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Transcript of 2-Legal & Tax ASP of Busn Sem i
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PRESENTATION ON : -
Further discussion on Companies Act,1956;
( upto slide 21 discussed in L-1) ( Slide 22 onwards )
MOA & AOA;
Management of a Company Directors, Meeting
Accounts & Audit;
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Definition
Contract can be defined as An Agreement
enforceable by law is a contract. A contract,
therefore, is an agreement the object is to create
a legal obligation , i.e. a duty enforceable by law.
Essential elements of a valid contract
1. Offer and acceptancethere must be a lawful
offer and a lawful acceptance.2. Intension to create legal relationshipthere must
be an intension among the parties
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Essential elements of a Contract
that the agreement should be attached by legal
consequences and create legal obligations.
3. Lawful considerationconsideration has been
defined a the price paid by one party for the
promise of the other. An agreement is legally
enforceable only when each of the parties to it
give something and get something.4. Capacity of parties- the parties to an agreement
must be competent to contract, otherwise it
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Essential elements of a Contract(contd..)
cannot be enforced by court of law.
5. Free consent- consent means the parties have
agreed upon the same thing in the same sense.
Free consent is absent if there is coercion, undue
influence, fraud, misrepresentation or mistake.
6. Lawful object- the parties to the agreement must
agree for the valid lawful object.7. Writing and Registration- all contracts to be
legally valid, must be in writing and registered.
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Essential elements of a Contract(contd..)
8. Certainty- agreements, the meaning of which is
not certain, or capable of made being certain, are
void.
9. Possibility of performance- the contract must be
capable of performance. An agreement which is
impossible to perform, physically or legally is
void.
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Kinds of Contracts
1. Valid contract- it is an agreement enforceable
by law. Here, all the essential elements of a
contract are existing.
2. Voidable contract- an agreement which is
enforceable by law at the option of one or more
of the parties there to, but not at the option of
the other/s, is a voidable contract.3. Void contract- this contract is not binding in
law. The causes can besupervening
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Kinds of Contracts (contd..)
impossibility or subsequent illegality.
4. Unenforceable contract- this is a contract which
is valid in itself, but is not capable of being
enforced in a court of law because of some
technical defects such as absence of registration,
adequate stamping, or if time barred.
5. Illegal or unlawful contract- this contract iscontrary to the law and hence is void ab-initio.
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Kinds of Contracts (contd..)
Contracts can also be expressed ,implied,
constructive/quasi.
Quantum Meruit means in proportion to the
work done. For part performance of the contract,
resulting in a breach, a suit of QM can be brought
by the aggrieved party.
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Discussion on Companies Act, 1956
Most voluminous Legislation in the world;
The Act has 658 Sections, XV Schedules;
The entire Act is split into XIII Parts with eachPart further being split into Chapters;
The Rules and Forms are further stated in the
Guidelines / Rules, 1957;
There are many other Rules / Guidelines forsupporting the provisions of the Sections
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Functional Division of the Act
Part I - Definitions, CLB, National Company Law
Tribunal(NCLT);
Part IIIncorporation of a Co. & matters incidental thereto;
Part IIIProspectus & Allotment relating to issue of shares& Debentures;
Part IV- Share Capital & Debentures;
Part VRegistration of Charges;
Part VIManagement & Administration;
Part VIIWinding Up;
Part VIIICompanies formed under Previous Co, Law;
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Functional Division of the Act (contd..)
Part IXCos. Authorised to Register under this
Act;
Part XWinding up of Unregistered Companies;
Part XI- Cos. Incorporated outside India;
Part XII- Registration Offices,& Officers & Fees;
Part XIII- General- collection of Info. & statistics;
The XV SCHEDULES follows thereafter.
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Some Basic facts of the Companies Act, 1956
For the interpretation of each Section, there are
innumerable Case Laws from the various Courts
that have pronounced judgment supporting or
contradicting an earlier decision;
Company Law is the source from which the
subject of Auditing gets its identity, importance
and procedures to initiate Corporate Audit; The Act is heavily based on interpretation and
justification, which decides the case.
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Some Basic facts of the Companies Act, 1956
The Administrative Machinery to monitor the
affairs is vested with the Ministry of Company
Affairs(MCA), the Company Law Board(CLB);
The routine functions are managed by the
Registrar of Companies(ROC), having Regional
Directors (RD), located in various states, where
the companies are required to file documents andReturns, and the public is authorised to inspect
the same according to the provisions of law.
