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Company Law

Collected By BdLawSource.com




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Table of Contents


Topic Page No

Letter of Transmittal
Executive Summary
Acknowledgement

Company Law 1
Government Company 2-4
Promoter 5-7
Memorandum of Association 8
Articles of Association 9-10
Share 11-13
Winding Up 14
Conclusion 15
Reference 16




























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Company Law

Introduction
The definition of Company is the as in the previous Act. The supreme court of India has
observed that a Company is in some respect, an institution like a state functioning under
its basic constitution consisting of the companies Act and the memorandum of association.
A Company is a legal person or legal entity separate from and capable of surviving beyond
the lives of its members. Like any juristic person, a Company is legally an entity apart
from ifs members, capable of right and duties of its own and endowed with the potential of
perpetual succession. There are mainly three kinds of companies as per section 5 of the
companies Act, 1994 viz; _ (1) Company limited by share (2) Company limited by
Guarantee (3) Company with unlimited liability.


Definition of Company limited by shares
According to section 5(a) Company limited by shares are those in which the capital is of
fixed amount divided into member of shares and in which the liability of the members do
not exceed the face value of his share.
Companies limited by shares are two kinds. There are
Private Company
Public Company

Private Company: As defined in section 2(1) (k) A Private Company is a company which
by its articles of association restricts the right of transfer of the share, limits the number of
members to fifty and prohibits invitation to the public to subscribe to the shares or
debentures of the company. As per
Section 5 A Private Company can be formed any two or more persons.


Public Company: As defined in section 2(1) (j) Public Company means a company
incorporated under this Act or under any law at any time in force before commencement of
this Act and which is not a private company. As per section 5 A Public Company can be
formed by at least seven persons as members and the membership are open to the
public.
















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Government Company

Government Company is a company which either registered as a Private Company or as a
Public company with the Registrar of Companies under the Companies Act, 1956, & the
Government has taken over or purchased 51% or more capital of the company. The
remaining capital may be taken over by the public.

According to Section 617 of the Indian Companies Act, 1956, a Government company
means, "any company in which not less than fifty one percent of the share capital is held
by the Central Government or any State Government or partly by the Central Government
and partly by one or more State Governments".
Features of Government Companies:

(1) Formation: Government Company is formed & registered under Indian Companies
Act, 1956, either as a Private company or Public company.

(2) Ownership: It may be partly or wholly owned by Government. State Government or
Central Government or both may own the Government Company. If it is partly owned by
Government then at least 51% of the capital must be taken over by the government.

(3) Management: Management of Government Company is vested in the hands of Board
of Directors. The Directors may be nominated by government or even the shareholders
can appoint the Board of Directors.

(4) Separate Legal Status: A Government company, like a joint stock company is an
incorporated association & artificial person having a common seal & perpetual succession.
It has a separate legal entity from its owners.

(5) Body Corporate: A Government company is incorporated under the Indian
Companies Act, 1956. It enjoys the status of body corporate. "It can enter into contract in
its own name & can acquire properties in its own name. It can sue & can sue by others

(6) Employees: The employees & other staff members in government company are
appointed by the company itself. The employees are neither government servants nor they
work under civil servants; the government may in exceptional cases nominate some top
executives.

(7) Capital Collection: A government company requires huge capital for its business
operations. The company is free to collect capital through its own sources & it can even
borrow the money depending upon its requirements.

(8) Approval of Accounts: Government company has to place its Annual Accounts &
Annual Reports for the approval of Legislature Assembly or Parliament as it is compulsory
as per the act.


(9) Flexibility: A government company enjoys full flexibility in its operations. It is free to
adopt different changing policies according to changing business environment.

(10) Exemptions: A government company is exempted from Budgetary Accounting &
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Audit. But, its Auditors are appointed by the government as per the guidance of controller
& Auditor General of India.


Difference between a public company and a private company:

