shares which a company is authorized to issue by its Memorandum of Association This is the maximum capital which the company will have during its lifetime unless it is increased  : 35 . 1.Need to Know .

Issued and subscribed capital:    It is the nominal value of the shares which are offered to the public for subscription The issued capital can never exceed the authorised capital It can almost be equal to the authorised capital which is the case when all the shares have been issued to the public 36 .2.

37 .3. called-up capital:  This is that part of the issued capital which has been called upon the shares.

4. Paid-up capital:  This is that part of the issued capital which has been paid up by the shareholders or which is credited as paid-up on the shares 38 .

39 .5. Uncalled capital:  This is the remainder of the issued capital which has not been called.  the company may call this amount any time but this is subject to the terms of issue of shares and the provisions of the Articles.

6. Reserve Capital:  This is that part of the uncalled capital of a company which can be called only in the event of its winding up  It is available only to the creditors on the winding up of the company 40 .

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FORMATION OF A COMPANY    PROMOTION REGISTRATION FLOATATION 42 .

Meaning of a Promotor Before a company is formed. -Whether it should be a private company or a public company -What its capital should be and -whether it is worthwhile forming a new company or 43 .g. certain preliminary steps are necessary e.

-taking over the business of an already established concern All these steps are taken by certain persons known as Promoters They do all the necessary preliminary work incidental to the formation of a company. 44 .

 45 . without the knowledge and consent of the company and if he does so the company can compel him to account for it.Duties of a promoter  The relationship of trust and confidence requires the promoter to make a full disclosure of all material facts relating to the formation of the company He should not make any secret profits at the expense of the company he promotes.

partnership or company  46 . association. Syndicate. The promoters have to ensure that the real truth is disclosed to those who are induced by the promoters to join the company. The promoter may be an individual.

Claim damages for breach of his duty. Rescind the contract and recover the purchase price where he sold his own property to the company. even though rescission is not claimed or is impossible or. or Recover the profit made. 2. 47 .PROMOTER S Liabilities for Non-disclosure The company may either 1. 3.

REGISTRATION  Check the Availability of the proposed names The promoters will have to get together at least 7 persons in case of a public company or 2 in case of a private company to subscribe the Memorandum of Association.  48 .

if any . if any.For the purpose of registration of the company the documents like : -Memorandum of the company. -the articles. which the company proposes to enter into with any individual for appointment as its managing or whole time director or manager should be presented to the Registrar of Companies of the State with required signatures 49 . .the agreement.

50  . It requires a declaration to be filed with a Registrar of Companies along with the Memorandum and the articles The declaration must certify that all requirements of the Act and Rules made there under in respect of registration have compiled with.

enter the name of the Company on the Registrar of Companies maintained by him (Sec 33) and then will issue a Certificate of Incorporation 51 . the Registrar will. When the aforesaid documents have been filed with the Registrar and the necessary fees paid. if he is satisfied.

52  . The Certificate of Incorporation is conclusive evidence that all the requirements of the companies Act has been compiled with. The duly signed certificate serves the same purpose in the case of a company which a birth certificate does in the case of a natural person.

it is ready for floatation .FLOATATION/CAPITAL SUBSCRIPTION  When a company has been registered and has received its certificate of incorporation. that is to say it can go ahead with raising capital sufficient to commence business 53 .

In case of a public company having share capital it is absolutely necessary to obtain a Certificate to commence business. The private company is prohibited form inviting public to subscribe to its share capital.  54 .

MEMORANDUM OF ASSOCIATION  The Memorandum of Association of a company is its charter which contains the fundamental conditions upon which alone the company can be incorporated It tells us the objects of the company s formation and the utmost possible scope of its operations beyond which its actions cannot go. 55  .

which their money is going to be used by the company and what risk they are undertaking in making investment 56 .Purpose of Memorandum: 1. or the purpose for. The prospective shareholders shall know the field in.

