EXECUTIVE PROGRAMME

COMPANY LAW

C O N T E N T S

STUDY I

INTRODUCTION

Company as a Business Medium

CompanyIts Meaning

CompanyIts Nature and Characteristics

Brief History of Company Law in India and England

Background of English Company Law

Development of Indian Company Law

Amendment by MRTP Act

Amendments made to the Companies Act by the Depositories Act, 1996

The Companies (Amendment) Act, 1999Salient Features

The Companies (Amendment) Act, 2000Salient Features

The Companies (Amendment) Act, 2002 and Companies (Second Amendment) Act, 2002Salient Features

The Companies (Amendment) Act, 2006

Nature, Form and Types of Business Enterprises

Non-Corporate Form of Business Enterprises

Corporate Form of Business Enterprises

Company as Distinguished from Other Business Enterprises

Distinction between Company and Partnership

Distinction between Company and Hindu Joint Family Business

Distinction between Company and Corporation

Advantages of Corporate Form of Enterprise

Disadvantages of Corporate Form of Enterprise

Concept of Corporate Personality

Lifting or Piercing the Corporate Veil

Statutory Recognition of Lifting of Corporate Veil

Lifting of Corporate Veil under Judicial Interpretation

Lifting the Corporate Veil of Small Scale Industry

Use of Corporate Veil for Hiding Criminal Activities

Personal Liability of Directors or Members

Illegal Association

Nature of Corporateness

Company as Person

Nationality and Residence of a Company

Company as a Citizen

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY II

INCORPORATION AND ITS CONSEQUENCES-I

TYPES OF COMPANIES

Introduction

Private Company

Privileges and Exemptions of Private Company

Special Obligations of a Private Company

Consequences of Infringement of the Articles of Private Companies

Public Company

Limited Company

Companies Limited by Shares

Companies Limited by Guarantee

Unlimited Company

Association not for Profit

Government Companies

Audit in Government Companies

Foreign Companies

Holding and Subsidiary Companies

Determination of Holding-subsidiary relationship and shareholding

Investment Companies

Producer Companies

Finance Companies

Public Financial Institutions

A Brief Study of Statutory Corporations

A Brief History of Growth of Statutory Corporations in India

Principal Characteristics of Statutory Corporations

What Corporations are State

Chartered Companies in the U.K.

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY III

INCORPORATION AND ITS CONSEQUENCES-II

PROMOTERS AND FORMATION OF COMPANIES

A. PROMOTERS

Definition

Promoters contract - Ratification thereof

Legal Position of a Promoter

Duties of a Promoter

Promoters Duties under the Indian Contract Act

Termination of Promoters Duties

Remedies available to the Company against the Promoter

Liabilities of Promoters

Remuneration of Promoters

B. FORMATION OF COMPANIES

Important Steps

Types of Company

Application for Availability of Name of Company

The Emblems and Names (Prevention of Improper Use) Act, 1950

Guiding Instructions for Deciding Availability of Names for Registration under the Companies Act, 1956

Circular No.13/90 dated 27.8.1990

Name Availability GuidelinesChanges

Preparation of Memorandum and Articles of Association

Vetting of Memorandum and Articles, Printing, Stamping and Signing of the same

Power of Attorney

Additional Documents Required

Statutory Declaration in e-Form No. 1

Payment of Registration Fees

Certificate of Incorporation

Conclusive Evidence

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY IV

INCORPORATION AND ITS CONSEQUENCES-III

MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

Memorandum of Association

Purpose of Memorandum

Form of Memorandum of Association

Contents of Memorandum

Printing and Signing of Memorandum

Name Clause

Situation Clause

Objects Clause

Doctrine of Ultra Vires

Shareholders right in respect of ultra vires acts

Effects of ultra vires Transactions

Liability Clause

Capital Clause

Association Clause and Subscription

Alteration of Memorandum of Association

Alteration of Name Clause

Effect of Change

Alteration of Registered Office Clause

Alteration of Objects Clause of the Company

Registration of Alteration

Alteration of Liability Clause

Alteration of Capital Clause

Articles of Association

Nature of Articles

Registration of Articles

Statutory Requirements

Contents of Articles

Provision in articles as regards expulsion of a member

Alteration of Articles of Association

Distinction between Memorandum and Articles

Legal Effect of the Memorandum and Articles

Members Bound to the Company

Company Bound to the Members

Member Bound to Member

Company not bound to Outsiders

Constructive Notice of Memorandum and Articles

Money Payable by Members is a Debt

Interpretation of Memorandum and Articles

Doctrine of Indoor Management

Exceptions to the Doctrine of Indoor Management

ANNEXURES

I Memorandum of Association of a Company Limited by Shares

II Memorandum and Articles of Association of a Company Limited by Guarantee and not having a Share Capital

III Memorandum and Articles of Association of a Company Limited by Guarantee and having a Share Capital

IV Memorandum and Articles of Association of an Unlimited Company

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY V

INCORPORATION AND ITS CONSEQUENCES-IV

CONTRACTS AND CONVERSIONS

Preliminary Contracts

Pre-incorporation contracts

Provisional Contracts

Contracts made after issue of Certificate of Commencement of Business in the case of Public Company, and after Incorporation in the case of Private Company

Common Seal

Conversion of a Private Company into a Public Company

Private Company (which is a subsidiary of public company) deemed to be a Public Company

Conversion of a Public Company into a Private Company

Commencement of Business

Commencement of New Business by an Existing Company

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY VI

FINANCIAL STRUCTURE AND MEMBERSHIP-I

CONCEPT OF CAPITAL AND FINANCING OF COMPANIES

Meaning of the term Capital

Use of the word Capital in different senses

Meaning and Nature of a Share

Kinds of Shares

Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001

Preference Shares or Preference Share Capital

Types of Preference Shares

Equity Shares

Preference Shares Compared with Equity Shares

Issue of Sweat Equity Shares

Sources of Capital

Raising of Capital from Promoters

Raising of Capital from Public

Raising of Capital from existing shareholders

Public Issue of Shares

SEBI (Disclosure and Investor Protection) Guidelines, 2000

SEBI Guidelines for Issue of Equity Shares

Preferential Issue by Existing Listed Companies

Issue of Shares at a Premium

Issue of Shares at a Discount

Further issue of shares

Rights Issue

Bonus Shares

Advantages of Issuing of Bonus Shares

SEBI Guidelines pertaining to Bonus Issue

Steps in Issue of Bonus Shares

Employee Stock Option Scheme

SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999

SEBI (Employee Stock Option Scheme and Employee Purchase Scheme) Guideline, 1999 as amended

ANNEXURE

Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY VII

FINANCIAL STRUCTURE AND MEMBERSHIP-II

ALTERATION OF SHARE CAPITAL

Alteration of Share Capital

Power of Alteration

Nature of Stock

Difference between Share and Stock

Reduction of Share Capital

Reduction of share capital without sanction of the Court/Tribunal

Reduction of capital when company is defunct

Reduction of capital of unlimited company

Equal Reduction of Shares of One Class

Qualification shares of directors

Creditors Right to Object to Reduction

Confirmation and Registration

Conclusiveness of certificate for reduction of capital

Diminution of share capital is not a reduction of capital

Liability of Members in respect of Reduced Share Capital

Company Prohibited to Buy its Own Shares or to Finance their Purchase

Power of Company to Purchase its Own Securities

Conditions for Buy-back

Prohibition for Buy-Back in Certain Circumstances

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY VIII

FINANCIAL STRUCTURE AND MEMBERSHIP-III

PROSPECTUS

Meaning and Definition of Prospectus

Invitation to Public

When Prospectus is not required to be issued

Statement in lieu of Prospectus

Dating and Registration of Prospectus

When Registrar Must Refuse Registration

Shelf Prospectus

Information Memorandum

Red-Herring Prospectus

Contents of Prospectus/Disclosures In Prospectus

As per Companies Act, 1956

Disclosures as per SEBI Guidelines

Application with Prospectus

Abridged Prospectus

Additional Disclosures in abridged Prospectus and Letter of Offer

Contents of the Letter of Offer

Abridged Letter of Offer

Voluntary Statement in Prospectus

The Golden Rule or Golden Legacy

Deemed ProspectusOffer for sale of existing shares

Liability for Untrue Statement

What is an Untrue Statement

Onus for Proof of Mis-statement

Remedies for Misrepresentation in Prospectus

Remedies Against Directors or Promoters

Criminal Liability for Mis-statement in Prospectus

Who is Entitled to Remedies

Penalty for Fraudulently Inducing to Invest Money

Prohibition of Allotment of Shares in Fictitious Name

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY IX

FINANCIAL STRUCTURE AND MEMBERSHIP-IV

DEBT CAPITAL

Borrowing

Power of Company to Borrow

Unauthorised or Ultra Vires Borrowing

Intra vires Borrowing but Outside the Scope of Agents Authority

Borrowing on Security of Property

Charge on Uncalled Capital

Charge on Book Debts

Promissory Notes and Bills of Exchange

Types of Borrowings

Bank-Borrowings

Work involved in relation to Raising of Working Capital from Banks and Raising Loans from Financial Institutions