The distinction between a public company and a private company are explained in the
following manner:
1. Minimum number of members
The minimum number of person required to form a public company is seven, whereas in a
private company their number is only two.
2. Maximum number of members
There is no limit on the maximum number of member of a public company, but a private
company cannot have more than fifty members excluding past and present employees.
3. Commencement of Business
A private company can commence its business as soon as it is incorporated. But a public
company shall not commence its business immediately unless it has been granted the
certificate of commencement of business.
4. Invitation to public
A public company by issuing a prospectus may invite public to subscribe to its shares
whereas a private company cannot extend such invitation to the public.
5. Transferability of shares
There is no restriction on the transfer of share In the case of public company whereas a
private company by its articles must restrict the right of members to transfer the share.
6. Number of Directors
A public company must have at least three directors whereas a private company may have
two directors.
7. Statutory Meeting
A public company must hold a statutory meeting and file with the register a statutory
report. But in a private company there are no such obligations.
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8. Restrictions on the appointment of Directors
A director of a public company shall file with the register consent to act as such. He shall
sign the memorandum and enter into a contact for qualification shares. He cannot vote or
take part in the discussion on a contract in which he is interested. Two-thirds of the
directors of a public company must retire by rotation. These restrictions do not apply to a
private company.
9. Managerial Remuneration
Total managerial remuneration in the case of public company cannot exceed 11% of net
profits, but in the case of inadequacy of profit a minimum of Rs. 50, 000 can be paid.
These restrictions do not apply to a private company.
10. Further Issue of Capital
A public company proposing further issue of shares must offer them to the existing
members. A private company is free to allot new issue to outsiders.
11. Name
A private company has to use words private limited at the end of its name. But a public
company has to use only the word Limited at the end of its name.




























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Promoter

Introduction
Before a Company is incorporated, or in the process of incorporation, it is common for
someone laid the groundwork of the Company. In practice, one does not always wait to
receive the Certificate of Incorporation before commencing business. Negotiations for the
purchase of material or land would already have commenced. The people who take the
responsibility of starting the Company are referred to as Promoters.

Definition
Promotion of a company is concerned with taking the steps necessary for incorporation.
"Promoter" is not defined in the Companies Act. In Tengku Abdullah v Mohd Latiff bin
Shah Mohd,[1996] Gopal Sri Ram JCA said: "A promoter is one who starts off a venture-
any venture-not solely for himself, but for others, but of whom, he may be one."
However the most cited case in this regard is Twycross v Grant where CJ
Cockburn said, one who undertakes to form a company with reference to a given subject
and to set it going and who takes all the necessary steps to accomplish that purpose.'
The promoter lays the foundations for a Company in terms of negotiations,
registration of the Company, obtaining directors and shareholders and preparing all the
paperwork.
However, because the Promoter is such an important person in the formation of the
company, the law places several responsibilities on him. These are known as fiduciary
duties.

Person who are not promoter
Person who is an employee or agent of the promoter e.g. an advocate
person who provides only professional help or advice
a shareholders [ Thiruvengadachariar vs Mudaliar (1938) ]

Function of the Promoter
1. The promoter decides the company name and asserts that it will be accepted by the
registrar of companies.
2. He decides the details of the company memorandum and an article, the nomination
of directors solicitors, auditors, bankers and the registered office of the company.
3. He makes arrangement for printing the memorandum and Articles, the registration
of a company and the issue of prospectus.
4. He is responsible to bring the company into existence.

# Duties of a Promoter:
Though some consider the term function similar to the term duties, but to me, duties are
wider than the mere concept of function. It involves something more responsibilities. The
duties of a promoter, however, include the followings:-

(i) Fiduciary duties;
(ii) Duty to disclose;






(i) Fiduciary duties:
Two things involve with the fiduciary duties of promoter -
(a) He is not allowed to make any secret profits; and
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(b) He is not allowed to derive a profit from the sale of his own property unless all
Disclosed.

So, from the moment he acts with the company in mind, a promoter stands in a fiduciary
position towards the company. [Henderson vs The Huntington Lopper etc. Co. Ltd
(1877)]

Damages for Breach of Fiduciary Duties: In the case of RE LEEDS & HANLEY
THEATRES OF VARIETIES LTD. (1902)
The Court ordered the Promoter to pay damages to the Company. The Court held that the
Promoters had fraudulently omitted to disclose the profit made by t hem on the sale of the
property to the Company. The amount of damages was equivalent to the amount of profit
made by the promoters.

(ii) Duty of disclose:
Whenever, a promoter keeps fiduciary relation with the company, he has full liability to
disclose to the company about any profit made by him out of promotion, e.g a profit on a
sale of property to the company.
The disclosure must be made to either -
(i) An independent board of directors, or [Erlanger vs New Sombrero Phosphate
Co. Ltd (1878)]
(ii) The existing and intended share holders, e.g by making disclosure in a prospectus.
[Lagunas Nitrate Co. vs Lagunas Syndicate(1899)]

However, it must also be kept in mind that a half disclosure is not a disclosure in the eye
of law so the disclosure must be full and complete. [ Gluckstein - Vs- Barnes (1990) ]

Consequence of non - disclosure:
If a sell is made or a contract is entered into without making a full disclosure then the
following consequences may be found:
(i) In case of sale, the sale may be set aside at the instance of the company ;
(ii) The company is not bound by the contract;
(iii) If it is found that the recession of the contract is not possible, the company may
Claim damage.

