Management and Control of Companies: A Comprehensive Guide, Study notes of Law

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KLE LAW ACADEMY BELAGAVI

(Constituent Colleges: KLE Society’s Law College, Bengaluru, Gurusiddappa Kotambri Law College, Hubballi, S.A. Manvi Law College, Gadag, KLE Society’s B.V. Bellad Law College, Belagavi, KLE Law College, Chikodi, and KLE College of Law, Kalamboli, Navi Mumbai)

STUDY MATERIAL

for

COMPANY LAW

Prepared as per the syllabus prescribed by Karnataka State Law University (KSLU), Hubballi

Compiled by

Tanmay Patil, Asst. Prof.

Vivek Narayan, Asst. Prof.

Reviewed by

Dr. Anita M.J., Asst. Prof.

K.L.E. Society's Law College, Bengaluru

This study material is intended to be used as supplementary material to the online classes and recorded video lectures. It is prepared for the sole purpose of guiding the students in preparation for their examinations. Utmost care has been taken to ensure the accuracy of the content. However, it is stressed that this material is not meant to be used as a replacement for textbooks or commentaries on the subject. This is a compilation and the authors take no credit for the originality of the content. Acknowledgement, wherever due, has been provided.

Objectives: SYLLABUS In view of the important developments that have taken place in the corporate sector, the course is designed to understand the formation, management and other activities of the companies. Important regulations pertaining to the issue of shares and the capital raising have come into force. This course aims to impart the students, the corporate management, control, possible abuses, the remedies, and government regulation of corporate business and winding up of companies. Course contents: UNIT – I Introduction and Concept Company – historical development – nature and characteristics of company – kinds of company – Corporate personality – limited liability – lifting of corporate veil – promoters – duties and liability of promoters UNIT – II Incorporation Procedure of incorporation – certificate of incorporation – MOA – AOA – Doctrine of indoor management – prospectus UNIT – III Management and Control of Companies Board of Directors – powers and functions: Distribution of powers between Board of Directors and general meeting Directors: appointment – qualification – position of directors – types of directors – powers and duties of directors – remuneration – removal Meetings: Meetings of Board and Committees – kinds of meetings – procedure relating to convening and proceedings at General and Other meetings – resolutions – Prevention of oppression and Mismanagement Corporate social responsibility UNIT – IV Financial structure of company Sources of capital: Shares – types – allotment – transfer of shares – rights and privileges of shareholders – dividends – declaration and payment of dividends, prohibition of buy back – private placement –

Debentures – floating charge – appointment of debenture trustees and their duties – kinds – remedies of debenture holders – redemption Acceptance of Deposit by Companies, charge on assets UNIT – V Reconstruction and amalgamation and winding up Reconstruction, rehabilitation and amalgamation: concept – jurisdiction and powers of courts and NCLT – vesting of rights and transfer of obligations – takeover and acquisition of minority interest Winding up: concept – modes of winding up – who can apply – procedure under different modes. Prescribed Books:

1. Taxman, Companies Act 2013.

2. Singh, Avtar, Company Law, (Lucknow: Eastern Book Company,2007) Reference Books:
3. Ramaiah,A, Guide to Companies Act , (Nagpur: Wadhwa, 1998)
4. Shah, S.M., Lectures on Company Law, ( Bombay: Tripathi, 1988)
5. Kuchal, S.C, Corporation Finance: Principles and problems, 10 th^ Edition, (Chaitanya Publishing House, 1973)
6. Y. D. Kulshreshta, Government regulation of financial management of private corporate sector in India, Indian Law Institute, (1986)
7. S. K. Roy, Corporate Image in India A Study of Elite Attitudes towards Public and Private Industry, (Shri Ram Centre for Industrial Relations and Human Resources ,1974)
8. Gower, L.C.B, Principles of Modern Company Law, (London: Sweet & Maxwell, 1997)
9. D. L. Majumdar, Towards a philosophy of Modern Corporation. (Asia Publishing House,

