Slide 1: Unit – 3
Companies Act Definition of company A company is a voluntary association of persons. It has a capital which is divided into small parts known as shares. At the same time it is an artificial person created by a process of ;aw. It has a perpetual succession and a common seal. Since it is artificial personnel it has no body or soul. Characteristics of a company Separate legal entity
Transferability of shares
Capacity to sue Slide 2: Separate Legal Entity:
In the eyes of the law, a company is regarded as an entity from separated from its members. In other words, it has an independent corporate existence, the company’s money and property belongs to the company and not to the shareholders.
2. Limited Stability:
A company may be limited by shares or limited by guarantee. In a company limited by shares, the liability of member is limited to the unpaid value of the shares.
3. Perpetual Succession:
A company has a perceptual succession i.e., it neither dies nor does its life depend on that of its members. It is not in any manner affected by insolvency, mental disorder or retirement of any of its members.
4. Common Seal:
Since a company has no physical existence, it must act through its agents and all such contracts entered into by its agents must be under the seal of the company. Slide 3: 5. Transferability of shares :
The capital of a company is divided into parts called shares. These shares are freely transferable so that no shareholder is permanently wedded to a company. A private company can impose certain restrictions on the transfer of its shares.
6. Separate Property:
A company can own separate property in its own name. although its capital and assets are contributed by its shareholders, they are not the private and joint owners of its property. The company is the real person in which all its property is vested and by which it is controlled, managed and disposed of.
7. Capacity of Sue:
A company can sue and be sued in its corporate name. It may also inflict or suffer wrongs. It can in fact do or have done most of the things, which may be done by or to a human being. Slide 4: Classification of Companies Classification on the basis of liability
Classification on the basis of number of members
Classification on the basis of incorporation
Classification on the basis of control Classification on the basis of liability
Companies limited by shares.
Companies limited by guarantee.
Unlimited companies. Slide 5: Classification on the basis of number of members
A private company
A public company Classification on the basis of incorporation
Registered companies. Classification on the basis of control
Subsidiary company Slide 6: Formation of Company Company comes existence when a number of persons come together with an intention to do some business. These persons are called promoters.
The following is the procedure to be followed while incorporating a company.
Documents to be filed with the registrar
The memorandum of association.
The articles of association if any, duly signed by the subscribers to the memorandum of association.
A statement of the nominal capital.
A list of directors and their consent to act as directors signed by each.
An undertaking in writing signed by each such director to take and pay for his qualification shares.
A declaration that all the requirements of the companies act have been complied with. Slide 7: Certification of incorporation The legal effects of incorporation are as follows:
A company becomes a body corporate, distinct from its members. It becomes a legal person.
A company has perceptual succession and common seal, it remains in existence until it is dissolved by liquidation.
A company can sue and be sued in its own name.
A company has a right to hold and sell property.
Company debts and obligations are liabilities of the company only and cannot be enforced against the individual share holders. Slide 8: Promoter – Duties and Liabilities Before a company is formed there must be some persons who have an intention to form a company and who take necessary steps to carry that intention into operation, such persons are called promoters. The word promoter is not, defined anywhere in the companies Act. In fact it is a short and convenient way of designing those who set in motion the machinery by which the act enables them to create an incorporated company.
A promoter is a person who brings the company into existence. A promoters is one who undertakes to form a company with reference to a given objects and to set it going and who takes the necessary steps to accomplish that purpose. Slide 9: Liability of Promoters A company can be compelled by the company to hand over any secret profit which he had made without full disclosures to the company.
Promoter may be held liable for the noncompliance of the provisions of the act.
Promoter is liable for any untrue statement in the prospectus to a person who has subscribed for any shares or debentures on the faith of the prospectus.
Besides civil liability the promoters are criminally liable for any other director or office of the company.
A company may proceed against a promoter for deceit or breach of duty, where the promoters has misused or retained any property of the company or for his quality of misfeasance or breach of trust., Slide 10: Memorandum and Articles of Association Memorandum of association is one of the document which has to be field with the registrar of companies at the time of incorporation of the company. The memorandum is an extremely important document in relation to the affairs of the company.
Purpose of memorandum
Potential shareholders shall know the purpose for which their money will be used.
Any one who deals with the company shall know without reasonable doubt whether the contract which he is entering into is within the scope of the company or not. Slide 11: Contents Memorandum of every company must contain the following clauses
The name of the company with ‘limited’ as the last word of the name in the case, of public limited company and with private limited as the word in case of private limited company.
