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COMPANIES(Part 2)

By:-Vinay Golchha

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Contents Membership In a Company. Share capital Shares Company Management Meetings and proceedings Borrowing powers, Debentures & charges Accounts & auditors. Prevention of oppression & miss management Compromises arrangements & reconstructions. Winding Up.

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MEMBERSHIP In A Company Members (Section 41): A company when incorporated is an artificial person.

It is a constitution of natural persons called members of a company.

Who are the members of a company?

(1) Subscribers to the memorandum of a company and entered as members in the

Register of Members;

(2) Every other person who agrees in writing to become a member of a company

and whose name is entered in its Register of Members;

(3) Every person holding equity share capital and whose name is entered as

beneficial owner in the records of the depository.

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Who Can Become A Member A company

A registered co-operative society

A Non-Resident Indian [NRI]

A Minor

HUF

Registered Trade Union

Shareholding in joint names

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How To Become A Member

Membership By Subscription

Membership By Application & RegistrationI. By Application & Allotment

II. By Transfer

III. By Succession

IV. Agreement to be in Writing

Membership By Beneficial Ownership

Membership By Qualification Shares

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Cessation Of Membership Cessation Of Membership By Act Of The Parties

I. Transfer Of Shares

II. Shares are Forfeited

III. Redeemable Preference Shares are Redeemed.

IV. Surrender Of Shares

Cessation Of Membership By Operation Of LawI. Insolvency

II. Death

III. Sale Of Shares

IV. Winding Up Of Company

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Rights Of Members To receive notices of all general

meetings.

To attend & vote at general meetings, appoint directors & auditors.

To receive copies of accounts of company.

Entitled to a copy of report of a statutory meeting.

To inspect the minutes of proceedings of any general meeting.

To inspect the register, index of members, debenture holders.

Priority to have shares offered if there is increase of capital by the company.

To receive share certificate.

To receive dividends in case of preference shares.

To make an application to the Central Government for ordering investigation into the affairs of the company.

Board of Directors fail to convene the same.

To present a petition to the Court for winding up of company

To transfer his shares.

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Liabilities Of Members

Company With Unlimited Liability – Liable for full debt of the company,

during the period he was a member.

Company limited By Shares – Liable for the nominal value of the shares.

Company limited By Guarantee – Liable to Contribute the amount

guaranteed.

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Register Of Members

Name, address & occupation.

Shares held by each member, distinguishing each share by its number, and

the amount paid on those shares.

Date at which each member was entered in the register.

Date on which any person cease to be member.

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Index of Members Every company having more than 50 members shall keep an

index in the form of a ‘Card-index’ of the names of the

members of the company.

The index, shall at all times, be kept at the same place as the

register of members.

On payment of a fee of Re. 1 for each inspection, any

member may make extracts from any register or acquire a

copy of any register.

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Foreign Registers

A company which has a share capital or which has issued debentures may

keep in any State or country outside India a branch register of members

or debenture holders resident in the State or country.

Annual Returns

Every company has to file every year 

with the Registrar annual returns containing certain particulars. Shall give

the particulars as on the date of holding the annual general meeting.

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Share Capital

Share Capital means the capital raised by a company by

the issue of shares. The word ‘Capital’ in connection with

a company is used in Several Senses:-I. Nominal, Authorised or Registered Capital.

II. Issued & Subscribed Capital.

III. Called-up Capital.

IV. Un-called Capital.

V. Paid-up Capital.

VI. Reserved Capital.

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Kinds of Shares Capital 2 Classes of Shares [Sec 86 as amended in 2002] -

A. Equity Share [Sec 85(2)]

"Equity Share Capital means all share capital which is not

preference share capital."

The equity shareholders receive dividend out of profits declared

in AGMs.

Dividend declared only after depreciation allowance and

payment of preference shareholders.

Voting right is in proportion to paid-up equity capital.

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Kinds of Shares Capital

B. Preference Shares [Sec 85(1)]

Preference shares capital is that part of share capital which

fulfills following two conditions:

I. Carries preferential right with respect to dividend- fixed

amount or at fixed rate; and

II. Carries preferential right with respect to repayment of

capital on winding up.