Approaching Banks for Working Capital Requirements

Raising Loans from Financial Institutions

Debentures

Characteristics of Debentures

Kinds of Debentures

Public Companies (Terms of Issue of Debentures and Raising of Loans with Option to Convert such Debentures or Loans into Shares) Rules, 1977

Public Financial Institutions

Debenture Stock

Debentures Trust Deed

Appointment of Debenture Trustees and Duties of Debenture Trustees

Liability of Company to Create Security and Debenture Redemption Reserve

Issue of Debentures

SEBI Guidelines pertaining to Issue of Debentures

Register of Debentureholders

Remedies Open to Debentureholders

Debenture-holders claim

Distinction Between Debentures and Shares

Redemption of Debenture

Re-issue of Redeemed Debentures

Public Sector Bonds

Foreign Bonds

Brokerage

Developments in Corporate Debt Financing

New Instruments in Money Market

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY X

FINANCIAL STRUCTURE AND MEMBERSHIP-V

CREATION AND REGISTRATION OF CHARGES

Definition of a Charge

Kinds of Charges

Fixed or Specific Charge

Floating Charge

Crystallisation of Floating Charge

Effect of Crystallisation of a Floating Charge

Postponement of a Floating Charge

Restraint on the Power to Create Charges with Priority to a Floating Charge

Invalidity of Floating Charge

Registration of Charges

Particulars to be filed with the Registrar in case of series of Debentures

Effect of Registration

Conclusive Nature of the Certificate of Registration

Consequences of non-registration

Companys Register of Charges

Registrars Register of Charges

Extension of Time and Rectification of Register of Charges

Satisfaction of Charges

Modification of Charges

Purchase or Acquisition of a Property Subject to Charge

Properties Situated Abroad and Subject to Charge

Definition and Nature of Mortgage

Essentials of a Mortgage

Kinds of Mortgages

Difference between Mortgage and Charge

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XI

FINANCIAL STRUCTURE AND MEMBERSHIP-VI

ALLOTMENT AND CERTIFICATES OF SECURITIES

Allotment of Shares

Notice of Allotment

General Principles Regarding Allotment

Statutory Provisions regarding Allotment

Minimum Subscription

Effect of Irregular Allotment

Revocation by applicant/allottee

Ultra vires allotment

Allotment Procedure

Return of Allotment

Share Certificate

Time of Issue of Share Certificate

Significance of Share Certificate

Damages against Company and Directors for wrong certificates

Split Certificate

Purpose and Form of Share Certificate

Issue of Share Certificates

Issue of Duplicate Share Certificate

Sealing and Signing of Certificate

Records of Certificates

Whether Share Certificate an Official Publication

Legal Effect of Share Certificate

Share Warrant

Position of the Holder of a Share Warrant

Share Certificate and Share Warrant Distinguished

Personation of Shareholder

The Companies (Issue of Share Certificate) Rules, 1960

Calls and Forfeiture

Calls

Requisites of a valid call

Payment in advance of Calls

Forfeiture of Shares

Re-issue of Forfeited Shares

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY XII

FINANCIAL STRUCTURE AND MEMBERSHIP-VII

MEMBERSHIP IN A COMPANY

Who are Members

Definition of Member

Modes of Acquiring Membership

Who may become a Member

Joint Members

Registration of Shares in the name of Public Office

Minimum Number of Members

Maintenance of Minimum Number

Restriction on Membership

Cessation of Membership

Expulsion of a Member

Personation and Penalty therefor

Register of Members

Index of Members

Place of Keeping and Inspection of the Registers

Remedy if inspection is refused

Register prima facie evidence

Rectification of a register of Members

Closing of Register of Members

Foreign Register

Preservation of Registers, etc.

No Notice of Trust

Power of the Central Government to Investigate into the Ownership of Shares

Declaration by Persons not holding Beneficial Interest in any Share

Rights of Members

Individual Rights

Corporate Membership Rights

Voting Rights of Members

Shareholders Pre-emptive Rights

Variation of Members Rights

Rights of Dissentient Members

Liability of Members

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY XIII

FINANCIAL STRUCTURE AND MEMBERSHIP-VIII

TRANSFER AND TRANSMISSION OF SECURITIES

Introduction

Provisions under companies act regulating transfer of securities

Transferor holds bonus shares only as a trustee for the transferee

Stamp Duty Payable and Affixation/Cancellation of Stamps

Lost Transfer Deeds

Delegation of Powers for Transfer

Transfer of Debentures

Power of the Board of Directors to Refuse Registration

Rejected Documents

Time for pointing out insufficiency of stamps

Impounding of documents relating to Share transfer

Extension of Time Limit for Presentation to Prescribed Authority under Section 108(1D)

Compliance with Section 108 a mandatory provision

Transfer of Shares to a Minor

Statutory Remedy against refusal under Section 111

Applicability of Section 111 to Private Companies and not to Public Companies

Transfer of Securities of a Public Company (Section 111A)

Restrictions on the acquisition and transfer of shares of, or by, certain bodies corporate

Applicability of Sections 108A to 108F

Some decided cases on Transfer of Shares

Transfer of Share Warrants

Certification of Transfer

Blank Transfer

Transfer of Shares during winding up

Forged transfer

Transposition of Name

Death of transferor or transferee before registration of transfer

Proof in a transfer by representative

Relationship between Transferor and Transferee

Rights of Transferor

Effects of Transfer

Priority among Transferees

Pledging of Shares

Transfer by way of a gift

Transmission of shares

Distinction between Transfer and Transmission

Succession Certificate

Companys lien on shares

Extent and waiver of lien

Enforcement and postponement of lien

Surrender of shares

Nomination of shares/debentures

Transmission of shares in favour of nominee(s)

Transfer and Transmission of Debentures

Transfer of Shares in Depository Mode

Legal Framework for Depository System

The Depositories Act, 1996 : An Analysis

ANNEXURES

I. Circulars and Clarifications

II. Schedule XV Section 108B(2)(b)

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XIV

MANAGEMENT AND CONTROL OF COMPANIES-I

INSTITUTION OF DIRECTORS

Concept of Director

Definition of Director

Types of Directors

Legal Position of Directors

Qualifications of Directors

Companies [Disqualification of Directors under Section 274(1)(g) of

the Companies Act, 1956] Rules, 2003

Qualification Shares

Number of Directors

Restriction on Number of Directorships

Appointment of Directors

Restriction on Appointment or Re-appointment of Directors

Appointment of First Directors

Appointment of Directors by Members in General Meeting

Appointment of Person other than Retiring Director

Appointment of Directors to be voted individually

Principle of Proportional Representation

Appointment of Directors by the Board

Appointment of Directors by Central Government

Application to the Company Law Board to Prevent Oppression

and Mismanagement

Appointment of Directors by Third Parties (Nominee Directors)

Appointment of a Director by Small Shareholders

Removal of Directors

Retirement of Directors

Resignation of Directors

Penalty for Wrongful Withholding of Companys Property

Vacation of Office of Directors

Remuneration of Directors

Remuneration of non-executive directors

Office or Place of Profit

Directors Relatives (Office or Place of Profit) Rules, 2003

Important Clarifications

ANNEXURE

I. Form DD-A, DD-B, DD-C

II. Companies (Appointment of Small Shareholders Director) Rules, 2001

LESSON ROUND-UP

SELF TEST QUESITONS

STUDY XV

MANAGEMENT AND CONTROL OF COMPANIES-II

POWERS AND DUTIES OF DIRECTORS

Distribution of Powers of a Company

Exercise of Powers

Powers to be Exercised only at Board Meetings

Other Powers to be Exercised at Board Meetings

Powers Which Must be Exercised by Unanimous Vote

Powers of the Board Exercisable with the Approval of the Company in General Meeting

Borrowings

Prohibitions and restrictions regarding political contributions

Power of Board and other persons to make contributions to the National Defence Fund, etc.

