Company Law and Auditng

8/2/2019 Company Law and Auditng

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Company Law and Auditing

Unit 1

Company Meaning,

Features, types, formation and registration, preliminary contracts,

memorandum of association, article of association, prospectus.

1. Company

1.1. Background

There are different forms of business organizations such as sole trader, joint Hindu family

business, partnership, co-operative societies and Joint Stock Company.

Sole trader is a person who carries on business exclusively by and for himself. He is not only the

owner of the capital of the undertaking but is usually the organizer and manager and takes all

the profits or responsibility for loses.

In the joint Hindu Family Business the ownership automatically comes with the birth in the

Hindu Family. Decisions are made by the Karta who is the head of the family.

Partnership is an association of two or more persons to carryon, as co-owners, a business and

to share its profits and losses.

Co-operative is a self help as well as mutual help.

A company is an association of persons who come together, share money or inputs and agree

to share the profits and losses of the business.

Company form of organization started in Italy in 13 century. During 17 & 18 centuries joint

stock companies were formed in England under the Royal Charter or acts of Parliament.

In India the first Company act was formed in 1850. A comprehensive bill was passed in 1956.


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1.2. Definitions

According to Lord Lindley - A Company is an association of many persons who contribute

money or moneys worth to a common stock and employs it in some trade or business, and

who share the profits and losses (as the case may be) arising there from.

According to Prof. L.H. Haney, A joint stock company is a voluntary association of

individual for profit, having a capital divided into transferable shares, the ownership of which is

the condition of membership.

1.3. Features

Following are the different features of a company.

1. Incorporated Association- A Company must be registered under the companys act.

Minimum member in case of public company should be 7 whereas in case of private company it

should be two. Maximum members in case of Private should be 50 whereas in case of public

there can be any number of members.

2. Artificial Person- A Company is created with the sanction of Law and is not itself a human

being, it is therefore called artificial.

3. Separate Legal Entity- A company is distinct from the persons who constitute it. Section

34(2) says that on registration the association of persons becomes a body incorporate by the

name contained in the memorandum.

4. Limited Liability- A company being a separate legal entity, its members are not as such liable

for its debts, hence in case of a company limited by shares, the liability of the members islimited to the nominal value of shares held by them. If the shares are fully paid, their liability is

nil.

In two case liability will be limited, 1.When the members are reduced to less than minimum and

2. When in the course of binding up, it appears that any business of the company has been

carried on with intend to defraud the creditors.


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5. Separate property- Shareholders are not the owners of the property of the company, neither

the company is the owner of the shareholders worth. Both are having the separate individual

ownership of their own property.

6. Separation of ownership and management- The shareholder of the company are widely

scattered. A shareholder might be interested to invest money but may not bre interested in the

management. The companies are managed by the board of directors who are the elected

representatives of the shareholders.

7. Transferability of shares- Since business is a separate from the members in a company form

of organization, it facilitate the transfer of members interests. The shares of a company are

transferable in the manner provided in the article of association.

8. Perpetual Existence - A company being an artificial person cannot be incapacitated by illness

and it does not have an allotted span of life. The death, insolvency or retirement of its members

leaves the company unaffected.

9. Common Seal- The law requires every company to have a seal and get its name engraved on

it. The seal of the company is affixed on all important documents and contracts as a token of

signature, as company being an artificial person cannot put its signature.

10. Company may sue and be sued in its own name- when the company will find any defaulter

against it, it can sue that defaulter by using its own name and if the company is defaulter, it can

be sued in its own name.

11. Publication of accounts- A joint stock company is required to file annual statement with theregistrar of the companies at the end of the financial year. The annual statements are available

for inspection in the office of registrar.

Types of Company


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1.4. Types of Companies

Joint stock companies can be categorized as following.

A. According to incorporation- The companies may be divided into three categoriesaccording to incorporation.

1. Chartered Companies These types of companies are incorporated under royalcharter issued by the king or head of the state. Certain exclusive rights and privileges

are granted to the companies. These companies are regulated by the incorporating

body which may be the king or the head of the state. These companies were popular

2. in England in 19th century. East India Company is the example of such company.These companies are no longer formed in any country.

3. Statutory Companies- These companies are formed under a special act ofparliament or of a state legislature. The objects, power, rights and responsibilities of

these companies are clearly defined in the Act. Generally companies for public utility


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services are formed under special statutes. RBI, IDBI etc are the examples of

statutory companies.

4. Registered Companies- These are the companies which are formed and registeredunder the provision of companies act. Most of the companies in India are registered

under the Indian Companies Act 1956.B. According to Liability- According to liability the companies can be classified into three

categories.

1. Companies limited by shares- These companies are having the share capital and theshareholders are not liable to pay anything more than the value of the share held by

them, whatever be the liability of the company.

2. Companies limited by Guarantee- These companies are also formed under thecompanies act with a stipulation in the memorandum clause that members are

guaranteed to pay a certain amount of money in case of its winding up. The amount

which the member undertakes to pay is called the guarantee money.

3. Unlimited Companies- These companies registered without limiting the liability ofmembers to the value of shares are called unlimited companies.

C. According to transferability of shares- As per this classification companies can oftwo types.1

1. Private Companies- A private company can be formed with the association of atleast two members but this number should not increase more than 50. It is generally

a family affair. Its shareholders are all relatives, friend and business assoctes. A

private company restricts by its articles (a) the right of member to transfer the

shares. (B) Limits the number of members to 50 ( c) Prohibits any invitation to thepublic to subscribe to its shares and debentures.

2. Public Company- A public company is the company which is formed under thecompanies Act 1956 or any other act regulation the company formation prior to this

and it is not a private company. In the public companies the public is largely

interested. Public companies can invite public for the investment in the companies.

