Slide 1

Slide 2 Salomon V Salomon & Co Ltd. Aron Salomon was specialized in manufacturing leather boots. By 1892,. Salomon incorporated his business as a Limited Liability Company, Salomon & Co. Ltd. Aron Salomon was specialized in manufacturing leather boots. By 1892,. Salomon incorporated his business as a Limited Liability Company, Salomon & Co. Ltd. Minimum required seven share holders were Mr. Salomon, his wife, daughter and four sons. Two of his sons became directors; Mr. Salomon was managing director and two sons, directors. Salomon owned 20,001 of the company's 20,007 shares, and other share holders one each. Minimum required seven share holders were Mr. Salomon, his wife, daughter and four sons. Two of his sons became directors; Mr. Salomon was managing director and two sons, directors. Salomon owned 20,001 of the company's 20,007 shares, and other share holders one each. Mr. Salomon sold his business to the new corporation for almost 39,000, of which 10,000 was a debt to him. Mr. Salomon sold his business to the new corporation for almost 39,000, of which 10,000 was a debt to him. 2 Company Law Slide 3 Salomon V Salomon & Co ltd - liquidation. When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. The judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors. The judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors. 3 Company Law Slide 4 Salomon v Salomon in brief SALOMON SALOMONLTD Salomons wife and 5 children SALOMON sole Proprietor DEBENTURES 20001 Shares6 Shares Trade Creditors BUSINESS 10,000 The Companies Act 1862 required 7 shareholders 4 Company Law Slide 5 Assets & liabilities - Salomon Ltd Secured Creditors (Salomon) Unsecured Creditors (trade) Shareholders Aron Salomon Ltds Assets 5 Company Law Slide 6 The Appeal The Court of Appeal also ruled against Mr. Salomon: The Court of Appeal also ruled against Mr. Salomon: Mr. Salomon had abused the privileges of incorporation and limited liability, Mr. Salomon had abused the privileges of incorporation and limited liability, which the Legislature had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". which the Legislature had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". The Lords Justices of Appeal described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability. The Lords Justices of Appeal described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability. 6 Company Law Slide 7 The House of Lords held: The company was duly constituted in law. The company was duly constituted in law. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders. "Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not. "Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not. Though after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not the agent of the shareholders or trustee for them. Nor are they liable in any shape or form, except as provided for by the Act. Though after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not the agent of the shareholders or trustee for them. Nor are they liable in any shape or form, except as provided for by the Act. 7 Company Law Slide 8 Meaning The word company is derived from the Latin (com = with or together; panis = bread), and originally referred to an association of persons who took their meals together. The word company is derived from the Latin (com = with or together; panis = bread), and originally referred to an association of persons who took their meals together. In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters. In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters. Now a days business matters have become most complicated and cannot be discussed at length on festive gatherings. Now a days business matters have become most complicated and cannot be discussed at length on festive gatherings. 8 Company Law Slide 9 9 Development of Indian Company Law The first Companies Act was passed in India in 1850. The first Companies Act was passed in India in 1850. The amending act of 1857 conferred the right of registration with or without limited liability. The amending act of 1857 conferred the right of registration with or without limited liability. The Companies Act, 1956 repealed all the previous Acts and is in force at present. The Companies Act, 1956 repealed all the previous Acts and is in force at present. The Companies Bill, 2009 is introduced in the Lok Sabha: The Companies Bill, 2009 is introduced in the Lok Sabha: (a) to revise and modify the existing Act (a) to revise and modify the existing Act (b) to delete redundant provisions and regroup the provisions (b) to delete redundant provisions and regroup the provisions (c) to re-wrie various provisions for easy interpretation; and (c) to re-wrie various provisions for easy interpretation; and (d) to adapt to the changing economic and technical environment. (d) to adapt to the changing economic and technical environment. Slide 10 10 What is a Company ? Company is a voluntary association of persons Company is a voluntary association of persons o formed for the purpose of doing business o having a distinct name and limited liability. It is a juristic person having a separate legal entity distinct from the members who constitute it, It is a juristic person having a separate legal entity distinct from the members who constitute it, o capable of rights and duties of its own and endowed with the potential of perpetual succession. Sec. 3(1)(i) of The Companies Act, 1956, states that 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws. Sec. 3(1)(i) of The Companies Act, 1956, states that 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws. Slide 11 Body corporate A company is a corporate body. A company is a corporate body. The word corporation is derived from the Latin term corpus which means body The word corporation is derived from the Latin term corpus which means body Company 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, and so turn it into a corporation. Company 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, and so turn it into a corporation. Section 2(7): "body corporate" or "corporation" includes a company incorporated outside India but does not include- (a) a corporation sole; (b) a co-operative society registered under any law relating to co-operative societies; and (c) any other body corporate not being a company as defined in this Act which the Central Government may, by notification in the Official Gazette, specify in this behalf; Section 2(7): "body corporate" or "corporation" includes a company incorporated outside India but does not include- (a) a corporation sole; (b) a co-operative society registered under any law relating to co-operative societies; and (c) any other body corporate not being a company as defined in this Act which the Central Government may, by notification in the Official Gazette, specify in this behalf; 11 Slide 12 Corporation Corporation is legal person created by the process other than natural birth. It is for this reason something called artificial legal person. Corporation is legal person created by the process other than natural birth. It is for this reason something called artificial legal person. As a legal person, this corporate being is capable of enjoying many of the rights, and incurring many of the liabilities of a natural person- a human being. As a legal person, this corporate being is capable of enjoying many of the rights, and incurring many of the liabilities of a natural person- a human being. But the 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. But the 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. 12 Slide 13 13 Characteristics of a Company. 1. Separate Legal Entity Separate Legal Entity 2. Limited Liability. Limited Liability. 3. Perpetual Life. Perpetual Life. 4. Common Seal Common Seal 5. Ownership of property. Ownership of property. 6. Transferability of shares. Transferability of shares. 7. Separate ownership and Management Separate ownership and Management 8. Capacity to sue and be sued. Capacity to sue and be sued. 9. Company though a legal person is not a citizen either under the Constitution of India or under the Citizenship Act. This has been the conclusion of a special bench of the Supreme Court in State Trading Corpn. Of India Ltd. v CTO AIR 1963 SC 1811. Slide 14 14 Separate Legal entity The importance of the separate entity was firmly established in Salomon v. Salomon & co. Ltd.(1897) A.C. 22. Tata Engineering and Locomotive Co Ltd. v State of Bihar, AIR 1965 SC 40 The corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members Lee v Lee air Farming Ltd (1960) All ER 429 PC: Lee, a qualified pilot held all but one of the shares in the company. He was appointed the governing director of the company and chief pilot. He was killed while piloting the companys aircraft. His widows claim of compensation was opposed on the ground that Lee was not a worker, as the same person cannot be employer and employee. Held that there was a valid contract of service between Lee and the company and so Lee was a worker. Slide 15 15 Limited Liability The liability of the members of the company is limited to the face value of shares held by him. They are liable to pay only the uncalled money due on shares held by them called upon to pay and nothing more, even if liabilities of the company far exceeds its assets. Unlimited Liability: a. Section 45 : if the members are reduced below the statutory minimum and the Co carries on business for more than 6 months, the members who are aware of the fact of such reduction, shall be personally liable for the debts contracted during that time. b. S. 542: If in the course of winding up it appears that the company was carried on to defraud creditors, the court may declare the defaulting parties to be personally liable. Slide 16 16 Perpetual succession. King is dead. Long live the King. A company does not die or cease to exist unless it is wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company. Even where during war all the members of a private company, while in general meeting was killed by a bomb, the company survived; not even a hydrogen bomb could have destroyed it Principles of Modern company law, Grower LCB. [ Meat Supplies (Guildford) Ltd; (1966) 3 All E.R.320] Slide 17 17 Common Seal. The company acts through its agents (Board of