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Some Basic facts of the Companies Act, 1956
The other Regulatory Authority is the Securities
& Exchange Board of India (SEBI). Section 55A
of CA, 1956, gives exclusive powers to SEBI to
administer the issue and transfer of securities andthe non-payment of dividends as is stated in
various Sections of the Act.
In the 2006 Amendment, MCA introduced e-Governance ( known as MCA-21), u/s 610
B,C,D for filing of Returns & payments.
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Some Basic facts of the Companies Act, 1956
( contd..)
u/s 266A to G, Director Identification Number
(DIN) was introduced in 2006, to ease in the
correspondence with the ROCs and quick
identification in e-Filing;
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A Company, its Nature and Kind
Section 3(1)(i) defines a Company as A
Company formed and registered under the Act or
an existing Company. or
A company is an incorporated Association,
which is an artificial juridical person, having a
separate legal entity, with a perpetual succession
and a common seal, a common capital comprisedof transferrable shares, and carrying limited
liability. ( Saloman vs Saloman & Co. Ltd.)
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A Company, its Nature and Kind( contd.)
Section 11 defines an Illegal Association which
states that No Company, Association or
Partnership consisting of more than 20 persons
( 10 in the case of Banking Business) be formed
to carry on any business for gain unless it is
registered under the Companies Act or under any
other law. Here the Liability is unlimited andpersonal.
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Types of Companies
PRIVATE COMPANY Sec 3(1)(iii):- A company with a minimum
PUC of Rs one lac or more and which by its AOA
1) restricts the right of members to transfer shares, if any;
2) Limits the number of members to fifty , excluding members who were
or are in the employment of the company;
3) Prohibits any invitation to the public to subscribe for any shares in, or
debentures of, the company, and
4) Prohibits any invitation or acceptance of deposits from persons other
than members, directors or their relatives.
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Types of Companies (contd.)
PUBLIC COMPANY Sec 3(1)(iv):- It means a
company which :-
1) Which is not a Private Co.;
2) Has a min PUC of Rs. 5 lacs or such higher PUC, asmay be prescribed;
3) Can invite the public to subscribe to its shares & debs;
4) Does not limit the max. number of members;
5) Can invite or accept deposits from the public; and
6) Is a Pvt. Co. but subsidiary of a Public Co.
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Types of Companies (contd.)
STATUTORY CO. :- It is incorporated by a
special Act passed either by the Central or the
State Legislature;
GOVERNMENT CO. :- Section 617 defines a
GC as any Company in which not less than 51%
of the PUC is held by the Central / State Govt.
FOREIGN CO. :- Section 591 to 596 discussesabout such companies.
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Types of Companies (contd.)
Section 25 Co. :- These are Companies having
obtained the prior permission of the CG not to
include the words Ltd or Pvt. Ltd. behind
their names since they have been formed topromote commerce, art, science, religion or any
other charitable purposes and not to distribute the
profits as dividends but to plough them back for
the aforesaid activities.
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Types of Companies (contd.)
Types of Companies based on Liability of Members:-
Companies limited by shares;
Companies limited by GuaranteeSec 12(2)(b); and
Unlimited Companies - Sec 12(2)(c).
Holding and Subsidiary Company ( Sec 4);
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Exemptions & Privileges of Pvt. Co
a) Only 2 Members can start a Co. which is 7 for Pub. Ltd.
Co.Sec 12;
b) It can commence business immediately on incorporation
as it need not wait to obtain the Certificate forcommencement of business Sec 149(7);
c) Can function with 2 Directors while three are required
otherwiseSec 252(2);
d) For General Meetings, the Quorum is 2 personspersonally present which is five for pub CoSec174(1);
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Formation of a Company
It is a lengthy process involving:
Promotion
Incorporation or Registration;
Capital Subscription; and
Commencement of Business.
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Memorandum Of Association (MOA)
MOA can be defined as the Charter which
defines the limitation of the powers of the
company. The MOA contains the fundamental
conditions upon which alone the company isallowed to be incorporated.
The contents of the MOANAME clause,REGISTERED OFFICE clause, OBJECTS
clause, LIABILITY clause, CAPITAL clause &
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Memorandum Of Association (MOA)
ASSOCIATION/SUBSCRIPTION clause.
Under the Objects Clause, the MAIN and OTHER
objects shall be separately stated.
Alteration of the NAME Clause:
A company may, by passing a Special Resolution,
and with the approval of the C/G, in writing,
change its name ( Sec 21). However, no suchpermission is required for dropping/addition of
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MOA ( contd..)
the words Limited or Pvt. Ltd. to the
Companys name.
