Legal Aspects of Business (LAB)

BY :- S. G. PRAJAPATI. Lecturer SVIM, Kadi. August- 2010 prajapatisandip79@gmail.com 1

CH- 1
Volume Two Company Law

Nature of Company

of Business

Contents
        

Nature of Companies Kinds of Companies Formation of Company Memorandum of Association Articles of Association Prospectus Membership in a Company Meetings and Proceedings Winding up

Commencement of Business


Sole Trader Partnership Company

Partnership


Partnership is one of the three ways of owning a business The Partnership Act 1890 defines a partnership as the relationship between two or more persons carrying on a business in common with a view to profit

Partnership (cont)


A partnership does not have a separate legal identity from its partners However, a partnership can have its own name and sue and be sued in that name Partners are agents for their firm and the other partners, so the rules from the law of agency apply


especially implied authority

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COMPANY
A company may be defined as a voluntary association of persons who have come together for carrying on some business and sharing the profits there from.
y

Section 3(1)(i) of the Companies Act, 1956 defines a company as: a company formed and registered under this Act or an existing Company. Existing Company means a company formed and registered under any of the earlier Company Laws.

Company Act 1956



The company act came into force from 1 April 1956. The act was based upon the recommendation of company law committee appointed under the chairmanship of Mr. C. H. Bhaba on 25 -101950. The committee submitted its report in 1952. The Indian company act extends to the whole India.

Objective of Company Act 1956

1.

Development of a company because a corporate form of business organisation constitute a very important sector of economy. Protect the interest of large number of share holder as they have a separate ownership from management in joint stock companies. Safe guard the interest of the creditors so that they have there money on time

2.

3.

Continue
4. To equip the government with necessary powers so that the interest of the consumer, labors and suppliers can be protected. 5. To attain the ultimate goal of the economic policy that is establishing a socialistic pattern of society

Characteristics Of A Company

1 Separate legal entity 2.Artificial person 3.Perpetual existence 4.Comman seal 5.Limited liability 6.Capacity to sue or to be sued 7.Transferability of share

Separate legal Entity

A

company is an separate legal entity means it is different from its members. It works as a individual body.  It can make contracts, open a bank account, can sue and be sued by others.  The law has recognised that even if a person holds virtually all the shares, the right and obligations of the company shall be different from its members.

Artificial person


A company is a purely a creation of law. It is invisible, intangible and exists only in the eyes of law. It has no soul, no body, but has a position to enter or exit into a contract, to appoint a people as its employees In short it can do every thing just like a natural person.

Perpetual existence [sec 34(2)]



Section 34(2) of the act states that an incorporated company has perpetual life. The life of the company is not related to the life of the members . Law create the company and law alone can dissolve it. The existence of the company is not affected by death, insolvency, retirement or transfer of share of members.

Limited liability


It means that the liability of a member shall be limited to the value of the share held by him, he cannot be called upon to bear the loss from his personal property.

Common seal


A company being an artificial person can not work as a natural being. Therefore, it has to work through its directors, officers and other employees. Common seal used as a official signature of a company company.

Transferability of share sec(82)



The share of a company are freely transferable. The shareholder can transfer his share to any person without the consent of other members. A company cannot impose absolute restrictions on the rights of member to transfer their shares

Capacity to sue and be sued



When a company incorporated it acquire a separate and independent legal personality. As a legal person it can be sue and be sued in its own name.

Comparison of Ownership


It is useful to compare the advantages and disadvantages of the three forms of business
  

Sole trader Partnership Company

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Sole Trader - Advantages



No legal filing requirements or fees and no professional advice is needed to set it up. You just literally go into business on your own. Simplicity one person does not need a complex organizational structure.

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Sole Trader - Disadvantages



It is not a particularly useful business form for raising capital (money). For most sole traders the capital will be provided by personal savings or a bank loan. Unlimited liability the most important point to note in terms of comparing this form to the company in that there is no difference between the sole trading business and the sole trader himself. As a result he has personal liability for all the debts of the business.