Directors, directors, employees etc) for carrying out its activities. The company acts through its agents (Board of Directors, directors, employees etc) for carrying out its activities. Common seal is considered to be the official signature of the company to bind the company. The name of the company must be engraved on the common seal Common seal is considered to be the official signature of the company to bind the company. The name of the company must be engraved on the common seal The common seal is affixed on important documents such as share certificates etc. The common seal is affixed on important documents such as share certificates etc. Articles usually provide regulations relating to the use of common seal, and it should be affixed in the manner provided in the Articles. Articles usually provide regulations relating to the use of common seal, and it should be affixed in the manner provided in the Articles. Slide 18 18 Ownership of Property The companys property is its own. It can own and dispose off its property in its own name. The companys property is its own. It can own and dispose off its property in its own name. A member cannot claim to be owner of the companys property during the existence A member cannot claim to be owner of the companys property during the existence Macaure v Northern Assurance Co Ltd. Macaure held all but one share of the company and advanced substantial sum to it. Insurance claim on Timber destroyed by fire was rejected since he had insured the same in his personal name. Held: rejection of claim valid. Macaure v Northern Assurance Co Ltd. Macaure held all but one share of the company and advanced substantial sum to it. Insurance claim on Timber destroyed by fire was rejected since he had insured the same in his personal name. Held: rejection of claim valid. Bacha F Guzdar v CIT Bombay -AIR (1955) SC 74: Mrs. Guzdar claimed exemption form Income tax on dividends from her Tea company since the company is doing Agricultural activity as is exempted from Tax to that extent. Held: Share holder is not the part owner of the company or its property and he is only given certain rights to vote, attend meetings, to receive dividends etc Bacha F Guzdar v CIT Bombay -AIR (1955) SC 74: Mrs. Guzdar claimed exemption form Income tax on dividends from her Tea company since the company is doing Agricultural activity as is exempted from Tax to that extent. Held: Share holder is not the part owner of the company or its property and he is only given certain rights to vote, attend meetings, to receive dividends etc Slide 19 19 Transferability of shares S. 82 - Shares in a company are freely transferable in the manner provided in the Articles of the company. S. 82 - Shares in a company are freely transferable in the manner provided in the Articles of the company. In a Private Limited company, some restrictions are there on transfer, but the right to transfer is not taken away. In a Private Limited company, some restrictions are there on transfer, but the right to transfer is not taken away. No shareholder is permanently or necessarily wedded to a company. No shareholder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares. Slide 20 20 Ownership and Management A company is managed by the elected representatives of the shareholders, the Board of Directors. A company is managed by the elected representatives of the shareholders, the Board of Directors. Since company ownership is separate from the share holders, share holders cannot manage the company by virtue of their shareholding. Since company ownership is separate from the share holders, share holders cannot manage the company by virtue of their shareholding. On legal and practical grounds, the Management is on elected representatives of the share holders. On legal and practical grounds, the Management is on elected representatives of the share holders. Legal provisions are made for the protection of the rights of shareholders and creditors. Legal provisions are made for the protection of the rights of shareholders and creditors. Slide 21 21 Capacity to sue and be sued. The company may sue or be used in its own name. The company may sue or be used in its own name. Rajendra Nath Dutta v Shibendra Nath Muhkerjee (1992) 52 CC 293 Cal : A lease deed was executed by the directors of the company without the seal of the company.A suit was filed by the directors to avoid the lease on the ground of fraudulent alteration of the lease deed by the defendants. Admittedly, the lease deed was executed by one the directors and the company accepted rent. Held: If company was aggrieved, it was the company which was to file a suit and not the directors. Therefore the suit was not maintainable. Bank Nationalisation case - R. C Cooper v Union of India AIR (1970) 1 SCC 564 : where the legislative measures directly touch the company of which the petitioner is a shareholder, he can petition on behalf of the company, if by the impugned action, his rights are also infringed.. It is, therefore, to be noted that an individual rights is not lost by reasons of the fact that he is a shareholder of the company. Slide 22 22 Illegal association As per Sec. 11, not more than 10 persons can carry on any banking business and not more than 20 in case of any other business, unless the association is registered under the Companies Act or any other law. As per Sec. 11, not more than 10 persons can carry on any banking business and not more than 20 in case of any other business, unless the association is registered under the Companies Act or any other law. If not, it is an illegal association except: If not, it is an illegal association except: 1. A Joint Hindu Family business. But where two or more Joint Hindu families form a partnership, the total number of members (excluding Minors) cannot exceed 10 or 20 as the case may be. 2. Any association of charitable, religious, scientific trust which is not formed with a profit motive 3. Foreign companies. An illegal association cannot enter into any contract, sue or can be sued. The members are personally liable. They are also punishable. An illegal association cannot enter into any contract, sue or can be sued. The members are personally liable. They are also punishable. Slide 23 23 The corporate Veil The basic principle, that the company is a distinct legal entity from its members, is regarded as a curtain or a veil between members of the company and the Public. In case of dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and indentifies the persons who are behind the scene and are responsible for the perpetration of fraud. The corporate veil cannot be lifted to see the identity of the persons behind it except in a few exceptional circumstances/situations, which have developed over a period of time through judicial pronouncements. Slide 24 24 Lifting the corporate Veil (i) to determine whether, it is an enemy company; Daimler Co Ltd v Continental tyre co. (1916)2 A.C 307 HL German nationals residing in Germany floated a company in London for trading in tyres manufactured in Germany. On a suit for recovery of debit filed by the company during I world war, the defendant argued that if the debts are repaid, it will amount to trading with enemy. Held that a company will be regarded as having enemy character, if the persons having de facto control of its affairs are resident in an enemy country, or wherever they may be, are acting under instructions from or on behalf of the enemy. (ii) If it is used for evasion or to circumvent tax obligation; In re Dinshaw Maneckjee Petit AIR (1927) Bom 379: To avoid surtax, a rich person formed four companies, in which he was majority shareholder. The companies made investments and whenever dividends were received, he availed loans from the company and never repaid. Slide 25 25 Lifting the corporate Veil - 2 (iii) when it is formed to defeat or circumvent law or defraud creditors or to avoid legal obligations; Gilford Motor Co v Horne - (1933)1 Ch935: A sold his business to B and agreed not to compete with him for a given number of years. A formed a Private Limited company with majority share holdings and re-entered the business. In a suit fied by B, the court granted injunction restraining a and his company from going ahead with the competing business. (iv) where the companies are in relationship of holding and subsidiary companies; The court may, on the facts of the case, treat a subsidiary company as merely a branch or department of one large undertaking owned by the holding company. [Firestone Tyre & rubber co v Llewellin (1957) 1 WLR464 HL& LIC of india v Escorts (1986)comp LJ 91] Slide 26 26 Lifting the corporate Veil - 3 (v) by implying in certain cases that the company is an agent or the trustee of its members; There may be an express agreement or agreement may be implied from the facts of the particular case. (vi) a shareholder has lost the privilege of limited liability; eg. Reduction of membership below Statutory minimum, misrepresentation of company name etc. Hendon v Adieman (1973) New LR 637: the directors of L and R Agencies Ltd, signed a cheque in the name f the company stating the companys name as L.R. Agencies Ltd. Held tht they are personally liable for not properly mentioning the name of the company. (vii) Violation of the laws relating to foreign exchange control Slide 27 27 Lifting the corporate Veil - 4 (ix) where the corporate entity is used for a fraudulent purpose; D D A v Skipper Construction Co. (P) Ltd. (1996) 4 Comp. LJ 233 (SC: The company failed to pay the purchase price of a plot to DDA. Construction started and space sold to various persons. Two sons of directors who had business of their own s claimed that they had separated from the father and their companies had nothing to do with the properties of their parents. In the absence of proof, it was held that the transfer of shareholding between the father sons must be treated as sham. The fact aht the director and members of his family had created several corporate bodies did not prevent the court from treating all of them as one entity belonging to and controlled by the director and his family. (ix) where the corporate shield was blatantly used to disobey the orders of the Court wilfully. Slide 28 Listed Company. listing of its securities with stock exchanges in the country. & Unlisted Company No listing. SEBI guidelines not applicable. Subsidiary Company. Another Co. holds > equity or controls composition of Board. & Holding Company. The controlling company of subsidiary company. Government Company. not less than 51% of the paid up capital held by Government. Also subsidiary of Govt. Co. & Non govt. Company. i.Domestic Company. ii.Foreign company: a company incorporated outside India and has the place of business in India. Private Companies.