Spl Res requires 21 days notice and with 75% of
the Members present ( or through Proxy ) and
voting are in favour of the Resolution.
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MOA ( contd..)
The Doctrine of Ultra Vires:-
According to this Doctrine, all such acts or
transactions of a Company which are ultra vires
( beyond the powers of) the objects clause of its
MOA, SHALL BE WHOLLY NULL & VOID,
and can never be subsequently ratified and
validated, even though all the shareholdersconsent or purport to ratify such transaction.
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Articles of Association (AOA)
The AOA contains regulations for the internal
administration of the Companys Affairs. It
prescribes the Rules and Bye-Laws for the
General Management of the Company and for theattainment of its objects as given in its MOA.
Being subordinate to the MOA, the AOA cannot
extend the objects as defined in the MOA.
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Contents of the AOA
The extent to which TABLEA is applicable;( Table A-Regulations for management of a company limited by shares)
Different classes of shares and their rights;
Borrowing powers of Directors;
Maintainance of Books of Accts and their Audit;
Matters relating to Board Meetings;
Winding Up; and many other Issues.
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ALTERATION OF AOA
I. Sec 31- The alteration must not be inconsistent
with the prov. of the C.A.,1956, MOA or
alterations ordered by the CLB or any other
statute;
II. The alteration must not deprive any person of
his rights under a contract;
III. Approval of the C/G must be obtained incertain cases;
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ALTERATION OF AOA (contd..)
IV. The alteration must not constitute a fraud on the
minority;
V. The alteration must be bonafide for the benefit
of the company as a whole.
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Binding force of MOA & AOA
U/s 36, subject to the provisions of the Act, the
MOA and AOA shall, when registered, bind the
company and the members. This includes:-
Company is bound to its Members;
Each member is bound to the Company;
Each member is bound to other members in
exceptional cases only; and Neither the company nor the members are bound
to outsiders.
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The Doctrine of Constructive Notice states that
after the MOA and AOA is registered, it becomes
a Public Document, and a person dealing with the
company in a manner which is inconsistent withthe provisions contained therein, the person shall
be deemed to have dealt with the company at his
own risk and cost, and shall have to bear the
consequences thereof.
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DOCTRINE OF INDOOR MANAGEMENT
In contrast to the earlier Doctrine, this Doctrine
implies that persons dealing with the company
are not bound to enquire into the regularity of the
internal proceedings.
The exception to the Rule is that when the
outsider had constructive notice of the
irregularity, or where proper enquiry was not
done which could have revealed the anomaly or
the documents dealt with are forged.
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Distinction between MOA and AOA
MOA
States the broad framework
within which the Co.
functions;
The MOA is subordinate tothe Act;
The MOA must be
compulsorily filed with the
ROC;
Cannot be easily altered;
AOA
Mentions about the internal
functioning which is subservient
to the MOA;
It is subordinate to the MOA;
If Table A is adopted, then filing
not required;
Can be altered by specialresolution only;
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Distinction between MOA and AOA
MOA
Acts done ultra vires the
MOA are void and cannot
be ratified;
Outsiders have no remedy
against the co. even it isultra vires the MOA.
AOA
Acts done by the AOA,
ultra vires the AOA but
intra vires the MOA, aresimply irregular and not
void.
Outsiders can enforce the
contract if ultra vires the
AOA.
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COMPANY MEETINGS
Statutory Meetings( Sec 165)- Applicable only
for Public Ltd. Cos.- The issues discussed are:-
1. Total no. of shares allotted and its
characteristics;
2. Total cash received;
3. Abstract of the Receipts & Payments Account;
4. Names,addresses,& occupation of the Directors;
5. Particulars of contracts entered into;
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Statutory Meeting ( contd..)
6. Extent of Underwriting contracts entered into
and the reasons therefor;
7. Arrears of any dues on calls from the directors,
managers and others;
8. Particulars of any commission / brokerage paid
to the Directors.
This Meeting is held once in the lifetime of a PublicLtd. Co.
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Annual General Meeting
U/s 166, every company shall call an AGM every
year and shall notify the members accordingly.
Between two AGMs, there should not be a gap of
more than 15 months. It should be held where theRegistered Office is situated.
The issues generally discussed are- To adopt the
Accounts/ To declare a dividend/To appoint or
reappoint Directors and To appoint the Auditors
& fix his Remuneration.
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Convened General Meeting by C/G
U/S 167, the C/Govt. can convene a General
Meeting if default occurs in holding an AGM u/s
166. This generally happens when the Directors
are not ready with the Accounts, or the Auditorsare Qualifying the Statutory Audit Report which
can doubt the integrity of the Directors.
