1. The Companies Act 1956 Definition & characteristics of a company,, Kinds of Companies, Provisions relating to incorporation, : Memorandum of Association, Doctrine of ultra-vires, Articles of Association, Doctrine of indoor management & constructive notice, Concept of Prospectus. Company Meetings, Resolutions Concept of Prospectus. Role & duties of promoter, transfer and transmission; Management – Appointment of Directors, Powers, duties, & liabilities of Directors. Winding Up of the Company - Types of Winding up.

2. The origins of Company  The origins and development of Company law in India is based on the English Company Law. Whatever Company legislations have been passed in England from time to time has been followed by the Indian law with certain modification. The Companies Act, 1956 is said to follow the U.K. Companies Act, 1948. In England, the ‘merchant guilds’.

3. History of Company Legislation in India  The Bhabha committee submitted its report in April 1952 covering almost all aspects of the Company law. Based on the recommendation of the Committee Report, a Bill was introduced in the parliament in 1953 which later on took the shape of the present Company Act viz. the Companies Act, 1956.

4. Company:-  The word ‘company’ has no strict technical or legal meaning literally the word means a group of persons associated for some common object or objects such as business, sports, charity etc. But, in common parlance, the word ‘company’ is normally reserved for those associated for economic purposes, i.e. to carry a business for gain.

5. Meaning and Definition of a Company  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.

6. Some more Definition of a Company  “a company is an artificial person created by law, having separate entity, with perpetual succession and common seal.” by Prof. Honey

7. Cont...  “A company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising from there”. Lord Justice Lindley

8. Cont.....  “A corporation is an artificial being, invisible, intangible, existing only in contemplation of the law is called company” Chief Justice Marshall

9. 9 Features of a Company 1. Incorporated Association 2. Separate legal Association 3. Artificial Person 4. Limited Liability 5. Transferability of Shares 6. Perpetual Succession. 7. Common Seal.

10. 1 Incorporated Association  A company must necessarily be incorporated or registered under the Companies Act. Minimum number required for this purpose is seven in the case of a ‘Public company’ and two in case of a 'private company' (Section 12).

11. 2 Separate legal Association  A company is a legal person having nationality in accordance with the country of its incorporation and a domicile in accordance with the place or state of its incorporation or registration.

12. 3 Artificial Person  The company, through a justice person, does not possess the body of a natural being. It exists only in the eyes of law. Being an artificial person, it has to depend upon natural person, namely, the directors, officers, shareholders, etc.,

13. 4 Limited Liability  One of the important advantages of formation of a company is that the members of the company are only liable to contribute towards payment of its debts to a limited extent. If the company is limited by shares.

14. 5 Transferability of Shares  The shares of a public company are freely transferable and members can dispose of their shares whenever they like without seeking any permission from the company or the other members. In a private company, however, some restriction on the right to transfer shares is essential in its articles as per section 3(I) (iii) of the companies Act, 1956,

15. 6 Perpetual Succession  Since company is an artificial person, it can not be incapacitated by illness and does not have an allotted span of life. Being distinct from the members, the death, insolvency or retirement of its members does not affect the Company. Members come and go but the company can go forever. It continues of may even if all its human members are dead.

16. 7 Common Seal.  A company being an artificial person has no body similar to a natural person. It does not have a mind or limbs of human being. It acts through natural person namely, the directors and other officers and employees of the company. But it can be held bound by only those documents which bear its signature. Common seal is the official signature of a company.

17. Types of Companies  Private Company  Public Company

18. Private Company [Section 3(1)(iii)]  A private company means a company which has a minimum paid up capital of one lakh rupees or such higher paid-up capital as may be prescribed and by its articles : (a)Restricts the right to transfer its shares, if any; (b)limits the number of its members to 50, not including:

19. Private Company …contd. (i) persons who are in the employment of the company, and (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; (c) prohibits invitation to the public to subscribe for any shares in or debentures of, the company.

20. Private Company …contd. (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.  Where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of membership, be treated as a single member.

21. Public Company [Section 3(1)(iv)]  A public company means a company which: is not a private company or subsidiary to private company.[In other words, it should not have the restrictions of Section 3(1)(iii) in its articles ]; (b) It has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;

22. Some other Types of Companies  Royal Charter or Chartered Companies: Treated as foreign companies.  Statutory Companies: Formed under Special Statutory Act of Parliament or State Legislature. For e.g., RBI, SBI, IFCI, etc.  Registered Companies: Are registered under the Companies Act. These companies have MoA and AoA for internal & external regulations.  Under the Act the companies are either (i) Companies limited by shares, (ii) Companies limited by guarantee, or (iii) Unlimited Companies.