A minimum of seven members are required to form a Public company. Public

companies are requested to issue the prospectus for the invitation to invest the

money. A company must issue the share within 120 days from the issue of the

prospectus. A public company can start the work only after receiving the certificate

of commencement from the Registrar of the Companies.

D. On the basis of ownership1. Government Company or Public Sector Company- A Company owned by Central or

State Govt. is called Government or Public Sector Company. Either whole of the


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shares or the majority of the shares are held by the Government. In some cases,

private investment is also encouraged but the 51% share remains with the Govt.

According to Companies Act 1956, Government company means any company in

which not less than 51 per cent of the paid up share capital is held by central Govt.or by any State Governments. Or partially by the central government ant partially by

one or more state governments and includes a company which is subsidiary of

Government Company.

Some of the examples of the Government companies in India are Coal Mine

Authority Ltd, Steel Authority of India Ltd.

2. Holding Companies- If a company can control the policies of another companythrough the ownership of its shares or through control over the composition of

Board of Directors, the company is called Holding Company.

A company, policy of which is controlled by the holding company is called subsidiary

company.

3. Subsidiary Company- A Company is called subsidiary when one of the followingconditions are fulfilled.

a) If the formation of Board of Directors is controlled by another company.b) The other company controls more than half of the voting rights of this company.c) If it is a subsidiary of a company which itself is a subsidiary of another company.d) The other company owns more than half of the maximum value of the shares in

the company.

E. On the basis of nationality-1. Indian Companies- A Company incorporated in India under the companies Act 1956,

whether operating in India or outside India is called an Indian Company.

2. Foreign Company-A Foreign Company means company incorporated outside Indiabut has a place of business in India through its branches or agencies. Such

companies have to furnish some information as required by the Registrar of

Companies in India.


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2. Promotion of a Company

2.1. Definition:

The promotion of every business requires a process to be followed. A number of formalities

have to be completed before a unit can come into existence. The length of process and the

number of formalities vary with the type of organization and scale of operations. It is easy to

start sole trade but it is lengthy to start a joint stock company.

2.2. Promotional activities can be broadly divided into to two

categories

A. Procedural decisions relating to planning and organizing a business (entrepreneurialDecisions).

B. Legal aspects or legal formalities involved in promotion.2.3. Procedural Aspects:-

Business activities were limited before the industrial revolution. Goods were generally

produced for the local markets. The arrangement of the various factors of production was

simple. There was very less competition and the goods were produced as per the demand.

After the industrial revolution the method of production has changed. Goods were no

longer produced for the local market but the international and national markets were the

target of the entrepreneur. Competition came into existence and it was not easy to procure

the different inputs of production such as land, labor, money, machinery etc. As all these

things are associated with investment, spending money, so before starting any business it is

necessary to study various things which are as following:

1. Product analysis: The 1st thing to be considered before starting a new enterprise isProduct. Its nature affects all other aspects of business. The product should be decided

on the technical information and marketing possibilities. Product should have demand

in market, it should be affordable, technology to produce it should be available, all thesefactors should be considered.

2. Marketing Product: The ultimate aim of the business is to sell the product to earn theprofits. It will be sold only when there will be demand in the market and its availability

in the market. The demand for the product should be estimated then accordingly it

should be produced then it should be made available to the consumer through a


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suitable distribution channel. Before starting a business, all these things should be

decided.

3. Financial Planning: Money is the lifeblood of any organization, and it is costly too. So itshould be used properly. Decision regarding the sources of money and its utilization

should be proper so that it will not be wasted later.Financial Planning has two aspects

a) Estimating financial needsb) Finding out the sources

4. Size of business unit: The determination of the size of the business is another decisionbefore starting any business. The size of business provides the framework within which

it will operate its activities. The initial size of the firm is generally decided on the basis of

its sale prospects. Later it depend upon the growth prospect of the firm

5. Internal Organization: A proper organizational structure is essential for the efficientworking of the concern. There should be a required number of people in the firm and

they should be aware of their duties properly. In bigger organizations all activities are

divided into different as functions like marketing, finance, human resource etc. Inter

departmental relations are also determined. Suitable persons are appointed to manage

various jobs.

6. Location of the Unit: Plant location means selecting a site for setting up the plant. Itinvolves selection of region, place and site. It should be near to the market and raw

material should be easily available.

7. Plant layout: It is the arrangement of the machines and equipments in the factory. Plantlayout aims at minimum material handling facilitating manufacturing processs and

effective use of various physical facilities.

8. Launching an enterprise: It is the actual starting of the business. When a new product isto be launched in the market, proper advertisement should be made so that the

consumer may know the product before it comes into the market.

2.4. Legal Aspects. Legal aspects of promotion deals with the formalities required for

setting up a business. The formalities are linked to the form of organization of the enterprise

and its scale of operation. A sole trader and a partnership firm hardly require any legal

formalities. A joint stock company requires a number of legal formalities before it can be set up.

It has to deal with the following aspects.

a) Registration or Incorporationb) Capital Subscriptionc) Commencement of business


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Registration or Incorporation

A company being an artificial entity comes into existence only after its registration with the

registrar of the companies. A number of formalities have to be completed before a request is

made to the registrar for the registration. After ensuring that all necessary documents are filled,the registrar of companies issues a Certificate of Incorporation. With this certificate the

company becomes a legal entity.

Steps for Incorporating a company:-

1. Application for the approval of the name:- An application is sent to the registrar for theapproval of the name of the company. A company may adopt any name which is not

prohibited under the Emblems and Name Act, 1950and which is not identical with the

name of a company already registered. The application should give the panel of three

names to avoid the delay. The application should be sent to the registrar and he isexpected to approve the name within 14 days of the receipt of application. The

proposed name should be registered within 3 months from the date if intimation by the

registrar failing which the promoter has to apply again to the registrar for the

revalidation of the approval.

