Session- Corporate Law

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Chapter 9

Corporate Law

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Section - 1 Meaning and Nature of a Company

9.1.1 What is a Company?

The word 'Company' has no strictly technical or legal meaning.It implies an association of persons for some common object.

The law relating to companies in India is contained in theCompanies Act, 1956, as amended up to date. This Act runsinto 658 sections and 15 schedules. The text of the law aloneoccupies more than 700 pages. Endeavour is, therefore, topresent some aspects of company law which are relevant for

managers.

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9.1.2 Definitions of aCompany

Section 3(1)(i) of the Companies Act, 1956 (the Act) merelystates that"a 'company' means a company formed andregistered under this Act or an existing company as defined inSection 3(1)(ii)." Section 3(1)(ii) lays down "an existingcompany means a company formed and registered under any

of the previous companies law". This definition neither givesthe meaning of a company clearly, nor defines a company interms of its features. To understand the meaning of acompany, let us see the definition as given by differentauthorities.

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a. "A company is an association of many persons who contribute

money worth to a common stock and employed in some trade or

business and who share the profit and loss arising there-from. The

common stock so contributed is denoted in money and is the

capital of the company. The persons who contribute to it or to

whom it pertains are members. The proportion of capital to which

each member is entitled is his share. The shares are always

transferable although the right to transfer is often more or less

restricted."

- Lord Justice Lindley

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9.1.3 Characteristics of a Company

The characteristic features of a company are asfollows:

a. Incorporated Association: The company mustbe incorporated or registered under the Act.

b. Artificial Legal Person: The company, being a juristic person, does not possess the body of

a natural being. It exists only in

contemplation of law.c. Separate Legal Entity: Unlike partnership,

the company is distinct from the personswho constitute it..'

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d. Perpetual Succession: A company being an artificial

person does not die. Its life is not dependant on itsmembers.

d. Limited Liability : The members of a company are only

liable to contribute towards payment of its debts to alimited extent, e.g., in a company limited by shares, amember's liability is limited to the nominal value of theshare. However, the Act provides for unlimited liabilitycompany as well.

e. Transferable Shares: The company's shares are capableof being easily transferred. They are traded in a stockexchange market.

f. Common Seal: A company can be held bound by onlythose documents which bear its signature. Common seal is

the official signature of a company. 66



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9.1.4 Kinds of CompaniesCompanies can be classified on various basis, which are asfollows:

a. On the basis of mode of incorporation-

i. Chartered Companies: Like East India Company. Thistype of company is generally not found in Indiapresently.

i. Statutory Companies: Which are created by a specialAct like Life Insurance Corporation, State Bank of India,Unit Trust of India, Reserve Bank of India.

i. Registered Companies: Are companies registered underthe Act.

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b. On the basis of Liability of Members-

iv. Limited by Shares: Where the liability of the members of a company is limited to the amount unpaid on the shares."

v. Limited by guarantee: Where the liability of the membersof acompany is limited to a fixed amount which the membersundertake to contribute to the assets of the company in theevent of its being wound up.

vi. Unlimited companies

: Every member is liable for the debts of the company, as in anordinary partnership, in proportion to his interest in thecompany," 88



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c. On the basis of Number of Members-vii. Private: Where the minimum number of member is two and maximum fifty.

viii. Public: Where the minimum number of member is seven and maximum number is limited by number of shares.

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On the basis of ownership

Government Companies

Non- government Companies

Association/charitable companies

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Government Companies: Means anycompany in which not less than 51 % of thepaid up share capital is held 'by the central

government and partly by one or more stategovernments."

Non- Government Companies: 51 % of the

paid up share capital is held by one or moreentrepreneurs or by public or a group of person other than government.

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On the basis of Control

i. Holding Company

ii. Subsidiary company

iii. One man company

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Holding Company- a company has controlover another company, the controllingcompany is known as the holding company.

Subsidiary Company- the company overwhich control is exercised by any anothercompany.