&Public Company. Different types of companies. Slide 29 29 Public Limited Company A company defined under section 3(1)(iv) of the Companies Act, 1956 is a public company which: - i. is not a private company; ii. has a minimum paid-up capital of Rs. 5 lakhs or such higher capital as may be prescribed; iii. is a private company but subsidiary of a public company. Minimum number is members is 2 (7 in case of public Companies) S. 12 Minimum number is members is 2 (7 in case of public Companies) S. 12 Slide 30 30 Private Limited Company Section 3(1)(iii) defines a private company as one which (a) has a minimum paid-up share capital of Rs. 1 Lakh or such higher capital as may be prescribed; and (b) by its Articles of Association: i. restricts the right to transfer its shares; ii. limits the number of its members to 50 which will not include:- A. members who are employees of the company; and B. members who are ex-employees of the company and were members while in such employment and who have continued to be members after ceasing to be employees; iii. prohibits any invitation to the public to subscribe for any shares or debentures of the company; and iv. prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. Slide 31 31 Privileges of Pvt Ltd. Company The companies Act 1956, exempts private Limited companies from the application of various sections of the Act. The companies Act 1956, exempts private Limited companies from the application of various sections of the Act. Thus certain restrictions as applicable to Public companies are not applicable to Private companies and hence these provisions are considered as Privileges. Thus certain restrictions as applicable to Public companies are not applicable to Private companies and hence these provisions are considered as Privileges. The annexure contains a list of certain such privileges. The annexure contains a list of certain such privileges. The list is not exhaustive. The list is not exhaustive. Privileges of a Private Limited company. Slide 32 32 Deemed Public Limited company. Deemed Public Limited company. A private company shall automatically become the public company under any one of the following circumstances:- A private company shall automatically become the public company under any one of the following circumstances:- Where at least 25% of the paid up share capital is held by one or more bodies corporate. Where at least 25% of the paid up share capital is held by one or more bodies corporate. Where the annual average turnover during the period of three consecutive financial years is not less than Rs 25 crores. Where the annual average turnover during the period of three consecutive financial years is not less than Rs 25 crores. Where not less than 25% of the paid up capital of a public company limited is held by the private company. Where not less than 25% of the paid up capital of a public company limited is held by the private company. Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives). Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives). Slide 33 33 Incorporation. The process of incorporation can be divided into 4 stages: The process of incorporation can be divided into 4 stages: a) Promotion b) Registration or incorporation c) Capital Subscription d) Commencement of Business. As regards a private company, it needs to go through the first two stages only. As soon it receives the certificate of incorporation, it can commence business. As regards a private company, it needs to go through the first two stages only. As soon it receives the certificate of incorporation, it can commence business. Public Company has to go through all of the four stages Public Company has to go through all of the four stages. Slide 34 34 Promotion. Preliminary steps taken for the purpose of registration and floatation of the company. Preliminary steps taken for the purpose of registration and floatation of the company. entire process by which a company is brought into existence. entire process by which a company is brought into existence. starts with the conceptualization of the birth a company and determination of the purpose for which it is to be formed. starts with the conceptualization of the birth a company and determination of the purpose for which it is to be formed. Promoters: Persons who conceive the company and invest the initial funds. He may be any person competent to contract. Promoters: Persons who conceive the company and invest the initial funds. He may be any person competent to contract. Person acting in the professional capacity do not thereby become promoters. eg. CAs, Advocates, etc, giving professional assistance. Person acting in the professional capacity do not thereby become promoters. eg. CAs, Advocates, etc, giving professional assistance. They usually enter into contract to acquire some property or right for the company, which is yet to be incorporated. Such contracts are called Pre-Incorporation or Preliminary contracts. They usually enter into contract to acquire some property or right for the company, which is yet to be incorporated. Such contracts are called Pre-Incorporation or Preliminary contracts. Slide 35 35 Pre incorporation contracts Pre incorporation contracts The promoter is having the following duties:- not to make any secret profit out of the promotion of company. not to make any secret profit out of the promotion of company. make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company. make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company. In case of default on the part of the promoter in fulfilling the above duties, the company may :- In case of default on the part of the promoter in fulfilling the above duties, the company may :- Rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered Rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered Retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit. Retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit. If these are not appropriate, the company can sue him to for breach of trust. Damages upto the difference between the market value of the property and the contract price can be recovered from him. If these are not appropriate, the company can sue him to for breach of trust. Damages upto the difference between the market value of the property and the contract price can be recovered from him. Slide 36 36 Promoters - Rewards. Promoters - Rewards. A promoter may be rewarded by the company for his efforts, in any way, including the following :- Company pay some remuneration for the services rendered. Company pay some remuneration for the services rendered. The promoter may make profits on transactions entered by him with the company after making full disclosure. The promoter may make profits on transactions entered by him with the company after making full disclosure. He may sell his property for fully paid shares in the company after making full disclosures. He may sell his property for fully paid shares in the company after making full disclosures. He may be given an option to buy further shares in the company. He may be given an option to buy further shares in the company. The promoter may be given commission on shares sold. The promoter may be given commission on shares sold. The articles of the Company may provide for fixed sum to be paid by the company to him. The articles of the Company may provide for fixed sum to be paid by the company to him. Slide 37 37 Duties of Promoters Duties of Promoters Fiduciary duties- Fiduciary duties- Disclosure of personal profits Erlanger v. New Phosphate Co. (1878)3AppCas1218(HL) Disclosure of personal profits Erlanger v. New Phosphate Co. (1878)3AppCas1218(HL) Disclosure of any interest received by the promoter. Disclosure of any interest received by the promoter. Failure to disclose the interest of the promoter in a transaction with the company, it is voidable at the option of the company. Failure to disclose the interest of the promoter in a transaction with the company, it is voidable at the option of the company. Promoters are compelled to account for and pay back the secret profits Promoters are compelled to account for and pay back the secret profits The company may also rescind the contract The company may also rescind the contract Slide 38 38 Promoters - Liabilities Promoters - Liabilities If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement. Slide 39 39 Steps for Formation Steps for Formation 1. Selection of type of the company. 2. Selection of name for the proposed company. 3. Apply for Directors Identification Number and Digital Signatures, if does not have 4. Drafting of Memorandum and Articles of Association. 5. Stamping, digitally signing and e-filing of various documents. 6. Payment of Fees. 7. Obtaining Certificate of Incorporation. 8. Preparation and filing of Prospectus/Statement in lieu of Prospectus and e-Form 19/20 (in case of public companies). 