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CORPORATE LAW
UNIT-I (COMPANY)
COMPANY - it’s meaning definition and characteristics
Companies’ = ‘com’ and ‘panies’
MEANING : ‘Comp’ means together and ‘panies’ means breed. Company means a group of persons who ate together. In ancient times, men of business thought, discuss the affairs of business over lunch or dinner. But now a day, by company is meant an association in which there is joint investment of capital. In modern age a company is the voluntary association of persons formed for the purpose of earning a profit with the investment of capital which is transferable in shares of limited liability. It is incorporated and registered as an artificial person’ under the company act.
Definition:- Sec 3(1) of the Indian Company Act 1956 company means a company formed and registered under this act or an existing company. Existing company means a company formed and registered under any of the previous company act. According to L.H.Honey- ‘A company is an incorporated association which is an artificial person created by law having a separate entity with a perpetual succession and a common seal.’
A company is voluntary association of persons which is formed with the specific objectives of establishing a business. It has a separate entity from its members who can freely transfer their interest as they desire.
Characteristics of a company:-
- Incorporated Association established by Law- is recognized by law-it needs to be incorporated.
- Artificial person- because its birth is not a natural birth. It is invisible, intangible and immortal artificial person. It has no body, no soul and suffers
no pain and enjoys no pleasure. But like a natural person a company can buy and sell properties, make agreement or enter into contracts.
- Separate Legal Entity- Company acquires a separate legal entity after incorporation which is distinct from the entity of its member- SOLOMAN v/s SOLOMAN & CO.
- Perpetual succession- Member may come and member may go, but the company goes on forever.
- Common seal
- Limited liability
- No. of members in Pvt. Ltd is 2-50; Public Co. is maximum (no limit).
- Transferability of share
- Representative management 10.Termination of existence only by law.
TYPES OF COMPANIES
Classification of Joint Stock Company
A. On the basis of incorporation :- These companies were formed. i. BY ROYAL CHARTER- by the express order of the King, Queen and called chartered companies. Example East India Co.(1600 AD) and Bank of England (1964 AD) companies enjoyed unlimited rights. ii. Incorporated by an Act of Parliament- incorporated by a separate Act examples are RBI, SBI, IFC, LIC word limited is not used for these companies. iii. Incorporation under companies Act 1956- Rights and liabilities of the members are governed by the provisional of companies’ act 1956. B. On the basis of Liability i. Limited Liability companies a. Companies liability limited by shares b. Companies liability by guarantee ii. Unlimited liability companies- This type of company are rare with business scenario today.
FORMATION OF A COMPANY
A. Promotion of a company B. Incorporation or registration of the company C. Certificate for Commencement of business-in case of a public co. only
A. PROMOTION OF COMPANY: Meaning and Definition- Before a company is formed some persons get together and conceive the idea of doing business, the concept of the company is born in their minds they investigate the sources and make a plan, they also deliberate on the legal aspects of the whole process. These persons are known as ‘Promoters’. HENRY- ‘PROMOTION is the process of creating a specific business enterprise. The aggregate of activities contributed by all those who participate in the building of the business constitutes promotion.’ L.H.HENRY ‘promotion may be defined as the process of organized and planning the finances of a business enterprise under the corporate form.’
B. FLOATATION/ INCORPORATION/ REGISTRATION OF COMPANY: Getting the company registered with the registrar of companies. The required fee for registration is paid and the certificate of registration obtained from the registrar of companies. The company becomes an entity only after it is registered. So long as a company is not incorporated, it cannot be called as a company from the legal point of view and it has no entity as such. i. Preliminary Activities:- Address of the registered office, name of the company, to get the license, to make appointment, to get the important document prepared, to send the application to the registrar. ii. Document to be filled with the registrar:- Memorandum of association, Article of Association, address of the H/o, list of directors, written consent of director, preliminary agreement, statutory declaration. Payment of prescribed fee & ordinary letter Certificate of incorporation
iii. Specimen of certificate of incorporation:- I hereby certify that company limited is incorporated as a company under the provisions of the companies act 1956 and that it is a limited company.
Office stamp Sign. Company Registrar C. To get certificate for commencement of business: only in case of public company.
f. Association and subscription clause- declaration of association, procedure of alteration of MOA.
• ALTERATION OR CHANGE
Memorandum Of Association Under rule the Memorandum of Association is an unalterable document. According to Sec 16 company act 1956 ‘ a company shall not alter the conditions contained in MOA except in two cases, in the mode and to the extent for which express provisions made in this act:- Alteration with Name Clause: a. By strict regulation and permission from central govt. (sec 21). The central govt. gives its permission to all the company law. b. By rectification or omission in name: by passing an ordinary resolution within three months from the site of such directions. Alteration in Registered Office: such change can be:- a. From one place to another in the same city or town: board of directors must pass a resolution to that effect and give to new address of its registrar office to the registrar, within 30 days. b. Shifting from one town to another in the same state:- pass special resolution and send the notification to the registrar within 30 days. c. Shifting from one state to another:
- Reason for shifting should be given.
