THE NEED FOR COMPANY LAW
What is law & why it is necessary? # Rules established by a governing authority to maintain orderly coexistence is termed as „law‟. # Law signifies a rule of human action and conduct. # Law is established by custom, by agreement or by authority where it is passed by Parliament. #Law governs the rules & principles of the affairs of a community, # Law may be a set of rules or principles dealing with a specific area of the legal system, viz. tax law, company law, etc. # Law is an order or dictum having absolute & unquestioned authority. # Any edict, decree, order, ordinance, statute, resolution, judicial decisions & usage, etc. – which are recognized and enforced by a controlling authority.
THE NEED FOR COMPANY LAW-CONTD.
how does law evolve and how it is introduced. # in the olden ages law was evolved from sacred words of advice revealed to wise men. # many European countries modeled their secular law based on the Roman Law. # note that secular laws are different from religious laws. the COMPANY LAW provides the foundation & legal framework to guide from the formation of a company until the dissolution or winding-up of the company. Introduction to:# the legal meaning of a COMPANY. # brief history of the Companies Act 1956.
LEGAL MEANING OF A COMPANY
COMPANY is an association of individuals for the purpose of carrying on a legitimate business. # COMPANY is not the same as Partnerships, as a company has greater number of members, the capital is more considerable, the enterprise is bigger in terms of risk and importance. # COMPANY is authorized by the government.
NATURE OF COMPANY
Strictly speaking a „company‟ does NOT have a technical or legal meaning. It means “a group of persons associated together for the attainment of a common end, social or economic”. A registered company means a company incorporated under the the Companies Act. An incorporated company is mostly a business organisation but can also be formed for other purposes, viz. charity, research, art, sports, religion, etc.
DEFINITION & CHARACTERISTICS OF A COMPANY
A Company is a : Voluntary association of persons.It is purely voluntary whose Capital is divided into Shares and any person can own those Shares. Two main characteristics:Artificial person created by the process of law just as a human being; but without a physical existence except in the eye of the law.(Lindley‟s definitionpg.3).Also, Salomon vs Salomon & Co. Ltd. Limited Liability- Limited by Shares or Guarantee. Liability is limited to the unpaid value of the Shares Or to the amount undertaken by a person in the event of winding-up. (Lloyds).
CHARACTERISTICS (Contd.)
Perpetual succession:It never dies; It‟s life is not depended on the life of it‟s shareholders.It is not affected by insolvency,lunacy,retirement of members.It continues to exist even if ALL the members are dead. Common Seal: It is the official signature of the company. Since it is invisible,all contracts are entered into by it‟s agents who must affix the seal of the company. Transferability of shares:No shareholder (member) is permanently or necessarily married to the company.Member can freely transfer his shares to anybody else. Can own separate Property: The company as a legal person can own & dispose properties.Property of the company is NOT the property of it‟s shareholders. Capacity to sue:A company may sue OR be sued in it‟s corporate name.
VEIL OF INCORPORATION AND WHEN THE VEIL IS LIFTED?
A company is a legal person covered under the veil of incorporation and recognised by law. This veil was being used by persons for fraudulent & improper conduct.It became necessary for the courts to lift this veil and act against the persons who benefit from the fraud or improper conduct.(Gilford Motors pg 5 ).WHEN IS THE VEIL LIFTED?
….. WHEN IS THE VEIL LIFTED??
To protect creditors from being cheated or when law is generally being defeated. (Bubble companies). When the character of the company is that of an enemy.(Daimler case page 9). To protect public policy.Prevent transactions which are against public interests. To protect state revenue and guard against tax evasion (avoidance?) When the company acts as an agent or trustee of it‟s members.
ADVANTAGES OF INCORPORATION
Limited liability:so that persons can involve in business without involving their fortunes or that of their off-springs. Transferability of shares:member can transfer his ownership WITHOUT the consent of other members. Separate legal entity:Is not affected by death,etc. Management: a majority owner of shares can stay away from the management of the company but retain his majority interest.(Gates,Nmurthy). Dealing with members:Transactions amongst it‟s members or between members and the company is permissible.They can sue one another.
COMPANY VS. PARTNERSHIP
Co. regulated by companies Act,1956. P/S governed by Indian Partnership Act,1932. Co. registration is compulsory. P/S registration is not compulsory. Co is a legal entity.P/S is made up of persons. Co has limited liability. In P/S, partners are jointly & severally liable. Co- shares are transferable. P/S need consent of all partners. P/S dissolved in case of death, insolvency, etc. Minimum: Pvt. Ltd. Co.=2, public Ltd. Co.=7, P/S=2. Maximum: Pvt.Ltd.Co.=50,Public Ltd Co.=Unlimited. P/S=20 (banking=10). Refer more points on page 13.