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Sources Of Capital

A. From Promoters

Private companies cannot invite general public to subscribe its share

capital.

Public companies can raise the necessary capital by private

placement without inviting the general public to subscribe. (not made

to more than 49 persons at a time)

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Sources Of CapitalB. From Public

By issuing a prospectus.

By an offer for sale or by deemed prospectus: Company offers/agrees to allocate shares to a financial institution or an

Issue House for sale to public.

The issue house publishes a document called an Offer For Sale at a price higher than what its holder/s had paid or at par.

The document is deemed to be a prospectus u/s 64(1).

By placing of shares: A broker or an underwriter finds persons who wish to buy shares.

The broker acts merely as an agent.

No need to issue a prospectus.

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Sources Of Capital

C. From Existing Shareholders

By issue of right shares to existing shareholders [Sec 81] allotted in

proportion to their existing holding. E.g.. 2 shares for every lot of 5

shares.

Companies are required to issue Letter Of Offer to the existing

shareholders of the company.

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Shares

A Share is evidenced by a share certificate (sec.84). A share

certificate is issued by a company under its common seal.

Stock is the aggregate of fully paid-up shares ,consolidated &

divided for the purpose of convenient holding into different

parts. It may be transferable or split up into fractions of any

amount, without regards to the original face value.

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Types Of Share

Preference Shares is a stock which may have any combination of

features not possessed by common stock including properties of both an

equity and a debt instrument, and is generally considered a hybrid

instrument.Equity Shares are those shares which are ordinary in the course of

company's business. They are also called as ordinary shares.

*Sweat Equity Shares are equity shares issued by a company to its

employees or directors at a discount, or as a consideration for providing

know-how or a similar value to the company.

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Issue of Shares at a Premium [Section 78]

Companies may issue shares at premium irrespective of the fact

whether the shares are listed or not.

No restriction in Companies Act on issue at premium, the only

restriction is on the utilization of premium amount.

Premium cannot be treated as profit as such the amount not

available for distribution as dividend.

Premium amount must be kept in separate account called

Securities Premium Account.

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Issue of Shares at a Premium

If premium is received in kind, an amount equal to premium amount

must be transferred to Securities Premium Account.

Premium to be used only for the following purposes as mentioned in

Section 78(2):

For issuing fully paid bonus shares;

For writing off preliminary expenses;

For writing off commission, discount expenses on issue of debentures;

and

For providing for premium payable on redemption of Redeemable

Preference Shares or debentures.

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Further Issue of Shares [Section 81]

Called Right Shares.

May be issued at any time after two years from incorporation or

one year from first allotment, whichever is earlier.

Must be offered to the existing shareholders in proportion to

their holding.

For listed company, information on quantum and proportion shall

be supplied to the concerned stock exchange.

Company must give notice of offer and the number of shares

offered to existing shareholders.

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Further Issue of Shares Give shareholders 15 days to decide.

The notice must state the shareholder's right to renounce the offer in

whole or in part in favour of some other person.

The board may dispose of the shares in a manner beneficial to the

company.

Condition of issue of shares to persons other than existing

shareholders.[Section 81 (1A)]:

I. Pass a special resolution in general meeting, and

II. In case of ordinary resolution Central Govt.'s approval must be

obtained.

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Bonus Issue When company accumulates large distributable profits it convert it

into capital.

Divide the capital among the existing shareholders in proportion to

their entitlement.

Members do not have to pay for such shares.

Bonus issue is a machinery for capitalizing distributable profits.

Must be sanctioned in the AGM on the recommendation of the

board.

Bonus shares is not income and hence not taxable.

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Allotment of Shares(Rules To Observed) A prospectus shall be filed with Registrar.

No allotment of shares shall be made to public unless the minimum subscription amount stated in the prospectus is raised and received by the company.

Application for shares should be made in prescribed form.

No allotment shall be made until the beginning of the 5th day after a date on which prospectus is issued.

Companies intending to offer must make an application to one or more stock exchanges for permission.

The whole of the application money should have been paid and received by company in cash.