23. Under the Act the companies are either  (i) Companies limited by shares,  (ii) Companies limited by guarantee,  (iii) Unlimited Companies.

24. Companies limited by shares : (sec 12 (2) a )  Such a company is company is called company limited by shares. A company limited by shares may be a public limited company or a private limited company.  The former has a minimum paid-up capital of Rs. 5 lac. Members minimum 7, maximum unlimited to form a company. The latter has a minimum paid-up capital of Rs. 1 lac. Members limited Minimum two. For private & public company resp...  During the existence of the company or in the event of winding up, a member can be called up to pay the amount remaining unpaid on the shares subscribed by him.

25. Companies limited by guarantee :(sec 12 (2) b )  Companies may or may not have share capital.  Each member promises to pay a fixed sum of money specified in the Memorandum in the event of liquidation of the company for payment of debts and liabilities of the company.  The amount promised is called ‘guarantee’.  Depend on entrance and subscription fees for their existence.  The amount guaranteed by each member is in the nature of reserve capital. Cannot be called upon except in the event of winding up of company.

26. Unlimited Companies: (sec 12 (2) c )  Liability of the members is unlimited like an ordinary partnership firm.  A company not having any limit on the liability of its members is called an ‘unlimited company.’  The articles of such a company shall state the number of members with which the company is to be registered.  Section 12 gives choice to promoters to form a company with or w/o limited liability.

27. How to form a company?  The whole process of formation of a company may be divided into four stages, namely: (i) Promotion (ii) Registration (iii) Raising of Capital. (iv) Commencement of Business.

28. 1) Promotion  Who is a Promoter? (sec- 62-69).  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”. However, the persons assisting the promoters by acting in a professional capacity do not thereby become promoters themselves.

29. Legal Position of a Promoter  Promoter stands in a fiduciary position towards the company.  In other words, he is not allowed to make secret profits.  Promoter has its liability,in case of secret profits.

30. 2) Registration/Incorporation  Private Company  Minimum Number of Members required – 2.(max under the act.)  Public Company  Minimum Number of Members required – 7.(max under the act.)

31. 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: (i)Section 25 Companies (ii)Govt. Companies (need not use Pvt. Ltd.) (iii)Producer Companies.

32. 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 and Articles of Association  Memorandum (sec 33(1)a)defines the limits & scope of activities of a company.  Articles (sec 33(1)b) defines and structure of a company.

33. 3. Preparation of other documents  A Statutory Declaration(sec 33(2)).  Consent of Directors (in case of a Public Company) (sec 266(1)).  Particulars of Directors, Manager, Secretary, etc. in the prescribed form.  Notice of registered address To be supplied within 30 days of incorporation.(sec 146).  Power of Attorney in favour of a professional to effect registration. Steps …contd.

34. 3) Raising of Capital  A company may raise capital through  Private placement  Issue of Prospectus  Private placement means raising of capital from friends, and through brokers/members.

35. Issue of Issue of Prospectus 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;(under SEBI act 1992. ) (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.(as per MOA) The same proportion as is payable on application and allotment on the shares, offered for public subscription;

36. Cont...  (c) There has been filed with the Registrar a duly verified declaration by one of the directors or the secretary or, where the company has not appointed a directors, a secretary in whole time practice in the prescribed form that clauses (a), (b) and (mentioned above) have been complied with.

37.  Commencement of Business.

38. Memorandum of Association(MOA). The first step in the registration of a company is to prepare memorandum of association. This is also known as constitution of the company.