2. Preparation of Memorandum of association: It is the constitution of the company whichdescribes its objects and scope and its relation with the outside world. The

memorandum is to be signed by at least seven persons if it is a public company and two

persons if the company is private. The memorandum should be properly stamped.

3. Preparation of article of association: Article of association is an article which containsthe rules and regulations relating to the internal management of a company. A publiccompany may not file its own articles of association, it may adopt model clause

prescribed in table A, Schedule 1 of companies Act, 1956. A private limited company is

also required to submit its article duly signed by the signatories.

4. Preparation of other documents: With memorandum and article of association, thereare other documents also which are required at the time of incorporation. It includes-

- The consent of 1st directors is acquired and filed with the Registrar of theCompanies.

-

The promoters should execute a power of attorney in favors of one of them or anadvocate who is to carry out the formalities.

- The company is required to have a registered office and its information is filed withthe Registrar within 30 days of its incorporation.

- A statutory declaration that all the legal formalities are completed as per therequirement of law.


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5. Payment of fees- At the time of registration, prescribed registration fees and filing feesfor each document filed for registration are to be paid at the registrar office. The fees

depend upon the nature of the firms.

6. Incorporation Certificate- When all the requirements are filed with the registrar, then ascrutiny is done. When all the documents are found in order, the registrar will enter thename of the company in the Register of the Companies and issues a certificate of

incorporation. The date mentioned in the certificate is the date of incorporation of the

company.

a)Capital SubscriptionAfter doing the registration of the company, the ext stage is to raise the funds. A private

company and a public company without share capital can immediately start the business

whereas a public company cannot commence the business unless minimum subscription asstated in the prospectus has been subscribed.

As per the SEBI guidelines, if a company does not receive 90 percent of the issue amount from

the public subscription within 120 days from the opening of the issue, the amount of

subscription received is required to be refunded the applications.

b)Commencement of businessA public company with the shares has to file the following documents with the registrar-

- A declaration that a prospectus or a statement in lieu of prospectus has been filedwith the registrar of the companies.

- A declaration that shares payable in cash equivalent to minimum subscription hasbeen allotted.

- A declaration that directors have taken up their qualification shares and have paidapplication and allotment money in the same proportion as others.

- A statement that no money is liable to become refundable to the applicants byreason of failure to apply for or to obtain permission for shares or debentures to be

dealt in on any recognized stock exchange.

- The secretary of the company or a director files a statutory declaration that therequirements relating to the commencement of business have been duly compiled

with.


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The registrar will satisfy himself that all the documents are in order and all the legal documents

have been completed. He will issue a certificate of commencement of business entitling the

company to start its business from the date mentioned in its certificate. The process of

company formation ends with the issue of this certificate.

3. Pre-incorporation or Preliminary Contracts:

The promoters of the company enter into the contracts to acquire some property or right for

the company which is yet to be incorporated. Such contracts are called pre contracts or

preliminary contracts. The promoters generally enter into such contracts as the agents of the

company about to be formed.

3.1. Position of promoters as regards pre-incorporation contracts:1. Company not bound by the pre-incorporation contracts. A company when it comes into

existence, is not bound by a pre-incorporation contract even where it tales the benefit

of the contract entered into on its behalf.

2. Company cannot enforce pre-incorporation contracts. A company cannot enforce pre-incorporation contracts, after incorporation; enforce the contract made before its

incorporation.

3. Promoters personally liable: The promoters remain personally liable on a contract madeon behalf of a company not yet in existence. Such a contract is deemed to have entered

into personally by the promoters.

3.2. Rectification of a pre-incorporated contract:

A company cannot ratify a contract entered into by the promoters on its behalf before its

incorporation. Therefore, it cannot by adoption or ratification obtain the benefit of the contract

purported to have been made on its behalf before it came into existence as ratification by the

company when formed is legally impossible.

Specific performance of pre-incorporation contract: Secs. 15 and 16.of the specific relief act

1963 deals with this point. When the promoters of a company have, before its incorporation,

entered into a contract for the purpose of the company and such contract is warranted by, or

enforced against, the company, provided that the company has accepted the contract and has

communicated such acceptance to the other party to the contract.


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3.3. Provisional Contracts: Provisional contracts refer to those contracts entered into

by a public company after incorporation but before it is issued the certificate to commence the

business.

According to Sec. 149(4), any contract made by a company before the date at which it is

entitled to commence business shall be provisional only, and shall not be binding on the

company until that date and on that it shall become binding. If the company is unable to obtain

the certificate to commence the business, the provisional contracts automatically lapse; if it

gets the certificate, the provisional contract becomes binding on the company. In the latter

case, there is no need for rectification of the contract by the company, the contract becomes

binding automatically.

4. Memorandum of Association

4.1. Meaning

The memorandum of association is the constitution of the company and provides the

foundation in which its structure is built. It is the principle document of the company and no

company can be registered without the memorandum of association. It defines the scope of the

companys activities as well as its relation with the outside worlds.

4.2. Definitions:-


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According to Lord Macmillan, the purpose of the memorandum is to enable the shareholders,

creditors and those who deal with the company to know what is permitted range of

enterprise.

4.3. Purpose:-

The main purpose of the memorandum is to explain the scope of the activities of the company.

The prospective shareholders know the areas where company will invest their money and the

risk associated with the investment. The outsiders will understand the limits of the working of

the company and their dealings with it should remain within the prescribed scope.