Loans to Directors

Application for ApprovalInformation to be Stated therein

Boards sanction for contracts in which Directors are Interested

Disclosure of Interest by Directors

Position of Interested Director

Duties of Directors

Liabilities of Directors

Liability to Outsiders

Liability to the Company

Liability to the Shareholders

Liability for Statutory Defaults and Violations

Liability under other Corporate Laws

Directors Liability for Acts of Co-directors

Criminal Liability

Liability as an Officer in Default

Courts Power to grant Relief in Certain Cases

Compounding of certain OffencesSection 621A

Monitoring and Management

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY XVI

MANAGEMENT AND CONTROL OF COMPANIES-III

MANAGING DIRECTOR, WHOLE-TIME DIRECTOR AND MANAGER

MANAGING DIRECTOR

Definition

Appointment

Qualifications

Powers of Managing Director

Duties of a Managing Director

Liabilities

EXECUTIVE DIRECTOR/WHOLE-TIME DIRECTOR

Appointment

Role and Powers of Executive/Whole-time Director

Duties of a Whole-time Director

Liabilities

MANAGER

Definition

Number of Managers in a Company

Director as Manager

Appointment

Disqualification

Term of Office

Restriction on the Number of Companies of Which a Person may be Appointed Manager

Restriction on Appointment of Manager

Distinction between Manager and Managing Director

Remuneration

Powers

Duties

Liabilities

Relationship with the Board of Directors

Compensation for loss of office

CHAIRMAN

Election of Chairman

Appointment

Removal of Chairman

Role

Whole-time and part time Chairman

Duties and Responsibilities

Chairmans Power under Common Law

Amendments to Resolution

Adjournment of Meetings

Chairmans Declaration as to result to voting

Liabilities

ANNEXURE I Schedule XIII

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY XVII

MANAGEMENT AND CONTROL OF COMPANIES-IV

COMPANY SECRETARY

Who is a Secretary

Who is a Company Secretary

Statutory Requirement

Importance of Secretary

Position of the Secretary

Qualities and QualificationsThe Companies (Appointment and Qualifications of Secretary) Rules, 1988

Appointment of a Secretary

Dismissal of a Secretary

Powers of a Secretary

Duties of a Secretary

Statutory Duties

General Duties

Liabilities of a Secretary

Rights of a Secretary

Role of a Company Secretary

Statutory Officer

Co-ordinator

Administrative Officer

Changing Requirements

COMPANY SECRETARY IN PRACTICE

Who can Practice

The Evolution of the Profession

Areas of Practice

Professional Duties and Code of Conduct

Rules Applicable to a Company Secretary in Practice

Professional Misconduct

Quality Review Board

Peer Review

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XVIII

MANAGEMENT AND CONTROL OF COMPANIES-V

MEETINGS

Introduction

Meaning of a Meeting

Kinds of Company Meetings

Statutory Meeting

Statutory Report

Contents of the Statutory Report

Certification of the Statutory Report

Registration of the Statutory Report

Notice of Statutory Meeting

Time and Place for Holding a Statutory Meeting

Production of list of members at the Statutory Meeting

Scope of Statutory Meeting

Adjournment of the Statutory Meeting

Penalty for Default

Annual General Meeting

Extension of Validity Period of AGM

Time and Place for holding an Annual General Meeting

Default in holding Annual General Meeting

Canceling/Postponing of Convened General Meeting

Object of holding an Annual General Meeting

Business transacted at an Annual General Meeting

Applicability of Provisions of Sections 171 to 186

Extraordinary General Meetings

Types of Business Transacted at Extraordinary General Meeting

Who May Convene Extraordinary General Meetings

Calling of Extraordinary General Meeting on Requisition

Calling of Extraordinary General Meeting by Company Law Board

Class Meetings

Meetings of Debentureholders

Meeting of Creditors

Meeting of Board of Directors

Notice of Board Meetings

Time and Place of Board Meetings

Agenda

Resolution Passed by Circulation by Directors

Minutes of Board Meetings

Quorum of Directors

Disclosure of Interest

Chairman of Board Meeting

Meetings of Committee of Directors

General Meetings

Requisites of Valid Meeting

General Meetings to be Convened by Directors

Notice of Meeting

Venue of the Meeting

Notice of Adjourned Meeting

Day of the Meeting

Time of the Meeting

Agenda

Quorum

Proxy

Voting at General Meeting

Voting and Demand for Poll

Chairman

Duties and Role of Chairman

Clause 49 of Listing Agreement on Corporate Governance

Motion

Amendment

General Rules Regarding Amendments

Methods of Ascertaining Sense of the Meeting

Resolutions

Resolution Requiring Special Notice

Resolutions Passed at Adjourned Meeting

Circulation of Members Resolution

Registration of Resolutions and Agreements

Passing of Resolutions by Postal Ballot

The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001

Adjournment

Postponement

Dissolution

Holding of Meetings through Teleconferencing

Minutes of Proceedings of Meetings

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY XIX

INVESTMENTS AND LOANS

Introduction

Inter-corporate Loans and Investments

No blanket permission from shareholders

Circular

Register of loans made, guarantees given, securities provided and investments made

Inspection of Register

Penalties

Exemptions

Investments to be held in Companys own name

Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992

Register of Investments not held in company own name

Penalty

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XX

DEPOSITS

Invitation and Acceptance of Deposits

Application of Provisions of Section 58A to Guarantee Companies and Section 25 Companies

Non-Banking Non-Financial Companies

Exemptions

Nomination by Depositors

Deposit in the Name of the Minor

Deposit in Joint Name

Deposit Receipt Not Transferable

Addition to Names not Permissible

Companys Right to Reject Application

Deposit from NRIs

Provisions Relating to Prospectus Apply to Issue of Advertisement

Companies (Acceptance of Deposits) Rules, 1975

Deposits and Loan

Deposit and Debenture

Depositor

Acceptance of deposits by Companies

Ceiling Limits for Acceptance of Deposits

Ceiling on Rate of Interest

Rate of Brokerage

Maintenance of Liquid Assets

Constitutional Validity of Section 58A of the Act and Rule 3A of Deposit Rules

Form and Particulars of Advertisement

Delivery of the Text of Advertisement to the Registrar

Statement in Lieu of Advertisement

Signing of Advertisement

Form of Application for Deposits

Furnishing of receipts to Depositors

Register of Deposits

General Provisions regarding Premature Repayment of Deposits

Exemption

Power of the Central Government

Return of Deposits

Renewal of Deposits

Repayment of Deposits

Penalties

Defaults in Repayment of Deposits to Small Deposit holders

Remedy if the Company Fails to Repay on Due Date

Powers to Grant Extension of Time and Exemption

ANNEXURES

I. Non-payment of Matured Deposits Remedies available to Investors

II. Investors Grievances Relating to Deposits, Mutual Funds, Collective Investment Scheme, Companies in Liquidation and other Investor Complaints