One man company- the company in whichone- man practically holds the entire sharecapital of the company.

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Producer Companies

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The companies (Amendment) Act, 2002, has introduced a new

type of company known as Producer Companies. Any ten or

more individual producers or any two or more producer

institutions may form and incorporate a company as a producer

company. This type of company shall have special provisions

regarding membership and voting rights and its administration.



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Lifting the Corporate Veil

The main advantage of forming a company is to have aseparate legal entity. At times, the facade of corporatepersonality might have to be removed to identify the personswho are really guilty. This is known as 'lifting the corporateveil'. Generally, courts do not interfere and essentially go bythe principle of separate entity as laid down in the Salomon's

case, it may be in the interest of members and in publicinterest to identify and punish the persons who misuse themedium of corporate personality.

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The circumstances under which the courts may liftthe corporate veil may broadly be grouped underthe following two heads:-

Under Statutory Provisions

Under judicial interpretations.

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Under Statutory Provisions- the company act and some other Acts impose personal liability of members or directors of acompany.

Reduction of Membership

Misstatement in prospectus

Failure to refund application money or excess money

Non- disclosure or misdescription of name

Holding & subsidiary companies

Investigation of the affairs of the company

Investigation of ownership of a company 1717



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Under judicial interpretations.

For protection of revenue- bacha F. Guzdar V. CIT, Bombay, AIR (1955)

SC 74

Prevention of fraud

Preventing or avoiding legal obligation-Jones v. lipman (1962) 1 WLR

832

Determination of character of the company- Daimler Company Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd

Company acting as agent

Fixing liability for economic offences

Fixing liability under welfare legislation 1818



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Formation and Incorporation of aCompany

9.2.1 Stages of Incorporation

The complete process of formation of a company may bedivided into four stages namely:

a. Promotion.

b. Registration/Incorporation.

c. Floatation/Raising of Capital.

d. Commencement of Business.

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9.2.2 Promotion

Promotion means the preliminary steps taken for the purpose of registration and

floatation of the company. Gerstenberg has defined the term promotion as "the discovery

of business opportunities and the subsequent organization of fund, property and

managerial ability into a business concern for the purpose of making profits there from".

Persons who perform the task of promotion are called promoters.

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9.2.3 Registration/ Incorporation of Company

The promoter of the company will submit the followingdocuments with the Registrar of Companies for the registration of the company:

a. The memorandum of association.

b. The articles of association.

c. A list of persons who have consented to act as directors of the proposed company.

d. A statutory declaration of compliance.

e. Any agreement with the relevant persons of the proposedcompany.

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The Registrar of Companies is to allot a CorporateIdentity Number (CIN) to each company registered

on or after November 1, 2000. After scrutiny of all

these documents and if they are in order, theRegistrar of Companies shall issue a 'certificate of

incorporation'. This certificate of incorporation given

by the Registrar shall be conclusive evidence that allthe requirements of the Act have been complied

with.



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9.2.4 Floatation/Raising of Capital

A private company is prohibited from inviting public tosubscribe to its share capital. Therefore, when a privatecompany is formed, the requisite capital is obtained from

friends and relatives by making its own arrangement. Apublic company can take either of the following steps:

a. Issue a prospectus in case public is to be invited tosubscribe to its capital, or

b. Deliver a statement in lieu of prospectus where thecompany has either not issued a prospectus or thoughit has issued a prospectus it has not proceeded to allotany of the shares offered to the public forsubscription.

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Prospectus

Section 2(36) defines that “ a prospectusmeans any document described or issued as aprospectus and includes any notice, circular,

advertisement or other document invitingdeposits from the public or inviting offers fromthe public for the subscription or purchase of any shares.

