Companies Law

Presented by Deepshikha Meeta Nikita Shivani

What is Company ?
The company form of business organisation is one in which the funds of a large number of investors are managed by few persons for the purpose of earning profits which are shared by all the investors.

Registration: A company is to be compulsorily registered under the Companies Act.

Characteristics of a Company

Distinct person Separate legal entity: A company is a distinct person possessing its own identity. It is a separate legal entity , independent from its members, though controlled by the B.O.D.

Salomon v Salomon & Co Ltd [1897] AC 22, it has been held that in common law, a company is a separate legal entity and thus a juristic "person" in the eyes of the law. As with all simple things, the case is complex and has many layers. Aaron Salomon was a Jewish leather merchant in Victorian England. He set up a company with the required seven shareholders (his wife and kids). He lent the company money (as a secured creditor) and then borrowed more money and got into financial trouble. The question of law was who should be paid first, unsecured creditors (like employees and utility bills) or himself as a secured creditor.

The UK Court of Appeal was anti-semetic and felt Salomon was a fraud and his company was a "sham". But the House of Lords court stated that the company was properly set up, there was no fraud and thus Mr. Salomon was a distinct entity from his company, his directorship, his shareholding and his rights as a secured creditor.

Perpetual succession : A company incorporated never dies. It has a perpetual succession. Its member may come and go but the company can go on for ever and remain the same entity

Artificial Person but not a citizen : the company is an artificial person. It functions through its B.O.D. However, it is not a citizen as it cannot enjoy the rights under the constitution of India.

In State Trading Corporation of India v C.T.O (1963) SCJ (705), it was held that neither the provisions of the Constitution nor the Citizenship Act apply to it. It should be noted that though a company does not possess fundamental rights, yet it is person in the eyes of law. It can enter into contracts with its Directors, its members, and outsiders. Justice Hidayatullah once remarked that if all the members are citizens of India, the company does not become a citizen of India.

Transferable Shares: In a public company, the shares are freely transferable. The right to transfer shares is a statutory right and it cannot be taken away by a provision in the articles. Limited Liability : A company may be company limited by shares or a company limited by guarantee. In company limited by shares, the liability of members is limited to the unpaid value of the shares. For example, if the face value of a share in a company is Rs. 10 and a member has already paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3 per share during the lifetime of the company. In a company limited by guarantee the liability of members is limited to such amount as the member may undertake to contribute to the assets of the company in

Separate Property : As a company is a legal person distinct from its members, it is capable of owning, enjoying and disposing of property in its own name. In Hyderabad (Sind) Electric Supply Co. vs. Union of India (A.I.R. 1959 Punj. 199), it was held that the property of the company is not the property of shareholders. It is the property of the company.
Capacity to sue and be sued: A company can sue and be sued in its corporate name.

REGISTRATION AND CERTIFICATE OF INCORPORATION

A company obtains separate legal existence only after it is registered under the Companies Act and is issued a Certificate of incorporation by the registrar of companies of the state where registered office of the company is situated. Certificate of incorporation is a document which certifies that the company has been registered with the registrar of companies under the companies Act on a particular date. Certificate of incorporation is issued by the registrar of companies when the procedure for registration of a company under the Act is complied with. As and from that date, the company obtains a legal status and is an independent corporate personality. The certificate of incorporation is a documentary proof to establish the registration of the company.

NAME OF THE COMPANY AND PROCEDURE FOR REGISTRATION OR INCORPORATION OF A COMPANY

1.

2.

3.

4.

Application for availability of name under which the company proposes to be incorporated is to be made to the registrar companies in the prescribed form in the state where the registered office of the company is to be situated. After the name is made available, memorandum and Articles of association of the company is to be filed with registrar of companies with necessary stamp duty and filing fees. It is advisable to file with the Registrar along with the Memorandum and Articles of association of the situation of the registered office of the company and the particular of first directors of the company. A declaration by an Advocate of the supreme court or of a high court or attorney or a pleader entitled to appear before a high court or a secretary or a chartered accountant practicing in India who is engaged in the formation of a company, or by a person named in the Articles as director, manager or secretary of the company, that all the requirements of the Act have been complied with in respect of registration, shall be filed with the registrar[sec 33].