39. What is Memorandum of Association of a company?  No company can be registered under the Companies Act, 1956 without the memorandum of association.  Under Section 2(28) of the Companies Act, 1956 the “The memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies law or the Companies Act, 1956.” 39

40. Some defination of MOA  “Is the constitution or charter of the company and contains the powers of the company.”- Lord cairns.  “The purpose of the MOA is to enable the sharholder,crediators, and those who deal with the company, to know what is its permitted range of enterprise.” – Lord Macmillan

41. Six Clauses CONTENTS OF MEMORANDUM OF ASSOCIATION Name Registered office LiabilityCapital Association or subscription Objects

42. 1 Name Clause[ section 13(1)(a)]  The memorandum must state the name of the company with ‘limited’ as the word,in case of a public limited company and with ‘private limited', in the case of a private limited company.  The company is free to choose any name but it must not be undesirable or must not resemble the name of any other registered company. 42

43. 2.Registered office clause [section 13(1)(b)]  The state in which the registered office of a company will be situated is mentioned in this clause.the registered office of the company is the official address of the company where the statutory books and records must normally be kept. 43

44. 3. Object Clause section 13(1)(c)&(d)] This clause is quite important and must be very carefully drafted as it determines the activities of the company. In the object clause each and every detail of activities of the business to be carried out must be laid down.  Main object:- This clause contains the main objects of the company to the pursued the purpose on its incorporation.  Objects incidental or ancillary :- It covers the objects which are incidental or ancillary to the attainment of the main object  Other objects :- This sub-clause will cover any objects which are not included in the ‘main objects’ 44

45. 4. Liability Clause[section 13(2)]  This clause states the nature of liability of the members of the company.  In the case of a company limited by share or by guarantee the fact that the liability of its members is limited must be made absolutely clear.  If the share are fully paid up his liability is clear. But in case of partly paid-up shares the liability is limited to the amount which is unpaid.  In case of a company limited by guarantee,the liability clause must state the amount which every member undertakes to contribute to the assets of the company in the event of its winding up. 45

46. 5. Capital Clause[section 13(4)(a)]  This clause states that amount of the capital with which the company is to be registered.  This clause should also state the number and face value of shares into which the capital of the company is divided.  The capital with which the company is ‘registered’ or ‘nominal’ or ‘authorized’. 46

47. 6. Association clause [section 13(4)(c)]  The association clause states – in this cause, the members declare that they desire to be formed into a company and agree to take the shares stated against their names.  The names,address and occupation of the members must be given each members must sign in the presence of witness.  They also agree to the purchase of qualification shares if any. 47

48. Case: Company for Restaurant Husband and wife, Niraj and Seema Mishra, based in Mumbai, are forming a company. They want a short name for the company with their surname in it. The company is being formed to run a restaurant. They project they would need 20 lakhs as the capital of the company. Immediately, the husband would contribute Rs. 2,00,000 to the share capital of the company. Mr. Mishra hopes to find others, after the company is formed, to take the shares of the company. They also contemplate occasionally hiring out the car they would buy for the company. Develop a Memorandum of Association for the Company. 48

49. Memorandum of Association of the Mishra private limited I. The name of the company is Mishra Private Limited II. The registered office of the company will be situated in the state of Maharashtra. III. The objective for which the company is begin established are as follows: a. Main object: running of restaurants b.Ancillary object : opening bank accounts, hiring premises an running of bakery c. Other objects: Hiring out of vechicles 49

50. IV. The liability of the members is limited v. The authorized share capital of the company is RS.20,00,000,divided into 2,00,000 50

51. ALTERATION OF MOA. As per section 16 “ A company shall not alter the condition contain in its memorandum,except i n the case,in the mode,and to the extent for which express provision is made in the company act.”

52. Special Resolution with Written Approval of Central Government. No Approval of Central Government is necessary if the change of name involves only the addition or deletion of the word “Private” with ordinary resolution (sec 22). Change by “ordinary resolution” and approval of Central Government when name is identical or too closely resembles the name of an existing company (sec 23). ALTERATION OF NAME CLAUSE. CLAUSE 52

53. From one premises to another premises in the same city, town or village. By passing a resolution to Board of Directors (board’s resolution), & with notice within 30 days. CHANGE OF REGISTERED OFFICE 53

54. From one town or city or village to another town or city or village in the same state In case of other state. 1.Special Resolution. 2.Confirmation of Regional Director — when jurisdiction of Registrar of companies is changed. 3.Copy of (i) & (ii) to be filed with Registrar office. 4.Notice of new location to Registrar office within 30 days (sec 146). CHANGE OF REGISTERED OFFICE 54

55. A.A. Special Resolution B. Alteration is sought on any of these grounds: (sec 17 1-2 ) To carry on its business more economically & more efficiently. To attain its main purpose by new or improved means. To enlarge or change the local area of its operations. To carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company. To sell or dispose off the whole or any part of the undertaking. To amalgamate with any other company. C. Copy of (A & B) is filed with ROC within 30 days. ALTERATION OF OBJECTS CLAUSE 55

