LAW RELATING TO CORPORATE BUSINESS ENTITIES

Salient features of a company

A company is a voluntary association of persons formed for the purpose of doing business.It has a distinct name and limited liability.It is a juristic person having a separate legal entity distinct from its members who constitute it. It is endowed with the potential of perpetual succession.

SALIENT FEATURES OF A COMPANY.

SOLOMON & CO LIMITED CASE This case illustrates that a company is a

separate legal entity once it is incorporated or registered under companies act.

Soloman was a prosperous leather merchant who converted his company into a limited company named soloman & co ltd.

The company so formed consisted of soloman, his wife and five of his children as members.

The company purchased the business of solomen (sole proprietor) for pound 39,000.

SOLOMON CASE CONTD…

Purchase consideration was paid in terms of debentures worth shilling 10,000 conferring a charge on the company’s assets.

Along with the above, 20,000 shares of shilling 1 each fully paid up was also given.

Balance was paid in cash.

SOLOMAN CASE CONTD….

The company ran less than one year. Liquidation proceeding started. House of lords held that the business belonged

to the company and not to soloman. The debentures of solomon had prior claim over

other creditors. The case of soloman & solomon & co ltd thus

recognised the principle of ‘limited liability’

CHARACTERISITICS OF A LIMITED COMPANY

A company once incorporated has perpetual succession. Also the company is distinct from its members. Even all the members of the company die in air crash the company survives.

The shares of the shareholders are transferable.

The company can sue and be sued.

LIFTING THE CORPORATE VEIL

There have been instances where the court had to it’s the corporate veil.

The circumstances under which the court may lift the corporate veil can be grouped in two heads (1) statutory provisions (2) judicial interpretation.

When the number of members fall below 7 in the case of public limited company or below 2 in case of private ltd company, then every person who is a member shall be jointly and severally liable for the payment of the whole debts of the company.

LIFTING THE CORPORATE VEIL

If the directors fail to comply with the deadline for refund dthe application money with interest to the unsuccessful applicants, then they are severally and jointly liable.

For misrepresentation in a prospectus, every director, promotor and every other person who authorises the issue of such a prospectus incurs liability who subscribe for shares on the faith of the untrue statement.

If it appears in the course of winding up of the company that some business of the company has been carried on with intent to defraud the credtiors then the court may declare that any persons who were knowingly parties to the carrying on the business, are personally responsible without any limitation of liability.

LIFTING THE CORPORATE VEIL

Judicial interpretations Gilford motor company vs. Horne – in this case

horne had been employed by gilford motor co. Horne was by agreement not to solicit the company \’s customers for a certain period after leaving employment. But gilford formed a company and solicited the customers of the erstwhile company. The court held that the formation of the company was a ‘cloak or sham to enable him to break his agreement and was restrained from such solicitation.

TYPES OF COMPANIES

Private company A private company must have atleast two persons. It restricts the right transfer its shares. Limits the number of members to fifty. Prohibits any invitation to the public to subscribe for

shares or debentures of the company. Prohibits any invitation or acceptance of deposits from

persons other than its members, directors or relatives. A private company need not hold statutory meeting. Quorum required for general meeting is 2 The shares of a private company need not be first offered

to the existing shareholders.

PUBLIC LIMITED COMPANY

It requires minimum seven members. Minimum paid up capital is rs.5 lacs. Atleast 3 directors required. Can raise capital by inviting public

subscription Shares are freely transferable.

MEMORANDUM OF ASSOCIATION

The memorandum of association is a document of great importance in relation to a company.

It is often described as the charter of the company defining as well as confining the powers of the company.

Any act done beyond the scope of the memorandum is ultra vires the company and hence null and void.

The memorandum of association contians the name clause, registered office clause, objects and powers clause.

The main objects clause state the main objects to be pursued by the company on its incorporation. The objects incidental or ancilliary to the attainment of main objects.

The other objects must state the objects which are not included in the above clauses.

MEMORANDUM OF ASSOCIATION case study – ashbury railway carriage and iron company ltd vs.

riche – in this case the company was formed with the object to make and sell or lend or hire railway carriage and wagons and all kinds of railway plants to carry on the businessof mechanical engineers and general contractors.

the company contracted with riche to finance ;the construction of railway line in belgium. the company repudiated the agreement . riche contended that agreement fell within the meaning of the words ‘general contractors’. the court held that (house of lords) that the term ‘general contractors’ must be taken to indicate the making generally of such contracts as were connected with the business of mechanical engineers. the house of lords held that the agreement was ultra vires of the memorandum of association.