2. The outsiders dealing with the company shall know with certainty as to what the objects of the company are and as to whether the contractual relation into which they contemplate to enter with the company is within the objects of the company 57 .

Section 13 required the memorandum of a limited company to contain : Name of the company The name of the state. stating separately. b. 58 . Main objects and other objects c.FORM AND CONTENTS  a. in which the registered office of the company is to be situated The objects of the company.

The amount of the authorized share capital. divided into shares of fixed amounts 59 .d. The declaration that the liability of the members is limited and e.

-numbered consecutively and -signed at least by seven persons two in case of a private Co.) -signed before at least one witness. divided into paragraphs. Sec 15 requires the memorandum to be -printed. who will attest the signatures 60 .

61 . Each of the members must take at least one share and write opposite his name the number of shares he takes The memorandum shall conclude with an association clause which states that the subscribers desire to form a company and agree to take shares in it.

Articles of association   They are the rules. regulations and byelaws for the internal management of the affairs of a company They are framed with the object of carrying out the aims and objects as set out in the Memorandum of Association 62 .

rights of the share holders. share certificates 2. Share capital. Transfer of shares 63 .Contents of articles They usually contain provisions relating to the following maters 1. variation of these rights. payment of commissions.

6. Forfeiture of shares Conversion of shares to stocks Alteration of capital General meetings and proceedings Voting rights of members. . 5. voting 64 .3. 7. 4.

their remuneration. Dividends and reserves 65 .8. their appointment. powers and proceedings and Board of Directors 9. qualifications. Secretary 11. Directors. Manager 10.

audits and borrowing powers 13.12. accounts. Capitalization of profits 14 winding up The articles shall be signed by the subscribers of the Memorandum and registered along with the Memorandum 66 .

Unlimited company: the articles shall state: a. a company limited by guarantee and a private company 1. 67 . the amount of share capital with which the company is to be registered. If it has a share capital.Regulation required in case of an unlimited company. Number of members with which the company is to be registered and b.

2. the Articles shall state the number of members with which the company is to be registered 68 . Company limited by guarantee: In the case of a company limited by guarantee.

the Article shall contain provisions whicha.3. Restrict the transfer of shares 69 . Private Company: In case of a private company having a share capital.

or debentures of the company 70 . Limit the number of its members to 50 (not including employee-members) and c.b. Prohibit any invitation to the public to subscribe for any shares in.

Printed b. description and occupation. Signed by each subscriber of the Memorandum ( who shall add his address.Form and signature of the Articles The Articles shall bea. Divided into paragraphs and c. if any) in the 71 .

It should be accepted by the Registrar for registration of a company. d. 72 .presence of at least 1 witness who will attest the signature and likewise add his address. description and occupation if any.

when registered. become public documents. 73 .DOCTRINE OF CONSTRUCTIVE NOTICE   Sec 610 provides that the memorandum and articles. They can be inspected by anyone on payment of nominal fee.

This is known as Doctrine of Constructive Notice 74 . Therefore anyone who contemplates entering into a contract with the company has the means of ascertaining and is thus presumed to have read these documents and understood them in their true perspective.

DOCTRINE OF INDOOR MANAGEMENT    The Doctrine of Indoor Management allows all those who deal with the company to assume that the provision of the articles have been observed by the officers of the company. In other words they are not bound to enquire into the regularity of internal proceedings An outsider is not expected to see that the company carries out its internal regulations 75 .

It should preferably be in writing. 76 .PROSPECTUS     It is a document which is not merely an advertisement It invites subscriptions to shares or debentures or invites deposits The aforesaid invitation is made to the public.

  There should be the dating of the prospectus. In case a prospectus is issued by an intended company it has to be signed by the proposed directors or by their agents authorized in writing. 77 .

management and project 78 . -capital structure of the company -terms of the present issue also the particulars of the issue -company.List of information to be contained in the prospectus. The prospectus should contain all the related information of the company like -general information.

or report by the accountants -statutory and other information -statement by experts. 79 . -mention of any outstanding litigation -management perception of risk factors -financial information like the report by the auditors of the company.-particulars in regard to the company and other listed companies under the same management.