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Partnership - Advantages


No formal legal filing requirement involved in becoming a partnership beyond the minimum requirement that there be two members of the partnership. Easier to obtain capital as there can be up to 20 members of the partnership, all of whom could pool their investment within the partnership.
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Partnership Advantages (cont.)



If you are aware of the problems the Partnership Act can cause (see disadvantages) then you can draft a partnership agreement to vary these terms of the Act The partnership agreement can therefore be used to provide a very flexible organizational structure although this usually involves having to pay for legal advice.

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Partnership - Disadvantages
 

A partnership will end on the death of a partner. If you are unaware of this when the partnership is formed, the Act may not reflect the intention of the partners. The partners are jointly and severally liable for the debts of the partnership. This means that each partner can be sued for the total debts of the partnership
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Company - Advantages


Companies are designed as to make it easy to raise capital. Companies have the ability to subdivide their capital into small amounts, allowing them to draw in huge numbers of investors who also benefit from the sub-division by being able to sell on small parts of their investment. Limited liability also minimizes the risk for investors and is said to encourage investment.
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Company Advantages (cont.)



It is also said to allow managers to take greater risk in the knowledge that the shareholders will not lose everything. The constitution of the company provides a clear organizational structure which is essential in a business venture where you have large numbers of participants.

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Company - Disadvantages


Forming a company and complying with company law is expensive and time consuming. It also appears to be an very complex organizational form for small businesses, where the Board of Directors and the shareholders are often the same people

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Company and Partnership Distinguished

      

Regulating Act Mode of Creation - Registration Legal status Personality, property & rights Liability of members Management to take part in it Transferability of interest- with/without consent Authority of members agents for contract
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Continue
    

Restriction on power Insolvency of firm and winding up of company Debt Dissolution with death of partner. Number of members

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THANK YOU

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CH- 2
Volume Two Company Law

Kinds of Companies

of Business

Types of companies
(Registered under company act 1956)
COMPANIES

Incorpora ted
Chartered companies
Statutory companies Registered companies

Liability
limited liability unlimited liability

Number of members
private

Control
holding

ownership
Governmen t Non governmen t

public

subsidiary

INCORPORATED
1.CHARTERED COMPANIES These companies are incorporated under a special charter granted by QUEEN or KING. such as the east India company. The bank of England.
The provision of Company Act does not apply to it.

2.STATUTORY COMPANIES These companies are incorporated by special act of legislature (ACT of parliament & company) example of such companies are RBI,SBI,UTI, LIC, Rail way, GSPC, GSRTC Etc.
The provision of Company Act apply to them.

INCORPORATED (con)
3. REGISTERED COMPANIES Companies registered under the Indian Companies Act, 1956 or an existing Company are called registered companies. To become a registered company one has to take the Certification of Incorporation from the registrar.

COMPANY WITH LIABILITY



COMPANY LIMITED BY SHARE [sec12(2)a]

Companies in which the liability of its members is limited to the extent of the amount unpaid on the shares held by a particular member. Liability can be enforced during the existence of the company and also at winding up of it. If share are fully paid, then liability of the share holder holding such share is NIL. Most commonly found in India

Conti
 COMPANY

LIMITED BY GUARANTEE

The liability of members is limited to a fixed amount which members undertake to contribute to the assets of the company in case of its winding up. The articles of such company must list out name of all such members with which company is incorporated. The purpose of this company is not profit but for the promotion of art, science, culture, charity, sport, or for some similar purpose. These companies may not have share capital.
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Conti
 UNLIMITED

COMPANIES Where in members are liable for the debts of the company irrespective of their interest in the company. In case of such company every member is liable for the debt of the company in proportion of his interest in the company. An unlimited company may not have share capital.
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Number of Members
PRIVATE COMPANIES [sec 3(1)(iii)] A private company is one which, by its Article of association :-

Restricts the right to transfer its share, if any Limits the maximum number of its member to fifty Prohibits any invitation to the public to subscribe for any share or debenture of the company.