9. Obtaining Certificate of Commencement of business (Public Co) Slide 40 40 Certificate of incorporation Certificate of incorporation If the Registrar is satisfied that the requirements as per the Act have been complied with, he shall register the MOA, AOA and other documents and issue the Certificate of incorporation. If the Registrar is satisfied that the requirements as per the Act have been complied with, he shall register the MOA, AOA and other documents and issue the Certificate of incorporation. On registration, the company comes into existence. On registration, the company comes into existence. Certificate of incorporation is the birth certificate. Certificate of incorporation is the birth certificate. It is conclusive evidence that all the requirements of the companies Act in respect of registration and of matters precedent and incidental thereto have been complied with. It is conclusive evidence that all the requirements of the companies Act in respect of registration and of matters precedent and incidental thereto have been complied with. Jubilee cotton mills Ltd. V. Lewis, (1924) A.C. 958, On 6 th January, the necessary documents were delivered to the registrar and two days after, the registrar issued the certificate dated it 6th January instead of 8 th. On 6th January, shares were allotted to Lewis before issue of certificate of incorporation. Held, as per certificate of incorporation, company was formed on 6 th January and, therefore, the allotment of shares was valid. Slide 41 41 Commencement of Business Commencement of Business A Public Limited Company having share capital has to obtain a separate certificate of commencement of business aper S.149(2A) 1. If a company has share capital and has issued a prospectus:- a. Shares up to the amount of minimum subscription must be allotted. b. Every director has paid to the company on each of the shares, which he has taken the same amount as the public has paid on such shares. c. No money is or may become payable to the applicants of shares or debentures for failure to apply for or to obtain permission to deal in those shares or debentures in any recognized stock exchange. d. A statutory declaration in Form 19 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed. 2. If a company has share capital but has not issued a prospectus: 3. It must file a statement in lieu of prospectus with the Registrar of Companies i. Condition b and d above to be complied with. e. Slide 42 42 Memorandum of Association Section 2(28) of the Companies Act, 1956 defines the term 'Memorandum' to mean the Memorandum of Association of the company as originally framed or as altered from time to time in accordance with the provisions of the Act. Section 2(28) of the Companies Act, 1956 defines the term 'Memorandum' to mean the Memorandum of Association of the company as originally framed or as altered from time to time in accordance with the provisions of the Act. The Memorandum is the charter of a company, which defines the ambit of the operations and the business to be carried on by the company. It is the basic document in the constitution of a company. The Memorandum is the charter of a company, which defines the ambit of the operations and the business to be carried on by the company. It is the basic document in the constitution of a company. The main purpose of the Memorandum is to lay down the objects for which a company is formed. The main purpose of the Memorandum is to lay down the objects for which a company is formed. Slide 43 43 Contents of Memorandum Name clause: ending with Limited or Private Limited. Name clause: ending with Limited or Private Limited. Domicile clause: Registered office of company- which state. Domicile clause: Registered office of company- which state. Objects clause: the activities which a company can carry on. Objects clause: the activities which a company can carry on. Main objects of the company to be pursued by the company. Objects incidental or ancillary to the attainment of the main objects Other objects of the company not included above. In case of the companies other than trading corporations whose objects are not confined to one state, the states to whose territories the objects of the company extend must be specified. Liability clause: Limited by shares or guarantee etc. Liability clause: Limited by shares or guarantee etc. Capital clause: The authorised Capital of the company. Capital clause: The authorised Capital of the company. Association clause: Declaration by 2/7 members. Association clause: Declaration by 2/7 members. Witness:, date and stamping. Witness:, date and stamping. Slide 44 44 Doctrine of Ulra vires. Doctrine of Ulra vires. Ultra vires means beyond the powers. Ultra vires means beyond the powers. Company is legally restrained from pursuing other purposes which are ultra vires or beyond its powers Company is legally restrained from pursuing other purposes which are ultra vires or beyond its powers Limits the legal capacity of a company in fulfilling the objects with which it was incorporated. Limits the legal capacity of a company in fulfilling the objects with which it was incorporated. Transactions outside the scope of the powers specified in the objects clause of the MOA and are not incidentally or necessary to the attainment of objects is ultra-vires and hence void. Transactions outside the scope of the powers specified in the objects clause of the MOA and are not incidentally or necessary to the attainment of objects is ultra-vires and hence void. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if all members agree. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if all members agree. The Members cannot ratify an ultra vires act. The Members cannot ratify an ultra vires act. Slide 45 45 Consequences of Ulra vires act. The company cannot sue for enforcement of any of its rights. The company cannot sue for enforcement of any of its rights. No person can sue the company for enforcement of its rights. No person can sue the company for enforcement of its rights. The doctrine does not apply in the following cases :- The doctrine does not apply in the following cases :- If an act is only ultra-vires of powers the directors If an act is only ultra-vires of powers the directors If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, the articles can be altered to rectify the error. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, the articles can be altered to rectify the error. If an act is intra vires, but is irregularly done, shareholders can validate. If an act is intra vires, but is irregularly done, shareholders can validate. In case of ultra-vires borrowing or acquiring of the property under an ultra-vires contract, then the third party has right to follow his money or property, if it exist as it is, and obtain an injunction from the Court restraining the company from parting with it. In case of ultra-vires borrowing or acquiring of the property under an ultra-vires contract, then the third party has right to follow his money or property, if it exist as it is, and obtain an injunction from the Court restraining the company from parting with it. The lender of the money to a company under the ultra-vires contract has a right to make director personally liable. The lender of the money to a company under the ultra-vires contract has a right to make director personally liable. Directors are personally liable to the company also. Directors are personally liable to the company also. Slide 46 46 Ultra vires - Cases. Ultra vires - Cases. Ashbury Railway Carriage and Iron Co. v Riche (1875) LR 7 HL 653. The object of the company was "to make and sell, or lend on hire, railway carriages and wagons and all kinds of railway plant, fittings, machinery and rolling stock and to carry on the business of mechanical engineers and general contractors; to purchase, lease, work and sell mines, minerals, lands and buildings; to purchase and sell any such materials on commission or as agents; to acquire, purchase, hire, construct or erect works or buildings for the purpose of the company and to do all such other things as are necessary, contingent or conducive to all or any of such objects." The company contracted for the financing of the construction of a railway line in Belgium. Held that the contract was ultra vires the company and observed that the Memorandum "states affirmatively the ambit and extent of vitality and power which by law are given to the corporation and it states negatively that nothing shall be done beyond that ambit and that no attempt shall be made to use the corporate life for any other purpose than that which is so specified." Slide 47 47 Ultra vires - Cases. Ultra vires - Cases. Dr. A. Lakshmanaswami Mudaliar v LIC of India (1963) 33 CC 420 (SC). An ultra vires act cannot be ratified even by whole body of shareholders. Rajendra Nath Dutta v Shibendra Nath Mukherjee (1982) 52 CC 293 (Cal). The execution of a document by the managing directors, without the common seal, is an ultra vires act and a subsequent resolution cannot ratify. Universal Mutual Aid & Poor Houses Association Ltd., In re (1934) 4 CC 256 (Mad). A contract, which is ultra vires the company, is no contract at all. Bell Houses Ltd. v City Wall Properties Ltd. (1966) 36 Comp Cas 87 (QB). A contract which, is ultra vires the company is void and can be so pleaded even by defendant sued by the company on it Madras Native Permanent Fund Ltd., In re (1931) 1 Comp Cas 256 (Mad) The ultra vires borrowings do not create the relationship of debtor and creditor Slide 48 48 Alteration of Memorandum Alteration of Memorandum Where a new object does not come within the purview of the Memorandum, Where a new object does not come within the purview of the Memorandum, the company can, in the circumstances mentioned in section 17 of the Act, the company can, in the circumstances mentioned in section 17 of the Act, first get the approval of the shareholders by a special resolution in a general meeting first get the approval of the shareholders by a special resolution in a general meeting subject to the condition that such objects will enable the company to achieve any of the purposes specified in sub- section (1) of section 17 and subject to the condition that such objects will enable the company to achieve any of the purposes specified in sub- section (1) of section 17 and get certificate for amendment in the Object Clause from the Registrar of Companies. get certificate for amendment in the Object Clause from the Registrar of Companies. Slide 49 49 Alteration of MOA - Purpose Alteration of MOA - Purpose A company may, by special resolution, alter the provisions of its Memorandum so far as may be required to enable it:- (a) to carry on its business more economically or more efficiently; (b) to attain its main purpose by new or improved means; (c) to enlarge or change the local area of its operations; (d) to carry on some business which under existing circumstances may conveniently and advantageously be combined with the business of the company; (e) to restrict or abandon any of the objects specified in the Memorandum; (f) to sell or dispose of the whole, or any part of the undertaking, or of any of the undertakings of the company; or (g) to amalgamate with any other company or