ORIGIN OF COMPANY LAW
The Act owes its origin to the English laws. # 17th & 18th centuries-by Royal Charter or Act of Parliament. # Growing commercialization lead to partnerships which were not incorporated by law. # This lead to separation of „ownership‟ from „management‟. This lead to fraudulent practices and duping the investors / owners. # British parliament passed the Bubbles Act in 1720 which curtailed the activities of ALL companies. # Was replaced by the Joint Stock Companies Act of 1844. This was modified (amended) from time to time until the Act of 1948 and 1985. # The Indian company law started with the Joint Stock Companies Act of 1850, which was regularly amended and consolidated until the Companies Act 1956.
Companies Act - 1 History
First legislature was „Registration of Joint Stock Companies,1850‟ ; based on English Companies Act,1844 (also known as Joint Stock Companies Act of 1844). In 1950, Bhabha Committee was appointed under Mr H C Bhabha with 12 members.And the most comprehensive & voluminous law was passed known as Companies Act,1956. Underwent major amendments every 2 or 3 years,known as The Companies (Amendment) Act,19xx. Scheme of the Act involved:Establishment, Management & Administration, Winding Up, & Miscellaneous provisions.
Companies Act – 2 Administration
The Central Government The National Company Law Tribunal OR Tribunal (comprising of a President and max of 62 members both judicial and technical). Orders of the Tribunal may prefer an appeal to the Appellate Tribunal, comprising C‟man & 2 members. The role of SEBI and it‟s impact on the Companies Act, 1956.
Different kinds of COMPANIES-1
incorporated under the Companies Act,1956 OR „not incorporated‟ If Incorporated: Statutory OR Registered. If Registered: Limited by #Shares #Guarantee #Unlimited. All THREE above can be Private Companies OR Public Companies. PLUS, there are Foreign Cos. And Govt. Cos.(so classification can be based on Incorporation, Liability, or Number of Members).
Different kinds of COMPANIES-2
+Incorporated cos are incorporated under the Companies Act,1956. +Un-incorporated cos are no longer registered under the Act. They were similar to large partnerships and the shares were transferable;but liability of members were unlimited.Their life was independent of the life of the members. +Statutory cos are created by law, i.e. Act passed by the Parliament – SBI, Railways, Elec.Board & similar establishments. +Foreign cos are incorporated outside India but has a place of business in India. However, if 50% of the shares are owned by Indians,it shall comply with the Cos Act. Other foreign cos need to comply with Sections 592 to 602 of the Act which deals with filing of documents, accounts, limited liability, regn of charges, winding-up, etc., etc.(refer pages 29 to 32)..
Different kinds of COMPANIES-3
+Unlimited cos – where the liability of the members is
unlimited and is in proportion to their holding of the subscribed share capital. +Subsidiary & Holding cos – a company which is controlled by another company is a Subsidiary co.The company which holds the control is a Holding co. Control can be in the form of #controlling the composition of the Board of Directors of another co. # a co. holds the majority of the nominal value of shares of another co. Nom. value represents the face value of the subscribed capital of the other co., and # a co. is a subsidiary of another subsidiary co. (example on page 25).+ Government co. is one where at least 51% of the paid-up capital of a co. is held by the #Central govt. or #state govt. or #by both. Govt. cos. are separate entities and are NOT the agent of the govt. OR a dept. of the Centre / State. +One-Man cos are legally permissible. The shares are practically owned by one individual, but to meet the min requirement of members, dummy members hold 1 or 2 shares each and may be his close relations or associates
Public company Vs. Private company
Minimum number: Public 7 and Private 2. Maximum number: Public x and Private 50. Min. Capital: Public Rs5 lakhs; Pvt. Rs1 lakh. Directors: Public=3; Pvt.=2. Shares: Public Co. can invite subscription to shares & debentures. Pvt.Co. can prohibit invitations. Transfers: Pvt.Co. can restrict transfer of shares. Refer legal position & comments on pages 18 & 19.
Note: Pvt. Co. can convert to Public Co. AND Vice Versa. Further reading from pages 41 to 57.
COMPANY - Formation
(Imagine a co. to be a ROBOT which needs a software designed by humans).