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY XXI

ACCOUNTS AND AUDIT

ACCOUNTS

Requirement of Keeping Books of Account

Place of Keeping Books of Account

Books of Accounts in Respect of Branch Office

True and Fair View

Preservation of Books of Accounts

Inspection of Books of Accounts

Maintenance of Costing Records and Stock Records

Persons Responsible for Keeping Books of Accounts

Statutory Books

Statistical Books

Annual Accounts: Balance Sheet and Profit and Loss Account

Annual Accounts to Comply with Accounting Standards

National Advisory Committee on Accounting Standards

Balance Sheet Abstract and Companys General Business Profile

Laying of Accounts

Default in Laying of Accounts

Approval of Balance Sheet and Profit and Loss Account

Penalty

Authentication of Annual Accounts by Secretary

Authentication of Annual Accounts when only one Director is available

Time Gap between authentication of accounts and signing by auditor

Approval of Annual Accounts by Delegation

Circulation of Balance Sheet and Auditors Report

Adoption of Accounts at Annual General Meeting

Filing of Annual Accounts with the Registrar

Clarifications issued by DCA with respect of filing of Annual Accounts

Inspection of Annual Accounts in case of Private Companies

Duty of officer to make Disclosure of Payments

Construction of References to Documents Annexed to Accounts

Determination of Net Profits

Directors Report

Directors responsibility statement

Directors of RBI

Signing of Boards Report

Liability for statements in Boards Reports

Compliance Certificate

Corporate Governance Report

Accounts of Holding and Subsidiary Companies

Chairmans Speech

AUDIT

What is Audit

Need for Audit

Appointment of Auditor

Qualifications and Disqualifications of Auditors

Method of Appointment of Auditors

Appointment of First Auditors

Subsequent Appointment of Auditors

Ceiling on Appointment as Auditor

Reappointment of Auditors

Appointment of Auditor Other Than a Retiring Auditor

Rights of Retiring Auditors

Filling of Casual Vacancy

Power of Central Government to Appoint Auditors

Appointment of Auditors by Special Resolution

Remuneration of Auditors

Term of Office

Resignation by an Auditor

Removal of Auditors

Status of the Auditors

Auditors of Government Companies

Rights and Powers of Auditors

Duties of Auditors

Judicial pronouncements on the duties of auditors

Liabilities of an Auditor

Audit of Branch Accounts

Special Audit

Cost Audit

Cost Audit Report

Social Audit

Proper Books of Accounts

True and Fair View

Notes on Accounts

Guidelines for Filing Statutory Applications

Annexure 1: Companies (Auditors Report) Order, 2003

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXII

DIVISIBLE PROFITS AND DIVIDENDS

Definition and Meaning of Dividend

Difference between Dividend and Interest

Types of Dividend

Final Dividend

Interim Dividend

Dividend on Preference Shares

Dividend on Equity Shares

Restrictions on Declaration of Dividend and Purpose Behind it

Ascertainment of Divisible Profits and Dividends

Depreciation

Loss of Previous Year(s) to be Set off against Profits of Current Year or Previous Years

Certain Legal Pronouncements on Divisible Profits

Transfer of Profits to Reserves

Dividend in case of Absence or Inadequacy of Profits

Declaration of Dividend

Revocation of Declared Dividend

Payment of Dividend in Cash or in Kind

Liability of Directors, Shareholders and Auditors for improper Dividend

Shareholders Right to Dividend

To Whom Paid

When Payable

Establishment of Investor Education and Protection Fund

Dividend Warrants

Dividend Mandate

Use of Information Technology in Cash Transaction of Listed Companies for Payment of Dividends

Can Dividends be Paid out of Capital

Payment of Interest out of Capital

Payment of Dividend out of Capital Profits

Remittance of Dividend or Interest or Sale Proceeds to NRIs, Foreigners and Foreign Companies

Rate of Dividend on Preference Shares

ANNEXURES

I. The Companies (Transfer of Profits to Reserves) Rules, 1975

II. Clarifications of the Department

III. The Companies (Declaration of Dividend out of Reserves) Rules, 1975

IV. Investor Education and Protection Fund

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY XXIII

SOLE SELLING AND SOLE BUYING AGENTS

Sole Selling Agents-Meaning

Appointment of Sole-selling Agents

Powers of the Central Government to Investigate Terms of Appointment

Companys Duty in Investigation

Penalty

Power of the Central Government to Prohibit the Appointment of Sole Selling Agent in Certain Cases

Re-appointment of Sole Selling Agents

Duties of a Secretary

Important Note

Remuneration of Sole Selling Agents

Sole Buying or Purchasing Agents

No Compensation to Sole Selling Agent for Loss of Office

Meaning of Relative

The Companies (Appointment of Sole Agents) Rules, 1975

Guidelines for filing statutory applications under Section 294AA of the Companies Act, 1956

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXIV

BOARDS REPORT AND DISCLOSURES

Introduction

Disclosures under Companies Act

Disclosure under Section 217(1)

Disclosure under Section 217(2)

Accounts of Holding and Subsidiary Companies

Particulars in respect of certain employees [Section 217(2A)]

Directors Responsibility Statement [Section 217(2AA)]

Comment on Auditors Report [Section 217(3)]

Other Disclosures

Disclosures pursuant to the Listing agreement of Stock Exchanges

Disclosures pursuant to employee stock option and employees stock purchase schemes

Disclosures pursuant to Directors of RBI

Approval of the Boards Report

Signing and dating of the Boards Report

Filing of the Boards Report

Right of Members to copies of Balance Sheet, Boards Report, etc.

Liability for Mis-statement

Chairmans Speech

Compliance Certificate under Section 383A

Need for Compliance Certificate

Scope of Compliance Certificate

Penalty for Non-Compliance

Mode and period of Appointment of PCS

Certification with Qualification

Penalty for false compliance certificate

Professional Responsibility

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXV

REGISTERS AND RETURNS

Statutory Books/Registers

Secretarial Standards

Electronic Forms

Digital Signature

Statutory Books Elaborated

Procedure for Keeping Registers and Returns at a Place other than the Registered Office

Non-statutory Registers

Filing of Various Forms/Returns with Registrar of Companies

Preparation and Filing of Returns with the Registrar of Companies

Returns on Occurrence of Certain Events

Filing Fee for Companies Registered in India

Filing Fee by Foreign Companies

Payment of fees

Company Secretarys Role in Filing and Filing Returns and Forms

Guidelines for Preparing/Filing Forms, Documents, Returns etc.

Defective Forms/Documents

Procedure for Condonation of Delay by Central Government in Relation to Filing of Documents with Registrar of Companies

Penalty for Filing False Documents/Statements with Registrar

ANNEXURES- I.List of returns and other documents filed with

Registrar of Companies

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXVI

INSPECTION AND INVESTIGATION

INSPECTION

Introduction

Note on Strategy

Nature of Inspection

Inspection by whom

Directors right to make inspection

Right of Members to make inspection

Time and Place of Inspection

Inspection of Books of Account and other books and papers

Notice for Inspection

Duties of Directors, other Officers and Employees

Powers of Inspector

Inspection Report

Follow-up Action on the Report of Inspecting Officer

Penalty for Default

Preparation by Company Secretary to face Inspection

Powers of Registrar to call for Information or Explanation

Reports of Registrar

Seizure of documents by Registrar

INVESTIGATION

Meaning and Object

Kinds of Investigation

Investigation of the Affairs of a Company by the Central Government

Special Resolution under Section 237(a)(ii) to investigate the affairs of the company

Clarifications with respect to Sections 234, 235, 237 and 241 of the Companies Act, 1956

Only Individual to be appointed as Inspector

Powers of Inspectors

Penalty for Default

Inspectors Report

Follow-up Action on the Report

Expenses of Investigation

Preparation by a Company Secretary to face Investigation

Investigation of the Ownership of Company

Restrictions on Shares and Debentures

Saving for disclosure by Legal Advisor or Banker

Protection of the Employees of Company during Investigation

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXVII

SHAREHOLDERS DEMOCRACY, MAJORITY POWERS AND MINORITY RIGHTS AND PREVENTION OF OPPRESSION AND MISMANAGEMENT

SHAREHOLDER'S DEMOCRACY

Introduction

MAJORITY POWERS AND MINORITY RIGHTS

Powers of Majority

The Principle of Non-interference (Rule in Foss v. Harbottle)

Justification and Advantages of the Rule in Foss v. Harbottle

Exceptions to the Rule in Foss v. Harbottle Protection of Minority Rights and Shareholders Remedies

Actions by Shareholders in Common Law

Statutory Remedies (under the Companies Act)