All moneys received shall be deposited in a Scheduled Bank until the certificate to commence business is obtained.

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Transfer Of Shares

A share is a movable property, transferable in the manner provided by the

articles.

A share holder has a statutory right, in the absence of restrictions in the

articles, to transfer shares to any person without consent of anybody.

A private company with share capital may restrict the right to transfer its

shares by its articles. Transfer of shares is less strict in a public company.

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Transmission Of Shares

Where shares pass by operation of law from one person to another.

For example, by holder’s insolvency, or lunacy or by death and inheritance.

The person to whom shares are transmitted shall make an application

to the company for transmission of shares in his name.

In case if the company refuses to register transmission, right of appeal

arises in the same manner as in case of transfer.

No instrument of transfer is required

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Forfeiture Of Shares

The articles generally give powers to Board of Directors to forfeit shares as

under:

I. If a member fails to pay any call or installment of a call

II. Any other circumstance which the articles may provide.

The articles may also provide that the failure by a member to fulfill any

engagement with any other member would forfeit his share.

Power of forfeiture is not inherent in a company and therefore this power

exists only when it is given by the articles.

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Dividends A dividend is a payment made by a corporation to its shareholders,

usually as a distribution of profits . When a corporation earns a profit or surplus, it can either re-invest it in the business (called retained earnings), or it can distribute it to shareholders.

RulesI. To be paid only out of Profit

II. Resolution at the AGM

III. Payment of Dividend in Proportion to paid-up capital

IV. Establishment of Investor Education & Protection Fund

V. To be paid to Registered Shareholder

VI. Unpaid Dividend to be transferred to Unpaid Dividend Accounts

VII. Penalty for Defaulting Director

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Board of Directors “ The Directors are the Brain of a Company”

"A director includes any person occupying the position of director

by whatever name called." [Section 2(13)]

Only individual, and not a body corporate, association or firm, shall

be appointed as director. [Section 253]

"An individual who direct, control, manage, superintend the affairs

of the company in the form of the board of directors.“

Every Public Company shall have at least 3 Directors &

Other Company (Private Company) at least 2 Directors.

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Small Shareholder's Director

A public company having a paid up capital of Rs.5 crore or above may

have a director from amongst small shareholders.

Shareholders not less than 1/10th (or 100) of the total shareholders may

elect suo-moto or upon a notice served at least 14 days before the AGM.

Listed company shall elect small shareholder's director through postal

ballot while an unlisted company on the recommendation of the

majority of small shareholders.

He is treated as director for all purposes but cannot be appointed as MD or whole-time director.

No individual can hold office of Small Shareholder's Director at the same time in more than 2 companies.

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Appointment Of Director First Directors - May be named in the Articles or subscriber to the

memorandum shall be first directors.

Rotational Directors - Two third of the total directors are liable to retire by

rotation every year and are eligible for re-appointment in the General Meeting.

[Section 256]

Directors By Third Parties.(Financial institutions or Banks)

Directors nominated by the Central Govt. u/s 408 are not liable to retirement.

Directors By Directors – As Additional Directors, In Casual Vacancy & As

Alternative Directors.

Directors By Proportional Representation

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Legal Position of Directors

Public companies must have at least three directors. [Section 252]

The Act does not lay down any qualification, but it lays down disqualifications.

Directors are the agent of the company.

A single director has no authority to bind the company unless such powers are delegated to him by

the board.

To some extent directors are also trustee of the company's properties.

Barring directors in the whole time employment, directors are not in the employment of the

company and are not entitled to any remuneration beyond what is allowed by the Act, i.e. sitting

fees.

They are not also required to hold any shares in the company on whose board they serve.

A director can hold an office or place of profit in the company in addition to his usual directorship.

[Section 314]

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Qualification of Directors

According to Sec 274 a person shall not be capable of being appointed as director if:

Found to be of unsound mind;

An un-discharged insolvent;

Applied to be adjudicated as an insolvent;

Convicted of any offence involving moral turpitude and sentenced for not less than six months and a period of 5 years has not elapsed.

Disqualified by an the Order Of Court.