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Section - 3 Memorandum of Association

9.3.1 Meaning and Importance

For the formation of a company one of the first steps is toprepare a document called the memorandum of association.According to the Act 'memorandum' means "the memorandumof association of a company as originally framed or alteredfrom time to time in pursuance of any previous companies law

or of this Act".21 This definition however, does not state thenature of this document nor is indicative of its importance.According to Lord Cairns the memorandum of association of acompany is its charter and defines the limitations of thepowers of a company. It contains the fundamental condition,

company is allowed to be incorporated. Thus thememorandum of association is the charter of the company,but it is not unalterable.

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Preparation of

MemorandumThe memorandum shall be drawn up in such a form as is given in TablesB,C,D and E in Schedule I to the Act.

• Form in Table- B for a company limited by share.

• Form in Table- C for a company limited by guarantee and not having sharecapital.

• Form in Table- C for a company limited by guarantee and having share capital.

• Form in Table- D for an unlimited company

It has to be printed, divided into paragraphs, numbered consecutivelyand signed by at least 7 persons (2 in the case of private company) in the

presence of at least one witness, who will attest the signature(s). Each of the subscribers shall at least take one share.

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9.3.2 Contents

The memorandum of a limited company is to contain the following clauses:

a. Name of the-Company - With 'limited' or 'private limited' as the last word(s) of thename.

a. Registered Office - The name of the state in which the registered office is to besituated.

b. Objects of the company - Stating separately:

i. The main objects. – to be perused by the company on its incorporation.

ii. Incidental or ancillary objects. – to the attainment of main object ( activities of trading company)

iii. Other objects not included in (i) and (ii) above.

d. Liability - A declaration is made that the liability of the member is limited.

e. Capital - The amount of authorized share capital divided into shares of fixedamounts. 2727



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9.3.3 Doctrine of ‘Ultra-vires'

The word 'ultra' means beyond and the word'vires' means the powers. Therefore the term'ultra-vires' means beyond the powers. In caseof a company~ it means beyond the powers of

the company. The powers of a company arecontained in the statute constituting it and thememorandum of association. The rule of ultra-vires was for the first time laid down in the case

of Ashbury Railway Carriage and Iron CompanyLtd. v. Riche." In this case the company wasformed with the object 'to make and sell, orlend or hire railway carriage and wagons and all

kinds of railway plants, to carryon the business2828



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The court (House of Lords) held that the

term 'general contractors' mustbe taken to indicate the making generallyof such contracts as wereconnected with the business of mechanicalengineers, otherwise it wouldauthorize the making of contracts of anykind and every description and would,

therefore, be altogether un-meaningful.Hence the contract was entirely beyondthe objects in the memorandum of association. The effects of ultra-vires

transactions are: 2929



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Section - 4 Articles of Association

9.4.1 Meaning

According to the Act 'articles' means the articles of associationof a company as originally framed or as altered from time to

time in pursuance of any previous company laws or of this Act... ".29 The articles of association of a company are its byelaws or rules and regulations that govern the management of its internal affairs and the conduct of its business. They definethe powers of its officers. They also establish a contract

between the company and the members and betweenthe members inter se.

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9.4.2 Contents of Articles

Articles usually contain provisions relating tothe following matters like:

a. Different classes of shares and their rights;

b. Procedure of making an issue of share capital andallotment there of;

c. Procedure of issuing share certificates and sharewarrants;

d. Forfeiture/penalty of shares and the procedure of their reissue;

e. Procedure for transfer and transmission of shares;

f. The time lag in between calls on shares,conversion of shares into stock3131



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9.4.3 Binding Force of Memorandum andArticles

The following are the legal implications:

a. The company is bound to its members;

b. Each member is bound to the company.

c. Each member is bound to other members so far as rights

and duties arising out of the articles are concerned.d. Neither the company nor the members are bound to

outsiders.

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9.4.4 Doctrine of Constructive Notice

The memorandum and articles when registered with theRegistrar become public documents and accessible to all. Theycan be inspected on payment of a nominal fee. Therefore,there is a presumption that any outsider dealing with companyhas read and understood these documents. This is known as'doctrine of constructive notice'. It is a negative doctrine,acting only against the outsiders and not the company.