EFFECT OF ULTRA-VIRES TRANSACTION

The ultra vires acts are null and void (void ab initio).

A member can get an order of restraint (injunction) from the court against such an ultra vires act.

For ultra vires acts of the company, the directors are personally liable.

Directors are personally liable to third parties.

MEMORANDUM OF ASSOCIATION

A.Lakshmanaswami mudaliar vs. Life insurance corporation

The directors of a company were authorised to make payments towards any charitable or any benevolent object or for any general or any other useful object. Following this board resolution, the directors paid two lakhs rupees to a trust formed for the purpose of promoting technical and business knowledge.

This payment was held ultravires. The court held that the directors could not spend the company’s money on any charitable or general object of their choice. They could spend for the promotion of only such charitable objects as would be useful for the attainment of the company’s own objects.

ARTICLES OF ASSOCIATION

The articles of association are rules that govern the management of its internal affairs.

The articles play a subsidiary part to the memorandum of association. The articles of association deal with :-

Share capital - call on shares Transfer of shares – transmission of shares,

forfeiture of shares, share warrants, alteration of share capital, general meetings, voting rights of members, dividends and reserves, accounts and audit, borrowing powers, winding up etc.

DOCTRINE OF INDOOR MANAGEMENT This doctrine says that persons who are delaing with the

company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to enquire into the irregularily of proceedings.

An outsider is not bound to see that the company carries out its own internal regulations.

The doctrine of indoor management has its genesis in the case of royal british bank vs. Turquand – in this case, the directors of the company had borrowed some money. The articles of association state that the directors can borrow money on bond as authorised by resolution passed at the general meeting. The directors gave bond to turquand without the authority of the resolution.

ROYAL BRITISH VS. TURQUAND CASE

(DOCTRINE OF INDOOR MANAGEMENT)

It was held by court that turquand can sue the company on the strength of the bond, as he was entitled to assume that the necessary resolution had been passed.

Exceptions to the doctrine of indoor management. If the outsider had knowledge of the lack of authority he

cannot claim the relief on this doctrine In the case of forgery, this doctrine is not applicable.

COMPANY MANAGEMENT

Company managed by board of directors. A public limited company should have at least

three directors. A private ltd company shall have atleast 2

directors. Directors may be appointed by : Subscribing to the memorandum of association. By shareholders in general meeting A person who desires to become a director

should file with the company his consent to act as director if appointed

COMPANY MANAGEMENT CONTD……

Appointment of managing director. By virtue of resolution passed by company in

general meeting By virtue of agreement with the company By virtue of resolution passed by board of

directors. It is compulsory for public and private ltd

company to appoint managing director having paid up capital of 5 crores or more.

His tenure is for a period of 5 years. However, he may be reappointed.

APPOINTMENT OF DIRECOTRS

2/3rd of the total number of directors shall retire at an annual general meeting of the company

Be appointed in a general meeting. Directors retiring by rotation can be reappointed. A director in a private ltd is not liable to retire in rotation. However,

the appointment of directors of a private ltd company can be made only at general meeting.

If no resolution is passed expressly stating that the vacancy shall not be filled up, then the retiring director will be deemed to have been appointed.

APPOINTMENT OF DIRECTORS BY BOARD

The board may if the articles permits appoint an additional director in the meeting of the board or by passing a resolultion by circulation.

The board may fill the vacancy due to death, resignation etc.

The board may appoint an alternate director in place of original director during the absence of not less than 3 months. The original director cannot appoint the alternate director. He vacates his office as soon as the original director returns to the state in which board meetings are held.

APPOINTMENT OF DIRECTORS

The central government can appoint directors for the purpose of prevention of oppression and management.

The minority shareholders can have representation on the board. It can be made for 3 years.

The appointment by third parties – the articles may give a right to financial institutions and debenture holders to nominate directors on the board. The nominee directors are non-retiring.

DUTIES OF DIRECTORS

The duties of directors can be classified into three types :-

Fiduciary duties – he should not exceed his authority and powers, he should act with honesty and in goodfaith.

