ch 1.lab-company law

8/4/2019 CH 1.lAB-Company Law.

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Legal Aspects of

Business

(LAB)

BY :- S. G. PRAJAPATI.

Lecturer SVIM, Kadi.

August- 2010

[email protected]


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Volume Two Company Law

Nature of Company

of Business

CH- 1


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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


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4

Commencement of Business

Sole Trader

Partnership

Company


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5

Partnership

Partnership is one of the three ways of

owning a business

The Partnership Act 1890 defines apartnership as the relationship between

two or more persons carrying on a

business in common with a view to profit


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6

Partnership (cont)

A partnership does not have a separate legal

identity from its partners

However, a partnership can have its ownname 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.

y Existing Company means a company formed and

registered under any of the earlier Company Laws.


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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 thechairmanship of Mr. C. H. Bhaba on 25 -10-

1950.

The committee submitted its report in 1952. The

Indian company act extends to the whole India.


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Objective of Company Act

19561. Development of a company because a corporate form

of business organisation constitute a very importantsector of economy.

2. Protect the interest of large number of share holder asthey have a separate ownership from management injoint stock companies.

3. Safe guard the interest of the creditors so that theyhave there money on time

.


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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

Continue


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Characteristics Of A Company

1 Separate legal entity

2.Artificial person

3.Perpetual existence4.Comman seal

5.Limited liability

6.Capacity to sue or to be sued7.Transferability of share


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Separate legal Entity

A company is an separate legal entitymeans 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 aperson holds virtually all the shares, theright and obligations of the company shallbe different from its members.


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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 anatural person.


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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 thelife 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 ofshare of members.


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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 theloss from his personal property.


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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 officialofficial signaturesignature

ofof aa companycompany.


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Transferability of share sec(82)

The share of a company are freely

transferable. The shareholder can transfer

his share to any person without theconsent of other members.

A company cannot impose absolute

restrictions on the rights of member to

transfer their shares


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Capacity to sue and be sued

When a company incorporated it acquire a

separate and independent legal

personality. As a legal person it can besue and be sued in its own name.


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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 yourown.

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 forraising capital (money).

For most sole traders thecapital will be provided by personal savings or abank loan.

Unlimited liability the most important point tonote in terms of comparing this form to thecompany in that there is no difference betweenthe sole trading business and the sole traderhimself.

As a result he has personalliability 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 ofthe partnership.

Easier to obtain capital as there can be up to

20 members of the partnership, all of whom

could pool their investment within thepartnership.


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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 termsof the Act

The partnership agreement can therefore be used

to provide a very flexible organizational structure

although this usually involves having to pay forlegal advice.


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Partnership - Disadvantages

A partnership will end on the death of apartner.

If you are unaware of this when the

partnership is formed, the Act may not reflectthe intention of the partners.

The partners are jointly and severally liablefor the debts of the partnership.

This means that each partnercan be sued for the total debts of thepartnership


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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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Kinds of Companies

of Business

CH- 2


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Types of companies(Registered under company act 1956)

COMPANIES

Incorporated

Chartered

companies

Statutory

companies

Registeredcompanies

Liability

limitedliability

unlimitedliability

Number ofmembers

private

public

Control

holding

subsidiary

ownership

Government

Nongovernmen

t


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INCORPORATED

1.CHARTERED COMPANIESThese companies are incorporated under a special

charter granted by QUEEN or KING. such as the

east India company. The bank ofEngland.

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.


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3. REGISTERED COMPANIES

Companies registered under the Indian

Companies Act, 1956 or an existing Companyare called registered companies.

To become a registered company one has totake the Certification of Incorporation from the

registrar.

INCORPORATED (con)


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COMPANY WITH LIABILITY

COMPANY LIMITED BY SHARE [sec12(2)a]

Companies in which the liabilityof its members is limited to the extent of the

amount unpaid on the shares held by a particularmember.

Liability can be enforced duringthe existence of the company and also at winding

up of it. If share are fully paid, thenliability of the share holder holding such share isNIL.

Most commonly found in India


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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 notprofit but for the promotion of art, science, culture,

charity, sport, or for some similar purpose.

These companies may not have share

capital.36


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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 thecompany.

An unlimited company may not

have share capital.37


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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.


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PUBLIC COMPANY [SEC 3(1)(iv)]

A public company means a company which is nota private company.

In other words, a publiccompany, means a company which by its articledoes not-limit the number of its member.

Does not prohibit anyinvitation to the public to subscribe for any share in,or debentures, of the company.

Number of Members(con)


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Difference Between Private &

public Company

Number ofShareholder 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%40

S i l i il t i t


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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 directors41


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When does Private Company

become Public Company ?

1. Conversion by default

Default is made in complying with the essentialrequirements 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.43


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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 theaforesaid percentage is first held.

Where a private company invites, accepts or

renews deposits from the publicDeposits 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.45


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Companies According to

Control

HOLDING AND SUBSIDIARY COMPANY

where a company has control over anothercompany, it is known as the holding company

The company over which control is exercised iscalled the subsidiary company.


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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 stategovernment or partly by one or more state

Government.

Rues for Govt company

1. Appointment of auditor by central govt.2. Audit report to be submitted to auditor general ofIndia

3. Audit report to be placed before parliament


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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

1. Documents

2. Accounts

3. Name

4. Requirement as to prospects

5. Winding up

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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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Foundation of

Companies

of Business

CH- 3


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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.


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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 companiesaffairs.