body of persons. - S.17(1) Slide 50 50 Articles of Association. Articles of Association. Contains the rules, regulations and bye-laws for internal management of the company. Contains the rules, regulations and bye-laws for internal management of the company. It need to be registered along with the memorandum. It need to be registered along with the memorandum. It is a contract between the shareholders and the company; and between the members interse It is a contract between the shareholders and the company; and between the members interse AOA is subordinate to the MOA and must not conflict with MOA or the provisions of the Act or any other law. AOA is subordinate to the MOA and must not conflict with MOA or the provisions of the Act or any other law. The companies which must have AOA (S.26) The companies which must have AOA (S.26) Unlimited companies Unlimited companies Companies limited by guarantee Companies limited by guarantee Private company limited by shares Private company limited by shares Not mandatory for public companies Not mandatory for public companies Slide 51 51 Alteration of AOA Alteration of AOA Every company have the power to alter its articles of association by a special resolution ( S.31) Every company have the power to alter its articles of association by a special resolution ( S.31) Limitations on the power of alteration Limitations on the power of alteration 1)It must not be in contravention of the provisions of the Act. 2) The power of Alteration in the article is subject to the conditions contained in the MoA. 3)An Alteration can not require a member to purchase more shares or increase his liability in any way except with his consent in writing.(S.38- effect of alteration in the MoA or AoA) 4)Alteration must not constitute a fraud on the Minority Alteration in the Articles as to converting a public company into private company- approval of the central govt. S.31(1) Prov Alteration in the Articles as to converting a public company into private company- approval of the central govt. S.31(1) Prov Slide 52 52 Doctrine of Constructive Notice Doctrine of Constructive Notice Section 610 provides that the Memeorandum and articles, when registered becomes public documents and they can be inspected by anyone on payment of a nominal fee, Section 610 provides that the Memeorandum and articles, when registered becomes public documents and they can be inspected by anyone on payment of a nominal fee, Every person dealing with the company is treated as having the knowledge of the contents of the memorandum. That means he has constructive notice. Every person dealing with the company is treated as having the knowledge of the contents of the memorandum. That means he has constructive notice. It seeks to protect the company against the outsider. It seeks to protect the company against the outsider. Imputation of knowledge whether the party concerned has actual knowledge or not. Imputation of knowledge whether the party concerned has actual knowledge or not. Kotla Venkataswamy v Ram murthy AIR (1934) Mad 579: The articles provided that all deeds and documents of the company shall be signed by the Managing director, secretary and working director. A mortgage deed was accepted where only two signed. Held the deed was invalid. Slide 53 53 Doctrine of Indoor Management Doctrine of Indoor Management An outsider is presumed to have constructive notice in respect of public documents and nothing more. An outsider is presumed to have constructive notice in respect of public documents and nothing more. They need not attempt to find out what may or may not have taken place within the doors that are closed to him. They need not attempt to find out what may or may not have taken place within the doors that are closed to him. They need not inquire into the regularity of the internal proceedings and may assume that all is being done regularly. They need not inquire into the regularity of the internal proceedings and may assume that all is being done regularly. It operates to protect outsiders against the company. It operates to protect outsiders against the company. Royal Bank v Turquand (1856) 6 E. & B. 327 The Directors of the Company were authorized by the articles to borrow by a special resolution of the Company in a general meeting. A bond under the seal of the company, signed by two directors and the secretary was given to the plaintiff without the authority of any such resolution. Held that this binds the company as Turquand was entitled to assume that the resolution of the Company in general meeting had been passed. Held that this binds the company as Turquand was entitled to assume that the resolution of the Company in general meeting had been passed. Slide 54 54 Indoor Management - exceptions Indoor Management - exceptions 1)Persons having knowledge of irregularity Howard v patent Ivory Co 38 ChD 156: Articles permitted the directors to borrow upto 1000 without resolution in a general meeting. The directors borrowed from themselves 3500. Held that the Company was liable to the extent of 1000 only, as they had notice of internal irregularity. 2) Where circumstances are suspicious so as to invite enquiry. Underwood v bank of Liverpool 1924 1 KB 774 : The sole director and principal share holder of the company paid into his own account cheques drawn in the name of the company. Held bank was liable to the Company. The Bank was put to enquiry and not entitled to rely on the ostensible authority. 3) Forgery Ruben v Great Fingall Consolidates- (1906) AC439 : The plaintiff was the transferee of a share certificate issued under the seal of the defendants company. The companys secretary, who had affixed the seal of the company and forged the signature of the two directors, issued the certificate. Slide 55 55 Indoor Management - exceptions 2 Indoor Management - exceptions 2 4)Representation through Articles: - Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills C AIR 1957 All 311: Articles authorised directors to borrow and also empowered them to delegate this power to any of them. The company refused to be bound by the loan on the ground that there was no resolution of the board delegating the powers to borrow to the director who borrowed. Held : Company liable. 5) Acts outside apparent authority: - Anand Bihari Lal v. Dinshaw & co AIR (1942) Oudh 417 : Plaintiff accepted a transfer of a companys property from its Accountant. He could not have presumed the authority to the Accountant, in absence of a power of attorney. Transfer of property belonging to the company is beyond the apparent authority of the accountant. Held transfer invalid. Anand Bihari Lal v. Dinshaw & co AIR (1942) Oudh 417 : Plaintiff accepted a transfer of a companys property from its Accountant. He could not have presumed the authority to the Accountant, in absence of a power of attorney. Transfer of property belonging to the company is beyond the apparent authority of the accountant. Held transfer invalid. Slide 56 56 Indoor Management - exceptions 2 Indoor Management - exceptions 2 4)Representation through Articles: - Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills C AIR 1957 All 311: Articles authorised directors to borrow and also empowered them to delegate this power to any of them. The company refused to be bound by the loan on the ground that there was no resolution of the board delegating the powers to borrow to the director who borrowed. Held : Company liable. 5) Acts outside apparent authority: - Anand Bihari Lal v. Dinshaw & co AIR (1942) Oudh 417 : Plaintiff accepted a transfer of a companys property from its Accountant. He could not have presumed the authority to the Accountant, in absence of a power of attorney. Transfer of property belonging to the company is beyond the apparent authority of the accountant. Held transfer invalid. Anand Bihari Lal v. Dinshaw & co AIR (1942) Oudh 417 : Plaintiff accepted a transfer of a companys property from its Accountant. He could not have presumed the authority to the Accountant, in absence of a power of attorney. Transfer of property belonging to the company is beyond the apparent authority of the accountant. Held transfer invalid. Slide 57 Capital Capital In a company capital refers to share capital. In a company capital refers to share capital. The MoA state the amount of capital, number & type of shares. The MoA state the amount of capital, number & type of shares. A company cannot issue share capital in excess of the limit specified without altering the capital clause of the MOA. A company cannot issue share capital in excess of the limit specified without altering the capital clause of the MOA. The following are different aspects of share capital:- 1. Nominal, Authorised or Registered capital : mentioned in MOA 2. Issued capital : offered for subscription to members. 3. Subscribed capital : subscribed or taken up by purchaser and allotted. 4. Called-up capital: total amount of called up in the above. 5. Paid-up capital: In the above, the total amount actually paid. Par value of shares : the face value of the shares. When the shares are issued at the price which is higher than the par value issue is at a premium. Similarly shares can be issued at a discount also. 57 Slide 58 58 Types of Shares There are two types of shares under Indian Company Law :- There are two types of shares under Indian Company Law :- 1. Equity shares : That part of the share capital of the company which are not preference shares. 