Number of Members(con)
PUBLIC COMPANY [SEC 3(1)(iv)] A public company means a company which is not a private company. In other words, a public company, means a company which by its article does not-limit the number of its member. Does not prohibit any invitation to the public to subscribe for any share in, or debentures, of the company.

Difference Between Private & public Company

       

Number of Shareholder 2/7 50/unlimited Number of Directors 2/3 Restriction on appointment of directors Restriction on invitation to subscribe for shares Transferability of shares Quorum 2/5 Special privileges Managerial remuneration - No restriction / 11%
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Special privileges to private companies

        

Number of members Allotment before minimum subscription Issue of prospectus - Advertisement for allotment Kind of shares voting rights/types fix by them only Commencement of business Index of members Statutory meetings/ report to registrar. Managerial remuneration Number & rules for directors

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When does Private Company become Public Company ?

1. Conversion by default
Default is made in complying with the essential requirements of a private company company low board ceases the special privileges of private company. It may also grant relief if on some other grounds it is just and equitable.
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Conti
2. Conversion by operation of law


where at least 25% of its share capital is held by one bodies corporate.
Sec. 43-A bodies corporation means public company or private company which has become public company by virtue of sec. 43.

Where its average annual turnover during the relevant period(3 consecutive financial year) is Rs. 10 crores or more. After 3 month it is converted.
Ex. 31/03/1990 8 crores+ 31/03/1991 10 crores+ 31/03/1992 -12 crore = avg annual turen over is 10 crore. So on 1 july 1992 converted.
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Conti


Where the private company holds at least 25% share capital of a public company.
In case of (1) and (3), the private company becomes a public company on and from the date on which the aforesaid percentage is first held.

Where a private company invites, accepts or renews deposits from the public
Deposits received from director, members or there relatives are excluded from meaning of term public
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Conti
3. Conversion by choice Company can do it by passing the resolution to altering the Articles of association. Company must also:

file the copy of such resolution to registrar with in 30 days. Take steps to raise its member to at least 7 & director to 3. Alter the regulations from articles which not fit for public company.
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Companies According to Control



HOLDING AND SUBSIDIARY COMPANY

where a company has control over another company, it is known as the holding company The company over which control is exercised is called the subsidiary company.

Ownership


Government Company (sec 617)

A government company means any company in which at least 51% of the paid up share capital is held by the central government or by any state government or partly by one or more state Government.

Rues for Govt company

1. 2. 3.

Appointment of auditor by central govt. Audit report to be submitted to auditor general of India Audit report to be placed before parliament

Conti


Foreign company It means any company incorporated outside India which has a place of business in India is known as foreign company. Rules for foreign company
Documents Accounts Name Requirement as to prospects Winding up
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1. 2. 3. 4. 5.

Some jargons


  

Association not for profit condition for license One man company Public financial institutions Prohibition of large partnership

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THANK YOU

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CH- 3
Volume Two Company Law

Foundation of Companies
of Business

How to form a company?



The whole process of formation of a company may be divided into four stages, namely:
(i) Promoter done preliminary work (ii) Registration with Registrar (iii) Floatation/Raising of Capital (iv) Commencement of Business.

Who is a Promoter?


A person who does the necessary preliminary work incidental to the formation of a company. The first person who control the companies affairs. When these things done, they hand over the control of company to its directors, who are often the promoter themselves.

Conti


Bowen, L.J.
The term promoter is a term not of law but of business, usefully summing up, in a single word promotion, a number of business operations familiar to the commercial world by which a company is brought into existence.

Functions of Promoter
He settles the detail of companies memorandum of association, articles of association , nomination of directors, solicitor, bankers, auditors, secretary and address of registered office of company
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Legal Position of a Promoter



Promoter stands in a fiduciary(Trusty) position towards the company. Fiduciary position hands in the creation and molding of the company.