When these things done, they hand over the

control of company to its directors, who areoften the promoter themselves.


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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 ofPromoter

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 54


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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. In other words,

1. He is not allowed to make secret profits.

2. To give benefit of negotiation to the company

3. Not to make unfair use of position.

Remuneration of promoters.


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Registration/Incorporation

Private Company

Minimum Number of Members

required 2.

Public Company

Minimum Number of Members

required 7.


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Steps

1. Application for availability of name:Three names in order of priority conforming tothe provisions of the Act and the Guidelinesissued 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) NGO.(ii) Govt. Companies (need not use Pvt. Ltd.)

(iii) The word Company In name.


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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 defines and limits the scope of

activities of a company.

S


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Steps contd.

Contents of Memorandum

1. Name clause

2. Registered office clause

3. Object clause Doctrine ofultra-vires

4. Liability clause

5. Capital clause


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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 within 30 days of

incorporation.


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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 ofSupreme 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.


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Certificate of Incorporation

Effect of Certificate ofIncorporation(Section 34)

On incorporation, the association of personsbecomes 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 contributeto the assets of the company in the event of itsbeing wound-up as is mentioned in the Act.


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Conclusiveness ofCertificate of

Incorporation (Section 35)

Conclusive to the effect that all

requirements of law relating to registration

and matters precedent and incidentalthereto have been duly complied with.

If after incorporation it is discovered that thereare certain irregularities with regard to

registration, these will not affect the validity of the

company.


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Raising ofCapital

A company may raise capital through

Private placement

Issue of Prospectus

Private placement means raising of capital

from friends, relatives and through

brokers.


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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 orcontracted to be taken by him and for which he

is liable to pay in cash,


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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 pre-incorporation contracts.

Position of promoters as regards preliminary

contracts.

1. Company not bound by preliminary contract

2. company cannot enforce preliminary contracts.

3. Promoter personally liable for it.66

Pre-incorporation contracts


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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.


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THANK YOU

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Memorandum of

Association

of Business

CH- 4


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Memorandum of Association

Memorandum of Association is a fundamentaldocuments of the company.

It contains, besides other significant

information, the objects for which the companyis formed.

Object clause defines as well as confines thepowers of the company.

Anything done beyond these objects is ultra-vires the company and void.


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Conti

Purpose of MOA

ForShareholder & Outsiders knowledge.

Printing & signing of MOA-

1. Printed.

2. Divided in to paragraph numbers consecutively and

3. Signed by 7 subscribers.(2 ) in presents of one witness.

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1. Name Clause: It contains the name with whichcompany is proposed to be registered.Companies Act requires that:

(a) The name chosen should end with the word Limitedor the words Private Limited, as the case may be.

(b) The name should not be undesirable i.e., it should notbe identical or too similar to the name of an alreadyexisting company

(c) Injunction if identical name adopted(d) Prohibition of use of certain names national emblem

(e) Use of some key words according to authorizedcapital. Ex. Corporation 5 cr.


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2.Registered Office Clause:This clause states the name of the State inwhich registered office of the company is to besituated.

3. Objects ClauseThis clause is to be divided into:

(a) Main objects and objects incidental or ancillary to mainobjects

(b)

Other objects A company cannot commence any businessstated under other objects unless specialresolution by the shareholders is passed.


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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 andthe number of shares into which the same

shall be divided.


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Alteration of Memorandum

Various clauses of memorandum ofassociation can be altered by following the

procedure laid down in the Act. Different

requirements are prescribed for differentclauses:

1. Name Clause: can be altered by:

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


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2. Registered Office Clause:

may be shifted:

(a) within the same city by passing Directors

Resolution;(b) From one city to anothercity within the same

State: by passing special resolution only, if no change in

jurisdiction ofRegional Director by passing special resolution in shareholder.

Alt ti f M d


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3. Objects Clause Special Resolution

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

4. Liability Clause Cannot be increased without written

consent of each and every member.

Can be reduced: by passing special resolution

Confirmation of court


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5. Capital Clause

Authorized capital may be increased

by passing an ordinary resolution at

a meeting of the shareholders.


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THANK YOU

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Articles

of Association

of Business

CH- 5


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Articles of Association The articles of association of a company are its bye-

laws 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 thecompany. 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 andobligations incidental to membership in the company

[Naresh Chandra Sanyal v. Calcutta Stock

Exchange Association Ltd. (1971)].

C i hi h t h


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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.


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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 withoutArticles.


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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 ofSection 3(1)(iii),approval of Central Government must

be obtained.

Doctrine of Constructive


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Doctrine ofConstructive

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

Bankv.Turquand. Rule ofIndoor Management is an exception

to the Doctrine of Constructive notice.

Exceptions of Indoor


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Exceptions of Indoor

Management

1. Knowledge of irregularity: Case: Howard

v. Patent Ivory Co.

2. Negligence : Case:Anand Behari Lal v.

Dinshaw & Co. (Bankers) Ltd.3. Forgery: Case: Ruben v.Great Fingal

Consolidated[Secy. Forged signatures of

two directors]

4. No knowledge of articles : Case: Rama

Corporation v.Proved Tin & General

Investment Co.


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THANK YOU

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Prospectus

of Business

CH- 6


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Prospectus

A prospectus, as perSection 2(36),

means any document described or issued

as prospectus and includes any notice,

circular, advertisement or other documentinviting 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


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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 twothings:

(a) It invites subscription to shares or

debentures or invites deposits.(b) The aforesaid invitation is made to the

public.


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THANK YOU