2. Preference Shares : i. carries Preferential rights in respect of Dividend at fixed amount or at fixed rate i.e. dividend payable is payable on fixed figure or percent and must paid before the holders of the equity shares can be paid dividend. ii. It also carries preferential right in regard to payment of capital on winding up or otherwise. Preference share capital has priority both in repayment of dividend as well as capital. Slide 59 59 Right Issue of Shares If, at any time after the expiry of 2 Years from the date of incorporation of the company or after one year from the date of first allotment of shares, whichever is earlier, a public company limited by shares issues further shares within the limit of authorised capital, If, at any time after the expiry of 2 Years from the date of incorporation of the company or after one year from the date of first allotment of shares, whichever is earlier, a public company limited by shares issues further shares within the limit of authorised capital, o its directors must first offer such shares to the existing equity share holders in proportion to the capital paid up on their shares at the time of further issue. This is commonly known as "Rights Issue of shares". This is commonly known as "Rights Issue of shares". The shareholders also has the right to renounce the offer in whole or part in favour of some other person. The shareholders also has the right to renounce the offer in whole or part in favour of some other person. This is commonly known as "Renunciation of Rights. This is commonly known as "Renunciation of Rights. Slide 60 60 Bonus shares Bonus shares are issued by converting the reserves of the company into share capital. It is capitalization of the reserves of the company. Bonus shares are issued by converting the reserves of the company into share capital. It is capitalization of the reserves of the company. Bonus shares can be issued by a company only if the Articles of Association of the company authorises a bonus issue. Bonus shares can be issued by a company only if the Articles of Association of the company authorises a bonus issue. If the company has availed of any loan from the financial institutions, prior permission is to obtained from the institutions for issue of bonus shares. If the company has availed of any loan from the financial institutions, prior permission is to obtained from the institutions for issue of bonus shares. If the company is listed on the stock exchange, the stock exchange must be informed of the decision of the board to issue bonus shares immediately after the board meeting. If the company is listed on the stock exchange, the stock exchange must be informed of the decision of the board to issue bonus shares immediately after the board meeting. Slide 61 61 Sweat Equity Shares equity shares issued by the company to employees or directors at a discount or for consideration other than cash for making available intellectual property rights or similar value additions. equity shares issued by the company to employees or directors at a discount or for consideration other than cash for making available intellectual property rights or similar value additions. For issue of sweat equity shares,following conditions are fulfilled :(S. 79A ) For issue of sweat equity shares,following conditions are fulfilled :(S. 79A ) (a) a special resolution passed by in general meeting; (b) the resolution specifies the number of shares, current market price, consideration, if any, and the class(es) of directors or employees. (c) not less than one year has, elapsed since the date on which the company was entitled to commence business. (d) Unlisted companies (issue of sweat equity Shares) Rules are to be complied with. For listed companies, SEBI guidelines are applicable. (e) Lock in period of 3 years. (f) > 15% of total paid up equity per year or Rs. 5 Cr. (higher), only with govt. approval. Slide 62 62 Employees stock Option Employees stock Option Scheme (ESOS) It is the option given to the whole time directors, officers or employees of a company which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price. Employee Stock Purchase Scheme (ESPS) means a scheme under which the company offers shares to employees as part of a public issue or otherwise. Slide 63 63 Prospectus. Prospectus is the general invitation to the public to subscribe to the capital of the company. Prospectus is the general invitation to the public to subscribe to the capital of the company. Prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any shares in, or debentures securities of a body corporate. S. 2(36) Prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any shares in, or debentures securities of a body corporate. S. 2(36) Only a public company can to issue prospectus to public. Only a public company can to issue prospectus to public. The prospectus shall matters and reports specified in Part I and II of Schedule II to the Companies Act. The prospectus shall matters and reports specified in Part I and II of Schedule II to the Companies Act. A public company has to issue a prospectus with reference to its formation or file a statement in lieu of prospectus with the concerned ROC. ( S.70) A public company has to issue a prospectus with reference to its formation or file a statement in lieu of prospectus with the concerned ROC. ( S.70) Slide 64 64 Management of the company Company acts through human agency. Company acts through human agency. S.291 vests the management of the company in the hands of the directors and they derive power from the general Meeting. S.291 vests the management of the company in the hands of the directors and they derive power from the general Meeting. As per the Act, every company is to have a Board of directors. As per the Act, every company is to have a Board of directors. The directors of a company are collectively known as the board of directors or the board The directors of a company are collectively known as the board of directors or the board The decisions are taken jointly by the Board of directors. The decisions are taken jointly by the Board of directors. Every public company (other than a deemed public company) must have at least three directors. For other companies - two. Every public company (other than a deemed public company) must have at least three directors. For other companies - two. Subject to the above, the articles of a company may fix the minimum and maximum number of directors for its board. Subject to the above, the articles of a company may fix the minimum and maximum number of directors for its board. Within the above limits, a company, at a general meeting may, by ordinary resolution, change the number of directors. Within the above limits, a company, at a general meeting may, by ordinary resolution, change the number of directors. Slide 65 65 Director Section 2(13) defines a director as any person occupying the position of a director, by whatever name he is called. Section 2(13) defines a director as any person occupying the position of a director, by whatever name he is called. Only individuals can be appointed as directors S. 253 Only individuals can be appointed as directors S. 253 Subject to provisions in the articles, the subscribers of the memorandum who are individuals shall be deemed to be the directors of the company, until the directors are duly appointed.(S. 254, 255) Subject to provisions in the articles, the subscribers of the memorandum who are individuals shall be deemed to be the directors of the company, until the directors are duly appointed.(S. 254, 255) Shareholders in general meeting must appoint directors. Shareholders in general meeting must appoint directors. In the case of a public company or a private company, which is a subsidiary of a public company, at least 2/3rds of the total number of directors shall be liable to retire by rotation, vacancy can be filled by re-election or appointment of new directors. In the case of a public company or a private company, which is a subsidiary of a public company, at least 2/3rds of the total number of directors shall be liable to retire by rotation, vacancy can be filled by re-election or appointment of new directors. Slide 66 66 Composition of Board - listed Co. Pursuant to the Clause 49 of the Listing Agreement covering the Corporate Governance Clause, a listed company shall ensure that Pursuant to the Clause 49 of the Listing Agreement covering the Corporate Governance Clause, a listed company shall ensure that its Board of directors shall have an optimum composition of executive and non-executive directors, with not less than 50% of the Board of directors comprising of non-executive directors. its Board of directors shall have an optimum composition of executive and non-executive directors, with not less than 50% of the Board of directors comprising of non-executive directors. The number of independent directors out of 50% non-executive directors would depend on whether the chairman is executive or non- executive. The number of independent directors out of 50% non-executive directors would depend on whether the chairman is executive or non- executive. In case of a non-executive chairman, at least one-third of the Board should comprise of independent directors and in case of executive Chairman, at least half of the Board should comprise of independent directors. Slide 67 67 Director - Qualifications. The Companies Act has not prescribed any qualification for appointment as a director in a company. The Companies Act has not prescribed any qualification for appointment as a director in a company. Sections 270, 272 and 273 of the Companies Act provides for share qualification for a director if it is required under the Articles of Association of the company. Sections 270, 272 and 273 of the Companies Act provides for share qualification for a director if it is required under the Articles of Association of the company. If a director is not holding specified qualifying shares before his appointment, he must acquire it within two months after his appointment as a director. If a director is not holding specified qualifying shares before his appointment, he must acquire it within two months after his appointment as a director. It is provided in the Act that a person shall not be capable of being appointed as a director, if he has certain disqualifications. It is provided in the Act that a person shall not be capable of being appointed as a director, if he has certain disqualifications. Section 274 lists the persons who are disqualified from being appointed as a director. Section 274 Section 274 lists the persons who are disqualified from being appointed as a director. Section 274Section 274Section 274 Slide 68 68 Ceiling on No. of Directorships Section 275 of the Act provides that no person, shall hold directorship in more than 15 companies. In calculation of 15 companies pursuant to the provisions of section 275 the following companies shall be excluded: Section 275 of the Act provides that no person, shall hold directorship in more than 15 companies. In calculation of 15 companies pursuant to the provisions of section 275 the following companies shall be excluded: (a) a private company which is not a subsidiary/holding company of a public company; (b) an unlimited company; (c) an association not carrying on business for profit section 25; (d) if he is an alternate director in another company. Penalty Any person who holds office, or acts, as a director in more than 15 in contravention, of the provisions shall be punishable with fine up to Rs. 50,000. [Section 279] Any person who holds office, or acts, as a director in more than 15 in contravention, of the provisions shall be punishable with fine up to Rs. 50,000. [Section 279] Slide 69 69 Types of Directors 1. Ordinary Directors : simple directors who attends Board meetings & are neither whole time directors nor managing directors. 