# Liabilities of Promoters: The promoters have the following liabilities:
(i) Liabilities in case of secret Profits: As said earlier that the promoters are not
allowed to make any secret profit. If any secret profit is made by the promoter, he is liable
to account to the company for all secret profits made by him. [ Gluckstein - Vs-
Barnes(1990) ].

(ii) Earned profits to be communicated to the Board of directors: It is not forbidden
for a promoter to earn profit but it must be reasonable. However, the earned Profits should
be communicated to the board of directors in case of business dealings with the company.
(iii) Liabilities from pre - registered agreement: If the promoter entered into any
contract with the third party before the company had got registered, the liabilities for such
contract incurred upon the promoters. [ Re Impress Engineering Co. (1880) ]

(iv) Liability from Preliminary expenses: The promoters shall be liable for the
preliminary expensed for the formation of the Company until the company gives
recognition of such expenses.

(v) Liability due to false statement in prospectus: The promoters may be held liable
for mis-statement in the Prospectus. For mis-statement a promoter is liable for paying
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compensation under s. 145 and for imprisonment up to five years or with fine under
criminal liability mentioned in section 397 of the companies Act, 1994. Besides, he
may be held liable under tort law.

(vi) Liability for abuse of powers: The promoter must keep a fiduciary relation with the
Company. So, he must not misuse his power in relation to the formation of the company.
In case of misuse he may be held liable.

(vii) Liability arising from death or insolvency: A promoter is not exempted from his
liability merely by death or insolvency. His liability vests upon the shoulder of his legal
representatives in case of death or insolvency.

There are many cases where Promoters did not remain true to their fiduciary duties. The
bottom line requirement from Promoters is that they must be transparent in their dealings
with the Company. There are three remedies in situations where the Promoters have
breached the Fiduciary Duties.
1. Rescission
2. Recovery of the Secret Profit
3. Damages for breach of Fiduciary Duties or deceit



So we can say that, Promoters have a legal duty not to make a secret profit out of the
promotion of the Company without the Company's consent and also to disclose to the
Company any interests the promoters have in any transaction proposed to be entered into
by the Company.

Before registering as a company it need to make some legal documents such as-
Memorandum of association and Articles of association. Which need to be registered.

























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Memorandum of Association

The Memorandum of Association is a document which contains the fundamental rules
regarding the constitution and activities of a company. It is a basic document which lays
down how the company is to be constituted and what work it shall undertake. It may be
termed as the charter of the company. Section 2(1)(v) of the companies Act, 1994
defines memorandum as the memorandum of a company as originally framed or as
altered in pursuance of the provisions of this Act.

According to Lord Cairns The memorandum is, as it were, the area beyond which the
action of a company cannot go; inside that area the share holders may make such
regulations for their own government as they think fit.

From of Memorandum
Section 9 states that the memorandum of every company shall
be printed
be divided into paragraphs numbered consecutively; and
be signed by each subscriber, who shall add his address and description in the
presence of at least two witnesses who shall attest the signature.


The contents of the Memorandum
Section 6(a) (b) & (c) of the Acts lays down that the memorandum of a association of
every shall contain the following particulars:
Name clause: The name of the company with the word limited at the end of a
Public Company and the words Private limited at the end of the name of a Private
Company.
Situation Clause: The name of the state in which the registered office of the
company is to be situated.
Object clause: The object of the company, the main object and objects incidental
and ancillary to the main object.
Area of operation clause: Except in the case of trading corporations, the state or
states to whose territories the objects extend.
Liability clause: The nature of the liability of the member, such as limited by
shares or by guarantee or unlimited.
Capital clause: In the case of a company having share capital unless the
company is an unlimited company, the memorandum shall state the amount of
share capital and the division thereof into shares of a fixed amount.

Alteration of Memorandum: Under section 12(1) (2) & (3) a company by special
resolution alter the provision of its memorandum with respect to the object of the
company. Clause other than conditions may be altered generally by special resolutions, as
if they are contained in the articles. A clause in the memorandum regarding the right of
dividend of class of share holders may be altered by special resolution [Rampuria catton
Mills Ltd. Re, A (1959)]
Articles of Association
The Articles of Association is a document which contains rules, regulation and bye laws
regarding the internal management of the company. It lays down the regulations for
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achievement of the object of the company as per its memorandum as to carry out those
objects. Section 2(1)(u) of the companies Act, 1994 defines Articles as the Articles
of Association of a company including, so far as they apply to the company, the
regulations contained in the schedule 1 to this Act.