PROMOTERS are the persons who form a company and take all preliminary steps needed by law to form a Company. A registered co. may also be a Promoter. MIN. NUMBERS: a co. can be formed by (7) or more persons (2- in case of pvt. Co) by subscribing their names to the M/A and observing other formalities. DOCUMENTS NEEDED: Before filing the documents, the Name of the co. should be approved by the Registrar. Once approved, following documents along with the Fees should be filed with the Registrar.(Contd)
Documents required ……
Memorandum of Association (M/A) signed by the promoters (known as Subscribers). Articles of Association (A/A) signed by the subscribers to the M/A. Or can adopt Table A. An agreement (if any) the co. proposes to enter with a person to be appointed as Manager / Director. List of Directors who have agreed to be the first Directors of the co.,along with the qualification shares. (Explain Director under the Act and ‘Director’ as a Designation viz. Marketing Dir, Personnel Dir, etc.). A Declaration that all formalities re. registration AND all requirements under the Act have been complied with. This is usually signed by an Advocate, C/A, C/S, or person named in the A/A.
Cert. Of Incorporation
If the Registrar is satisfied with the compliance to the Act, he retains the documents and issues the “Cert. Of Incorporation”. It is conclusive proof that the co. exists & is a ltd. Co. (if applicable). From the day of incorporation, the company assumes ALL the characteristics (already discussed earlier) of a Registered Co. under the Companies Act,1956.
Preliminary Contracts (Pre-Incorporation)
Promoters need to enter into contracts for the formation of the co.,viz. property for regd. Office. Peculiarity:Promoter cannot act as an agent of a non-existing co., nor can the co. enter into a contract.
The co. after incorp., also cannot ratify the contracts.
Therefore, the promoters are personally liable and have to pay damages in case of failure to perform. Solution:- The co. can enter into a new contract on the same terms or amended terms, provided agreed by both the parties. Hence, promoters include the following clause in the contract entered into by them: The incorp. Co. makes a fresh contract on the same terms as the org. contract, AND the liabilities of the promoters comes to an end. If the incorp. Co. does NOT enter into a fresh contract within a specified time, either of the two parties can rescind the contract.
MEMORANDUM OF ASSOCIATION
Again, the definition under the Act is neither explanatory nor helpful.It says Memorandum means a M/A of a co. as originally framed in pursuance of the Companies Act, 1956. M/A is a fundamental document of the co. based on which the co. came into existence. It is a charter & raison d‟etre (reason for existence) of the co. Purpose: So that prospective shareholders & outsiders know for what object their money or other consideration, is going to be used. The format will be according to the Act, under the Sch.1, Tables B,C,D,E. (A=??).
M/A : Contents
Name Clause:the name of the co. followed by „Limited‟ or „Private Limited‟.(similar/misleading names,etc.) Domicile Clause: The State in which the RO of the co. is situated. Object Clause:The main object for the co. Also objects which are ancillary or incidental to the main object. OTHER OBJECTS not included above. And the States to which such Objects may extend. Liability Clause: That it is limited by Shares, or by Guarantee. Capital Clause:The total amt. of the Share Capital and the division into Shares of a fixed amount. Each Promoter will mention the amt. of Shares taken by him. In case of Ltd. by guarantee, the undertaking by each member of his contribution in case of need. Association Clause: Stating that the subscribers (promoters), desire to form a co. and agree to take Shares.
Doctrine of “ULTRA VIRES”
A company has the right to do all things:Essential to the achievement of it‟s OBJECT Clause. AND Reasonable & Incidental to it‟s OBJECT Clause. Authorised to be done by the Co.Act,1956. EVERY other act of the co. is ultra vires. ULTRA means “BEYOND”. VIRES means “POWER”. i.e. beyond the legal powers and authority of the company. Effects of ultra vires acts by the co. :Court may restrain the co. from proceeding with the act. Shareholders may ask the Directors to restore the money used in such acts as their personal liability. Ab Initio void contract: Neither the co. nor the other contracting party can enforce the contract. (Explain UV the company, and UV the Directors).
Articles of Association (A/A)
The purpose of A/A is to help the co. to carry out it‟s objects as per the M/A. The A/A contains the Rules, Regulations, and Bye-laws which govern the internal management of the affairs of the company. It must therefore not violate the M/A or the Cos. Act,1956. Any violation will be considered an ‘ultra-vires’ act. Contents include: Dealings with shares:calls, lien, transfer, transmission, forfeiture, etc. Alterations to Capital General Meetings of the co. Directors, Managers, Secretary, etc. Dividends and Reserves Accounts and Audits Borrowing powers Capitalisation of profits Winding-up procedures Etc., etc., etc.