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Managerial Remuneration Not defined in the Act but reference to be found in Sections 198, 309, 311

and 387 suggesting that director and managerial personnel are entitled to receive managerial remuneration.

Managerial Remuneration may take the form of monthly payment, say, salary or a specified percentage of net profits or a commission and /or by way of a fee for each meeting of the board, besides any or all of the following:

Rent free accommodation;

Any other amenity provided free of charge or at concessional rate; and

Any insurance, annuity, or gratuity.

Payment received for holding an office/place of profit is not managerial remuneration. [Section 309(1)]

The overall Managerial Remuneration payable not to exceed 11% of the net profit. [Section 198 (1)]

MD and Whole-time directors may be paid a monthly salary or specified percentage of net profit. [Section 309 (3)]

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Types of Company Meetings

General Meetings Of Shareholders :

Statutory Meeting under Section 165;

Annual General Meetings under Section 166;

Extraordinary General Meetings under Sec 169 :

Convened by directors suo moto between two AGMs.

Convened by directors on requisition.

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Statutory Meetings [Section 165]

Companies limited by guarantee and share shall, within one month

and not more than six months from the date of commencement of

business, hold a general meeting of the members to be called the

Statutory Meeting.

Failure to hold Statutory Meeting renders the company liable to be

wound up u/s 433(b).

This provision is not applicable to a private company. [Section 165(10)]

The board shall, at least 21 days before the day on which the meeting

is held, forward a report to every member of the company called

Statutory Report.

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Annual General Meeting[Section 166]

Every company must, in each calendar year, hold an annual general

meeting so specified in the notice calling it, provided that not more

than 15 months shall elapse between two AGMs.

First AGM may be held within 18 months from the date its

incorporation.

Subsequent AGM should be held on the earliest of the following:

[Sec 166 & 210]

15 months from the last AGM;

The last day of the calendar year; or

6 months from the close of the financial year.

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AGM… In case of difficulty in holding meeting the Registrar may extend

time by not more than 3 months.

Application for extension of time should be made before the due

date of holding AGM.

Any delay including extension by RoC, shall make the officer in

default punishable with fine extending up to Rs 50,000 and Rs

2,500 for every day of the default.

Delay in completion of audit or annual accounts do not constitute a

special reason justifying extension of time for holding of AGM.

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Time and Place of holding AGM

Every AGM called after giving 21 days notice must be held on a

day other than a public holiday.

Should be held on a working day, during business hours, at the

Registered Office of the company, or

a place within the city, town, or village in which registered office

is situated.

An adjourned meeting accidentally comes to be held on a public

holiday does not contravenes the provisions of Section 166 (2).

Time of subsequent AGMs may be fixed by the Article or by a

resolution in the AGM.

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Business Transacted at an AGM [Section 173]

Ordinary business relating to:

Consideration of accounts, Balance Sheet and report of board and auditor;

Declaration of dividend;

Appointment of director in place of those retiring; and

Appointment and fixing of remuneration of the auditors.

Every other business is a special business.

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EGM [Sec 169]

Every general meeting of company with exception to Statutory

Meeting and AGM is called an Extraordinary General Meeting.

Every business at an EGM is a special business, which arises between

two AGMs being urgent, and cannot be deferred to the next AGM.

Usually the Articles contain provisions empowering the board for

calling an EGM.

If there are not within India directors capable who are not sufficient in

number to form a quorum any director or two members may call an

EGM.

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Calling of EGM on Requisition

The board shall on requisition of members holding 1/10th of the

paid up capital or voting right, forthwith call an EGM.

The requisition shall set the matters for consideration, duly signed

and deposited at the registered office of the company.

If the EGM is not called within 21 days of the requisition the

meeting may be called on a day not later than 45 days from the

date of deposit of requisition:

By requisitionists themselves; or

By 1/10th of the shareholders or members holding 1/10th of

voting right.

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Calling of EGM By CLB [Sec186]

If, for any reason it is impracticable to call an EGM, the CLB may, either

of its own or on an application of any director or the member:

Order a meeting of the company;

and give such ancillary or consequential directions as the CLB thinks

expedient.