PREVENTION OF OPPRESSION AND MISMANAGEMENT

Prevention of Oppression

Meaning of Oppression

Oppression must be of a continuous Nature

Public Interest

Winding up Order under Just and Equitable Clause

Winding up Would Unfairly Prejudice the Petitioners

Prevention of Mismanagement

Persons Entitled to Apply

Powers of the Company Law Board/Tribunal

Consequences of Termination or Modification of Agreements

Powers of the Central Government to Prevent Oppression or Mismanagement

Power to Prevent Changes in the Board

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXVIII

COMPROMISES AND ARRANGEMENTS AN OVERVIEW

Scope of Section 391

Sanctioned Arrangement binding on all Concerned Parties

Need for Reports from Registrar of Companies

When Courts do not sanction a Scheme

Explanatory statement

Powers of the Court to Supervise the Implementation of the Scheme

Powers of the Court to Sanction Modification of the Terms of a Scheme

Powers of the Court to order a Winding up while considering a Scheme

Powers of the Court to make Consequential Orders

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXIX

LAW RELATING TO CO-OPERATIVES, SOCIETIES AND TRUSTS

LAW RELATING TO CO-OPERATIVE SOCIETIES

Introduction

Types of Societies

Definition

Societies that can be Registered

Cooperative Principles

Objects of Multi-State Co-operative Societies

Application for Registration

Enclosures to Application

Whom to Apply

Members of the Co-operative Society

Registration of the Society

Refusal to Register

Deemed Registration

Registration Certificate

Subject Matter of Bye-Laws

Amendment in Name and Bye-Laws

Admission as a Member

Expulsion of Members

Management

General Meeting

Board of Directors

Chief Executive

Powers and Functions of the Board of Directors

Meetings of the Board

Investment of Funds

Net Profits

Disposal of Net Profit

Settlement of Disputes

Amalgamation of Co-operative Societies

Transfer of Assets or Division of Assets

Conversion

Winding up of a Co-operative Society

LAW RELATING TO SOCIETIES

Introduction

Status

Registration

Procedure for Registration

Rules and Regulations

Society May Make Bye-laws

Members Their Rights and Liabilities

When Members Treated as Strangers

Property of Society : Where it vests?

Working and Management of Society

Amendment or Alteration

Suits by and Against Society

Enforcement of Judgement Against Society

Amalgamation or Division of the Society

Dissolution of Society

Consequences of Dissolution

Registrar of Societies Powers & Duties

Offences and Penalties

Taxable Income (Computation)

LAW RELATING TO TRUSTS

Introduction

Trust Laws in India

Indian Trust Act

Scope

Definition of Trust

Trust and Contract

Difference Between Trust and Bailment, Trust and Agency

Classification of Trusts

Creation of Trusts

Certainties of a Trust

Who Can Create a Trust

Who May be a Trustee

Duties of Trustee

Liabilities of Trustees

Rights, Powers and Disabilities of Trustees

Meaning of a Beneficiary

Who may be a Beneficiary

Doctrine of Cypres

Rights and Liabilities of Beneficiaries

Extinction of a Trust

Revocation of a Trust

Certain Obligations in the Nature of Trust

Tax Treatment of Trust

ANNEXURES

I Schedule II: List of National Co-operative Societies

II Guidelines for Registration of a Society under Societies Registration Act, 1860, as applicable to Delhi

III Titles of Authorities Equivalent to Registrar of Societies in Various States

LESSON ROUND-UP

SELF TEST QUESTIONS

STUDY XXX

PRODUCER COMPANIES

Genesis

Objects of Producer Company

Formation of Producer Company and its Registration

Membership and voting rights of members of Producer Company

Benefits to Members

Memorandum of Association, Articles of Association

Contents of Memorandum of Producer Company

Contents of Articles of Association of Producer Company

Amendment to Memorandum and Articles

Option to Inter-State Co-operative Societies to become Producer Companies

Vesting of undertaking in Producer Company

Concession, etc. to be deemed to have been granted to Producer Company

Provisions in respect of Officers and other employees of Inter-State

Co-operative Society

Number of Directors

Appointment of Director

Vacation of Officer by Directors

Powers and functions of Board

Matters to be transacted at the General Meeting

Liability of Directors

Committee of Directors

Meetings of the Board and Quorum

Chief Executive and his functions

Secretary of Producer Company

Quorum of the General Meeting

Voting Rights

Annual General Meetings [Section 581ZA]

Share Capital

Transferability of shares and attendant rights

Surrender of shares

Books of account

Internal Audit

Donation or Subscription by Producer Company

General and other reserves

Issue of Bonus Shares

Loan, etc., to Members [Section 581ZK]

Investment in other companies, formation of subsidiaries etc. [Section 581ZL]

Amalgamation, merger or division, etc., to form new Producer Companies

Disputes

Striking off name of Producer Company

Re-conversion of producer company to Inter-State Co-operative Society

Expected Benefits to Producer Companies

Difference between a Producer Company and a Private Company

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXXI

LIMITED LIABILITY PARTNERSHIPS

Introduction

Salient Features

Distinction between LLP and Partnership

Distinction between LLP and Comapny

Contribution of Capital

Statement of Solvency and Accounts

Limited Liability

Members and designated Members

Roles and Responsibilities of Designated Partners

Partners obligation

LLP agreement

Making a choice

Winding up and dissolution

Comparison of LLP with Private Limited Company

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXXII

APPLICATION OF COMPANY LAW TO DIFFERENT SECTORS

Banking

Procedure for application

Insurance

Insurance Regulatory and Development Authority (IRDA)

Powers, Duties and Functions of the Authority

Registration of an Insurance Company

Setting up an Insurance business

Registration of an Insurance Company

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXXIII

OFFENCES AND PENALTIES AN OVERVIEW

Introduction

Officer in default

ANNEXURE- I. List of Sections Imposing Penalty

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXXIV

STRIKING OFF NAMES OF COMPANIES

Meaning of Striking off

When a Company is still in operation

The rights of person aggrieved by the company having

been struck off the register

Effect

Mode of Sending Letter/Notice

Who can apply?

Supreme Court Rules

MCA Circulars

Procedure for Striking off a company

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXXV

WINDING UP OF COMPANIES

Introduction

Company cannot be adjudged insolvent

Winding up and Dissolution

Modes of winding up

Winding up by the Court/Tribunal

Grounds on which a company may be wound up by the Court

Who may petition for winding up

Jurisdiction of Court for entertaining winding up petition

Voluntary winding up

Kinds of voluntary winding up

Members voluntary winding up

Creditors voluntary winding up

Distinction between Members and Creditors voluntary winding up

Powers of the Court to Intervene in voluntary winding up

Winding up subject to the supervision of Court

Effect of supervision order

Distinction between voluntary winding up and winding up under the supervision of the Court

Commencement of winding up

Winding up of unregistered companies

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXXVI

AN INTRODUCTION TO E-GOVERNANCE

Introduction

Organisation of ROC offices under MCA-21

Front office

Virtual front office

Registrars Front office

Back office

Important features

Director Identification Number

Corporate Identity Number

Digital Signature Certificate

Certified filing centre

Infrastructure for e-filing

Mode of payment

Service Request Number

Payment of stamp duty

Categories of e-forms

Annual filing

Pre-certification of e-forms

Terms used while e-fling the e-forms

Introduction of e-stamping facility by MCA

Key benefits of MCA21 Project

Clarifications issued by MCA from time to time

General structure of an e-form and e-filing process

E-forms notified

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXXVII

SECRETARIAL STANDARDS

Secretarial Standards - issued for the first time in any country- a unique and pioneering effort

Secretarial Standard on Meetings of the Board of Directors (SS-1)

Secretarial Standard on General Meetings (SS-2)

Secretarial Standard on Dividend (SS-3)

Secretarial Standard on Registers and Records (SS-4)

Secretarial Standard on Minutes (SS-5)

Secretarial Standard on Transmission (SS-6)

Guidance Notes

Procedure for issuing Secretarial Standards

Secretarial Standard on Passing of Resolutions by Circulation (SS-7)

Secretarial Standard on Affixing of Common Seal (SS-8)

Secretarial Standard on Forfeiture of Shares (SS-9)

The Institute has recently issued the Secretarial Standard on Boards Report (SS-10)

TEST PAPERS/2010

Test Paper 1/2010

Test Paper 2/2010

Test Paper 3/2010

Test Paper 4/2010

Test Paper 5/2010

PREVIOUS SESSIONS QUESTION PAPER

June 2010

December 2010

STUDY I

INTRODUCTION

LEARNING OBJECTIVES

This chapter deals with the company as a business medium, the nature and form of business enterprises and types of business enterprises. It explains the concept of corporate personality and the nature of corporateness, i.e. company as a person, resident and a citizen.