A director is duty bound to exercise reasonable care in the management of its affairs

DUTIES OF DIRECTORS CONTD

A director or his relative should not should not enter contracts with the company for sale, purchase or supply of any goods, materials, or services without the consent of the board of directors.

If the paid up capital of a company is one crore or more, no such contract shall be entered without the prior approval of the central government.

A director who is interested directly or indirectly in any contract should reveal his interest at a meeting of board of directors.

DUTIES OF DIRECTORS

Directors are appointed by the shareholders to manage the company. It is their duty to attend the board meetings and review periodically the progress of the company.

The office of director will be vacated if the director fails to attend himself from three consecutive meetings of the board without the leave of the of absence of the board. This stipulation negates the habitual absence by a director through this stringent action.

It is the responsibility of directors to convene annual general meeting, statutory and extraordinary meeting

DUTIES OF DIRECTORS ….

For mala fide acts – if the directors act dishonestly and in breach of trust, the directors would be liable to account for and surrender profits to the company. They should make good loss sustained by the company.

For negligence – they should act like a prudent businessmen in discharging their duties.

Liability to third parties – directors may incur personal liability to third parties – for example if the prospectus of the company does not contain all the items to be covered, then directors incur a liability to third parties. Also incase of irregular allotments.

DIRECOTRS – CRIMINAL LIABILITY

Directors are criminally liable for the following :- Prospectus containing untrue statements. Inviting deposits contravention of rules Issuing false advertisements inviting deposits Fraudulently inducing people to invest money Failure to refund excess application money. Failure to lay balance sheet

DIRECTORS – CRIMINAL LIABILITY CONTD…

Giving loans to corporate bodies in excess of limits

Acting as director after removal from office.

False declaration of company’s solvency.

Failure to supply information to auditor.

CO0MPANY MEETINGS

Company meeting should be called by directors.

Shareholders can requisition holding extraordinary meeting

National company law tribunal can call for annual general meeting in case of default in convening the meeting.

KINDS OF MEETINGS

Shareholders meetings Statutory meeting Annual general meeting Extraordinary general meeting Board meetings Meeting of board of directors

STATUTORY MEETING

Company limited by shares, company by guarantee having a share capital should convene statutory meeting.

It should be held within one month or not more than six months from the date of commencement of business.

This meeting is called “statutory meeting” This is the first meeting of the share holders. 21

days notice should be given. There will be only one such meeting in the

lifetime of the company.

ANNUAL GENERAL MEETING A public ltd co or a private ltd company which is

a subsidiary of a public ltd company should conduct an annual general meeting of the company.

It should be held at the registered office of the company.

The first Annual General Meeting can be held within 18 months from the date of incorporation. subsequent AGMs should be held in each calendar year. the gap in between AGMs should not be more than 15 months, but can be held within 18 months if approved by registrar.

ANNUAL GENERAL MEETING CONTD….

Notice of Annual General Meeting should be given 21 days before the date of the meeting.

EXTRAORDINARY GENERAL MEETING

All meeting other than AGM shall be EGM.

It can be held for transacting any urgent business or special business.

All business transacted in the egm is called “special business”

An EGM can be called by board of directors.

EXTRAORDINARY GENERAL MEETING

The directors on requisition holding 1/10th of voting power.

By the requisitionists themselves if the board does not call the meeting within 45 days of depositing a valid requisition. Meeting must be held within 3 months of the deposit of requisition. EGM can be called by national company law

tribunal.

An institutional shareholder can call an EGM.

BOARD MEETING

A board meeting should be held atleast once in 3 calendar months and 4 meetings every year.

Notice of board meeting should be given to every director in writing.

1/3 of the total strength or minimum of two whichever is higher shall form quorum.

RESOLUTIONS

Any motion voted upon with or without an amendment is called a ‘resolution’.

There are two types of resolutions – (1) ordinary resolution (2) special resolution(3) resolutions requiring special notice.

An ordinary resolution is one passed with a simple majority of the members voting at a meeting.

Special resolution – the votes cast in favour by members present should be three times the votes cast against the resolution. Special resolution is required for some matters like alteration of memoraum of association.

PASSING OF RESOLUTION BY POSTAL BALLOT

Listed companies shall get any resolution passed by postal ballot.

Some subjects for which resolution by postal ballot can be made is prescribed by central government. Some of the subjects so declared are like alteration of the object clause of memorandum, buy-back of shares, sale of undertaking f the company etc.