4.4. Importance of Memorandum of association-

Memorandum of association is the fundamental document of a company which contains

conditions upon which the company is incorporated. The document is important due to

following reasons

1. It defines the limitations on the powers of the company established under the act.2. The whole structure of the company is built upon memorandum.3. It explains the scope of activities of the company. The investors know where their

money will be spent and outsider also know the nature of the activities the company is

authorized to take up.

4. It is a charter of the company which sets out its written goals.4.5. Clauses of memorandum

The memorandum of association contains the following clauses:

1. The name clause: - the company being a separate legal entity must have a name. Acompany may choose any name which does not resemble the name of any other

company and should not contain the words like king, queen, emperor, government

bodies and the names of word bodies like U.N.O., W.H.O., World Bank etc. The name

should not be objectionable in the opinion of government.

If the name is found to be objectionable, it can be changed by passing an ordinary

resolution.

2. Registered office clause: - Every company should have a registered office, theaddress of which should be communicated to the registered of the companies. This

helps the registrar to correspondence with the company. The place of the registered

office should be informed to the Registrar of the Companies within 30 days of

incorporation or commencement whichever is earlier.


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A company can shift its registered office from one place to another in the same town

with the intimation to the registrar. But if the company is shifting its registered

office from one town to another town in the same state, a special resolution is

required to be passed. If the office is to be shifted from one state to another state, it

involves alteration in the memorandum.

3. Object Clause: - this is the most important clause of the Memorandum ofassociation. It determines the rights and the powers of the company and also

defines the sphere of its activities. The object clause should be decided carefully as it

is not possible to alter it later on. No activity can be undertaken by the company

which is not mentioned in the object clause. The choice of the object lies with the

subscribers to the memorandum. They are free to add anything to it provide it is not

contrary to the provision of the companies act and other laws of land.

4. Liability clause: - this clause states that the liability of the members is limited to thevalue of shares held by them. It means that the members will be liable to pay only

the unpaid balance of their shares. The liability of the members may be limited by

guarantee. It also states that the amount which every member will undertake to

contribute to the assets of the company in the event of winding up.

5. Capital Clause: - This clause states that total capital of the proposed company. Thedivision of the capital into equity share capital and preferential shares should also be

determined. The number of shares in each category and their value shuld be

identified. If special rights or privileges are conferred on any type of shareholder, it

should also be mentioned in the memorandum.

6. Association Clause: - this clause contains the names of signatories to thememorandum of association. The memorandum must be signed by at least seven

persons in case of public company and by two members in case of private company.

5. Article of association

5.1. Meaning

The article of association or the articles are just the rules, regulations and by laws for the

internal management of the affairs of the company. They are framed with the object of carryingout the aims and objects as set out in the memorandum of association.

5.2. Contents of article of association: Article usually contains provisions relating

to the following matters:


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1. Share Capital, rights of shareholders, variation of these rights, payment for commission,share certificate.

2. Lien on shares3. Calls on share4.

Transfer of shares

5. Transmission of shares6. Forfeiture of shares7. Conversion of share into stock8. Share warrant9. Alteration of capital10.General meetings and proceeding threat

Voting rights of members

11.Directors, their appointment, powers, duties etc.12.Manager13.Secretary14.Dividends and reserves15.Accounts, borrowing powers16.Capitalization of profits17.Winding up5.3. Companies which must have their own Article (Sec. 26): The following companies shall

have their own article, namely

a. Unlimited companies

b. Companies limited by guarantee

c. Private companies limited by shares.

5.4. Forms and signature of article

The article shall be

a. Printed

b. Divided into paragraph

c. Signed by each subscriber of the memorandum in the presence of at least 1 witness who

will attest the signature and likewise add his address, description and occupation, if any.

The article of association printed on computer laser printer should be accepted by the

registrar for registration of a company provided they are neatly and legibly printed.


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5.5. Article and memorandum- their relationship

1. The articles are subordinates to the memorandum. The articles cannot give powers to a

company which is not conferred by the memorandum nor can they purport to create rightswhich are inconsistent with the memorandum.

2. The memorandum must be read in conjunction with article this is the case when it is

necessary

A. to explain any ambiguity in the terms of the memorandum

B. to supplement the memorandum upon any matter about which it is silent except as

regards matters which must be statute be provided by the memorandum.

3. The terms of the memorandum cannot be modified or controlled by the articles. If

however, there is any ambiguity in the memorandum, the article may be referred to for

clarification.

5.6. Article and memorandum- Distinction

1. Memorandum of association is the charter of the company, whereas the article is the set

of regulations for the internal management.

2. Memorandum specifies the scope of the activities of the company whereas the article

indicates the rules for carrying out the objects of the company.

3. Memorandum is the supreme document whereas the article is the subordinate to the

memorandum of association.

4. Every company must have its own memorandum whereas a company limited by shares

need not have articles of its own.

5. There is strict restriction on the alteration of memorandum whereas article of association

can be altered by a special resolution

6. Prospectus

6.1,2 Meaning and definition of prospectus


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After the receipt of certificate of incorporation, if the promoters of a public limited company

wishes to issue shares to the public, he will issue a document called prospectus. It is an

invitation to the public to subscribe to the share capital of the company. The companies Act,

1956 defines prospectus as any document described or issued as a prospectus and include any

notice, circular, advertisement or other documents inviting deposits from the public or inviting

offer from the public for the subscription of shares. It is circulated among the public in printedpamphlets. It gives all necessary information about the company so that the prospective

shareholders may fully understand the objectives and the plans of the company.

6.3. Objectives:

Prospectus is issued with the following broad objectives:

It informs the company about the formation of a new company. It serves as written evidence about the terms and conditions of issue of shares or

debentures of a company.