REGISTRATION OF PROSPECTUS   A prospectus can be issued by or on behalf of a company only when a copy thereof has been delivered to the Registrar for registration The registration must be made on or before the date of publication thereof 80 .

  The copy must be signed by every person who is named therein as director or proposed director of the company Further such a prospectus must state on the face of it that a copy of it has been delivered to the Registrar for registration on or before the date of its publication 81 .

82 . The Prospectus must be issued within 90 days of the date on which a copy thereof being delivered to the Registrar for registration.

To keep an authenticated record of the terms and conditions of issue of shares or debentures and To pinpoint the responsibility of the persons issuing the prospectus for statements made by them in the prospectus 83 . 2.OBJECTS OF REGISTRATION OF A PROSPECTUS 1.

84 . To increase its authorized share capital by such amount as it thinks expedient by issuing fresh shares. by an ordinary resolution passed in general meeting alter the conditions of its memorandum in regard to capital so as: 1. a company limited by share capital may. if the articles authorize.Alteration of share capital Sec 94 provides that.

and reconvert the stock into fully paid-up shares of any denominations 85 . 3. To consolidate and divide all or any of its share capital into shares of larger amount then its existing shares.2. To convert all or any of its fully paid-up shares into stock.

To sub-divide its shares. into shares of smaller amount than fixed by the memorandum. or any of them.4. 86 . but the proportion paid up and unpaid on each share must remain the same.

have not been taken or agreed to be taken by any person 87 .5. at the date of the passing the resolution in that behalf. To cancel shares which.

The creditors are entitled to object under certain conditions. 88 .PROCEDURE FOR THE REDUCTION OF CAPITAL    The company should pass a special resolution for the reduction of the capital Then it has to apply to the court (now tribunal) by the way of petition to confirm the resolution .

  The company has also to send minutes giving detail of the share capital altered The reduction of the capital takes effect only on registration of the court s (now tribunal) order with the Registrar and not before 89 .

and that the share capital is now as set out in the minutes. The Registrar will issue a certificate of registration which will be a conclusive evidence that the requirements of the act have been compiled with. 90 .

thereby altering the memorandum within the meaning of section 40. be in accordance with the articles 91 . therefore.  The registered minutes are deemed to be substituted for the corresponding capital clause in the memorandum. The copies of the memorandum which will be issued subsequently must.

They are in fact the mainspring of the company 92 . The directors are the brain of a company.DIRECTORS     A company in the eyes of law is an artificial person. They occupy a pivotal position in the structure of the company.

conduct.Definition of Directors A Director is a person having control over the direction. management or superintendence of the affairs of a company Only individuals can be directors 93 .

NUMBER OF DIRECTORS    A public company shall have at least 3 directors A private company shall have at least 2 directors However a public company having a paid-up capital of Rs.5crores or more. one thousand or more small share holders shall have at least one director elected by such small share holders in the manner prescribed. 94 .

  The number fixed by the statutory limit may be increased or decrease within the limits prescribed by the articles by an ordinary resolution Any increase in the numbers of directors beyond the maximum permitted by the Articles shall be approved by the Government 95 .

no approval of the central government is needed. 96 . If the increase in the number does not make more than 12.

97 .Small shareholder  They are the shareholders holding shares of nominal value of Rs.20000 or less in a public company.

POSITION OF DIRECTORS     Directors Directors Directors Directors as as as as agents employees officers trustees 98 .

Appointment of the directors by the directors 4.Appointment of directors 1.Appointment of the directors by the company 3.First directors 2.Appointment of the directors by the third parties 99 .

100 .Appointment by proportional representation 5.Appointment of the directors by the Central government.4.

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