2. Managing Director 3. Whole-time/Executive Directors : 3. Whole-time/Executive Directors : in the whole-time employment of the company. 4. Additional Directors : appointed by the Board between the two annual general meetings subject to the provisions of the AoA. 5. Alternate Director : act for "the original director" during his absence for more than three months from the state. 6. Professional Directors : possess professional qualifications and no pecuniary interest in the company. 7. Nominee Directors : Nominated by Banks and financial institutions. 8. Independent Directors : non executive director. No pecuniary relationship or transactions with the company, promoters, directors etc. Slide 70 70 Managing Director. As per section 269(1), a public company or a subsidiary of a public company, having a paid up share capital of Rs.5 crores or more shall have a managing or whole-time director or manager. As per section 269(1), a public company or a subsidiary of a public company, having a paid up share capital of Rs.5 crores or more shall have a managing or whole-time director or manager. The definition of the Managing Director in S.2(26), may be analysed as: The definition of the Managing Director in S.2(26), may be analysed as: (a) he must be a director of the company; (b) he must be entrusted with substantial powers of management. (c) the general powers to do administrative acts are not substantial powers (d) the powers may be entrusted by an agreement or by a resolution passed at a general meeting or a Board meeting or by MoA or AoA. (e) the powers must be exercised subject to the superintendence, control and directions of the Board; (f) The designation given is not the criteria to be deemed as a managing director. Appointment should not be for > 5 years at a time and not more than two companies. (not for Pvt Cos.) Appointment should not be for > 5 years at a time and not more than two companies. (not for Pvt Cos.) Company may have more than one managing director. Company may have more than one managing director. 70 Slide 71 71 Meetings. Broadly, meetings in a company are of the following types :- I Meetings of Members: Statutory Meeting (Sec 165) Annual General Meeting Annual General Meeting (Sec. 166 - 167) Extraordinary General Meeting( Sec. 169) D. Class Meeting: II. Meetings of the Board of Directors Meeting of the Board of Directors Meeting of the Board of Directors Meeting of a Committee of the Board III. Other Meetings Meeting of debenture holders Meeting of Creditors 71 Slide 72 72 Statutory Meeting. A public company to hold this meeting only once after formation. A public company to hold this meeting only once after formation. To be held within not less than one month or within not more than six months from the date of certificate of commencement of business. To be held within not less than one month or within not more than six months from the date of certificate of commencement of business. The following matters only can be discussed: - The following matters only can be discussed: - a. Floatation of shares / debentures by the company b. Modification to contracts mentioned in the prospectus The purpose is to enable members to know all important matters pertaining to the formation of the company and its initial life history. The purpose is to enable members to know all important matters pertaining to the formation of the company and its initial life history. A notice of at least 21 days before the meeting must be given unless consented by members, holding not less than 95 % of voting rights. A notice of at least 21 days before the meeting must be given unless consented by members, holding not less than 95 % of voting rights. The Board of Directors must send to every member a Statutory Report at least 21 days before the meeting. The Board of Directors must send to every member a Statutory Report at least 21 days before the meeting. 72 Slide 73 73 Annual General Meeting. Every type of company, once a year. Every type of company, once a year. Not more than 15 months must elapse between two AGMs. Not more than 15 months must elapse between two AGMs. First AGM to be held within 18 months from incorporation. It need not hold any AGM in the year of incorporation and the following year. First AGM to be held within 18 months from incorporation. It need not hold any AGM in the year of incorporation and the following year. A notice of at least 21 days must be given unless members, holding not less than 95% of voting rights, accord consent to a shorter notice. A notice of at least 21 days must be given unless members, holding not less than 95% of voting rights, accord consent to a shorter notice. The notice must be accompanied by a copy of the annual accounts, directors report on the position of the company for the year, and an explanatory statement of the special business. The notice must be accompanied by a copy of the annual accounts, directors report on the position of the company for the year, and an explanatory statement of the special business. Ordinary business: Matters that must be discussed at every AGM. Ordinary business: Matters that must be discussed at every AGM. a. Consideration of annual accounts, directors report and the auditors report b. Declaration of dividend c. Appointment of directors in the place of those retiring d. Appointment of and the fixing of the remuneration of the statutory auditors. Special Business: all other matters Special Business: all other matters Slide 74 74 Resolution Ordinary Resolution - S. 189(1) the notice required under this Act has been duly given, the votes cast in favour of the resolution exceed the votes against. Special Resolution - S. 189(2) the notice required under this Act has been duly given, and intention to move the Special Resolution has been duly specified, or intimated. the votes cast in favour of the Resolution are not less than three times the number of the votes, if any, cast against the Resolution. Required for Altering the MOA and AOA etc Resolution requiring Special Notice - S. 190 At least 14 days notice to be given t the Company and in turn, 7 days Notice to be given by the company to the members. Used for appointment of a director, remoal of director, against re appointment of retiring auditors etc. Slide 75 75 Proxy Any member entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote instead of himself Any member entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote instead of himself A proxy shall not have any right to speak at the meeting. A proxy shall not have any right to speak at the meeting. The instrument appointing a proxy shall be in writing and signed by the appointer or his attorney duly authorised in writing. The instrument appointing a proxy shall be in writing and signed by the appointer or his attorney duly authorised in writing. In case of proxy by body corporate, it should be under its seal or signed by an officer or an attorney duly authorised by it. In case of proxy by body corporate, it should be under its seal or signed by an officer or an attorney duly authorised by it. If three days notice in writing is given, a member can inspect the proxies lodged. If three days notice in writing is given, a member can inspect the proxies lodged. 75 Slide 76 76 Voting. by show of hands (S.177) unless a poll is demanded, a motion is decided by show of hands. unless a poll is demanded, a motion is decided by show of hands. One member has one vote; proxy votes are not counted One member has one vote; proxy votes are not counted chairman's declaration of result to be conclusive. (S.178). chairman's declaration of result to be conclusive. (S.178). by Poll (S.179) Voting right is in proportion to his share holding ; proxies counted. Voting right is in proportion to his share holding ; proxies counted. Passing of resolutions by Postal Ballot (S.192 A) Resolutions of a listed public Company, in cases relating to business notified by the Central Government, to be passed only by postal ballot. Resolutions of a listed public Company, in cases relating to business notified by the Central Government, to be passed only by postal ballot. It includes voting by shareholders by electronic mode also. It includes voting by shareholders by electronic mode also. The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001 gives the rules regarding Postal Ballot. The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001 gives the rules regarding Postal Ballot. Notice by Regd. Post AD or Certificate of Posting. Notice by Regd. Post AD or Certificate of Posting. Share holders to send their assent or dissent within 30 days. Share holders to send their assent or dissent within 30 days. 76 Slide 77 77 Quorum Quorum for meeting (1) Five members personally present in the case of public company, ( 2 for others) or as mentioned in the articles, whichever is higher. (2) Unless the articles of the company otherwise provide, If within half an hour from the appointed time, a quorum is not present, the meeting, if called upon the requisition of members, stand dissolved. If within half an hour from the appointed time, a quorum is not present, the meeting, if called upon the requisition of members, stand dissolved. In other cases, the meeting stand adjourned to the same day in the next week. The time and place shall be the same or as determined by Board. In other cases, the meeting stand adjourned to the same day in the next week. The time and place shall be the same or as determined by Board. If at the adjourned meeting a quorum is not present within half an hour from appointed time, the members present shall be a quorum. If at the adjourned meeting a quorum is not present within half an hour from appointed time, the members present shall be a quorum. 