Conti
5. If a company intends to participate in an industry included in the schedule of industries Act 1951, a license to that effect must be obtained. In case of a public company, the following further required are to be complied with: i. A list of person who have consented to act as directors. ii. A written consent of the directors to act in that capacity. iii. An undertaking by the directors to take up and pay for their qualification shares.

EFFECTS OF REGISTRATIONS
From the date of incorporation mentioned in the certificate of incorporation: 1. Each of subscribers to the Memorandum and other persons as may from time to time be members of the company, shall be a body corporate by name contained in the Memorandum. 2. Shall be capable forthwith all the exercising of functions of an incorporated company. 3. Shall have perpetual succession And a common seal 4. With such liability on the part of the members to contribute to the assets of the company is the event of it being wound up as is mentioned in the Memorandum and Articles of company.

Conti
5.

6.

7.
8.

As from the date mentioned in the certificate of incorporation it becomes altogether distinct from its members and obtains an independent corporate and legal status. Acquires perpetual succession. Property belongs to the company and not to individual shareholders. A private company can commence business immediately on incorporation. A public company has to obtain a certificate of commencement of business before commencing business.

ADVANTAGES OF INCORPORATION
1.

2.

3.

4.

Corporate Existence: The company on corporation obtains independent corporate existence. Ti is vested with an independent legal personality distinct from the members who compose it. It become a body corporate of immediately functioning as an incorporated individual. Liability: The liability of the members is limited to the extend of nominal amount of shares subscribed in the companys share capital. In case of the company limited by guarantee. The liability of the members is limited to the extent of the amount guaranteed by each members. Transferable Shares: Shares in a company can be transferred easily without the consent of the other members. Perpetual Successions: As the company has separate legal existence independent of its members, it is not affected by death or insolvency of a member. It has a perpetual existence.

CONTI..
5. 6.

7.

8.

Members and the Company: company being a separate legal entity it can sue its members in the ordinary way, can give loans to members, enter into contracts with members, etc. Management: management of the company can be vested in professionals and the members of the company can appoint capable persons to manage the affairs of the company to the general interests of the shareholders. Employees of the company can also become its shareholders. Separate Property: Though capital and assets are contributed by its members, it is the company which is the owner of the capital and assets and it can enjoy and dispose off property in its own name. Capacity to sue and be sued: A company being a body corporate, can sue and be sued in its own name.

FILLING OF APPLICATION, DOCUMENTS, INSPECTION, ETC through Electronic Form[Secs. 610B, 610C, 610D AND 610E]

Companies Act, 2006 with effect from 16.09.2006 required application, balance sheet, prospectus, return, declaration, Memorandum of association, Articles of Association, particulars of charges or any other particulars or documents, to be filed, delivered, maintained and inspected through the electronic form and authenticated.

Types of Companies
Royal Charted Or Charted Companies

Registered Companis

Statutory Companie s

Unlimited Companies

Companies Limited By Share

Companies Limited By Guarantee

Public Companies

Private Companies

Royal Charted Or Charted Companies

These Companies are incorporated special Royal Charter issued by the King or Queen.

Their Power and action are governed by the

charted for example East India Company, Bank of England, etc.

Such Companies are treated as foreign Companies in India.

Statutory Companies

These Companies are formed under the Special Statutory Act

of the Parliament or State Legislature.

For example Reserve Bank of India, State Bank of India, Industrial Finance Corporation of India, Life Insurance Corporation of India. These companies are mostly public undertakings and are formed with the main object of public utilies and not for profits.

Any change in the working of these companies is regulated by Parliament or Legislative amendments only.

Registered Companies

Companies registered under the Companies Act, 1956 or under any previous Companies Act.

All companies now regulated by the provision of the Companies Act, 1956.These companies have Memorandum of Association and Articles of Association for their external and internal regulation.

1.

Companies registered under the Companies Act are either Companies Limited By Share

2.
3.

