PowerPoint Presentation by HC120704001018


									  Social & Legal Issues

Indian Companies Act

               Social & Legal Issues

              Companies Act, 1956

• A company implies an association of persons for
  some common object(s). According to the act :A
  company formed and registered under the companies
  act 1956 or under any previous company law. A
  company is a contractual entity created by the
                 Social & Legal Issues

           Characteristics of a Company
1.   Incorporated Association
2.   Artificial legal Person
3.   Separate legal Entity
4.   Perpetual Succession
5.   Limited Liability
6.   Transferable Shares
7.   Common Seal
8.   Separate Property
9.   Capacity to Sue and Being Sued
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                   Kinds Of Companies

•   A) On the basis of mode of Incorporation:
•   Chartered Companies
•   Statutory Companies
•   Registered Companies
•   B) On the basis of Liability of Members
•   Limited by Shares
•   Limited by Guarantee
•   Unlimited
•   C) On the basis on the number of members
•   Private
•   Public
•   D) Others: Govt. Companies, Foreign company, Holding and
    subsidiary company
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       Distinction between private and Public
Pvt. Company                    Public Company
Minimum number of members Minimum number of members to
to form a company is 2    form a company is 7
Max. number of members          No restriction
should not exceed 50
Right to transfer share is      Freely transferable
Prospectus can not be issued    Prospectus is issued

Commence business               Can start only after receiving the
immediately after getting the   certificate to commence business
certificate of incorporation    from registrar of companies
Numbers of Directors must be    Must have at least 3
at least 2
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Distinction between private and Public Company
Directors consent to work as a        Necessary
Director with Registrar is not
Number of Directors can be            Not more than 12 without the
increased to any number               approval of the central govt.
Directors are required to retire by   At least 2/3rd of Directors must
rotation                              retire by rotation
Managerial Remuneration –No           Not more than 11% of net profit.(
restriction                           not mere than 5% to a sgl.Director)
Can be registered with a paid up      Rs 5 Lakh
capital of Rs. 1 lakh
Can not accepts deposits from         Can accept deposits from public
Need not hold statutory meeting or    Must do so
file a statutory report
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               Lifting The Corporate Veil
•    The circumstances under which the courts may lift the corporate
     veil are:
1.   Under Statutory Provisions
•    Reduction of Membership
•    Misrepresentation of Prospectus
•    Fraudulent Conduct of Business
•    Failure to return application money
•    Mis-description of name
•    Non-payment of tax
•    Liability of ultra -Vires acts
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             Lifting of the Corporate Veil

2) Under Judicial Interpretations:
• For determining the enemy of the company: Daimler
  Company vs Continental Tyre rubber company
• For the Benefit of revenue-Sir Dinshaw Maneckjee Petil,
• For prevention of Fraud and Improper conduct
• Others
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     Formation and Incorporation of a Company

• • Promotion
• • Registration/Incorporation
• • Flotation/Raising of Capital
• • Commencement of Business
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• • Promotion refers to the entire process through which a
• company is brought into existence.
• • It starts with the conceptualization of the birth of the
• with an objective for which it is to be formed.
• • The persons who conceive the company and invest the initial
• funds, are known as promoters.
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         Registration/Incorporation of Company

•   The Promoters of the company will submit the following
•   documents with the Registrar of Companies for the
•   registration of company:
•   • Memorandum of Association
•   • The article of association
•   • A list of persons who have consented to act as directors
•   of the proposed company
•   • A statutory declaration of compliance.
•   • Any agreement with the relevant persons of the proposed
•   company.
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         Registration/Incorporation of Company

• • The Registrar of the Companies is to allot a Corporate
•   Identity Number to each company registered on or after
•   November 1, 2000.
•   • After scrutiny of all the documents a certificate of
•   incorporation is issued
                    Social & Legal Issues

            Flotation and Raising of Capital

• • A public company can take either of the following
•   • a) Issue a prospectus to invite public for
•   • b) Deliver a statement in lieu of prospectus where
•   company has either not issued the prospectus or it has
•   issued the prospectus , has not proceeded to allot any
•   shares offered to the public for subscription
                          Social & Legal Issues