The state in which the registered office of the company is to be situated.
The objects of the company which can be classified into main objects and other objects.
The liability of the members.
The share capital of the company. Slide 12: Articles of Association Articles means the articles of association of a company as originally framed or as altered from time to time in pursuance of this Act. The articles of association are next in importance to the memorandum of association. It contains the fundamental conditions upon which alone a company is allowed to be incorporated. The articles usually contain the following matters,
Lien on shares
Calls on shares
Transfer of shares
Transmission of shares
Forfeiture of shares
Alteration of capital
Dividends and reserves Slide 13: The following companies must have their own articles,
Companies limited by guarantee
Private companies limited by shares. There are three alternatives forms in which a public company may adopt articles.
It may adopt table-A in full
It may wholly exclude Table-A and set out own articles in full
It may frames its own articles and adopt part of table-A Slide 14: Differences between memorandum of association and articles of association Articles of association
They are regulations for the internal management of the company and are subsidiary to the memorandum.
They are the rules for carrying out the objects of the company as set out in the memorandum.
They are subordinate to the memorandum. If there is a conflict between the articles and the memorandum, the latter prevails.
A company limited by shares need not have articles of its own. In such a case, Table-A applies.
They can be altered by a special resolution, to any extent provided they do not conflict with the memorandum and the companies Act.
Any Act of the company which is ultra vires the articles can be confirmed by the shareholders. Slide 15: Memorandum of Association It is the charter of the company indicating the nature of its business, its nationality and its capital. It also defines the company’s relationship with outside world.
It defines the scope of the activities of the company or the areas beyond which the actions of the company cannot go.
It being the charter, is supreme document.
Every company must have its own memorandum.
There are strict restrictions on its alteration. Some of the conditions of incorporation contained in it cannot be altered except with the sanction of the company law broad.
Any Act of the company which is ultra vires the memorandum is wholly void and cannot be ratified even by the whole body of shareholders. Slide 16: Prospectus In order to finance its activities, a company needs capital which is raised by a public company by the issues of a prospectus inviting deposits or offers for shares and debentures from the public. A private company is prohibited from making any invitation to the public to subscribe for any shares in, or debentures of the company. Hence it need not issue a prospectus. The important contents of the perspectives are,
General information of the company
Capital structures of the company
Terms of the present issue
Particulars of the issue
Company, management and project
Particulars in regard to the company
Outstanding litigation pertaining to matters
Management perception of risk factors Slide 17: 1.General information of the company:
general information of the company like the name, address of registered office, names of regional stock exchange and other stock exchanges where application is made for listing of present issue, rating from CRISIL or any other rating agency. 2.Capital structure of the company:
Authorized issue, subscribed and paid-up capital.
Size of present issue giving separate reservations for preferential allotment to promoters and others.
Paid up capital. 3.Terms of the present issue
Term of payments
Rights of the instruments holders
Availability of forms, prospectus and mode of payments Slide 18: 4. Particulars of the Issue
Means of financing. 5. Company, management and project
History and main objects and present business of the company.
Subsidiary of the company.
Promoters. 6. Particulars in regard to the company
particulars in regard to the company and other listed companies under the same management. Slide 19: 7. Outstanding litigation pertaining to matters
Outstanding litigation pertaining to matters likely to affect operation and finance of the company including tax liabilities of any nature etc. 8. Management perception of risk factors
management perception of risk factors. Such as sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw material or in marketing of products, cost/time over run etc. Slide 20: Misleading Prospectus-Consequence and Remedies If there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material fact, it may result in
Criminal liability Civil Liability A person who has been induced to subscribe for shares on the faith of a misleading prospectus has remedies against the company, and the directors, promoters and experts.
The remedies available against the company are,
To Rescind the Contract: Any person who takes shares on the faith of statement of fact contained in a prospectus can apply to the court for rescission of the contract, if those statements are false or fraudulent or if some material information has been withheld.