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Section - 7 Share and ShareCapital

9.7.1 Meaning of Share

The capital of a company is divided into certain indivisibleunits of a fixed amount. These units are called shares.

According to the Act '''Share' means a share in the sharecapital of a company, and includes stock except where adistinction between stock and share is expressed or implied."Share may also be defined as 'Interest in the companyentitling the owner thereof to receive proportionate parts of profits, if any, and of a proportionate part of the assets of the

company upon liquidation.

9.7.2 Meaning of Share Certificate

A share certificate is issued by a company under its commonseal. It specifies the shares held by a member and is prima-

facie evidence of the title of member to the shares. Each share3434



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9.7.3 Meaning of Stock

Stock is the aggregate of fully paid up shares, consolidatedand divided for the convenient holding into different parts. Itmay be transferred or split up into fraction of any amount,without regard to the original face value of share. Stock can be

validly issued only when shares are fully paid up.9.7.5 Types of Shares

There are two types of shares:

a. Preference share

b. Equity or ordinary share. This type Of share can be furtherdivided into.

L With voting rights; or

ii. With differential right as to dividend, voting or otherwise.3535



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9.7.6 Characteristics of Preference Shares

Preference shares have two characteristics:a. They have preferential rights to be paid

dividend during the life time of company;and

b. They have preferential right to the return of capital when the company goes intoliquidation.

9.7.7 Types of Preference Shares

a. Cumulative or non-cumulative: With regardto the payment of dividends, preferenceshares ma be cumulative or non-3636



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9.7.8 Share Warrant

A public company limited by shares, if so authorized by itsarticles, may issue, with the previous approval of the centralgovernment, with respect to any fully paid up shares, awarrant stating that the bearer of the warrant is entitled to

share specified therein. The shares become transferable bymere delivery of the share warrant;"

9.7.10 Transfer of Shares

One of the important features of a company is that its sharesare transferable. Some of the important aspects of the Actrelating to transfer of shares are:

a. Time within which transfer must be registered: Is withintwo months of the application of transfer.

b. Refusal of transfer: Where the articles of a company give

power to the board to refuse registration of a transfer of 3737



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c. Transfer instrument must be valid and proper: A properinstrument of transfer is lodged with the company by the

buyer with valid signature of the seller. The company aftersatisfying the validity of instrument of transfer, shallrecord the transaction. Appropriate stamps are to beaffixed on the transfer deed.

d. Appeal against refusal to register: The transferor or

transferee may appeal to the Tribunal (NCLT) against anyrefusal of the company to register the transfer or againstany failure on its part within a period of 2 months, eitherto register the transfer or to send notice of its refusal toregister the same. This period of two months shall reckon

from the receipt of the notice of such refusal.

e. Forged Transfer: An instrument on which the signature of the transferor is forged is called a forged transfer. A forgedtransfer can never confer ownership upon the transfereethereof, however genuine the transaction may appear.

f. Transfer of shares under depository system: Is governed3838



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9.7.11 Transmission of Shares

Transmission of shares takes place:

a. When the registered shareholder dies; or

b. When he is adjudicated an insolvent; orc. Where the shareholder is a company, and it goes into

liquidation.

9.7.12 Nomination of Shares

Every holder of shares or debentures may, at any time,nominate, a person to whom his shares or debentures shallvest in the event of his death. The nomination shall be in theprescribed form and lodged with the company.