                   Commencement of Business

•   Every private company and a company not limited by shares can
•   commence business immediately on receipt of certificate of
•   incorporation. But a public company limited by shares is debarred
•   from commencing business on borrowing money without the
•   certificate of commencement of business
•   ���� Where a company has issued Prospectus –
•   ���� The minimum subscription in cash has been raised
•   ���� Every director of the company has paid in cash his qualification
•   shares , a proportion payable on application and allotment on the
•   shares offered for public subscription.
•   ���� No money is liable to be repaid to applicants for any shares or
•   debentures which have been offered for public subscription by
•   reason for any failure to apply for, or to obtain permission for the
•   shares of debentures to be dealt in any recognized stock exchange
                          Social & Legal Issues

                   Commencement of Business

•   ���� A statutory declaration duly verified by one of the directors or the
•   secretary in the prescribed form that the above conditions have
•   been complied with, is filed with the registrar
•   ���� Where the company has not issued prospectus –it has to satisfy the
•   following conditions:
•   ���� A statement in lieu of the prospectus if filed with the Registrar
•   ���� Every director of the company has paid in cash his qualification
•   shares , a proportion payable on application and allotment on the
•   shares.
•   ���� A statutory declaration duly verified by one of the directors or the
•   secretary in the prescribed form that the above conditions have
•   been complied with, is filed with the registrar.
•   ���� When the company has compiled with the above conditions the
•   Registrar will issue a certificate to commence business.
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             Memorandum of Association
• • Meaning and Importance
• MOA of a company is its charter and defines the
  limitations of the
• powers of the company
• It is not unalterable
• • Content:
• i) Name of the Company: with ‘limited’ and ‘private
  limited’ as the
• last word(s) of the name
• ii) Registered Office
• iii) Objects of the company : main objects , Incidental and
• objects, other objects not included in first two.
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                Memorandum of Association

•   iv) Liability: A declaration is made that the liability of
•   the members is limited.
•   v) Capital-The amount of authorized share capital
•   divided into shares if fixed amount
•   vi) Association or Subscription: The initial members are
•   called subscribers, who sign the memorandum in the
•   presence of one witness
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                  Articles of Association

• • Article of Association of a company are its bye laws.
• It controls the internal management of the company
• and defines the powers of its offices.
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               Difference of MoA and AoA

• Charter of Company             • Regulations for internal
• Defines the scope of             Mgt
  activities                     • Rules for carrying out the
• Supreme Document                 objects of Co.
• Must for every company         • Subordinate to the
• Strict restrictions, some
                                 • Company limited by
  alterations may require          shares need to have it.
  sanction of central govt.
                                 • Act ultra-vires but intra-
• Act ultra-vires is wholly        vires the memorandum
  void and can’t be ratified       can be ratified
                         Social & Legal Issues

                     Doctrine of Ultra -Vires

•   • Ultra –Vires means beyond the powers.
•   • Ashbury Railway Cairrageand Iron Company Ltd vs
•   Riche
•   Doctrine of Constructive Notice
•   • The memorandum and articles when registered with the
•   Registrar becomes public document and accessible to
•   all.
•   • Therefore there is a presumption that any outsider
•   dealing with the company has read and understood these
•   documents. This is known as doctring of constructive
•   notice.
•   • Kotla Venkatswamy vs C Ramamurthy.
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             Doctrine of Indoor Management

•   • Persons dealing with the company in good faith have
•   a right to assume that the internal requirements
•   prescribed in public documents (memorandum and
•   articles have been observed.
•   Exceptions:
•   • Where the outsider had knowledge of irregularity.
•   • In case of forgery
•   • Negligence on the part of the outsider
•   • Acts outside the scope of apparent authority
•   • Rayal British Bank v.Turquand
                    Social & Legal Issues

              Registration of the Company

• • The promoters file the memorandum of association
•   article of association and a declaration by a lawyer
•   that the requirements of the act have been followed
•   with the Registrar of the Companies.
•   • Registrar of the Companies issues the Certificate of
•   Incorporation of the company.
•   • Distinct Legal Entity
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•   • “Prospectus means any document described or
•   issued as a prospectus and includes any notice,
•   circular, advertisement or other document
•   inviting offers from the public for the
•   subscription and purchase of shares in,or
•   debentures of a body corporate.”
                    Social & Legal Issues


• Pre-Requisites of Prospectus
• • Prospectus must be dated
• • Prospectus must be signed
• • Prospectus must be registered
• Golden rule of the Prospectus
• There should be an honest disclosure of all facts. The
• true nature of the company’s venture to be disclosed.
                       Social & Legal Issues