56. The liability of a member of a company cannot be increased unless the member agrees in writing (sec 38). From unlimited liability, it can be made limited by re-registration of the company. ALTERATION OF LIABILITY CLAUSE 56

57. A company can reduce share capital by first passing a special resolution for reduction of capital.but powers to reduce share capital must be guaranteed in the articles of the company,otherwise the share capital can be altered by special resolution giving such powers. The company can apply to the court by petition for getting confirmation from the court for reducing the share capital. The main duty of the court is to look after the interest of the creditors and different classes of shareholders, and then decide whether the company should be allowed to reduce share capital. Same for vice versa. ALTERATION OF CAPITAL CLAUSE 57

58. The words : Ultra means beyond Vires means the powers Ultra Vires means beyond the powers. A company which owes its incorporation to statutory authority can not effectively do anything beyond the powers expressly or impliedly conferred upon it by the statute or Memorandum of Association. ‘ULTRA VIRES’’ 58

59. Doctrine of ultra vires  The object clause of the Memorandum of the company contains the object for which the company is formed.  An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and, therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine of ultra vires.

60. Cont…  This doctrine prevents the wrongful application of the company’s assets likely to result in the insolvency of the company and thereby protects creditors/invester.  Besides the doctrine of ultra vires prevents directors from departing the object for which the company has been formed and, thus, puts a check over the activities of the directions.  It enables the directors to know within what lines of business they are authorized to act.

61. Articles Of Association  A document that specifies the regulations for a company's operations.  The articles of association define the company's purpose and lays out how tasks are to be accomplished within the organization, including the process for appointing directors/body and how financial records will be handled. 61

62. Cont... It must be  a) Printed  b) Divided into paragraphs & numbered consecutively  c) signed by each subscriber to the Memorandum in the presence of witness (sec 30).

63. Items covered by the Articles of Association include :-  The importants of company.  Powers, duties, rights and liabilities of Directors.  Powers, duties, rights and liabilities of members.  Rules for Meetings of the Company.  Dividends.  Borrowing powers of the company.  Calls on shares.  Transfer & transmission of shares.  Voting powers of members 63

64. Companies which must have Articles  Unlimited Companies: (sec 27 1 )  The Articles of such a company must state:  Total number of members; and  Share capital.  Companies limited by Guarantee : (sec 27 2 )  Articles of such company must state total number of members.

65. Companies which must have Articles …contd.  Private Companies limited by shares:  must include requirements of Section 3(1)(iii). a)Transfer of shares, b) No of member c) prohibition of any invitation d) prohibition of deposites. No Article Company  A public limited company having share capital may be registered without Articles.

66. Memorandum of AssociationArticles of Association Charter of CompanyRegulations for internal management Defines the scope of the activitiesRules for carrying out the objects of company. Supreme documentSubordinate to the memorandum. Must for every company Public Company limited by shares need not have it (Table ‘A’ applies) Strict restrictions, alteration only with sanction of central govt./ tribunal. Can be altered by special resolution. It define the relationship between the company & the outsiders It define the relationship between company & its staff and between members & members interests

67. 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 in proper sence, this is called as constructive Notice of memorandum and articles”

68. Legal effect  The legal effect of this doctrin is that if a person deal with a company in a manner which is inconsistent with the provisions contained in M/A & A/A.  He must be deemed to have dealt with the company at his own risk & cost and shall have to bear consequences thereof.

69. DOCTRINE OF INDOOR MANAGEMENT There is exception to the above doctrine of constuctive notice that is 1)Persons dealing with the company are not bound to enquire into the regularity of the internal proceedings 2)They need not enquire as to whether the general meeting of the shareholder or the meeting of the bord of directors was convened on proper notice. 3)Whether a proper quorum was present at the meeting or whether the necessary resolution was properly pass or not.

70. These are entitled to assume that what has been regularly done by the company And can hold the company liable even if the internal formalities are found ‘ not to have been completed’ This rule is know as the doctrin of indoor management. Exceptions :- 1)Knowledge of Irregularity 2)Negligence by outsider 3)Forgery 4)Acts outside the scope of Apparent Authority.

71. The Directors  Section 2(13) define a Director  “ Any Person occupying the position of dorector, by what ever name is called as a directors”  The director are responsible for contemplating and determining the general policy of management and directing the company’s business in best possible manner.