A meeting so called shall be deemed to be a meting of the company

duly called, held and conducted.

The CLB will interfere very sparingly, and only when the application of a

meeting is made bona fide in the larger interest of the company.

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Meeting of Board of Directors

A meeting of the Board of directors shall be held at least once in every

three months and at least four such meetings shall be held in one year.

As long as four meetings are held in a calendar year, the interval

between two meetings may be more than three months.

Listed companies are required to hold at least four board meetings in a

year with a maximum time gap of four months between two meetings.

(LA - Clause 49)

Notice of every meeting of the board shall be given in writing to every

director for the time being in India, and at his usual address in India to

every director.

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Board Meetings…

Failure would make the officer in default punishable with a fine

extending up to Rs 1000.

The notice should contain the time date and place of meeting.

There is no provision for minimum days for giving notice. It is

generally prescribed by the Articles.

If the notice of the meeting is not given to even one director the

meeting and any resolution passed thereat would be invalid.

Notice of the adjourned meeting should be given to the directors

who did not attend the original meeting.

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Requisites Of A Valid Meeting

Proper Authority

Notice Of Meeting

Quorum For Meeting

Chairman Of The Meetings

Minutes Of Meetings

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Borrowings Ultra Vires

Invalid excess of authority or power

exercised by an entity. Since

the powers exercised by

any officer of

an organization are limited by the

constituting or vesting

instrument (such as MOA), any act

outside those limitations is ultra

vires.

Intra Vires

Within the legal power or authority or

a person or official or body etc.

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Debentures A type of debt instrument that is not secured by physical assets or

collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital.

KindsI. BearerII. RegisteredIII. SecuredIV. UnsecuredV. Redeemable VI. IrredeemableVII. ConvertibleVIII.Non-Convertible

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ACCOUNTS & AUDITORS Proper and accurate compilation of financial information of a corporate and its disclosure, in a

manner that is standardized and understood by stakeholders, is central to the credibility of the corporates and soundness of investment decisions by the investors. The preparation of financial information and its audit, therefore, needs to be regulated through law with stringent penalties for non-observance. 

The present statute provides for a mechanism for development of Accounting Standards. We understand that Accounting Standards for the use of Indian corporate sector, taking into account International Accounting Standards, are being developed through the instrumentality of the National Advisory.

The Committee took note of the contribution made by the ICAI and the NACAS in development of proposals for Accounting Standards and took the view that the existing institutional mechanism for formulating and notifying Accounting Standards under the Companies Act, 1956 may be retained. Committee on Accounting Standards (NACAS). Holding-Subsidiary Accounts and Consolidation .

The Committee took the view that consolidation of financial statements of subsidiaries with those of holding companies should be mandatory. The Committee discussed the question of the manner of maintenance of accounts of entities other than companies but controlled by companies registered under the Act. (CONT.)

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With consolidation of financial statements by holding companies on mandatory basis, the provisions requiring attaching the accounts of subsidiary companies with those of holding companies, for circulation to shareholders in accordance with the provisions of the present Companies Act should be done away with.

Further, the Committee took the view that the holding companies should be required to maintain records relating to consolidation of financial statements for specified periods. Presentation of consolidated financial statements by the holding company should be in addition to the mandatory presentation of individual financial statements of that holding company.

At present, Section 209 (4A) of the Act requires companies to preserve the books of accounts, together with the vouchers relevant to any entry in such books of account, in good order, relating to a period of not less than 8 years immediately preceding the current year. The Committee felt that the rules may provide for preservation of books of account and records of the company for a period of 7 years to bring it in harmony with Income Tax Act. 

In order to bring about more transparency and uniformity in the maintenance of accounts, the Committee felt that the companies should continue to be mandated to maintain their books of accounts on accrual basis and double entry method of book keeping. (CONT.)

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Maintenance of Records Outside the Country : The companies should have an option to keep records outside the country provided financial information in compliance with the Companies Act is available within the country and written notice is given to the Registrar of the place where the records are kept. However, such a Company should be obligated to produce the records that are kept outside the country, if and when required to do so as specified in the Rules. 