1. 2. 3.

In other words,
He is not allowed to make secret profits. To give benefit of negotiation to the company Not to make unfair use of position.

Remuneration of promoters.

Registration/Incorporation


Private Company


Minimum Number of Members required 2.

Public Company


Minimum Number of Members required 7.

Steps
1.

Application for availability of name:

Three names in order of priority conforming to the provisions of the Act and the Guidelines issued by Department of Company Affairs in this regard:  Name to end with the word(s) Limited or Private Limited, as the case may be, except:
NGO. (ii) Govt. Companies (need not use Pvt. Ltd.) (iii) The word Company In name.
(i)

Steps


contd.

Name should not be identical or too similar to the name of an already existing company. Should not include the name of a registered trade mark.

2.

Preparation of Memorandum Articles of Association



and

Memorandum defines and limits the scope of activities of a company.

Steps


contd.

Contents of Memorandum 1. Name clause 2. Registered office clause 3. Object clause



Doctrine of ultra-vires

4. 5.

Liability clause Capital clause

Steps


contd.

3. Preparation of other documents

Power of Attorney in favor of a professional to effect registration. Consent of Directors (in case of a Public Company) Particulars of Directors, Manager, Secretary, etc. in the prescribed form. Notice of registered address


To be supplied incorporation.

within

30

days

of

Steps


contd.

Statutory Declaration
To the effect that all requirements of law with respect to incorporation have been duly complied with.  The declaration to be signed by:

 

Advocate of Supreme Court or High Court; OR C.A../C.S. practicing in India and associated with the formation of the company; Director, Manager, Secretary of the company (as named in the Articles)

4. Filing of documents with Registrar.

Certificate of Incorporation



Effect of Certificate of Incorporation (Section 34)

On incorporation, the association of persons becomes a body corporate by the name contained in the memorandum Capable forthwith of exercising all the functions of an incorporated company Having perpetual succession and a common seal Liability on the part of the members to contribute to the assets of the company in the event of its being wound-up as is mentioned in the Act.

  

Conclusiveness of Certificate of Incorporation (Section 35)



Conclusive to the effect that all requirements of law relating to registration and matters precedent and incidental thereto have been duly complied with.
If after incorporation it is discovered that there are certain irregularities with regard to registration, these will not affect the validity of the company.

Raising of Capital


A company may raise capital through

 

Private placement Issue of Prospectus

Private placement means raising of capital from friends, relatives and through brokers.

Commencement of Business
(Section 149)


Where Company has issued a Prospectus:

A company cannot commence business or exercise borrowing powers unless:

(a) shares up to the amount of the minimum subscription have been allotted by the company; (b) every director of the company has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash,

Pre-incorporation contracts


The promoter 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 preliminary or preincorporation contracts. Position of promoters as regards preliminary contracts.
Company not bound by preliminary contract company cannot enforce preliminary contracts. Promoter personally liable for it.
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1. 2. 3.

Pre-incorporation contracts
 

Void-ab-initio. However, pre-incorporation contracts shall be valid if:



The contract is made for the purpose of the company and the contract is warranted by the terms of incorporation. The company adopts the transactions after incorporation.

THANK YOU

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CH- 4
Volume Two Company Law

Memorandum of Association
of Business

Memorandum of Association
 

 

Memorandum of Association is a fundamental documents of the company. It contains, besides other significant information, the objects for which the company is formed. Object clause defines as well as confines the powers of the company. Anything done beyond these objects is ultravires the company and void.

Conti


Purpose of MOA For Shareholder & Outsiders knowledge. Printing & signing of MOAPrinted. Divided in to paragraph numbers consecutively and Signed by 7 subscribers.(2 ) in presents of one witness.


1. 2. 3.

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Contents of Memorandum
1.