Form of Articles
Model forms of articles, for use in the case of companies not limited by shares, are given
in schedule 1 to the Act. Section 19 states that the Articles of every company shall;
be printed
be divided into paragraphs numbered consecutively; and
be signed by each subscriber of the memorandum, who shall add his address and
description in the presence of at least two witnesses who shall attest the signature.

Contents of Articles
The Articles of association, describe the powers of the directors, other officers, and of the
shareholders as to voting etc. It also describes the mode and from in which change in the
internal regulation of the company, may from time to time, be made. The Articles of
association cannot go beyond the limit set by it. The contents of articles are: Share capital,
right of shareholders, payment of commission, share certificates, transfer of shares, Lien
on shares, share warrants, alteration of capital etc.

Alteration of the Articles of Association: Under section 20 a company may by special
resolution alter, exclude from or add to its articles and such alteration, exclusion or
addition shall be valid as if originally contained in the Articles.









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Registration of memorandum and articles
The memorandum and articles if any shall be field with the Registrar who if satisfied that
the requirements of this Act have been complied with shall retain and register them within
thirty days from the date of their receipt and in the event of refusal he shall communicate
the grounds within ten days after that period to the company. An person on being
aggrieved by a refusal of the Registrar under sub-section (1) may make an appeal to the
Government within thirty days of the receipt of the refusal order The decision of the
Government in an appeal under this section shall be final.

Effect of registration.
On the registration of the memorandum of a company the Registrar shall certify under his
hand that the company is incorporated and in the case of a limited company that the
company is limited. From the date of incorporation mentioned in the certificate of
incorporation the subscribers of the memorandum together with such other persons as
may from time to time become members of the company shall be a body corporate by the
name contained in the memorandum capable forthwith of exercising all the functions of an
incorporated company and having perpetual succession and a common seal but with such
liability on the part of the members to contribute to the assets of the company in the
event of its being wound up as is mentioned in this Act.
Conclusiveness of the certificate of incorporation: Section 25 provides that a
certificate of incorporation given by the Register in respect of any association shall be
conclusive evidence that all the requirements of the Act in respect of registration and
of matters precedent and incidental thereto have been complied with. This does not
mean that all the objects of the company as set out in the memorandum are legal. If a
company with illegal objects happens to be registered the company may be forbidden
to carry on its business in furtherance of its illegal objects. [Bowman vs. secular
society 1917]

















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Share

The capital of a company is divided into units of different denominations and each such
until is called share. Share means a share in the capital of the company and includes
stock except when a distinction between stock and share is expressed or implied.
A Share is the interest of a shareholder in the company measured by a sum of money for
the purpose, of liability in the place, and of interest in the second, but also consisting of a
series of covenants entered into by all the Shareholders inter set.

A Shareholder has a right
to participate in the profit of the company; and he has ability.
to contribute in the event of winding up of the company.

Characteristics of shares
A Share is not a sum of money but is an interest measured in a sum of money and
made up of various rights, contained in the contract.
The share or other interest of a member in a company is a movable property.
[Sec.30]
The Share of a public company are freely transferable in a manner provided by the
articles of the company. [Sec.30]
According to the provisions of the companies Act, 1994 and the memorandum and
articles of association of a company, a Share holder has some right duties and
liabilities.
A Share is an interest having a money value and made up of diverse right specified
under the articles of association.
Each Share must be numbered so that one can be distinguished from another.

Classification of Share
A companys Share may be different kinds such as
1) preference Share
2) Ordinary or Equity Share
3) Deferred or promoters Share
4) Other Share

Preference Share
Preference Shares are those which have some Preference over other kinds of shares. The
Preference may be in the ways of payment of divided or of payment of capital in the event
of winding up of the company.

Ordinary or Equity Share
Ordinary or Equity Share are those which have not special right as to divided of capital
allocated to them. In other words all shares other than Preference Shares ordinarily equity
shares. The ordinary or equity share holders are entitle to divided from the net profit of
the company only after satisfying the claims of the Preference Shareholders.