The draft resolution should be sent to the shareholders for voting within 30 days.

Postal ballot includes voting by electronic mode.

LIABILITIES OF DIRECTORS

Directors are personally liable for ultra vires acts – they should indemnify the company in respect of any consequent loss or damage sustained. If the directors apply the company’s money for purposes for which the company cannot sanction, they become liable to replace it.

Capital – Company Law

Nominal, Authorised or Registered Capital – This is the sum stated in the memorandum as the share capital of a company with which it is proposed to be registered. This is the maximum amount of capital which it is authorised to raise by issuing shares and upon which it pays stamp duty.

Issued Capital – It is that part of the authorised capital which the company has issued for subscription. The amount of issued capital is either equal to or less than the authorised capital.

Called up capital – The company may not call up full amount of the face value of shares. Thus the called up capital represents the total amount called up on the shares subscribed.

Paid up capital – Paid up capital is the amount of money paid up on the shares subscribed.

Company Law - Debentures

Debenture means a document which either creates a debt or acknowledges it. Palmer describes debenture as “any document under seal, evidencing a deed, the essence of admission of indebtedness.”

The term debenture simply means a document acknowledging a loan made to the company and providing for the payment of interest on the sum borrowed until the debenture is redeemed.

It generally creates a charge on the undertaking or undertakings of the company.

Kinds of debentures : Bearer debentures – On maturity , the principal sum is

paid to the bearers.

Company Law - Debentures

Registered Debentures – These are debentures which are payable to the registered holders i.e. persons whose names appear in the Register of debenture holders. Such debentures are transferable like shares.

Perpetual or Irredeemable Debentures A debenture which contains no clause for redemption is called perpetual debentures.

Convertible debentures – A company may also issue convertible debentures to convert them into equity or preference shares.

Company Law – Minimum Subscription Minimum Subscription : Securities and Exchange Board of India (SEBI)

relating to minimum subscription requires that if the company does not receive the minimum subscription of 90% of the issue, the entire subscription will have to be refunded to the applicant within 42 days from the date of closure of the issue. If there is a delay in the refund of the application money by more than 8 days after the company becomes liable to pay the amount, then interest @ 15% per annum shall be paid by the company.

Company Law - Shares

Sec. 2(46) of Companies Act, 1956 defines share “ as a share in the share capital of a company”

A share signifies the interests of a shareholder in the company : the right to receive dividend , attend meetings, vote at the meeting and share in the surplus assets of the company in the event of the winding up of the company.

Classes of shares – (1) Preference Shares (2) Equity Shares Equity share means a share which is not a preference share. The rate

of dividend is not fixed. No company can issue irredeemable preference shares. Preference shareholders can vote on the following circumstances (1)

any resolution for winding up of the company (ii) any resolution for reduction or repayment of share capital (iii) any resolution at any meeting, if dividend on cumulative preference shares remains unpaid for atleast two years.

Shares can be issued at par, premium and at discount. Employees and directors are issued special type of shares called sweat

equaity shares (Employees stock option scheme)

Company Law - Shares

Rights Shares – The existing members of a company have a right to be offered shares when the company wants to increase its subscribed capital. Such share is called ‘Rights shares’.

Company Law – Winding up

Winding up of a company is the process whereby its life is ended and its property is administered for the benefit of its creditors and members. An administer called ‘Liquidator’ is appointed and he takes control of the company, collects its assets pays its debts and finally distributes the surplus among the members in accordance with their rights.

Modes of winding up : A company may be wounded up in any of the following three

ways – A. Compulsory winding up order of the court. B. Voluntary winding up. The court may order a company to be wound up if it is unable to

pay its debts. A creditor for more than Rs.500/= has served on the company registered office has made a demand the company has not complied with the demand

Company Law – Winding up

A petition for compulsory winding-up of a company may be presented by :

The company itself by passing of a special resolution

Central government Any creditor or creditors

Company Law – Borrowing Powers Every trading company has an implied power to borrow.

A power to borrow includes the power to charge the assets of the company by way of security to the lender.

Memorandum of the company authorises the power to borrow.

Articles provide as to how and by whom these powers shall be exercised. It may also fix up the maximum amount which can be borrowed by the company.

The power to borrow money is generally exercised by the directors. Sec. 293 limits the directors’ power to borrow, to the aggregate of the paid up of the company and its free reserves.