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9.7.13 Forfeiture of Shares

A company's articles usually contain a power for it to forfeitthe shares of amember who fails to pay calls within a certain time after theyfall due. Forfeiture of shares must be exercised:

a. In accordance with articles

b. After giving a proper notice

c. After passing a resolution for forfeiture

d. Bonafide and in good faith

9.7.14 Surrender of Shares

Surrender of shares means voluntary return of shares by theshareholder to the company for cancellation. There is no

provision for surrender of shares either in the Act or in Table A.However, the articles of some companies may allow surrender4040



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9.7.15 Kinds of Share Capital

a. Preference share capital

b. Equity or ordinary share capital

9.7.16 Alteration of Capital

a. Increase: By issuing new shares.

b. Consolidation: By division into shares of larger amount.

c. Conversion: Of fully paid shares into stock.d. Sub-division: Into shares of smaller amount.

e. Cancellation: Of shares which have not been taken up.

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9.7.20 Reduction of CapitalA company limited by shares, if so authorized by its articles,may by special resolution, which is to be confirmed by the

Tribunal (NCLT) reduce its share capital in any of the followingmanner:

a. By reducing or extinguishing the liability of members foruncalled capital;

b. by paying off or returning capital which is in excess of thewants of the company;

c. payoff paid-up capital on the understanding that it may becalled upagain;

d. a combination of the preceding methods;

e. write off or cancel capital which has been lost or is not4242



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Section - 10 Company Meetingsand Resolutions

9.10.1 Introduction

A company being an artificial legal person, can only actthrough some human intermediary. The various provisions of the Act and rules empower members to do certain things. All

decisions of the company are taken in meetings.9.10.2 General

a. Requisites of a valid meeting: It must be duly convenedlegally constituted and properly conducted.

b. Notice of meeting must be proper and adequate: Forgeneral meetings at least 21 clear days notice must begiven to every member and auditor of the company. Itmust specify the date, time and place of meeting.

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a. Chairman of the meeting: Every meeting is presided overby the chairman who is to conduct the proceedings of the

meeting properly. The chairman is either the chairman of the board or elected for every meeting. His main role is tomaintain order and decorum in the meeting.

b. Quorum: The quorum is generally laid down in the articles.In the absence of any provision in the articles, the quorum

is 5 members for public and 2 members for privatecompany. The articles can not provide for a smallerquorum.

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9.10.4 Statutory Meetinga. Object: The main purpose is to enable the members to

know at an early date the financial position and prospectsof the company and also to provide them an opportunityof discussion on various matters arising out of promotion

and formation of a company.b. When held: Only once in the life time of the company. It is

to be held within a period of not less than one month butnot more than six months from the date the company isentitled to commence business. This is the first meeting of

the shareholders.

c. Not required to be held: A private company is not requiredto hold a statutory meeting. This meeting is also notrequired to be held by a public company not having sharecapital or has unlimited liability or a government company.

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d. Notice: At least 21 days notice is to be given.

e. Statutory report: Is presented in this meeting. Its contentsinclude, total shares allotted, total amount of cashreceived, an abstract of receipts and payments, details of contract, directors, brokerage and commission.

f. In case of default: Penalty is Rs. 5000 and is also a ground

for winding up.

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9.10.5 Board Meeting

a. When to hold: At least once in every three calendarmonths and 4 meetings every year."

b. Notice: To be given to every director in writing. No form orperiod of notice is laid down. Usually a week's notice is sufficient.

The notice must' state, the date, time and place of meetings.

c. Quorum: 1/3 of the total strength or two, whichever ishigher.

d. Passing of resolution by circulation is permissible.9.10.6 Motion

a. Meaning: A proposal under consideration by members in ameeting before it is voted upon.

b. Rules as to motion: The following are the rules as to4747



9.10.9 Resolution

a. Meaning: Any motion voted upon and agreed to in a

meeting and entered in minutes. In other words, a motionwhen passed, with or without amendment, is called aresolution.

b. Types of Resolution:

i. Ordinary resolution

ii. Special resolution

iii. Resolutions requiring special notice.

a. What is an ordinary resolution: A motion passed by simple

majority of the members voting at a general meeting. .b. Special resolution: The votes cast in favour, by whatever

means, by members present should not be less than threetimes the votes cast against the resolution. Intention asspecial resolution should be specified in the notice or

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