72. 72 Duties of the Directors 1) Fiduciary Duties a) To act honestly and with good faith b) Not to use confidential information of the company for their own purpose. c) Duty of Care and to act reasonably while acting for the company. Statutory Duties a) Not to contract with company, where he/she or his relative has an interest in the Contract. b) where he/she has a interest, they need to inform the board or seek prior approval while entering into contract, otherwise the contract is voidable. c) Duty to attend and convene meetings. d) Duty not to delegate.

73. The directors liabilities  The liability of the directors can be either civil or criminal.  If provided in the MOA, the liability may be unlimited, for a limited company, otherwise it may be altered.  Liability may be for breach of fiduciary duties  The directors are personally liable for the following:  a) Ultra vires acts  b) negligent acts  c) liability for the acts of third parties

74. Criminal Liability  Liability of the director for any untrue statement in the prospectus  Inviting any deposits in contravention of the law  Liability for false advertisement  Failure to repay the application money, which was excess  Concealing the names of the creditors  Failure to lay the balance sheet.  Failure to provide information to the auditor etc.

75. Business Law 75 Prospectus  A document containing detailed information about the company and an invitation to the public for subscribing to the share capital and debentures issued is called prospectus

76. Business Law 76 Contents of a Prospectus  General Information  Capital Structure of the company  Terms of the present issue  Company Projects

77. Business Law 77 Statement in lieu of Prospectus When a public company chooses to raise its capital only from its directors, members or their relatives then it issues a statement in lieu of prospectus which contains the details of share capitals filed with the registrar.

78. Business Law 78 Shelf Prospectus  A shelf prospects means a prospects issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus.  Such prospectus is valid for one year.

79. Meetings  “Any gathering,assembly or coming together of two or more persons for the transaction of some lawful business of common concern is called meeting” - P K Ghosh  “ concurrence or coming together of atleast a quorum of members by previous notice or mutual agreement for transacting business for a common interest is a meeting”

80. Business Law 80 Various kinds of Meetings  Statutory Meeting  Annual General Meeting  Extra Ordinary General Meeting

81. Business Law 81 Statutory Meeting  For a public Ltd. Co. happens once in a life time, not required for Pvt. Ltd. Co.  Should be conducted within the one month of issuing of certificate of commencement.  A statutory report is prepared which give details about the shares allotted, the progress with respect to the contract of the company.  Failure of holding the statutory report can lead to the winding of the company.

82. Business Law 82 Annual General Meeting (AGM)  Held once in a year to adopt the final account, appoint new auditors, elect directors, declaration of dividend.

83. Business Law 83 Extra Ordinary General Meeting (EGM)  Any meeting of shareholders after the AGM would be an EGM.  Normally called between two AGMs, this meeting can be called by directors, can be called by court or if 10% of the shareholders make a requisition to the board to call for an EGM.  The board of directors must do so with in 45 days, failing which these 10% shareholders can call the EGM themselves

84. Business Law 84 Requisites of a valid meeting  Notice of the meeting  Agenda of the meeting  Proxy  Quorum of Meeting  Voting  Minutes of meeting

85. Business Law 85 Winding Up  Winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members

86. Business Law 86 Process  A liquidator is appointed by the court / director and director gives the whole of the control / affairs of the company to the liquidator at the time of the winding up of the company.  After utilizing all the information's liquidator disposed the assets of the company and the funds are utilized to pay the creditors and the surplus is distributed among the shareholders. Once this is over the company is said to be dissolved.

87. Business Law 87 Modes of Winding Up 1. Winding up by Tribunal ( Court) or Compulsory winding up 2. Voluntary Winding Up

88. Business Law 88 Winding up by tribunal 1. If the company has, by special resolution, resolved that the company be wound up by the tribunal. 2. If default is made by company in delivering the statutory report to the registrar or in holding the statutory meeting. 3. If the company doesn’t commence the business within a year of its incorporation, or suspends its business for a whole year.

89. Business Law 89 Winding up by tribunal 4. If the number of members is reduced, in the case of public company below 7, and in the case of private company below 2. 5. If the company is unable to pay its debts. 6. If the company has mad a default in filing with the registrar its balance sheet and profit & loss account or annual return for any five consecutive financial year. 7. If the company has acted against the interest of the India

90. Business Law 90 Voluntary Winding Up  Voluntary winding up is one which is voluntarily decided by the members or creditors on their own level without intervention of tribunal