Companies Limited By Guarantee

Unlimited Companies

Companies Limited By Share

It is a registered company having the liability of its members limited by its memorandum of association to the amount, if any, unpaid on the shares respectively held by them.

The amount remaining unpaid on the shares can be called up at any time during the
lifetime of the company or at the time of winding up.

His personal assets cannot be called upon for the payment of the liabilities of the company, if nothing remains to be paid on the shares purchased by him. such a company is also

known as a Share Company.

1. 2.

A company limited by shares may be a public company or a private company. There are two most popular types of companies Private Limited Companies Public Limited Companies

Private Limited Companies

A company which has a minimum paid up capital of one lac rupees or such higher paid-up capital as may be prescribed and by its articles Restricts the right to transfer its shares, if any; Prohibits any invitation to the public to subscribe for any share in, or debentures of, the company; Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. Limits the number of its members to 50; not including: a. Person who are in the employment of the company;

b.

Person 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.

Every private company existing on the commencement Act, 2000. A company registered under section 25 shall not be required to have minimum paid up capital, this restriction are mandatory provision of a private limited company.

Words Private Limited should be used at the end of the companys name. A Private company must have its own Articles of Association. A Private

company is classified into:

i. ii. iii. iv. Companies Limited by shares; Companies limited by guarantee(if it has a share capital); Unlimited Companies(if it has a share capital); Producer Companies.

Public Limited Companies

A company other than the private company or which is not a private company is a public company.

Any 7 or more persons can join hands to form a public company. Its maximum membership is unlimited.

By Companies Act, 2000, a public company shall mean a company, whichi. ii. Is not private company; Has minimum paid up capital of 5 lac rupees or such higher paid up capital, as may be prescribed; iii. Is a private company which is a subsidiary of a company which is not a private company

Company fails to enhance its paid up capital of 5 lac

rupees within the period of two years, such company

shall be deemed to be a defunct company and its name shall be struck off from the register by the Registrar.

A public company is further classified into: i. Companies Limited by shares;

ii. Companies limited by guarantee;

iii. Unlimited Companies

Companies Limited By Guarantee

These types of companies may or may not have a share capital. The working funds, if required, are raised from source like fees,donation,subsidy,grant.

Each member promises to pay fixed sum of money specified in the Memorandum in the event of liquidation of the company for payment of the debt and liabilities of the company[Sec. 13(3)]. This amount promised by him is

call Guarantee.

The amount guaranteed by each member is in the nature of reserve capital. This amount can not be called upon except in the event of winding up the company.

Non-trading or non-profit companies formed to promote culture, art, Science, religion, charity, etc.., are formed as companies limited by guarantee.

Unlimited Companies

The liability of the member in these company is unlimited

like an ordinary partnership firm, in proportion to his interest

in the company.

A company not having any limit on the liability of its members is called Unlimited company. Section 12 gives choice to the promoters to form a company with or without limited liability.

An unlimited company may or may not have a share capital. If it has a share capital it may be public or private company.

Companies Registered for Promoting Commerce, Art, Science, Etc.

Central Government has powers under section 25 of the Act, to direct by license that the association may be registered as a company with limited liabilities without the addition to its name of the word Limited or Private Limited

1.

The satisfaction of the Central Government that an

association is about to be formed as a limited company for promoting commerce, art or any other useful objective.

2.

Association intends to prohibit the payment of any dividend to its members.

Government Companies

Any Company in which not less than 51% of the share capital is held by the Central Government or by the State Government or partly by the Central Government and partly by one or more State Government is called a Government company.

The central Government under section 620 of the Act is

empowered to declare by notification in the Official Gazette that any of the Act shall not apply to any Government company.

The concept of the Government companies is enlarged by the Amendment Act, 1974.

Foreign Companies

A company incorporated outside India is a foreign company. Section 592 to 608 of the Companies Act apply to foreign companies.

If not less than 51% paid up share capital (whether

equity or preference), of a company incorporated

outside India and having an established in India, is held by one or more citizens of India

Producer Companies

The introduction of Producer Companies by companies

Amendment Act, 2000 with effect from 06.02.2003 provides

for corporate governance of members joining together to achieve specified objective.