•   Deemed Prospectus- When a company allots shares or
•   debentures to the public through the medium of Issue Houses,
•   then the issue houses invite subscription from the public
•   through their own offer document. This is also called
•   prospectus by implication.
•   • Statement in Lieu of Prospectus- Where a public company
•   does not invite public to subscribe for its shares, but arranges
•   to get money from private sources>The promoters here need
•   not issue a prospectus but are required to draft prospectus
•   • Red Herring Prospectus- is a prospectus ,which does not
•   have complete particulars on Price of securities offered and
•   quantum of securities offered. E.g.-Jet Airways, Suzlon
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• Persons who collectively constitute the company as a
  corporate entity are members or shareholders

• a) The subscribers to the memorandum
• b) Who agrees in writing to become member and whose name
  appears in the register of members
• c) Who holds equity share capital and whose name is entered
  as beneficial owner in the records of the depository
• The agreement in writing to take shares of the company
• The registration of name in the register of members
                     Social & Legal Issues


S.no   Shareholder                             Member

1      Is a member                             May not be a
                                               shareholder because
                                               the company may not
                                               have a share capital
2      Person who owns a bearer share          Struck off from the
       warrant is a shareholder                list

3      A legal representative of a member      Applies for

4      No share are allotted to a subscriber   Subscriber to a
       to the memorandum                       memorandum
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               Who can be a member

•   Minor
•   Insolvent
•   Partnership Firm
•   Foreigner
•   Company
•   Trade Union or Society
•   President of India
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    Modes of acquiring membership/Index of a member

• Membership by subscription
• Membership by application and registration

• A company with more than fifty members shall keep an index
  of members
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       Rights of member / Register of Member

• Statutory Rights
• Contractual/otherwise

• Name address and occupation
• Share held by each member and the amount paid up on those
• Date at which each person was entered in the register as a
• Date at which any person ceased to be a member
                      Social & Legal Issues

                Termination of Membership

•   Transfers his shares
•   Shares are forfeited by the company
•   Surrenders his shares
•   Shares are sold by the company to enforce its lien
•   Dies
•   Is adjudged insolvent
•   Shares have been redeemed by the company
•   Rescind the contract of membership on fraud or
                     Social & Legal Issues


• A company is an artificial legal person and the directors as a
  body endow the artificial legal person with human face than
  can act and react.
• The person through whom a company acts and does its
  business, and termed as director.
• An individual can be appointed as director, no corporate
  body corporate, association or firm

• Cannot hold a office of more than fifteen companies
                    Social & Legal Issues

               Qualifications of a director

• No academic, professional or share qualification
• Articles may provide for any qualifications
• Where share qualification is fixed by articles then the act
• a) Qualification shares must be taken within 2 months after
• Nominal value of qualification shares must not exceed Rs.
  5000 or one share where its value exceeds Rs. 5000
• Share warrants will not count for this purpose
                     Social & Legal Issues

               Appointment of Directors

• First director
• Appointment of directors by company
• Appointment of directors by the board
• Appointment of directors by third parties (nominee director)
• Appointment of directors by proportional representation
• Appointment by central government
• Appointment by small shareholders
 Consent for appointment
  Written consent is required to be signed and files with the
  registrar and the company
                  Social & Legal Issues

                Removal of Directors

• By shareholders
• By Central Government
• By Tribunal
                     Social & Legal Issues

               Powers of Board of Directors

• The board of directors of a company shall be entitled to
  exercise all such powers and to do all such acts and things, as
  the company is authorized to exercise and do.
• The following powers are:
• The power to make calls
• The power to issue debentures
• The power to borrow money otherwise than on debentures
• The power to invest funds
• The power to make loans
• The power to buy back of shares
                     Social & Legal Issues

     Power to be exercised in the general meetings

•   Sale, lease or disposal of the undertaking
•   Showing any concession regarding payment of debts
•   Make investment of the amount of compensation received
•   Contribution to charitable
•   Borrowing monies exceeding the aggregate of the paid up
    capital and free reserves of the company
                          Social & Legal Issues

                         Duties /Limitations

•   Good faith
•   Reasonable care
•   Disclose interest
•   Participate in the communities
•   Attend board meetings