77 Slide 78 78 Extraordinary General Meeting. The EGM may be called by : 1. the Board on its own motion for transacting special or urgent matters. 2. the Board on requisition of members: holding not less than 1/10th of the paid up capital of the Co. holding not less than 1/10th of the paid up capital of the Co. having, not less than 1/10th of total voting powers of all members having, not less than 1/10th of total voting powers of all members Within 20 days from the date of deposits of a valid requisition, Board shall proceed to call a meeting on a day not later than 45 days. 3. Members themselves. If the company fails to proceed as above, the members may call t a meeting within 90 days from the date of deposit of requisition. If the company fails to proceed as above, the members may call t a meeting within 90 days from the date of deposit of requisition. 4 Company Law Board /Tribunal. Suo moto or on the application of any director or member. Suo moto or on the application of any director or member. 78 Slide 79 79 Meetings of the Board of Directors must be held at least once in every three months and at least four such meetings must be held in every year. must be held at least once in every three months and at least four such meetings must be held in every year. Notice must be given in writing to every director for the time being in India, and at his usual address in India to every other director. Notice must be given in writing to every director for the time being in India, and at his usual address in India to every other director. The quorum for board meetings is 2 or 1/3 of the total strength of the Board, whichever is greater. The quorum for board meetings is 2 or 1/3 of the total strength of the Board, whichever is greater. Interested directors, who has a personal interest in the matter being discussed are not to be considered for the purposes of quorum. Interested directors, who has a personal interest in the matter being discussed are not to be considered for the purposes of quorum. If a meeting of the Board could not be held for want of quorum, unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day. If a meeting of the Board could not be held for want of quorum, unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day. 79 Slide 80 80 Powers of the Board Subject to the provisions of this Act, the Board shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. (S.291) Subject to the provisions of this Act, the Board shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. (S.291) Powers to be exercised only by resolutions passed at Meetings: (S. 292) Powers to be exercised only by resolutions passed at Meetings: (S. 292) a. To make calls on shares holders in respect of money unpaid on their shares b. the power to issue debentures c. the power to borrow moneys otherwise than on debentures d. the power to invest the funds of the company e. the power to make loans Board may, by a resolution passed at a meeting delegate to any committee of directors, the managing director, or the manager of the company or any other principal officer of the company or in the case of a branch office of the company, a principal officer of the branch office, the powers specified in clauses (c), (d) and (e), to the extent specified in the resolution and subject to such conditions as may be imposed. Board may, by a resolution passed at a meeting delegate to any committee of directors, the managing director, or the manager of the company or any other principal officer of the company or in the case of a branch office of the company, a principal officer of the branch office, the powers specified in clauses (c), (d) and (e), to the extent specified in the resolution and subject to such conditions as may be imposed. Some exceptions are given in S.292 for a Banking company to protect acceptance of deposits and borrowing from other banking companies. Some exceptions are given in S.292 for a Banking company to protect acceptance of deposits and borrowing from other banking companies. 80 Slide 81 81 Restrictions on Powers of the Board The Board of directors of a public company, or a subsidiary of a public company, shall not, except with the in general meeting :- a. sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, b. remit, or give time for the re-payment of, any debt due by a director c. invest, otherwise than in trust securities, the amount of compensation received by the company in respect of compulsory acquisition of any such undertaking d. borrow moneys, to make the total borrowings (apart from temporary loans from the company's bankers in the ordinary course of business) in excess of the paid-up capital of the company and its free reserves. e. contribute, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed fifty thousand rupees, or five per cent of its average net profits during the three financial years immediately preceding, whichever is greater. Where the company has borrowed in excess of (d) above, the lender cannot recover it, unless he proves that he advanced the loan in good faith and without knowledge that the limit imposed by had been exceeded 81 Slide 82 82 Winding up of a company It is the stage, whereby the company takes its last breath. It is the stage, whereby the company takes its last breath. It is a process by which business of the company is wound up, and the company ceases to exist anymore. It is a process by which business of the company is wound up, and the company ceases to exist anymore. All the assets of the company are sold, and the proceedings collected are used to discharge the liabilities on a priority basis. All the assets of the company are sold, and the proceedings collected are used to discharge the liabilities on a priority basis. There are three ways, in which a company may be wound up: There are three ways, in which a company may be wound up: Winding up by the court. Winding up by the court. Voluntary winding up, Voluntary winding up, Members Voluntary winding up. Members Voluntary winding up. Creditors Voluntary winding up. Creditors Voluntary winding up. Winding up subject to supervision of the court Winding up subject to supervision of the court 82 82 Slide 83 83 Winding up by the Court A company may be wound up by the court in following situations: 1. If it has passed a special resolution to wound up its affairs. 2. If there is a default, in holding the statutory meeting or in delivering the statutory report to the Registrar. 3. If it fails to commence the business within one year from the date of incorporation, or suspends it's business for a whole year. 4. If the number of members, is reduced to less than seven or two in case of public company and private company respectively. 5. If the company is unable to pay its debts 6. If the court is of opinion that the company should be wound up. The court may form such an opinion, if it comes to the knowledge of court that, the company is mismanaged, or financially unsound, or carrying an illegal operations etc. 83 Slide 84 84 Who Can Apply for Winding Up Following persons can apply to the court, for petition for winding up: The company itself The company itself The creditor The creditor Any Contributory Any Contributory Registrar Registrar Any person authorised by central government, in case of oppression or mismanagement (S.397) Any person authorised by central government, in case of oppression or mismanagement (S.397) Court May Pass any of the following orders:(SEC 443) Dismiss it, with or without costs Dismiss it, with or without costs Make any interim order, as it thinks fit, or Make any interim order, as it thinks fit, or Pass an order for winding up of the company with or without costs. Pass an order for winding up of the company with or without costs. 84 84 Slide 85 85 Consequences of Winding Up order If the court is satisfied, that sufficient reasons exist in the petition for winding up, then it will pass a winding up order. 1. Court will send notice to an official liquidator, to take charge of the company. He shall carry out the process of winding up, ( S.444) 2. The winding up order, shall be applicable on all the creditors and contributories, whether they have filed the petition or not. 3. The official liquidator is appointed by central Govt ( sec. 448) 4. The company shall provide particulars, relating to assets, cash in hand, bank balance, liabilities, creditors etc, to the official liquidator. ( S.454) 5. The Central Govt. shall keep a cognizance over the functioning of official liquidator, and may require him to answer any inquiry. (463) 6. The the court will order for dissolution when the affairs of the company are completely wound up, or the official liquidator is unable to carry on the winding up procedure for want of funds. 85 Slide 86 86 Voluntary Winding Up A company may, voluntary wind up it's affairs, if it is unable to carry on it's business, or if it was formed only for a limited purpose, or if it is unable to meet it's financial obligation, and etc. A company may, voluntary wind up it's affairs, if it is unable to carry on it's business, or if it was formed only for a limited purpose, or if it is unable to meet it's financial obligation, and etc. Members Voluntary Winding Up Members Voluntary Winding Up By an ordinary resolution, where the purpose of formation is completed, or the time limit for which it was formed, has expired. By an ordinary resolution, where the purpose of formation is completed, or the time limit for which it was formed, has expired. By way of special resolution By way of special resolution Directors of the company shall call for a Board of Directors Meeting, and make a declaration of winding up, accompanied by an Affidavit, stating that; The company has no debts to pay, or will repay it's debts; if any, within 3 years from the commencement of winding up, as specified in declaration (488) Directors of the company shall call for a Board of Directors Meeting, and make a declaration of winding up, accompanied by an Affidavit, stating that; The company has no debts to pay, or will repay it's debts; if any, within 3 years from the commencement of winding up, as specified in declaration (488) 86 Slide 87 87 Members Win