8. Pennington, Robert R., Pennington’s Company Law, (U.K: Oxford University Press, 2001) 9. Rajiv Jain, Guide on foreign collaboration – Policies & Procedures (Vidhi Publication, 2007). 10. C. Singhania, Foreign collaborations and Investments in India – Law and procedures, (Fred B. Rothman & Co, 1999) 11. Joyant M Thakur, Comparative Analysis of FEMA – FEMA Act, 1999 with FERA.
9. Sanjiv Agarwal, Bharat’s guide to Indian capital, 2nd Edition , ( New Delhi: Bharat Law House Pvt Ltd, 2001) Note: The course teachers have to keep track of the notification regarding enforcement of the Companies Act, 2013 and teach the provisions enforced. For the provisions not enforced, the parallel provisions from the Act of 1956 are to be taught.

Meaning of a Company The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread), and it originally referred to an association of persons who took their meals together. In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters. Nowadays, business matters have become more complicated and cannot be discussed at festive gatherings. Therefore, the company form of organization has assumed greater importance. It denotes a joint-stock enterprise in which the capital is contributed by several people. Thus, in popular parlance, a company denotes an association of likeminded persons formed for the purpose of carrying on some business or undertaking. A company is a corporate body and a legal person having status and personality distinct and separate from the members constituting it. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality. The word ‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly, ‘corporation’ is a legal person created by a process other than natural birth. It is, for this reason, sometimes called an artificial legal person. As a legal person, a corporation can enjoy many of the rights and incurring many of the liabilities of a natural person. An incorporated company owes its existence either to a special Act of Parliament or to company law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought into existence by special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance Industries Limited have been formed under the Company law i.e. Companies Act, 1956 which is being replaced by the Companies Act, 2013. Definition of Company In the legal sense, a company is an association of both natural and artificial persons (and is incorporated under the existing law of a country). In terms of the Companies Act, 2013 (Act No. 18 of 2013) a “company” means a company incorporated under this Act or under any previous company law [Section 2( 20 )].

In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving beyond the lives of its members. However, an association formed not for profit also acquires a corporate character and falls within the meaning of a company by reason of a license issued under Section 8(1) of the Act. A company is not merely a legal institution. It is rather a legal device for the attainment of the social and economic end. It is, therefore, a combined political, social, economic and legal institution. Thus, the term company has been described in many ways. “It is a means of cooperation and organization in the conduct of an enterprise”. It is “an intricate, centralized, economic and administrative structure run by professional managers who hire capital from the investor(s)”. Lord Justice Lindley has defined a company as “an association of many persons who contribute money or money’s worth to common stock and employ it in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contributed in it or form it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his “share”. The shares are always transferable although the right to transfer them may be restricted.” From the foregoing discussion, a company has its own corporate and legal personality distinct which is separate from its members. A brief description of the various attributes is given here to explain the nature and characteristics of the company as a corporate body. Historical Development As we all know that India has drawn a lot of legislation from England. Similarly, in the case of Companies law, India enacted company law based upon the company law enacted in England. The three phases which influenced the Company legislations may be divided as i) Colonization era; ii) Period after World War II & iii) the Opening up of Indian markets in the year 1990.

Company Law immediately after the termination of the last war. Two company lawyers— one from Bombay and the other from Madras— were successively appointed to advise Government on the broad lines on which, the Indian Companies Act, 1913 , should be revised and recast in the light of the experience gained during the war years. Their reports were considered by Government and a memorandum embodying its tentative views was circulated towards the end of 1949 for eliciting an opinion. On 28th October 1950, the Government of India appointed a Committee of twelve members representing various interests under the chairmanship of Shri H. C. Bhabha, to go into the entire question of the revision of the Companies Act, with particular significance to the development of trade and industry of India. This Committee, popularly known as the Bhabha Committee, submitted its report in March, 1952, recommending comprehensive changes in the Companies Act of 1913. The report of the Bhabha Committee was again the subject of discussion and comment by Chambers of Commerce, Trade associations, professional bodies, leading industrialists, shareholders and representatives of labour. The Bill, which eventually emerged as the Companies Act, 1956, was introduced in Parliament on 2nd September 1953. IT was a comprehensive and consolidating as well as amending piece of legislation. The Bill was referred to a Joint Committee of both Houses of Parliament in May 1954. The Joint Committee submitted its report in May 1955, making some material amendments to the Bill. The Bill, as amended by the Joint Committee, underwent some further amendments In Parliament and was passed in November 1955. The new Companies Act (I of 1956) came into force from 1st April 1956. Major Changes brought forth by the Companies Act 1956  Promotion and growth of Companies.  Capital structure of the Companies.  Company meetings and procedures.  Company accounts and its presentation & powers and duties of the auditors of the company.  Inspection and investigations of the affairs of the Company.  The constitution of the Board of Directors, Powers and functions of directors, Managing Directors and Managers; and  (^) Administration of the Company Law.