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Extra-Ordinary General Meeting
u/s 169, the Board can, on requisition of the
Members, shall call this meeting to discuss
specific issues.
The Members so requesitioning, should hold atleast 10% of the total voting power.
Section 171 to 186 discusses on Meetings:-
Sec 171- Length of Notice21 days notice inwriting is required.
Sec 173- Explanatory statement attached to the
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Meetings ( contd..)
Notice explaining the facts and reasons for the item
to be discussed.
Sec 174- Quorum5 members in the case of a
Public Company and 2 members in the case of aPvt. Co.
Sec 175Appointment of a Chairman.
Sec 176- Proxiescannot speak at a meeting andcan vote only if there is a poll.
Sec 189- Ordinary & Special Resolution- It is 49:51
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Meetings (contd..)
for passing an O/R and 75:25 for passing a S/R.
Sec 190Resolutions requiring Special Notice.
Sec 192- Registration of certain resolutions and
documents;
Sec 205- Dividends to be paid only out of profits;
Sec 205C- Unclaimed dividend to be transferred to
Investor Education & Protection Fund
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Books of Accounts & Audit
Sec 209Books of Accounts to be maintained by
the Company;
Sec 210- At every AGM, the Balance Sheet and the
P&L Account to be placed;
Sec 212- Balance sheet of Holding Co. to include
details of Subsidiaries;
Sec 217- Board Report - the state of companysaffairs, amounts to be transferred to Reserves,
amount to be recommended as dividend, material
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Boards Report
changes that have taken place between the B/S
date and the date of the Report, activities of the
Company and its Subsidiaries, remuneration
received by executives exceeding Rs. 24 lacs perannum.
Sec 217(2AA) discusses about Directors
Responsibility Statement which states that the
Accounting Standards have been followed, due
prudence has been applied, proper care has been
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Boards Report (contd..)
taken to safe guard the assets and to prevent
frauds and irregularities, and lastly the Accounts
have been prepared on a Going Concern basis.
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AuditorsAppointment & Remuneration
Sec 224The first Auditors are appointed by the
Board within one month of registration and shall
hold office till the AGM; The subsequent
Auditors are appointed by the Members at theAGM by ordinary resolution ;
Sec 224A states about Auditors appointed by a
Special Resolution where 25% or more is held by
a FI /CG /SG, either singly or jointly.
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AuditorsAppointment & Remuneration ( contd..)
u/s 224(1B), The Auditor has to give a written
consent accepting the appointment, since the
restriction on 20 Audits per Partner has to be
adhered to;The Reappointment of Auditors, u/s 224(2), shall
automatically happen, unless :-
1) He is not qualified for re-appointment;2) He has given notice in writing of his
unwillingness to be re-appointed;
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AuditorsRe-appointment ( contd..)
3) Resolution has been passed that the existing
auditor shall not be re-appointed;
4) Where notice has been given to reappoint
somebody else other than the retiring auditor,and the person serving the notice has expired or
is incapacitated.
u/s 224(3), the C/G has the power to appoint anauditor in case a vacancy is not being filled up;
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Special Audit (Sec 233A )
The C/G may, on reports received or in its own
volition, direct a Special Audit, if it is of the
opinion that:-
I. That the affairs of the company are not beingmanaged in accordance with sound business
principles or prudent commercial practices; or
II. That the company is being managed in amanner likely to cause serious injury or damage
to the interests of the trade, industry or business
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Special Audit (Sec 233A ) ( contd..)
to which it pertains; or
III. That the financial position of the company is
such as to endanger its solvency;
Cost Audit ( Sec 233B)
For a company engaged in production, processing,
manufacturing or mining activities, in
accordance with the orders of the C/G, u/s 209,the Books of Accounts also to include such
particulars as relating to utilisation of material,
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Cost Audit ( Sec 233B) ( contd..)
Labour and other items of cost. The C/G may
order the audit of the Cost Books to be
conducted.
The Cost Auditor shall be appointed by the
Board with the previous approval of the
C/G. The report to be furnished to the C/G
with a copy to the Company. The C/G shall,give instructions regarding the action that
needs to be taken.
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The Actual Reality
Facts, as such, never settled anything.They are working tools only. It is theimplications that can be drawn from factsthat count, and to evaluate these requireswisdom and judgment that are unrelatedto the computer approach to life.
CLARENCE B. RANDALL
Jan, 13, 2011 MMS -SEM II -2LEG & TAX ASP
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