At the end of this lesson, you will be able to understand:

Definition of a company.

Nature and characteristics of a company.

History of Company Law in India and England.

The development of Indian Company Law along with various amendments to it including the Companies (Amendment) Act, 2006.

Forms and types of business enterprises.

Distinction between a company and other business enterprises.

Advantages and disadvantages of corporate form of enterprises.

Concept of Corporate Personality and Nature of Corporateness.

1. COMPANY AS A BUSINESS MEDIUM

CompanyIts Meaning

The word company is derived from the Latin word (Com=with or together; panis =bread), and it originally referred to an association of persons who took their meals together. In the leisurely past, no less than in the speedy present, merchants took advantage of festive gatherings, to discuss business matters. Nowadays, the business matters have become more complicated and cannot be discussed at length at festive gatherings. Therefore, the word company has assumed greater importance. It denotes a joint stock enterprise in which the capital is contributed by a large number of people. Thus, in popular parlance, a company denotes an association of like minded persons formed for the purpose of carrying on some business or undertaking. Though an association may be brought into existence for multifarious purposes, in Company Law it figures predominantly as a business association with a large and fluctuating membership formed for acquisition of gain. There may also be non-profit trading concerns like a club or a society. In Smith v. Anderson, (1880) 15 Ch. D. 247, it was observed that a company, in broad sense, may mean an association of individuals formed for some purpose.

A company may be an incorporated company or a Corporation, or an unincorporated company. An incorporated company is a single and legal (artificial) person distinct from the individuals constituting it, whereas an unincorporated company, such as a partnership, is a mere collection or aggregation of individuals. Therefore, unlike a partnership, a company is a corporate body and a legal person

1

having status and personality distinct and separate from that of the members constituting it.

It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality. The word corporation is derived from the Latin term corpus which means body. Accordingly, corporation is a legal person created by the process other than natural birth. It is, for this reason, sometimes called artificial legal person. As a legal person, a corporate is capable of enjoying many of the rights and incurring many of the liabilities of a natural person.

The incorporated company owes its existence either to a special Act of Parliament or to a company legislation. The public corporations like Life Insurance Corporation of India and Damodar Valley Corporation have been brought into existence through special Acts of Parliament, whereas companies like Tata Iron and Steel Co. Ltd., Hindustan Lever Ltd. and State Trading Corporation of India Ltd. have been formed under the Companys Legislation as may be applicable. The trading partnership which is governed by Partnership Act is the most apt example of an unincorporated association.

In the legal sense, a company is an association of both natural and artificial persons incorporated under the existing law of a country. In terms of the Companies Act, 1956 (Act No. 1 of 1956) [hereinafter referred to as the Act] a company means a company formed and registered under the Companies Act, 1956 or under the previous laws relating to companies" [Section 3(1)(ii)]. In common law, a company is a legal person or legal entity separate from, and capable of surviving beyond the lives of its members. However, an association formed not for profit acquires a corporate life and falls within the meaning of a company by reason of a licence under Section 25(1) of the Act.

But a company is not merely a legal institution. It is rather a legal device for the attainment of any social or economic end. It is, therefore, a combined political, social, economic and legal institution. Thus, the term company has been described in many ways. It is a means of cooperation and organisation in the conduct of an enterprise. It is an intricate, centralised, economic and administrative structure run by professional managers who hire capital from the investor(s). Lord Justice James has defined a company as an association of many persons who contribute money or moneys worth to a common stock and employ it in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who form it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share.

Under Halsburys Laws of England, the term Company has been defined as a collection of many individuals united into one body under a special domination, having perpetual succession under an artificial form, and vested by the policy of law with the capacity of acting in several respects as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the designs of its institution, or the powers upon it, either at the time of its creation or at any subsequent period of its existence.

From the foregoing discussion it is clear that a company has its own corporate and legal personality distinct and separate from that of its members. A brief description of the various attributes is given here to explain the nature and characteristics of the company as a corporate body.

CompanyIts Nature and Characteristics

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an artificial person (i.e. created by law); it is clothed with many rights, obligations, powers and duties prescribed by law; it is called a person. It is appropriately described as an artificial person being invisible, intangible, existing only in the contemplation of law. Being the creation of law, it possesses only the properties conferred upon it by its Memorandum of Association. Among the most important of these are individuality and immorality. Within the limits of powers conferred by the charter, it can do all acts as a natural person may do.

As it has a distinct legal personality of its own, it is capable of enjoying rights and being subject to obligations which are different from those enjoyed or borne by its members. Like a natural person it can enter into contracts, sue and can be sued in its own name, but unlike a human being it has no mind. You cannot shake it by the hand, or knock it down in a fit of temper, as it is inanimate and has no physical shape or form. Again, like a natural person it has individuality and owns property but unlike him, it has a common seal and perpetual succession.

The most striking characteristics of a company are:

(i) Corporate personality

By incorporation under the Act, the company is vested with a corporate personality quite distinct from individuals who are its members. Being a separate legal entity it bears its own name and acts under a corporate name. It has a seal of its own. Its assets are separate and distinct from those of its members. It is also a different person from the members who compose it. As such it is capable of owning property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts and suing or being sued in the same manner as an individual. Its members are its owners but they can be its creditors simultaneously as it has a separate legal entity. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The shareholders are not the agents of the company and so they cannot bind it by their acts. The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus, incorporation is the act of forming a legal corporation as a juristic person. A juristic person is in law also conferred with rights and obligations and is dealt with in accordance with law. In other words, the entity acts like a natural person but only through a designated person, whose acts are processed within the ambit of law [Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass AIR 2000 SCW 139].

The case of Salomon v. Salomon and Co. Ltd., (1897) A.C. 22, has clearly established the principle that once a company has been validly constituted under the Companies Act, 1956 it becomes a legal person distinct from its

members and for this purpose it is immaterial whether any member has a large or small proportion of the shares, and whether he holds those shares beneficially or as a mere trustee.

In the case, Salomon had, for some years, carried on a prosperous business as a leather merchant and boot manufacturer. He formed a limited company consisting of himself, his wife, his daughter and his four sons as the shareholders, all of whom subscribed for 1 share each so that the actual cash paid as capital was 7. Salomon sold his business (which was perfectly solvent at that time), to the Company for the sum of 38,782. The companys nominal capital was 40,000 in 1 shares. In part payment of the purchase money for the business sold to the company, debentures of the amount of 10,000 secured by a floating charge on the companys assets were issued to Salomon, who also applied for and received an allotment of 20,000 1 fully paid shares. The remaining amount of 8,782 was paid to Salomon in cash. Salomon was the managing director and two of his sons were other directors.

The company soon ran into difficulties and the debentureholders appointed a receiver and the company went into liquidation. The total assets of the company amounted to 6050, its liabilities were 10,000 secured by debentures, 8,000 owning to unsecured trade creditors, who claimed the whole of the companys assets, viz., 6,050, on the ground that, as the company was a mere alias or agent for Salomon, they were entitled to payment of their debts in priority to debentures. They further pleaded that Salomon, as principal beneficiary, was ultimately responsible for the debts incurred by his agent or trustee on his behalf. The trial judge and the Appellate Court agreed with these contentions and decreed against Salomon. The House of Lords disagreeing with the lower Courts, repudiated these contentions and accepted the appeal and reversed the order of the Appellate Court. The House of Lords held that on registration, the company comes into existence and attains maturity on its birth. There is no period of minority, no interval of incapacity. It has its own existence or personality separate and distinct from its members and, as a result, a shareholder cannot be held liable for its acts even though he holds virtually the entire share capital. Thus, the case also established the legality of what is known as one-man company. The case also recognised that subscribers do not have to be independent or strangers to one another. The case also recognised the principle of limited liability. It also established that a person can be at the same time a member, a creditor and an employee of the company, as well as its director.