The Amendments in the Companies Act, 1956 As any other legislation various amendments were made to the Companies Act 1956 as mentioned below: Timeline of Amendments 1960 1962 1963 1964 1965 1966 1967 1969 1974 1977 1985 1988 1991 Opening of the market gates to the Globe- The Era of liberalisation, privatization and globalisation saw the anachronistic Companies legislation made in time of closed market and hence inadequate to handle the global entry. This non-conducive legislation would have obstructed the Indian Corporate Sector. In pursuance to this necessity the Companies Bill, 1993 was formed but was later withdrawn. The Depositories Act, 1996 was introduced in India and later a working Group was constituted to rewrite the Companies Act, 1956. In pursuance to above made effort the Companies Bill, 1997 was introduced in Rajya Sabha on August 14, 1997 in order to replace the prior legislation. The President of India promulgated the Companies (Amendment) Ordinance, 1998 on October 31,

1998. But this promulgated the Companies (Amendment) Ordinance, 1998 was soon replaced by the Companies (Amendment) Act, 1999. The objectives of the Companies (Amendment) Act, 1999:  To surge the capital market by boosting the morale of the National business houses.  Fostering the FITs and Foreign Direct Investments in the country. The changes brought by the Companies (Amendment) Act, 1999 are:  A facility was introduced to allow the Corporate Sector to buy-back company’s own share.  Provisions relating to investments and loans were liberalised and rationalised.  Requirement of prior approval of the Central Government on investment decisions was done away with and companies were allowed to issue “sweat equity” in lieu of the intellectual property.  The compliance of the Indian Accounting Standard was made mandatory and the National Committee on Accounting Standard was also incorporated.

The Companies (Amendment) Act, 2015: It received the presidential assent on May 2015 and became operate on 29th May 2015. It is designed to address the issues of the stakeholders such as Chartered Accountants and other professionals. Key Amendments brought in by the Companies (Amendment) Act, 2015 may be explained as follows: No minimum Paid-up share Capital No minimum paid-up share Capital requirements will now apply for incorporating private as well as Public Companies in India. Relaxation in relation to related party transaction In the case of related party transactions which requires stake-holders approval relaxation has been given wherein earlier required special resolution has been replaced by the ordinary resolution. Inspection of the resolution filed with the Registrar This Act has limited public access of such resolutions relating mainly to the strategic business matters. Such documents will no longer be available for the public to review or permitted to take copy of. Common Seal Optional Under the Act of 2013 it was required to affix common seal on certain documents but, now after the Act of 2015, the use of the common Seal has been made optional although the common seal is one of the integral characteristics of a Company. Violations of Acceptance of Deposits Companies Act of 2013 provisions in relation to the Acceptance/ renewal/ repayment of deposits. However no specific penalty prescribed for the new compliance with the relevant provision i.e. Section 13 and Section 76. A new Section 76A has been introduced for these non-compliances. The defaulting company will be liable for a minimum fine of INR 1 crore and maximum amount of INR 100 crore in addition to the amount of deposit or part thereof along with interest.