The registration of a Producer Company enables incorporation

of Co-operatives as companies and conversion of existing cooperatives into companies on optional basis.

Producer Company means a body corporate registered under the Companies Act, 1956 as a Producer Company.

Definition [Sec. 2(36)] Section 2(36) of the Act defines prospectus as: prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate.

Prospectus

PROSPECTUS [Sec. 44(2)(a) & 56]

Every prospectus issued by or on behalf of a company or by or on behalf of any person who is or has been engaged or interested in the function of a company shall state the matters specified in part 1 of schedule 2 and set out the reports specified in part 2 of schedule 2 subject to the provisions contained in part 3 of schedule 2.

Dating of prospectus [Sec. 55]: Prospectus shall be dated and that date shall be taken as the date of publication of the prospectus. Registration of prospectus [Sec. 60]: No prospectus shall be issued unless on or before the date of its publication, a copy of the prospectus has been delivered to the Registrar for registration duly signed by every person who is named therein as a director or proposed director of the company.

Civil liability Compensation

Damages for deceit or fraud Recission of the contract for misrepresentation Liabilities for non compliance with section 56 Liability under general law Penalty for contravening sections 57 & 58 Penalty for issuing the prospectus without delivering for registration

Criminal liability [Sec. 63(1) & 68]

Every person who authorises the issue of prospectus shall be punishable for untrue statement with imprisonment for a term which may extend to 2 years or with fine which may extend to Rs. 50,000 or with both. Fraudulently including person to invest money: Any person who either knowingly or recklessly makes any statement , promises or forecasts which is false, deceptive or misleading or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into:

I.

II.

any agreement with a view to acquiring, disposing of, subscribing for, or underwriting shares or debentures; or any agreement, the purpose of which is to secure a profit to any of the parties from the yield or shares or debentures , or by reference to fluctuations in the value of shares or debentures; shall be punishable with imprisonment for a term which may extend to 5 years or with fine which may extend to one lac rupees or with both.

MINIMUM SUBSCRIPTION [Sec.69]

No allotment shall be made of any share capital of a company offered to the public for subscription unless the minimum amount is raised. The minimum amount which shall be raised, is called, Minimum Subscription. This minimum subscription is fixed by the Board of Directors after taking into account the matters specified in clause 5 of part 1 to schedule 2 of the Act, i.e.,

I. II. III. IV. V. VI.

the purchase price of any property purchased or to be purchased; any preliminary expenses payable; any commission payable towards subscription of any shares; the repayment of any money borrowed by the company for the above matters; working capital; any other expenditure.

Conditions for obtaining certificate of commencement

1. 2.

3.

4.

At least minimum subscription has been raised; Every director of the company has paid to the company, on each of the shares taken by him or agreed to be taken by him the amount payable by him on application and allotment of the shares; Obtain or apply for permission for dealing of the shares or debentures on the recognised stock exchange so that no money is repayable to applicants for any shares or debentures offered for public subscription by reason of any failure to apply for, or to obtain stock exchange permission; There has been filed with the registrar a duly verified declaration by one of the directors or the secretary or of the secretary in whole time practice that the above provisions have been complied with [Sec. 149(1)].

SEBI Guidelines

The companies issuing securities offered through an offer document shall satisfy the following at the time of filing the draft offer document with SEBI, and also at the time of filing the final offer document with the Registrar of Companies/ Designated Stock Exchange.

(No issuer company shall make any public issue of securities, unless a draft Prospectus has been filed with the Board through a Merchant Banker, at least 30 days prior to the filing of the Prospectus with the Registrar of Companies (ROC): Provided that if the Board specifies changes or issues observations on the draft Prospectus (without being under any obligation to do so), the issuer company or the Lead Manager to the Issue shall carry out such changes in the draft Prospectus or comply with the observations issued by the Board before filing the Prospectus with ROC.