Their Lordships of the House of Lords observed:

When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate capable forthwith of exercising all the functions of an incorporated company. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulk of its capital to one person. The company is at law a different person altogether from the subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive

the profits, the company is not in law their agent or trustee. The statute enacts nothing as to the extent or degree of interest which may be held by each of the seven or as to the proportion of interest, or influence possessed by one or majority of the shareholders over others. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertakings, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of company.

The case of Lee v. Lees Air Farming Ltd. (1961) A.C. 12 (P.C.), illustrates the application of the principles established in Salomons case (supra). In this case, a company was formed for the purpose of aerial top-dressing. Lee, a qualified pilot, held all but one of the shares in the company. He voted himself the managing director and got himself appointed by the articles as chief pilot at a salary. He was killed in an air crash while working for the company. His widow claimed compensation for the death of her husband in the course of his employment. The company opposed the claim on the ground that Lee was not a worker as the same person could not be the employer and the employee. The Privy Council held that Lee and his company were distinct legal persons which had entered into contractual relationships under which he became, the chief pilot, a servant of the company. In his capacity of managing director he could, on behalf of the company, give himself orders in his other capacity of pilot, and the relationship between himself, as pilot and the company, was that of servant and master. Lee was a separate person from the company he formed and his widow was held entitled to get the compensation. In effect the magic of corporate personality enabled him (Lee) to be the master and servant at the same time and enjoy the advantages of both.

The case of Foss v. Harbottle (1843) Hare 461, though is usually cited in connection with oppression & mismanagement, it relates directly to the theory of the corporate personality. The facts briefly reported were that the minority shareholders brought an action against the directors to compel them to make good the losses incurred by the company due to fraud committed by them. It was held that since the loss was suffered by the company, the only proper plaintiff for any action is the company, itself and the company can act only through its majority shareholders. This decision is the logical result of the principle that a company has separate legal entity from the members who compose it.

The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43, recognised the principle of separate legal entity even much earlier than the decision in Salomon v. Salomon & Co. Ltd. case. Certain persons transferred a Tea Estate to a company and claimed exemptions from ad valorem duty on the ground that they themselves were the shareholders in the company and, therefore, it was nothing but a transfer from them in one name to themselves under another name. While rejecting this the Calcutta High Court observed: The company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.

In reference to one-man companies of the Salomon kind, Kania, J. observed in T.R. Pratt (Bombay) Ltd. v. E.D. Sasson & Co. Ltd., A.I.R. 1936 Bom. 62 the following:

Under the law, an incorporated company is a distinct entity, and although all the shares may be practically controlled by one person, in law a company is a distinct entity and it is not permissible or relevant to enquire whether the directors belonged to the same family or whether it is compendiously described a one-man company.

Thus, one-man companies exist with the encouragement of the legislature, and the great majority of them are as bona fide and genuine as in a business sense. They are convenient and suitable media for provision and application of capital to industry. Reference may also be made to Dhulia Amalner Motor Transport Ltd. v. Roychand Rupsi Dharmasi, A.I.R. 1952 Bom. P. 37. A partnership firm carrying on the business of plying buses having worked for some time, some of the partners formed a private limited company which they could do under the law even while the partnership continuted to be a running concern. Such of the partners who formed the company sold to the company their own buses which were heretobefore being used by the firm. The other set of partners who constituted the minority sued the section of partners forming the company for accounts and their share of profits on the ground that in reality the company was not a different entity from the firm and that the business carried on by it was the same as that of the firm. Basing their arguments on Salomons case, their Lordships of the Bombay High Court observed: I am simply here dealing with the provision of a statute and it seems to me to be essential to the artificial creation that the law should recognise only that artificial existence quite apart from the motives or conduct of individual corporators either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and nothing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not. In view of this, the court held that the plaintiffs had no legal right to sue for accounts of the business done by the company which was altogether a third person. Buses which the company was plying were the property not of its shareholders, but the property of the company itself. Company was a corporate body whose entity was entirely different from the entities of its shareholders. Motive for becoming shareholders is not a field of inquiry. The law recognises the existence of the company irrespective of the motives, intentions, schemes or conduct of the individual shareholders.

Experience of a Shareholder is Experience of a Company

The experience of a shareholder of a company can be regarded as experience of a company. In New Horizons Ltd. v. Union of India, AIR 1994, Delhi 126, the tender of the company, New Horizons Ltd., for publication of telephone directory was not accepted by the Tender Evaluation Committee on the ground that the company had nothing on record to show that it had the technical experience required to be possessed to qualify for tender. On appeal the rejection of tender was upheld by the Delhi High Court.

The judgement of the Delhi High Court was reversed by the Supreme Court which observed as under:

Once it is held that NHL (New Horizons Ltd.) is a joint venture, as claimed by it in the tender, the experience of its various constituents namely, TPI

(Thomson Press India Ltd.), LMI (Living Media India Ltd.) and WML (World Media Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.) had to be taken into consideration, if the Tender Evaluation Committee had adopted the approach of a prudent business man.

Seeing through the veil covering the face of NHL, it will be found that as a result of re-organisation in 1992 the company is functioning as a joint venture wherein the Indian group (TPI, LMI and WML) and Mr. Aroon Purie hold 60% shares and the Singapore based company (IIPL) hold 40% shares. Both the groups have contributed towards the resources of the joint venture in the form of machines, equipment and expertise in the field. The company is in the nature of partnership between the Indian group of companies and Singapore based company who have jointly undertaken this commercial enterprise wherein they will contribute to the assets and share the risk. In respect of such a joint venture company, the experience of the company can only mean the experience of the constituents of the joint venture i.e. the Indian group of companies (TPI, LMI and WML) and the Singapore based company (IIPL) (New Horizons Ltd. and another v. Union of India (1995) 1 Comp. LJ 100 SC).

(ii) Limited Liability

The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organisation. Limited liability means the status of being legally responsible only to a limited amount for debt of a company. The company, being a separate person, is the owner of its assets and bound by its liabilities. The liability of a member as shareholder, extends to contribution to the assets of the company up to the nominal value of the shares held and not paid by him. Members, even as a whole, are neither the owners of the companys undertakings, nor liable for its debts. In other words, a shareholder is liable to pay the balance, if any, due on the shares held by him, when called upon to pay and nothing more, even if the liabilities of the company far exceed its assets. This means that the liability of a member is limited. For example, if A holds shares of the total nominal value of Rs. 1,000 and has already paid Rs. 500/- (or 50% of the value) as part payment at the time of allotment, he cannot be called upon to pay more than Rs. 500/-, the amount remaining unpaid on his shares. If he holds fully-paid shares, he has no further liability to pay even if the company is declared insolvent. In the case of a company limited by guarantee, the liability of members is limited to a specified amount mentioned in the memorandum.

In the case of unincorporated associations like partnership firms, the liability of the partners for the debts of the business is unlimited. Not only their share in the firm but their personal assets may be attached to satisfy the debts and liability of the firm. Section 25 of the Indian Partnership Act, 1932, for example, lays down that every partner, is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is partner.

Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has observed: The statutes relating to limited liability have probably done more than any legislation of the last fifty years to further the commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed

and encouraged aggregation of small sums into large capitals which have been employed in undertakings of great public utility largely increasing the wealth of the country.

There are, however, some statutory exceptions to the principle of limited liability. As provided by Section 45 of the Companies Act, 1956, the members become personally liable if the membership falls below prescribed minimum and the business is carried on for more than six months thereafter. It is also provided in the Act vide Section 323 that a limited company may, if so authorised by its articles, alter its memorandum by special resolution so as to render the liability of its directors or of any of its director or manager as unlimited. Further, where in the course of winding up it appears that any business of the company has been carried on with an intent to defraud creditors, the Court (now Tribunal) may declare the persons who were knowingly parties to the transaction as personally liable without limitation of liability for all or any of the debts/liabilities of the company.