- Sanctionary the central govt.
Alteration In Object Clause:- It is extremely difficult to alter the object clause but under sec17(1) object clause can be altered only in the following circumstances:-
- To carry business more economically
- To enlarge or change the legal area of operation, alternate the co. with any other co. Procedure Of Alteration: 1. Special resolution: copy of resolution file with the central govt. 2. Ratification by central Govt. - is application for proposed alteration is filed with the central govt., the central govt. shall scrutinize the application to convenience itself- when the central govt. is satisfied. It shall give its confirmation to the proposed alternation by issuing directive. 3. Registration of alteration: a copy of alteration shall be filed by the company with the registrar of companies within 3 months from the policy. 4. Alteration in liability clause:- As a general rule, the liability of the shareholder of a limited company cannot be made unlimited unless it is expressly agreed to by All the members of the company but in special case, a limited co. may also authorized by its article by special resolution alter the memorandum, so as to render the liability of its director or of any director or manager unlimited. a. Conversion of limited liability into unlimited: No alteration b. Registration of unlimited liability co. as limited liability.
- Co. must pass special resolution
- File a copy of resolution with central govt. within 30 days
- A copy of the confirmation must be filed with the registrar of companies within 3 months. Alteration In Capital Clause: A company may make any alteration in the capital clause of its memorandum. It can only do so if there is such provision in its articles to alter the condition.
a. Increase in share capital:- ordinary resolution and inform the registrar within 30 days b. Reduction in share capital: it is done by a special resolution to reduce its share capital in any way.
Limitation Regarding Alteration of Article
Under special circumstances and important verdicts of courts- some restrictions have been imposed on the alteration of article:-
A. Statutory Restriction
- Alteration must be by a special resolution.
- Alteration must not be inconsistent with the provision of the company act.
- Alteration must not be inconsistent with the memorandum of association.
- Permission of central govt. for alteration
- Written consent of the member for alteration B. Judicial Restriction
- Alteration must not be illegal for business
- Alteration must be in good faith and for the company benefits.
- Alteration must not be depriving any person of his rights under contract.
- The alteration should not be a fraud on the minority by the majority.
- Alteration must not cause breach of contract with a third party.
Doctrine of Constructive Notice
A public document is one which is open to inspection by the public. Any person can examine these documents and get their copies by paying the requisites fee. It is therefore assumed that any person who deals with the company is familiar with the contents of these documents. The duty of every person who deals with a company to study the memorandum and article of association of the company and enter into contract in the light of the powers and limitations of the company as defined in these documents. Whether he studies these documents or not and is deemed to have dealt with the company at his own risk. This assumption is what is called- “The constructive notice- The legal implication of this doctrine is that- if any person deals with a company in a
manner which is inconsistent with the provision of its memorandum or article i.e. enters into a transaction which is beyond the power of the company- he does so at his own risk and cost and shall have to bear the consequences thereof. Example if articles of a company needs that a bill of exchange issued by it shall have the signatures of two directors, a person who has a bill signed by only one director cannot claim any payment of such bill.
Doctrine of Indoor Management
It is not necessary for an outsider to be conversant with the internal or ‘indoor management’ of the company, Outside can assume that the company has correctly carried out the internal procedure. Those who deal with the company in good faith assume that the internal requirement prescribed in the company’s public documents has been observed. They are not bound to investigate the regularity of the company’s internal proceedings. Only required to be sure that the proposed dealings are apparently regular and consistent with the memorandum and articles.
Doctrine of Ultra Vires
Such acts of a company which are beyond the scope of the company’s memorandum and articles are known as ultravires. A company cannot do any such act which is not stated in its memorandum or is not directly related to the company objects are ultravires act.
LIFTING THE CORPORATE VEIL
A company is an artificial person which born by an Act of law and is terminated by an Act of law. Its identity is totally different from of its members. The decision in the case of Soloman Vs Soloman & co. established the fact that there crops up a VEIL between a company and its members when it is incorporated, which lawfully gives a separate entity to the company and its members. This distinction between the two is called the Corporate VEIL.
Unit-II
PROSPECTUS
The prospectus is issued by public Co. to raise the necessary capital for the company. It is short of an advertisement of the company.
Meaning of prospectus: - Sec 2(36) ‘Prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for subscription or purchase of any shares in or debenture of body corporate.
It is clear that a prospectus is a document that invites the public to subscribe to share capital or debenture of a company.
NEED FOR THE PROSPECTUS
It is not necessary to every Co. to issue of statement in lieu of prospectus, but for the public Co. it is compulsory.
A Company in which director themselves arrange the capital from their personal sources. It is not necessary to issue a prospectus, but company must file a statement in lieu of prospectus to the registrar of companies.
OBJECTS OF PROSPECTUS:-
a. To invite the public to invest in the share or debenture. b. Dictate the conditions on which the public is invited to invest in share or debenture.