Provided further that the period within which the Board may specify changes or issue observations, if any, on the draft Prospectus shall be 30 days from the date of receipt of the draft Prospectus by the Board.

Provided further that where the Board has made any reference to or sought any clarification or additional information from any regulator or such other agencies, the Board may specify changes or issue observations, if any, on the draft Letter of Offer after receipt of comments or reply from such regulator or other agencies .

Companies barred not to issue security

No company shall make an issue of securities if the company has been prohibited from accessing the capital market under any order or direction passed by the Board.

Issue of securities in dematerialised form

Issue of securities in dematerialised form : No company shall make public or rights issue or an offer for sale of securities, unless: (a) the company enters into an agreement with a depository for dematerialisation of securities already issued or proposed to be issued to the public or existing shareholders; and (b) the company gives an option to subscribers/ shareholders/ investors to receive the security certificates or hold securities in dematerialised form with a depository.

ADVANTAGES OF PUBLIC ISSUE

For public company: Able to raise funds and capital through the sale of its securities Public companies may issue their securities as compensation for those that provide services to the company like Directors,employees,etc
For private company: No requirement to publicly disclose financial information Spends less for certified public accountants and other bureaucratic paperwork required of public companies wealth and income of the owners remains relatively unknown by the public.

CONTD.
Other: shareholders enjoy limited liability additional capital can be raised by issuing more shares or debentures it enjoys greater borrowing power board of directors with expertise/experience can be appointed to take decisions and delegates responsibilities shareholders can sell/transfer their shares freely

CAPITAL

Capital refers to the amount invested in the company so that it can carry on its activities. In a company capital refers to "share capital". As the total capital of the company is divided into shares, the capital of the company is called share capital. The amount of the capital is mentioned in the capital clause of the Memorandum of Association registered with the Registrar of the Companies

TYPES OF SHARE CAPITAL

Nominal/Authorized/Registered capital It refers to the maximum amount of share capital which a company is authorized to issue as per its Memorandum of Association. Issued capital Issued capital is that part of the authorized capital which the company offers to public, that may include vendors, for subscription or purchase. A company may issue its entire authorized capital or may issue it in parts from time to time as per the needs of the company.

Subscribed capital Part of issued capital which is taken up or subscribed by those who are offered for subscription. Company may receive application for equal to, more than or less than shares issued. This capital can be equal to or less than the issued capital. Paid up capital It is the portion of called up capital which is paid by the shareholders, to calculate the paid up capital, the amount of installments in arrears is deducted from the called up capital. Uncalled capital It is that portion of the issued/subscribed capital that is not called up by the company on the shares allotted.

SHARES a share in the capital of the company

TYPES OF SHARES
PREFERENCE SHARES

TYPES OF SHARES
EQUITY SHARES

CUMULATIVE REEDEMABLE PARTICIPATING

NONCUMULATIVE IRREDEEMABLE NONPARTCIPATING

Preference shares A preference share is one which carries following preferential rights over other type of shares called equity shares in regard to the following : A) Payment of dividend B) Repayment of capital at the time of winding up of the company. Equity shares All shares which are not preference shares are equity shares. Holders of these shares receive dividend out of the profits of the company after the payment of dividend has been made to the preference shareholders.

ALLOTMENT OF SHARES [Secs. 69 70 72 & 73]

The allotment of shares by the company shall be made in accordance with sections 69, 70, 72 and 73 of the companies Act. Application for shares is an offer and allotment of shares by the company is an acceptance of the offer. Allotment can be made on a written or an oral application.

The following rules are to be observed: 1. A prospectus or a statement in lieu of prospectus shall be filed with the registrar. 2. No allotment of shares shall be made to public unless the minimum subscription amount stated in the prospectus is raised and received by the company. 3. Application for shares should be made to the company in the prescribed form called Application Form. 4. No allotment shall be made untill the beginning of the 5th day after a date on which the prospectus is issued. 5. The beginning of the 5th day or such later time shall be called time of the opening of the subscription list. 6. Every company intending to offer shares or debentures to the public shall make an application to one or more recognised stock exchange for permission. 7. The amount payable on application on each share shall not be less than 5% of the nominal amount of the share. 8. The whole of the application money should have been paid to and received by the company in cash.