(iii) Perpetual Succession

An incorporated company never dies except when it is wound up as per law. A company, being a separate legal person is unaffected by death or departure of any member and remains the same entity, despite total change in the membership. A companys life is determined by the terms of its Memorandum of Association. It may be perpetual or it may continue for a specified time to carry on a task or object as laid down in the Memorandum of Association. Perpetual succession, therefore, means that the membership of a company may keep changing from time to time, but that does not affect its continuity. But a partnership firm, on the other hand, is affected by the death or incapacity of its partners. A company is independent of the lives of its members as a natural consequence of incorporation and transferability of its shares.

The membership of an incorporated company may change either because one shareholder has transferred his shares to another or his shares devolve on his legal representatives on his death or he ceases to be a member under some other provisions of the Companies Act. Thus, perpetual succession denotes the ability of a company to maintain its existence by the constant succession of new individuals who step into the shoes of those who cease to be members of the company. Professor L.C.B. Gower rightly mentions, Members may come and go, but the company can go on for ever. During the war all the members of one private company, while in general meeting, were killed by a bomb, but the company survived not even a hydrogen bomb could have destroyed it.

(iv) Separate Property

A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name. The company is the real person in which all its property is vested, and by which it is controlled, managed and disposed of. Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43 held that no member can claim himself to be the owner of the companys property during its existence or in its winding-up. A member does not even have an insurable interest in the property of the company. A person, for example, was the holder of nearly all the shares except one of a timber company and was also a substantial creditor. He insured the companys timber in his

own name. The timber, having been destroyed by fire, the insurance company was held not liable to him. [See Macaura v. Northern Assurance Co. Ltd., 1925 A.C. 619]. Lord Buckmaster observed in this case that No shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. In the words of Walton, J.: The property of the company is not the property of the shareholders, it is the property of the company. [Gramophone and Typewriter Co. v. Stanley, (1906) 2 K.B. 856 at 869].

In other words, the property of the company is not the property of the individual members. As stated by the Supreme Court, a shareholder has merely an interest in the company arising under the Articles of Association, measured by a sum of money for the purpose of liability, and by a share in the profit. He has merely a right to participate in the profits of the company subject to the contract contained in articles of association (R.C. Cooper v. Union of India, A.I.R. 1970 S.C. 564). In another case the Supreme Court held that, though the income of a tea company is entitled to be exempted from Income-tax up to 60% being partly agricultural, the same income when received by a shareholder in the form of dividend cannot be regarded as agricultural income for the assessment of income-tax. [See Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay, A.I.R. 1955 S.C. 74]. It was also observed by the Supreme Court that a shareholder does not, as is erroneously believed by some people, become the part owner of the company or its property; he is only given certain rights by law, e.g., to receive or to attend or vote at the meetings of the shareholders. The court refused to identify the shareholders with the company and reiterated the distinct personality of the company. A similar observation was also made by Evershed, L.J. in these words:

Shareholders are not, in the eyes of the law, part owners of the undertaking. The undertaking is something different from the totality of shareholders. [Short v. Treasury Commissioners, (1948) A.C. 534].

On this rationale itself, the tenancy rights of the shareholder which were being used by the company, the companys use ended when the shareholders withdrew their permission [Rajdhani Chit Fund P. Ltd. v. Mukesh Maheshwari (1999) 96 Com Case 837 (Del)].

Thus, incorporation helps the property of the company to be clearly distinguished from that of its members. However, in a partnership firm, the partners are the joint owners of the firm property. Consequently, if there happens to be a change in the membership of a partnership firm, its assets have to be transferred to the new members.

(v) Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be movable property and, subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a company. When the joint stock companies were established, the object was that their shares should be capable of being easily transferred, [In Re. Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588]. Section 82 of the Companies Act, 1956 enunciates the principle by providing that the shares held by the members are movable property and can be transferred from one person to another in the manner provided by the articles. If the

articles do not provide anything for the transfer of shares and the Regulations contained in Table A in Schedule I to the Companies Act, 1956, are also expressly excluded, the transfer of shares will be governed by the general law relating to transfer of movable property.

A member may sell his shares in the open market and realise the money invested by him. This provides liquidity to a member (as he can freely sell his shares) and ensures stability to the company (as the member is not withdrawing his money from the company). The Stock Exchanges provide adequate facilities for the sale and purchase of shares.

However, by virtue of newly inserted Section 111A to the Companies Act, 1956 in view of the Depositories Act, 1996, the shares in all the companies except private companies, have been made freely transferable.

Further, as of now, in most of the listed companies, the shares are transferable through Electrical mode i.e. through Depository Participants instead of physical transfers.

As soon as the shares are transferred, the transferee steps into the shoes of the transferor and acquires all the rights in respect of those shares. In a partnership firm, a partner cannot transfer his share in the capital of the partnership firm except with the unanimous consent of all the partners. If a transfer is made against the will of the partners, the transferee does not become a partner, although he has some rights in the dissolution of the firm. [Refer Section 29 of the Indian Partnership Act, 1932]. Thus, the principle difference between a partnership and a company in this respect is that, while, in the case of the former, transferability depends on express agreement and is circumscribed by the legal and practical limitations; in the case of company it exists to the fullest extent unless there is some express restriction.

(vi) Common Seal

On incorporation, a company acquires legal entity with perpetual succession and a common seal. Since the company has no physical existence, it must act through its agents and all such contracts entered into by its agents must be under the seal of the company. The common seal of the company is of very great importance. It acts as the official signature of a company. The name of the company must be engraved on its common seal. A rubber stamp does not serve the purpose. A document not bearing common seal of the company is not authentic and has no legal force behind it.

The person authorised to use the seal should ensure that it is kept under his personal custody and is used very carefully because any deed, instrument or a document to which seal is improperly or fraudulently affixed will involve the company in legal action and litigation.

(vii) Capacity to Sue and Be Sued

A company being a body corporate, can sue and be sued in its own name. To sue, means to institute legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against the company are to be instituted in its own name. Similarly, the company may bring an action against anyone in its own name. A companys right to sue arises when some loss is caused to the company, i.e. to the

property of the personality of the company. Hence, the company is entitled to sue for damages in libel or slander as the case may be [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj)]. A company, as a person separate from its members, may even sue one of its own members for libel.

A company has a right to seek damages where a defamatory material published about it, affects its business. Where video cassettes were prepared by the workmen of a company showing, their struggle against the companys management, it was held to be not actionable unless shown that the cassette would be defamatory. The court did not restrain the exhibition of the cassette. [TVS Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37]. The company is not held liable for contempt committed by its officer. [Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129 Comp Cas 192 Mad]. In case of unincorporated association an action may have to be brought in the name of the members either individually or collectively.

(viii) Contractual Rights

A company, being a separate legal entity different from its members, can enter into contracts for the conduct of the business in its own name. A shareholder cannot enforce a contract made by his company; he is neither a party to the contract nor entitled to the benefit of it, as a company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on contracts made by his company. The distinction between a company and its members is not confined to the rules of privity, however, it permeates the whole law of contract. Thus, if a director fails to disclose a breach of his duties to his company, and in consequence a shareholder is induced to enter into a contract with the director which he would not have entered into had there been disclosure, the shareholder cannot rescind the contract.

Similarly, a member of a company cannot sue in respect of torts committed against it, nor can he be sued for torts committed by the company. [British Thomson-Houston Company v. Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore, the company as a legal person can take action to enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are distinct from those of its constituent members.

(ix) Limitation of Action

A company cannot go beyond the power stated in the Memorandum of Association. The Memorandum of Association of the company regulates the powers and fixes the objects of the company and provides the edifice upon which the entire super-structure of the company rests. The actions and objects of the company are limited within the scope of its Memorandum of Association. In order to enable it to carry out its actions without such restrictions and limitations in most cases, sufficient powers are granted in the Memorandum of Association. But once the powers have been laid down, it cannot go beyond these powers unless the Memorandum of Association is itself altered prior to doing so.

(x) Separate Management

As already noted, the members may derive profits without being burdened with the management of the company. They do not have effective and intimate control

over its work