Name Clause: It contains the name with which company is proposed to be registered. Companies Act requires that:
(a) (b)

(c) (d) (e)

The name chosen should end with the word Limited or the words Private Limited, as the case may be. The name should not be undesirable i.e., it should not be identical or too similar to the name of an already existing company Injunction if identical name adopted Prohibition of use of certain names national emblem Use of some key words according to authorized capital. Ex. Corporation 5 cr.

Contents of Memorandum
2. Registered Office Clause:
This clause states the name of the State in which registered office of the company is to be situated.

3. Objects Clause
This clause is to be divided into:
(a)

(b)

Main objects and objects incidental or ancillary to main objects Other objects

A company cannot commence any business stated under other objects unless special resolution by the shareholders is passed.

Contents of Memorandum
4. Liability Clause
The MOA of a company limited by shares or by guaranty shall also state that the liability of its members is limited.

5. Capital Clause
This clause states the authorized capital and the number of shares into which the same shall be divided.

Alteration of Memorandum


Various clauses of memorandum of association can be altered by following the procedure laid down in the Act. Different requirements are prescribed for different clauses:
(a) (b)

1. Name Clause: can be altered by:

Passing a special resolution; and Obtaining the approval of the Central Govt.

Alteration of Memorandum
2. Registered Office Clause: may be shifted:
(a) (b)

within the same city by passing Directors Resolution; From one city to another city within the same State:
 

by passing special resolution only, if no change in jurisdiction of Regional Director by passing special resolution in shareholder.

Alteration of Memorandum
3. Objects Clause
 

Special Resolution Only on Grounds stated in Sec.17(1).

Cannot be increased without written consent of each and every member. Can be reduced:
 

4. Liability Clause


by passing special resolution Confirmation of court

Alteration of Memorandum
5. Capital Clause


Authorized capital may be increased by passing an ordinary resolution at a meeting of the shareholders.

THANK YOU

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CH- 5
Volume Two Company Law

Articles of Association
of Business

Articles of Association


The articles of association of a company are its byelaws or rules and regulations that govern the management of its internal affairs and the conduct of its business. The articles regulate the internal management of the company. They define the powers of its officers. They also establish a contract between the company and the members and between the members inter se. This contract governs the ordinary rights and obligations incidental to membership in the company [Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. (1971)].

Companies which must have Articles



Unlimited Companies:


The Articles of such a company must state:

Total number of members; and  Share capital.


Companies limited by Guarantee:



Articles of such company must state total number of members.

Articles contd.


Private Companies limited by shares:



must include requirements of Section 3(1)(iii).

No Article Company


A public limited company having share capital may be registered without Articles.

Alteration of Articles


Articles may be altered by a company by passing special resolution at a general body meeting of shareholders. However, where alteration has the effect of converting a public company into a private company (i.e., introduction of restrictive clauses of Section 3(1)(iii), approval of Central Government must be obtained.

Doctrine of Constructive Notice



According to Section 610, every person dealing with the company is deemed to have read M/A and A/A and understood the contents thereof in the correct perspective.




Doctrine of Indoor Management

The rule was first laid down in Royal British Bank v. Turquand. Rule of Indoor Management is an exception to the Doctrine of Constructive notice.

Exceptions of Indoor Management

1.

2.

3.

4.

Knowledge of irregularity : Case: Howard v. Patent Ivory Co. Negligence : Case: Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd. Forgery : Case: Ruben v. Great Fingal Consolidated [Secy. Forged signatures of two directors] No knowledge of articles : Case: Rama Corporation v. Proved Tin & General Investment Co.

THANK YOU

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CH- 6
Volume Two Company Law

Prospectus

of Business

Prospectus


A prospectus, as per Section 2(36), 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 or debentures of a body corporate.

Prospectus
contd.


Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things:
(a) It invites subscription to shares or debentures or invites deposits. (b) The aforesaid invitation is made to the public.

THANK YOU

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