M/A and A/A: a study …
RELATIONSHIP: # AA are subordinate to the MA #MA should be read in conjunction with AA #The terms of MA cannot be modified or controlled by the AA. DISTINCTION: #MA is a charter indicating name, capital, nationality, etc. and relationship with outsiders. AA are a set of regulation for the internal management of the company. #MA defines the scope of activities or objects. AA sets the rules to achieve the objects. #MA is the main document. AA is subordinate to the MA. #Every co. must have a MA. But Ltd. Cos. can adopt Table A. #Any act ultra-vires the MA is void and cannot be ratified even by all the shareholders. Acts which are ultra-vires the AA (but intra-vires the MA) can be ratified by the shareholders.
CONSTRUCTIVE NOTICE & INDOOR MANAGEMENT
Constructive Notice:The MA and AA after incorporation become public documents. So anybody dealing with the co. is deemed to know the contents of the MA and AA. It does not operate against the co. but against the outsider. Anyone dealing with a co. is presumed to have read the MA and AA and has also understood the same. (ignorantia juris non excusat). Venkataswamy vs Rammurthi – Pg. 69) Indoor Management: Constructive Notice has one limitation. The outsiders can presume that the internal management of the co. are being complied with on a regular basis. Outsiders are presumed to have read the docs and the proposed contract is not UV the coc. And they are not bound to do more. Also known as the Turquand Rule.(Page 70). Indian case Lakshmi Rattan Cotton Mills Ltd. VS. J.K. Jute Mills Co. Ltd. (Page 104latest edition).
Exceptions to ‘Indoor Management’
Irregular: Where the outsider has knowledge of any irregularity, e.g. the same person inside the co. as well. Negligence: where circumstances are suspicious in order to attract enquiry and this was not done. Forgery: Nothing can validate a forgery. [refer case laws page 71].
RAISING OF CAPITAL :– THE „PROSPECTUS‟ Pg.113
A co. needs money (capital) to finance its activities. This is obtained from the public by selling shares/debentures or inviting deposits. So the co. issues a Prospectus spelling the prospects (objects) of the co. and the purpose for which the money (capital) is required. Any document inviting deposit from the public or inviting offers from the public for buying (or subscribing) shares or debentures of the co. is a Prospectus. {Read Sec 2 (36) of the Act –page 74- old edition}. Dating The Prospectus must be dated as the date of publication. Signing The prospectus must be signed by the proposed Directors of the co. or by their agents.. All matters relating to a Prospectus are exercised by the central Govt., The Tribunal and the Registrar.
PROSPECTUS – contd.
REGISTRATION: It has to be Registered BEFORE the date of publication. OBJECTS: (1) To keep a record of the terms of the issue of the shares, and (2) To assign responsibility of the persons issuing the Prospectus. CONTENTS: It is a window for investors to look into the co., hence, should give a complete picture with the fullest disclosure possible. Samples are:(1) General info: #name and address of RO #Consent of Cent. Govt. #StockEx. Where shares are listed #Date of opening/closing of the Issue #name/address of auditors #Rating from CRISIL (Credit Rating Info. Services of India Ltd.) or any rating agency. #Underwriters-name and address. (2) Capital structure: #Authorised, Issued, Subscribed & Paid-up (3) Co. Management & Project (3) Cos. Under the same Management. (4) Pending litigations (5)Risk Factors,e.g. forex changes, cost over-run, etc. (go through pages:117 to 121- latest edition)
PROSPECTUS … contd.
RED HERRING PROSPECTUS:which does not have
complete particulars on the price or quantity of securities (eg. shares,debentures) offered. MIS-STATEMENTS: Ref. New Brunswick vs. Muggeridge – 123 (82) – the Golden Rule „strict & scrupulous accuracy‟, „state facts as facts‟. Attracts both Civil & Criminal penalties.#can rescind the contract #claim damages #plus, imprisonment upto 2 years or fine of Rs50K, or both. STATEMENT IN LIEU OF PROSPECTUS: If a co. wishes to raise capital from private resources, the co. prepares a draft Prospectus known as Stat. in lieu of Prospectus.(as per Sch III of the Act). Cannot allot shares unless at least 3 days before the allotment, the Statement should be registered with the Registrar). END:but also read the book for additional information).