• Actions malafide
• Incompetent to act
• Deadlock in the board
                   Social & Legal Issues

                   Company meeting

•   General meeting
•   Requisites of valid meeting
•   Notice of meting must be proper and adequate
•   Chairman of the meeting
•   Quorum
•   Voting
•   Agenda
•   Minutes
                              Social & Legal Issues

                             Kinds of Meetings
                                                     of a Company

                             Shareholders                Directors
                                                                     Debenture holders

               General Meetings         Class meetings

                             Annual General
Statutory Meetings

 Extra Ordinary
                      Social & Legal Issues

                      Statutory Meetings

•   Object
•   When held
•   Not required to be held
•   Notice
•   Statutory report
•   In case of default
                  Social & Legal Issues

               Annual general meeting

• Which company to hold
• When to be held
                    Gap between two AGM
 First AGM
 Subsequent AGM
 Extension of time     maximum 3 months
 Business to be transacted
 Notice 21 days
 Default
                    Social & Legal Issues

                     Board Meetings

 When to hold:Atleast once in every three calendar months and
  4 meetings every year
 Notice: To be given to every director in writing. No form or
  period of notice is laid down. Usually a week’s notice is
  sufficient. The notice must state the date, time and place of
 Quorum:1/3 of the total strength or two, whichever is higher.
 Passing of resolution by circulation is permissible
                    Social & Legal Issues


• A proposal under consideration by members in a meeting
  before it is voted upon

• Rules
• Should be positive in terms and should always be in writing
• Within power, scope and relevant to business
• Comply with the provisions of the Act, memorandum and
• Duly proposed by any member in a meeting
• Should not be withdrawn before consent
                     Social & Legal Issues


• Any motion voted upon and agreed to in a meeting and entered
  in minutes. A motion passed with or without amendment is
  called resolution

 Types of Resolution

Ordinary resolution
Special resolution
Resolutions requiring special notice
                  Social & Legal Issues

           Winding up of a Company

• Company dissolved

• Winding up a company is a process whereby its life is
  ended and its property administered for the benefit of its
  creditors and members. An administrator called
  liquidator, is appointed and he takes control of the
  company, collects its assets, pays its debts and finally
  distributes any surplus among the members in
  accordance with their rights
                    Social & Legal Issues

             Winding up of a Company

• Winding up of a company differs from insolvency of an
  individual in as much as a company cannot be made insolvent
  under the insolvency law. Even a solvent company can be
  wound up.
                     Social & Legal Issues

                   Modes of winding up

• Compulsory winding up under orders of the National
  company law Tribunal NCLT

• Voluntary Winding up
• The power of the court are transferred to the National
  Company Law Tribunal by the company (Amendment)Act
  2002. The central government is in the process of formation of
  this Tribunal
                     Social & Legal Issues

  Grounds for winding up by the Tribunal (NCLT)

• By the company passing a special resolution.
• Default in holding statutory meeting or in delivering statutory
  report to the registrar
• Failure to commence business within a year from the date of
  incorporation or suspension of business for a whole year
• Reduction in membership below the minimum required
• Inability to pay its debts of Rs 1 lakh
• Tribunal is of the opinion that it is just and equitable
• Default of company’s filing its balance sheet and profit and
  loss account on annual return for any five consecutive
  financial years
                     Social & Legal Issues

  Grounds for winding up by the Tribunal (NCLT)

• If the company has acted against the interests of sovereignty
  and integrity of India, the security of the state, friendly
  relations with foreign states public order, decency or morality.
• If the Tribunal is of the opinion that the company should be
  wound up as it had become sick and is unlikely to become
  viable in future
                      Social & Legal Issues

             Who may petition for winding up

•   The company
•   Any Creditor
•   Any Contributor
•   Any combination of creditor, contributory acting jointly or
•   The registrar
•   Any person authorized by the central government
•   The official liquidator
•   The central government and the state government
•   Workers of a company cannot prefer a winding up petition
    against the company
                      Social & Legal Issues


•   To conduct proceeding in winding up
•   To make a report
•   To take custody of company’s property
•   To comply with directions of the creditors or contributories or
    the committee of inspection
•   To summon meeting of creditors and contributories
•   To obtain directions from the tribunal
•   To keep statutory books
•   To get accounts audited
•   Central governments control of liquidator
•   Information as to a pending winding up

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