Claim for damages: Any person induced by a fraudulent statement in a prospectus to take shares is entitled to sue the company for damages. Slide 21: Criminal Liability
where a prospectus contains any untrue statement, every person who authorizes the issue of the prospectus is punishable with imprisonment which may extend to two years or with fine which may extend to Rs.500 or with both. He will not be liable if he proves
That the statement was immaterial or
That he had reasonable ground to believe that the statement was true Slide 22: Share holders meetings As per the companies Act, the meetings of a company are classified as,
Annual General Meeting(AGM)
Extraordinary General Meeting(EGM)
Class meeting Statutory meeting Every company limited by shares and company limited by guarantee and having a share capital shall within a period of not less than one month and not more than six months from the date at which the company is entitled to commence business, hold a general meeting of the members of the company.
The following companies are not required to hold a statutory meeting.
A private company
An unlimited company
A company limited by guarantee and not having a share capital. Slide 23: Annual General Meeting (AGM) Every company shall in each year hold in addition to any other meeting a general meeting as its annual general meeting. The annual general meeting is to be held in addition to any other general meeting that must have been held in a year.
The first annual general meeting must be held within 18 months from the date of incorporation. In that case the company is not required to hold an annual general meeting in the year incorporation or in the following year.
Every annual general meeting shall be called during business hours on a day that is not a public holiday, shall be held either at the registered office of a company or some other place within the city, town or village in which the registered office of the company is situated. Slide 24: Extraordinary General Meeting(EGM)
A statutory meeting and annual general meeting of a company are called ordinary meetings. All general meetings other than these are called extraordinary general meetings. This meetings are generally held for the purpose of dealing with any extraordinary matter which cannot be postponed till the next annual general meeting.
An extraordinary general meeting may be convened by any one of the following,
The Board of Directors
Any directors or any two members
Company law board. Slide 25: Class Meeting
Class meetings of various kinds of shareholders and creditors are held under different circumstances.
Similarly where a scheme of arrangement is proposed, meetings of the several classes of share holders and creditors are required to be held. At the time of winding up also, the meetings of creditors and members, for certain purposes, are held. Slide 26: Board meetings
Directors of a company exercise most of their powers at the meetings of the board. The companies Act contains the following provisions relating to board meeting.
Number of Meetings: In the case of every company a meeting of its board of directors shall be held at least once in every 3 months and at least 4 such meetings shall be held in every year.
Notice of Meetings: Notice of every meeting of the board of directors of a company shall be given in writing to every director for the time being in India and at his usual address in India.
Quorum of Meetings: The quorum of the board shall be 1/3 of its strength or two directors which ever is higher. Slide 27: Power of company law board to order meeting If for any reason it is impracticable for a company to call, hold or conduct an extraordinary general meeting, either on its own or on the application of any director of the company, or of any member of the company who would be entitled to vote at the meeting. Procedure and requisites of a valid meeting The person responsible for calling and conducting the meeting must observe the following rules of procedure.
Notice of Meeting
Quorum for Meeting
Chairman of the Meeting
Minutes of the Meeting
Place of meeting
Voting and Poll Slide 28: Proper authority: The authority to call a meeting lies with the board of directors. If the directors do not call the meeting, the members or the company law board may call the meeting.
Notice of Meeting: A proper notice should be given to the members and all others who are entitled to attend the meeting. Notice means bringing a thing to the knowledge of the other party.
Quorum for Meeting: Minimum number of members required to consists a valid meeting and to transact business legally therein is called ‘quorum’.
Chairman of the Meeting: The members personally present at the meeting shall elect one of themselves to be chairman thereof an a show of hands. So, every meeting is presided over by a chairman. The regulates, and supervisor the proper conduct of the business at a meeting. Slide 29: 5. Minutes of the Meeting
These are a record of what the company and directors do in meetings.
Minutes of proceedings of meetings every company shall keep a record of proceeding of all every general meeting and its proceedings.
Minutes Book: book in which record of the proceeding of a meeting is kept. Proxies:
A member entitled to attend and note at a meeting may vote either in person or by proxy. A proxy is an authority used both for,
The person authorized to Act or voice for another at a meeting of the company.
As the instrument by which a person appointed to Act for another at a meeting of the company. Slide 30: 7. Place of Meeting:
May be at the registered office of company or some other place in same city, town or village where registered office of company is located.
8. Voting and Poll:
The motions proposed in a meeting are decided on the votes of members of the company. Evert holder of equity shares has a right to vote, while preference shareholders has a right to vote only on resolutions directly affecting the rights attached to his preference shares. Slide 31: Resolutions A proposal when passes and accepted by the members becomes resolution. Three kinds of resolutions are recognized by the companies Act.
Resolution requiring a special notice.