It induces the investors to invest in the shares and debentures of the company. It describes the nature, extent and future prospectus of the company. It maintains all authentic records on the issue and makes the directors liable for the

misstatement in the prospectus.

6.4. Contents:

The following important matter is included in the prospectus:

The prospectus contains the main objectives of the company, the name and addressesof the signatories of the memorandum of association and the number of shares held bythem.

The name, addresses and occupation of directors and managing directors. The number and classes of shares and debentures issued. The qualification share of directors and the interest of directors for the promotion of

company.

The number, description and the document of shares or debentures which within thetwo preceding years have been agreed to be issed other than cash.

The name and addresses of the vendors of any property acquired by the company andthe amount paid or to be paid.

Particulars about the directors, secretaries and the treasures and their remuneration. The amount for the minimum subscription. If the company carrying on business, the length of time of such businesses. The estimated amount of preliminary expenses. Name and address of the auditors, bankers and solicitors of the company. Time and place where copies of balance sheets, profits and loss account and the

auditors report may be inspected.


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The auditor's report so submitted must deal with the profit and loss of the company foreach year of five financial years immediately preceding the issue of prospectus.

If any profit or reserve has been capitalized, the particulars of such capitalization will bestated in the prospectus.

A company prospectus is released by businesses to inform the public and investors of thevarious securities that are available. These documents describe to buyers and participants

about mutual funds, bonds, stocks and other forms of investments offered by the company. A

prospectus is generally accompanied by basic performance and financial information about the

company.

6.4. Basic information in the prospectus

Considerations

1. During the period of time in which a company is being established, the prospectus isreleased by the brokerage firm or underwriter of the business venture. This is done atthe time of the initial public offering to investors.

Features

2. A company prospectus usually contains information on the leadership of the company.It details short biographies of the officers who manage the day-to-day operations of the

business.

Significance

3. Pending litigation is also a topic that is included in a company's prospectus. Thisinformation is critical to the investor base. Lawsuits often have detrimental effects on

the long-term success of a company. As such, the investors need to know this

information.

Regulations

4. In the United States, a publicly-traded company must file a copy of its prospectus withthe Securities and Exchange Commission (SEC). In order for a business to issue shares

and finalize sales, the document must follow all rules and regulations of the SEC.

Exceptions

5. A simplified version of a prospectus often referred to as an "offering memorandum,"can be issued instead of the full document. This can occur only in cases in which a

business files a Form 10-K and can prove that its market capitalization is stable.

6.


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UNIT 2

1. Membership in a company

1.1. Definition

1.2. Members and Shareholders

The Members or Shareholders of a company are the persons who collectively constitute the

company as a corporate entity. The terms member, shareholders and holders of shares are

used interchangeably. They are synonymous in the case of a company limited by shares, a

company limited by guarantee and having a share capital and an unlimited company whosecapital is held in definite shares. But in case of an unlimited company or a company limited by

guarantee, a member may not be a shareholder, for such a company may not have a share

capital

1.3. Distinction between a shareholder and a member:

1. A registered shareholder may be a member but a registered member may not be a

shareholder because the company may not have the share capital.

2. A person who owns a bearer share warrant is a shareholder but he is not a member as hisname is struck from the list of members.

3. A legal representative of a deceased member is not a member until he applies for

registration. He is however; a shareholder even though his name is does not appear in the

register of the members.

1.4. Who can become a member of a company?

Any person, who is competent to contract according to section 11 of The Indian Contract Act

1872, may become a member of a company. This is subject to the provision of thememorandum and article of the company. The article may provide that there are certain

persons who cannot be a member of a company.

1. Minor

2. Insolvent


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1.5. How to become a member?

A person can be a member of a company in the following way:

1. Membership by subscription: The subscribers to the memorandum of association of a

company are deemed to have agreed to become its members. When the company is registeredtheir names are registered as members in the register of member.

2. Membership by application and registration: Apart from the subscriber of memorandum

every person, who agrees in writing to become a member and whose name is entered in the

register of the members, is a member of the company. Registration of the mane of a person as

a member of a company may result from any one of the following ways:

- By application and allotment

- By transfer

- By succession

- Agreement to be in writing.

3. Membership by beneficial ownership: Every person holding equity share capital of a

company and whose name is entered as beneficial owner of the records of the depositary shall

be deemed to be a member of the concerned company.

4. Membership by qualification shares: before a person can be appointed as a director of a

public company, he must take, or sign an undertaking to take and pay for, the qualificationshares, if any. He thus becomes a member and is in the same position as a subscriber to the

Memorandum of the company.

1.5. Cessation of membership or termination of membership:

A person may cease to be the member of a company by,

1. Act of the parties

2. Operation of law

1. Cessation of membership by the act of parties

A person may cease to be the member of a company-

a. If he transfers his shares to another person

b. If his shares are forfeited.


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c. If the company sells his shares under some provision in its Article

d. If he rescinds the contract to take shares on the ground of misrepresentation in the

prospectus or on the ground of irregular allotment.

2. Meetings

2.1. Meaning

2.2. Definitions2.3. Need

2.4. Requisites of a valid meeting

A meeting can validly transact any business if the following requirements are satisfied.

1. Proper authority: the proper authority to convene a general meeting of a company isthe board of the directors. The board should pass a resolution to call the general

meeting of the company, at a duly convened meeting of the board.

2.5. Voting

2.6. Proxy: In the case of a company, every member of a company entitled to attend andvote at a meeting has the right to appoint another person, whether a member or not, to attend

and vote for him. The term proxy is applied to the person so appointed. Also it refers to the

instrument by which a member of a company appoints another person to attend t

2.7. Resolution

2.8. Kinds of general Meetings

Meetings of a company can be classified as following:

A. General Meetings


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General meetings include

1. Statutory meetings2. Annual general meetings3. Extraordinary meetings

These meetings are called general as these are general for all the members of the company.