Deferred or promoters Share
The Deferred Shareholders participate in the distributable profits of the company. Deferred
Share are also called as the promoters Share since this type of shares are issue to the
promoters of founders of the company for the service rendered by them in promoting and
forming the company.
Other Share: [e.g. Bonus shares, No par value shares, Non-voting ordinary shares,
Employees shares]
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Allotment of shares
General rule of law of contract applies to Allotment of shares i.e. by issuing prospectus,
the company invites public to purchase share. Persons who are interested to take shares
apply to the company and when the company accepts the said offer for the purchase of
shares is known as an Allotment of shares.
Unconditional acceptance: An acceptance must be unconditional and correspond
with the terms of the offer. For example, if any applicant applies for 50 shares but he
allotted only 20 shares in his name, he may refuse to take it. However, there may be a
number of applicants and it may be impossible for the company to make an allotment in
full to every applicant, in this case, the difficulty may be removed by adding the following
clause in the from of applicant, I agree to accept such shares or any smaller number that
may be allotted to me.

Share certificate
Share certificate means the certificate issued by the company evidencing that the number
of share specified in the certificate has been allotted. After allotment of shares it is the
duty of the company to issue a Share certificate to the allottee free of cost. So, it is an
obligation cast upon cast upon the company, the allotment of share or debentures, to
issue a share certificate to the allottee.

Share warrant
A Share warrant refers to a document issued by a company, stating that its bearer is
entitled to the Shares therein specified. It is issued under the common seal of the
company and is substitute for the Share certificate. If the articles provide then the
company may issue Share warrant for fully paid up Share. One of the important features
of Share warrant is that the transfer of it is possible by mere delivery without the transfer
being registered by the company. Share warrant, however are considered as negotiable
instrument and a bonafide purchaser for value shall have good title on it if he has obtained
it in good faith.

Transfer of Share
One the privilege of a Share holder of a public company is that, he has the right to transfer
the Shares he belongs. Under the provisions of our companies Act along with other
relevant laws and regulations, the right to transfer of Share is a statutory right and this
right is not subject to curtailment in a general sense. Despite the fact, the transfer of
Share of a private company is closely restricted. But in case of public company, Shares are
freely transferable.

Restrictions on the Transfer of Shares
If the transferee is a man of unsound mind
If the instrument of transfer is incomplete, irregular or not property stamped
If the instrument of transfer is not property executed or not property stamped
If the transferee is undesirable to the company and is a threat for the smooth
function of the company
If the transferee of a partly paid up shares is a minor
If the transferee of a partly paid up shares is in the opinion of the directors,
financially incapable of paying the remaining debts of the company
If the transferee is a debtor of a company and a company has a lien on shares
If the calls are in arrears against the shares to be transferred

Certification of transfer
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When the shares are transferred the company gives a balance ticket to the transferor
retaining the share certificate for cancellation. The company also gives the transferee a
certified instrument of transfer.

Blank Transfer
In a blank transfer the buyers name or signature or the date of sale may not be given.
The seller signs and the transfer from ma change hands and the first transferor will be
treated as the transferor even if the registration takes place after his death. Blank Transfer
is common also when securities are mortgaged to raise money. The advantage is that it
saves the trouble of complying with the formalities of transfer every time a security
changes hands. A transfer in blank, when accompanied by the share certificate or scrip
conveys both the legal and equitable right in the shares and also the right to call upon the
company to register the transfer.

Transfer when completed
Transfer of shares is complete when duly executed and stamped transfer deed is delivered
to the company irrespective of the fact whether the company registers it or not. [K.N
Narayanan vs ITO (1984)]

Instrument of Transfer of shares
There is no time limit or any consequential obligation if stamp is not affixed with
instrument of transfer. There is no penal provision either stamp may be paid even after
session of the instrument to the company.































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Winding Up

Winding up is a legal process by which the life of a company is put to an end. In the
course of winding up the assets of the company are realized by converting them into
money, and the same is then applied for the satisfaction of debts, the balance being
returned to the share - holders. The share - holders do not get anything until the creditors
are fully paid.
A company may go into liquidation not only when it becomes insolvent but also
when the share - holders think that it will not be profitable to continue the business in the
way in which it had been done.


Conclusion

Companies law is the field of law concerning companies and other
business organizations. This includes corporations, partnerships and other associations
which usually carry on some form of economic or charitable activity. The most prominent
kind of company, usually referred to as a "corporation", is a "juristic person", i.e. it has
separate legal personality, and those who invest money into the business have limited
liability for any losses the company makes, governed by corporate law.

Reference

Books:
Commerci al Law and Industri al Law (Busi ness Law)

Website:
http://en.wikipedia.org/wiki/Companies_law