Cash Flow Statement To Be Made Mandatory :World over, the importance of Cash Flow Statement is being specifically recognized. At present, the listed companies are mandated to include a Cash Flow Statement in the Annual Report and the Standards of Accounting prescribed by ICAI also requires in specified cases a Cash Flow Statement to be submitted along with the Balance Sheet and Profit & Loss Account with a view to make Cash Flow Statement mandatory. The Committee felt that there was a need to include the definition of the term Financial Statement in the Act, to include Profit & Loss Account, Balance Sheet, Cash Flow Statement and Notes on Accounts. Financial Year.

The Companies Act at present does not contain any provision relating to the minimum period of a Financial Year. The Concept Paper has defined the Financial Year with the minimum period of six months. The Committee dwelt on the subject and came to the conclusion that the first financial year should begin from the date of incorporation and end on the immediately succeeding 31st March and the subsequent Financial Years should also end on 31st March every year.

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PREVENTION OF OPPRESSION & MISMANAGEMENT. A company in a broad sense is a group of persons who have come

together or who have contributed money for some common purpose

and have incorporated themselves into distinct legal entity. Company is

the amalgamation of two distinct words- “com” and “pain”, the former

meaning with/together and the later meaning “bread”.  The whole

scheme of the Companies Act, 1956 is to ensure proper conduct of the

affairs of the company in public interest and preservation of image of

country in public interest.

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Majority rule is hallmark of democracy. It equally applies to corporate democracy and is not free from pitfalls and abuse. Corporate democracy is more vulnerable to it because it is reckoned with the number of shares and not with number of individuals involved.

The rule of majority  has been made applicable to the management of the affairs of the company. The members pass resolution on various subjects either by simple or three-fourth majority. Once resolution is passed by majority it is binding on all members. As a resultant corollary, court will not ordinarily intervene to protect the minority interest affected by resolution. However there are exceptions to this rule- Prevention of Oppression and mismanagement being one such ground. The requisite number of members to make an application before the Tribunal is :

In case of Company having share capital: 100 members or 1/10th of total number of its members, whichever is less or member/s holding not less that 1/10th issued capital. The applicants should have paid all calls and other sum due on their shares.

In case of Company not having a share capital: not less than 1/5th of total number of the members. In case of joint shareholding they will be counted as only one member.

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Compromises, Arrangements & ReconstructionsThe provisions of the Companies Act regarding a scheme of ‘Compromise’ or

‘Arrangement’ are mainly applicable to those companies which are liable to be wound up under the act [sec.390(a)].It is to be remembered that these provisions are applicable to foreign company incorporated outside India but doing business in India and a government company also because they are liable to be wound up under the act . These provisions would also equally apply to concern which is in winding up . By providing these provisions , the law intends to provide a kind of substitute for winding up and There by Save a company from going in to liquidation .

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Statutory Provision

Section 391 lays down that ; Where a compromise or arrangement is proposed :

I. Between a company & its creditors .II. between a company and its members .

The compromise or Arrangement will then binding on :I. All the creditors or classes of creditors .II. All the members or classes of members .III. The company IV. In the case of company which is being wound up on the liquidators

and contributories

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Reconstruction & Amalgamation The term Reconstruction implies the formation of a new

company to take-over the Assets of an existing company with

the idea that the persons interested and the nature of business

substantially remains the same.(Section – 394)

The term Amalgamation is taken to mean as the union of two or

more companies, so as to form a third entity or one company is

absorbed into another company. (Section – 395)

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WINDING UP

Winding up or liquidation of a company represents the last stage in its life. It

means a proceeding by which a company is dissolved. The assets of the company

are disposed of, the debts are paid off out of the realised assets and the surplus if

any ,is then distributed among the members in proportion to their holdings in the

company.

The two terms winding up and liquidation are used interchangeably.

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Modes Of Winding UpI. Winding up by the court i.e. compulsory winding up (Sections. 433 to 483)

II. Voluntary winding up (Sections. 484 to 521)

A. Members voluntary winding up

B. Creditors voluntary winding up

III. Winding up subject to Supervision of Court.

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