B. Class meetings- it is the meeting of the different classes of shareholders, debenturesand creditors etc.

A. General meetings of shareholders2.9. Statutory meeting

Every company limited by shares and every company limited by guarantee and having a share

capital shall within a time period of not less than one month and not more than six months

from the commencement of the business, should hold a general meeting of its members. This

meeting is called statutory meeting and it is held once in the life time of a company.

Statutory Report: The board of members should at least, 21 days before the day on which the

meeting is to be held, forward a report, called the statutory report to every member of the

company.

Contents of statutory report: the statutory report of a company contains all the necessary

information relating to the informational aspect of the company. It sets the following

information:

a. Total shares allottedb. Cash receivedc. Abstract of receipts and paymentsd. Directors and auditorse. Contractsf. Underwriting contractsg. Arrears of callh. Commission and brokerage

Certification of report: the statutory report shall be certified as correct by not less than 2

directors of the company, one of them should be managing directors, if there is one.

Procedure at the meeting:

1. List of the members: the meeting starts by showing the list of the members, theirnames, addresses, and occupation etc.


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2. Discussion relating to the formational aspects: the member has the liberty to discussany topic relating to the formation of the company.

3. Adjournment: The meeting may adjourn from time to time.

2.10. Annual General Meeting

Every company in each year hold in addition to any other meeting a general meeting as its

annual general meeting and shall specify the meeting as such in the notice calling it. There shall

not be an interval of more than 15 months between one annual general meeting of the

company and the next. A company shall hold its first annual general meeting within a period of

18 months from the date of its incorporation.

Time and place of the meeting: Every annual general meeting shall be called during business

hours on a day that is not a public holiday. It shall be held either at the registered office of the

company or at some place within the city.

21 days notice: a general meeting of a company may be called by giving not less than 21 days

notice in writing. It may be called by a shorter notice if it is agreed to pay all the members

entitled to vote in the meeting.

Importance of Annual general meeting: It is the annual general meeting of the company that

the shareholders can exercise any control over the affairs of the company. They can confront

the directors, their elected members, at least once in a year. They get the opportunity to

discuss the affairs and review the working of the company. They can also take the necessary

action to protect their interests. Appointment of auditors is also done in the Annual General

Meeting of the company.

2.11. Extraordinary General Meetings

A statutory and annual general meeting of a company is called ordinary meetings of the

company. Any meetings other than these are called extraordinary general meetings of the

company. It is called for transacting some urgent or special business which cannot be

postponed till the next annual general meeting.


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It can be convened by

a. Board of directorsb. By the requisitions themselves on the failure of the board of directors to call the

meeting

3. Dividend

3.1. Meaning

3.2. Definition

3.3. Source of Dividend

3.4. Declaration of Dividend

3.5. Payment of Dividend

3.6. Claimed and Unclaimed Dividend.

4. Directors

4.1. MeaningA company in the eyes of law is an artificial person. It has no physical existence. It has

neither soul nor a body of its own. As such it cannot act in its own.

The company cannot act in its own person. It can only act through directors, the directors are

the brain of a company. They occupy a pivotal position in the structure of the company.


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4.2. Definitions:

Director includes any person occupying the position of directors, by whatever name called.

A director may be defined as a person having control over the direction, conduct,

management, or superintendence of the affairs of the company. Only individuals can

be directors. No corporate, association or firm can be appointed director of the

company. Only an individual can so appointed.

Number of Directors

Every public company shall have at least 3 directors and every other company e.g. a

private company a deemed public company, at least 2 directors.

4.3. Powers of directors

The powers can be divided as following

1. General power of the board: The board of directors of a company isentitled to exercise all such powers and to do all such acts and things as the

company is authorized to exercise and do.

This means the powers of the directors are co extensive with those of company. Theproposition is however done in two ways

- The board shall not do anything which is to be done in the general meeting of thecompany.

- The board shall exercise its powers subject to the provisions contained in thecompanies act, or the memorandum or article of association.

2.Powers to be exercised at board meeting:- Make calls on shareholders in respect of money unpaid on their shares- Issue debentures- Borrow money otherwise than on debenture- Invest the funds of the company- Make loans

Powers to be exercised with the approval of company in general meeting:


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The board of directors of a public company or private company which is subsidiary of a public

company, shall exercise the following powers only with the consent of the company in general

meeting

a. To sell, to lease or otherwise dispose of the whole or substantially the whole, of theundertaking of the company.

b. To remit or give time for repayment of any debt due to the company by a directorexcept in the case of renewal or continuance of an advance made by a banking company

to its directors in the ordinary course of business.

c. To invest the amount of compensation received by the company in respect of thecompulsory acquisition of any undertaking or property of the company.

d. To borrow the money where the borrowed money is more than the paid up capital ofthe company.

e. To contribute to the charitable and other funds not directly relating to the business ofthe company or the welfare of the employees.

4.4. Duties of Directors

4.5. Appointment of directors

1. First directors: Article of association of the company usually names the firstdirector by their respective names or prescribes the method of appointing them.

1. If the name of the 1st directors is not there in the article , the number ofdirectors and their names should be determined in writing by the subscriber of

the memorandum of association.

2. If the 1st directors are not appointed in the above manner, the subscribers of thememorandum of association, who are the individual, become the director of the

company.