CONTENTS OF PROSPECTUS
- Main object of the company and signatories to the memorandum
- Share capital- authorized, issued, subscribed and paid-up capital, size of present issue paid-up capital
- Terms of the present issue
- Particulars of the issue
- Managerial Personnel- Promoters, Manager, Managing Director.
- Minimum subscription
- Opening of the subscription list
- Application and allotment moneys
- Share and debenture issued for consideration other than cash 10.Under writer, Preliminary Expenses, Promoter, Property Acquired, Time and Place of Inspection, Details Of Business. 11.In case of existing company profit & loss and balance-sheet, golden rule for prospectus.
SHARE CAPITAL OF COMPANY
SHARE CAPITAL
TYPES OF SHARE CAPITAL
ALTERATION OF SHARE CAPITAL
REDUCTION OF SHARE CAPITAL
MEANING OF SHARE CAPITAL : The share capital of a company is the capital that the company gets by the sale of its share. The term ‘capital’ and the ‘share capital’ are the same for a company. But there is a difference between a company’s share capital and its loan capital. The capital of a company includes both its share capital and loan’s capital. The share capital represents the company own assets whereas loan capital represents the assets of its creditors. There must be an appropriate ratio between the two for successful running of the company.
FORMS OF SHARE CAPITAL
- It may consolidate and divide its share capital into share of large amount than its existing shares.
- It may convert its fully paid up shares into stock or reconvert the stock into fully paid up shares.
- It may sub divide its share into share of smaller amount.
- It may cancel the shares which have not taken by any person.
These rights can be exercised by company-
a. In its general meeting b. No need of any approval/ sanction of central govt. court.
Legal Restriction for Alteration:
Under sec 6, of the company Act restrictions on a company to alter its share capital are as under:
- Alteration by specified companies- alteration can be done only by a company: a. Limited by share b. By guarantee c. Having a share capital
- Provision in article of association:- article of company must authorize the alteration and state how the alteration is to be affected.
- Passing of ordinary resolution: Procedure of Alteration a. Acceptance of ordinary resolution in general meeting. b. Information to registrar:- Except for an increase with share capital, information to registrar has been given within 30 days. Registrar shall resend the notice and make any alteration. Default Rs. 1000 in a day and up to 5 lacs.
c. Notice of increase of share capital:
i. Notice must be given to registrar within 30 days of passing the resolution. ii. In case of default – Rs. 1000 in a day upto 5 lacs
Reduction of share capital: Reduction of share capital is meant reducing the paid up capital of the company the objective is to protect the interest of the company share capital. In any of reduction:
- By writing of lost capital
- By regarding surplus capital
- By extinguishing or reducing the liability on share
Legal Restriction for Reduction
- By specified companies- only by company limited by share or by guarantee and having a share capital can reduce its share capital.
- Authorization by articles
- By specified resolution
- Confirmation by national company law tribunal.
Procedure For Reduction: a) Passing specified resolution b) Application to the tribunal for confirmation c) Order confirming reduction-before company register Reason for reduction in capital:
- If company has suffered a loss in its business.
- If company has mare capital
- If company fixed assets have been over valued
- If there any fictitious assets in the company balance sheet.
KINDS/TYPES OF SHARES
**1. Equity shares
- Preference shares**
EQUITY SHARES: An equity share is also called an ordinary share. According to sec 43 of the company act 2013 are share of a company which are not preference share are equity or ordinary shares. Equity shares core activity to major portion of the share of a company having share capital. Equity shareholders have the right to vote. They are the real owner of the company. Equity share holder can influence the management of the company.
PREFERENCE SHARES: preference share having preferential rights, It carries a profit ratio in payment of dividend to the shareholders. It carries a profit ratio on a winding up for repayment of capital. Kinds of preference shares
- Simple or non cumulative preference share
- Cumulative and convertible preference share
- Non convertible preference share and redeemable preference share
- Irredeemable preference share and participative preference share
Distinction between equity shares and preference share
- Right of dividend
- Return of capital
- Rate of dividend
- Accumulation of dividend
- Redemption of dividend
- Voting rights
MEANING OF STOCK:
Lord cairns: Stock means that the company has received the total value of shares and it is a positive to divide the share into groups or categories. We can say that stock means the collected value of shares which the company can later diversely into different groups.
Characteristics of stock
- Fully paid up shares can converted into stock
- Company articles have provision to convert shares into stock
- Stock has no definite number
- Company cannot invite the public to buy its stock
MEANING OF SHARE CERTIFICATE
Sec 46 of the company act-‘A certificate under the common seal of the company specifying any share held by any member, shall be a prima facie evidence of the title of the shareholder. Sherlaker. “A share certificate is a document of the title to the share issued by the company under its common seal. Its specify the no. of shares need by a member.
Contents: Name of Co., Address of Registered Office, S.No. Of Share Certificate, Name Address of Share Holders, No. Of Share, Value of Share Money, Amount of Paid-Up, Revenue Stamp.
Every person whose name is entered as member in the register of members entitled to received within two months of allotment or within one month after the application for registration of transfer.
- One certificate for the entire share several certificate each for one or more of his share upon payment of one rupee for every certificate after the first.