TRANSFER OF SHARES [Secs. 82, 108- 113]

Meaning of transfer The word 'transfer' is an act of the parties by which title to property is transferred from one person to another. The word 'transmission' is preferable to devaluation of title by operation of law. It may be by succession or by testamentary transfer.

Shares of a company are freely transferable subject to the restrictions contained in the companies Act, any other statutes and the provisions of the Memorandum and Articles of Association of the company (section 82). However, in case of private company, by its very definition, there has to be restrictions on the transfer of shares. But in the case of a listed company / unlisted public company, after the enactment of Depositories Act, 1996, the securities have become freely transferable. Even the Board of Directors cannot refuse transfer of shares on any ground.

Sections 108 -113 provide the rules and regulations for transfer of shares.

Instrument of transfer (Sec 108)

A company shall not register a transfer of shares of, the company, unless a proper transfer deed in Form 7B as given in the Companies (Central Government's) General Rules and Forms, 1956 duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company, alongwith the certificate relating to the shares, or if no such certificate is in existence, alongwith the letter of allotment of the shares.

 Transfer of instrument in prescribed form and presentation Section 108 requires that where share transfer form is delivered to the Board it should be duly stamped. It means stamp of adequate value should be affixed and cancelled on transfer deed.

Determination of valuation of shares for affixing stamps on the transfer deed It was held in Union of India v Kulu Valley Transport Ltd. (1958) that in case shares are not quoted, the value of the shares for the purpose of stamp means the price that the shares would fetch at the time of transfer or consideration agreed, whichever is higher. However, no transfer duty is applicable for transfer of shares in case of shares are in Dmat form. Value of share transfer stamps to be affixed on the transfer deed Stamp duty for transfer of shares is 25 paise for every Rs. 100 or part thereof of the value of shares as per Notification No. SO 130(E), dated 2801-2004 issued by the Ministry of Finance, Department of Revenue, New Delhi. Transfer procedure not applicable under the depositories system Section 108(3) provides that the provisions of section 108 shall not apply to transfer of securities under the depositories system.

 Time limit for presentation In the case of listed company, at any time before the date on which the register of members is closed, in accordance with law, for the first time after the date of the presentation of the prescribed form to the prescribed authority under clause (a) of section 108(1A) or within twelve months from the date of such presentation, whichever is later. In any other case, within two months from the date of such presentation. Application for transfer (Sec. 110) (1) An application for the registration of a transfer of the shares or other interest of a member in a company may be made either by the transferor or by the transferee. (2) Where the application is made by the transferor and relates to partly paid share, the transfer shall not be registered, unless the company gives notice of the application to the transferee and the transferee makes no objection to the transfer within two weeks from the receipt of the notice. (3) For the purposes of sub-section (2), notice to the transferee shall be deemed to have been duly given if it is despatched by prepaid registered post to the transferee at the address given in the instrument of transfer, and shall be deemed to have been duly delivered at the time at which it would have been delivered in the ordinary course of post.

 Transfer by legal representative (Sec. 109)

A transfer of the share or other interest in a company of a decreased member thereof made by his legal representative shall, although the legal representative is not himself a member, be as valid as if he had been a member at the time of the execution of the instrument of transfer.
Transmission by operation of law The company may register as shareholder any person to whom the rights of any shareholders of the company have been transmitted by operation of law. Registration of transfer I. a transfer of share is complete by registration with the company. The transferee becomes a member of the company only when the transfer is registered by the company; II. the company shall cancel the name of the transferor from the register of members and enter in his place the name of the transferee. The tranferor continues to be holder of the shares until his name is so cancelled.

 Share certificate A new share certificate is issued to the tranferee or the old share certificate is endorsed to the transferee, if all the shares mentioned in the old certificate are transferred to the transferee.

Time limit for issue of certificate on transfer (Section-113) Within a period of two months in case of unlisted companies Within a period of one month in case of a listed companies

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