2. Appointment of the directors by the company: Directors must

be elected by shareholder in the general meeting. In case of public company, or a

private company which is subsidiary of a public company, at least 2/3 of its directors

shall be liable to retire by rotation; such directors are called rotational directors, and

shall be appointed by the shareholder in the general meeting. Rotation and

Ascertainment of directors retiring by rotation and filling of vacancies:


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1. At annual general meeting, of a public company or a private company subsidiaryof a public company, 1/3

rdof the member will retire by rotation.

2. The directors to retire by rotation will be all those who have been longest in theoffice since their last appointment.

3.

At the annual general meeting, at which a director retires by rotation, thecompany may fill up the vacancy by appointing the retiring directors.

4. If the place of the retiring directors is not filled up, the meeting may resolve notto fill the vacancies.

3.Appointment of directors by directors:The directors of the company may appoint-

a. Additional director: any additional directors appointed by the directors shallhold office only up to the date of the net annual general meeting of the

company. The number of the directors and additional directors must notexceed the maximum strength fixed for the board by the Article.

b. In a casual vacancy: in case of a public company, or a private company whichis subsidiary of a public company, if the office of any director appointed by

the company in general meeting is vacated before his term of office expires

in the normal course , the resulting casual vacancy can be filled by directors.

4. Appointment of directors by third party: the article undercertain circumstance gives power to the debenture holders or other creditors

e.g. a banking company or a financial org. that have advanced the loans to the

organization, to appoint their nominee to the board. The number of directors so

appointed should not exceed 1/3rd

of the total number of directors.

5. Appointment by proportional representation: Thearticle of a company may provide for the appointment of not less than 2/3

rdof

the total number of directors of a public company or of a private company which

is the subsidiary company of public company.

6. Appointment of directors by the central government: Sec. 408of companies act 1948, empowers the central government to appoint such

number of directors on the board of the company as the tribunal may, by order

in writing , specifies as necessary to effectively safeguard the interest of the

company, its shareholders or the public interest. The appointment will not

exceed three years.

4.7. Position of Director


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It is very difficult to pinpoint the exact legal position of the directors of a company.

Following is the list of various positions which a director can take.

Directors as agent: A company as an artificial person acts through directors who are

the elected representatives of the shareholders. They are, in the eyes of law, the

agents of the company.

Directors as employees: Although the directors of a company are its agents, they

are not employees or servants of the company for being entitled to privilege and

benefits of which are granted under the companies act to the employee. But there is

nothing to prevent a director from being a servant of the company under a special

contract of service which he may enter into with the company.

Directors as officers: For certain matters under the companies act, the directors are

treated as the officers of the company. Sec.2 (30) of companies act 1948. As such

they are liable to certain penalties if the provision of the companies Act is not

compiled strictly

Directors as trustees: Directors are treated as the trustees of

1. Companys money and property: Directors must account for all the companysmoney and property over which they exercise control. They have also to refund

the company and its money and property which they have improperly paid away

or transferred.

2. Of power entrusted to them. Directors are trustees of the powers entrusted tothem in the sense that they must exercise their powers honestly and in the

interest of the company and the shareholders and not in their own interest.

Restriction on the appointment of Directors

A person shall not tbe capable of being appointed director of a company by the article and shall

also not be named as a director or proposed director in the prospectus unless before the

registration of the article or the publication of the prospectus or the filing of te statement inlieu of prospectus, as the case may be, he or his agent authorized in writing and hs

1. Signed and filed with the registrar a consent in writing to act as such directors and has2. A. Signed the memorandum for his qualification share, if any

B.taken is qualification shares, if any, from the copany and paid or agreed to pay for

them.


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C. Signed and filled with the registrar an undertaking in writing to take from the

company his qualification share, if any, and paid for them.

4.6. Number of directorship

No person to be a director of more than 20 companies Sec (275). A person shall not hold the

office of more than 20 companies at one time as a director.

Exclusion of certain directorship: in calculating the number of companies in which the person is

director, following companies may be excluded-

a. A private company which is neither a subsidiary nor a holding company of a publiccompany.

b. An unlimited companyc. An association not carrying a business for profit or which prohibits the distribution of

dividends.

d. A company in which a person is only an alternate director.Disqualification of Directors

A director must be

a. An individualb. Competent to contractc. Hold a share qualification

The following persons cannot old the office of the directors

1. A person of unsound mind2. An undischarged insolvent3. A person who have applied to be adjudicated an insolvent4. A person who has been convicted by a tribunal of any offence involving moral

turpitude.

5. A persons whose call in respect of share of the company held for more than 6months, have been in arrar.

6. A person who has been disqualified for appointment a directors by an order of theTribunal under sec. 203. Of companies act

7. A person who is already a director of the company- Which has not filed the annual accounts and annual returns for any three continuous

financial years commencing on and after the first day of April, 1999?


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- Has failed to repay its deposits or interests thereon due date redeem its debentureson the date or pay dividend and such failure continues for years.

4.8. Vacation of Office and Removal of Directors

Vacation of office by directors

The office of a director shall become vacant if

a. He fails to obtain within two months of his appointment, or at any time thereafterceases to hold, the share qualification, if any required of him by the article of the

company.

b. He is adjudged to be of unsound mindc. He applies to be adjudged in insolventd. He is adjudged an insolvente. He is convicted by a court of any offence involving moral turpitude and sentenced in

respect thereof.

f. He fails to pay any call in respect of shares.g. He absents himself from the three consecutive meetings of directorsh. He fails to make disclosure to the board of directors with regard to any contracts with

the company in which he is directly or indirectly interested.

i. He is removed from the office before his period of office by an ordinary resolution.j. Having been appointed a director by virtue of his holding any office or other

employment in the company.

4.9. Removal of Directors

Directors may be removed by

1. Shareholders: The share holders may remove the directors before the expiryof their period in the office by passing an ordinary resolution. This does not however

- Apply to the case of a director appointed by the central government under section408.

- Authorize, in case of a private company, removal of a director holding office for lifeon April 1, 1952.

- Apply to the case of a company which has adopted the system of electing 2/3 rd of itsdirectors by the principle of proportion representation.


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2. Central Government: The central government, may in some cases, remove thedirectors form their offices

Case to be made out against the managerial person- the central government may

state a case against the managerial personnel of a company and refer the same to

the tribunal with a request that the tribunal may enquire into the case and record

the findings whether he is fit or proper person to hold the office of director or any

other office connected with the conduct and management of the company.

3. Removal by Tribunal: Where on an application to the tribunal for the prevention ofoppression or mismanagement, the tribunal finds that the relief ought to be

granted; it may terminate, set aside or modify any agreement between the company

and the managing director or any other director of the company.

1. Share

The capital of a company is divided into certain individual units of fixed amount. These units are

called shares. Hare means share in the share capital of a company. It includes stock except

where a distinction between stock and shares is expressed.

A share is evidenced by a share certificate. A share certificate is issued by a company under its

common seal. It specifies the share held by a member and is its prime facie evidence of the title

of the member to the share.


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Types of shares

a.Preferential sharesb.Equity shares

Preferential shares

Preference shares with reference to any company limited by share, are those which have two

characteristics:

1. They have a preferential rights to be paid dividend during the lifetime of the company2. They have a preferential right to the return of capital when the company goes for

liquidation.

Kind of preferential share:

1. Cumulative preference shares: these are the shares on which the dividend goes onaccumulating till it is fully paid off.

2. Non cumulative preference shares: these are the shares on which the dividend doesnot accumulate. If there is no profit for a particular year, the shareholder will not get

anything.3. Participating preferential shares: These categories of shares are not only called to a

fixed rate of dividend but also to a share in the surplus profits which remain after

the claims of the equity shareholders.

4. Non participating preference shares: the shareholders are only entitled to only afixed rate of dividend.

5. Convertible preference shares: these are the shares which entitle their holders toconvert them into equity shares within a certain period.

6. Non convertible shares: these are the shares which do not confer on their holder aright of conversion into equity shares.

7. Redeemed preference shares: a company limited by shares may, if so authorized byits articles, issue preference shares which are to be redeemed.


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Equity shares

Equity shares, with reference to any company limited by shares , are those which are not

preference. Equity shares carry the voting rights with them and the y dont have any fixed

amount of dividend associated with them. They are entitled to get it as per the profit of the

company.

2.Share Capital

Share capital means the capital raised by a company by the issue of shares. The word capital is

connected with a company used in several senses. It may mean authorized, issued and

subscribed, or paid up or reserve capital of the company.

Basic terms:

1. Authorized or nominal capital: this is the nominal value of the shares which a companyis authorized to issue by its memorandum of association. In the case of a limited

company, the memorandum shall state the amount of the capital with which the

company is proposed to be registered and the division thereof into shares of the fixed

amount. This is the maximum capital which the company is proposed to be registered

and the division thereof into shares of the fixed amount. This is the maximum capital

which the company will have during its lifetime unless it is increased.

2.

Issued and subscribed capital: issued capital is the nominal value of the shares which areoffered to the public for subscription. A company does not issue all its capital at once, so

that the issued capital is less hat the authorized capital. It can never exceed the

authorized capital.

3. Called up capital: this is the issued capital which has been called up on the shares.4. Paid up capital: this is the part of the issued capital which has been paid up by the

shareholders or which is credited as the paid up on the shares.

5. Uncalled capital: this is the remainder of the issued capital which has not been called.The company may call this amount any time but this is subject to the terms of issue of

shares and the provision of the article.6. Reserve capital: this is that part of the uncalled capital of a company which can be called

only in the event of its winding up. A limited company may, by a special resolution,

determine that a portion of its uncalled capital shall not be called up, except in the

event and for the purpose of the company being wound up.


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Kind of share capital

The share capital of a company can be divided into two categories.

a. Equity share capital1. With voting rights2. With differential rights as to dividend, voting or otherwise in accordance with such

rules and subject to such conditions as may be prescribed.

b. Preference share capital: it is the capital which is raised through raising preferentialshares

Alteration of share capital

A limited company having a share capital may, if so authorized by its article, alter its

share capital as follows, that is to say, it may-a. Increase nominal share capital by issuing new sharesb. Consolidate and divide all or any part of its share capital by issuing new shares.c. Convert fully paid up shares into stock or vice versa.d. Subdivide its shares, or any of them into shares of smaller amount.e. Cancel share which have not been taken up and diminish the amount of its

authorized capital by the amount of the shares so cancelled.

Ordinary resolution required: the power of alteration shall be exercised by the

company in general meetings and shall not require to be confirmed by the Tribunal.Ordinary resolution for such a purpose is enough. The company shall give notice of

the alteration of capital to the registrar within 30 days after doing so.


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Dividend

Dividend is the return which a shareholder gets from its investment in an organization. It is the

award of risks which an investor takes from the organization.

Dividend may be a fixed amount of money or it may vary according to the profit of theorganization, it depends upon the kind of shares an investor is having.

Importance of Dividend:

Possible reasons for paying dividend are as following-

Self Control and Dividends- individuals generally lack self control. So they rely on rules and

programs which check their temptation.

Information Signaling: Investors want to have the information about their investment. Dividend

gives them the information about the profit of the organization as they get dividend

accordingly.

Return: Investors will get returns from what they are investing. This return will be high but the

level of risk will also be very high, few risk takers follow the statement, more risk, more profit.

Company Law and Auditng

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