Dividend The Companies Act, 2015 has introduced a proviso which states that a company must set-off the losses and depreciation carried over from past years against the profits of the company before declaring dividend for a financial year. The Companies (Amendment) Act, 2017 The Companies (Amendment) Bill, 2016 was intended to be passed by the legislature, but after referring it to the Committee this Bill went through a lot of corrections and metamorphosed into The Companies (Amendment) Bill, 2017 which was then passed as the Companies (Amendment) Act, 2017. The salient features of the amendments brought by this Act are:  Synergy with SEBI and RBI Rules: For the first time, several provisions have been amended to align the Act with various rules and regulations of the SEBI (Security Exchange Board of India) and the RBI (Reserve Bank of India). For example, Sections 194 and 195 of the Act, which was dealing with the offence of insider trading and forward dealing, have now been omitted since the SEBI regulations were succinct to cover all.  The instances of such frauds. Further disclosures to be made in the prospectus have also been aligned with the SEBI’s power to regulate IPOs (Initial Public Offering). The definition of ‘debenture’ has been amended to permit RBI to disqualify certain instruments as debentures.  Proportionality of penalties: The quantum of penalty will now be levied taking into consideration the size of the company, nature of business, injury to public interest, nature and gravity of default, repetition of default, etc. which is one of the most appreciated amendments. Two new provisions regarding the determining of the level of punishment have been freshly introduced and lesser penalties for one person companies and small companies were inserted. Provisions for small companies and penal vigour has been reduced.  Placement process made easier in Private Sector: The placement process is rationalised by doing away separate offer letter details to be kept in the records of the Company and hence reducing the number of filings to Registrar. The company is not allowed to use money from private placement unless allotment made and the return of the same filed with the

The most striking characteristics of a company are: (i) Corporate personality A company incorporated under the Act is vested with a corporate personality so it redundant bears its own name, acts under a name, has a seal of its own and its assets are separate and distinct from those of its members. It is a different ‘person’ from the members who compose it. Therefore, it is capable of owning property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts and suing or being sued in the same manner as an individual. Its members are its owners however they can be its creditors simultaneously. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. A Company is an artificial person created by law. It is not a human being, but it acts through human beings. It is considered as a legal person which can enter contracts, possess properties in its own name, sue and can be sued by others etc. It is called an artificial person since it is invisible, intangible, existing only in the contemplation of law. It can enjoy rights and being subject to duties. (ii) Limited Liability The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organization. The company, being a separate person, is the owner of its assets and bound by its liabilities. The liability of a member as a shareholder extends to the contribution to the capital of the company up to the nominal value of the shares held and not paid by him. Members, even as a whole, are neither the owners of the company’s undertakings nor liable for its debts. There are various exceptions to the principle of limited liability. In other words, a shareholder is liable to pay the balance, if any, due on the shares held by him, when called upon to pay and nothing more, even if the liabilities of the company far exceed its assets. This means that the liability of a member is limited. (iii) Perpetual Succession An incorporated company never dies, except when it is wound up as per law. A company, being a separate legal person is unaffected by death or departure of any member and it remains the same

entity, despite the total change in the membership. A company’s life is determined by the terms of its Memorandum of Association. It may be perpetual, or it may continue for a specified time to carry on a task or object as laid down in the Memorandum of Association. Perpetual succession, therefore, means that the membership of a company may keep changing from time to time, but that shall not affect its continuity. The membership of an incorporated company may change either because one shareholder has sold/transferred his shares to another or his shares devolve on his legal representatives on his death or he ceases to be a member under some other provisions of the Companies Act. Thus, perpetual succession denotes the ability of a company to maintain its existence by the succession of new individuals who step into the shoes of those who cease to be members of the company. Professor L.C.B. Gower rightly mentions, “Members may come and go, but the company can go on forever. During the war, all the members of one private company, while in general meeting, were killed by a bomb, but the company survived — not even a hydrogen bomb could have destroyed it”. (iv) Separate Property A company is a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name. The company is the real person in which all its property is vested, and by which it is controlled, managed and disposed of. Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43 held that “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up”. A member does not even have an insurable interest in the property of the company. (v) Transferability of Shares The capital of a company is divided into parts, called shares. The shares are said to be a movable property and, subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a company. When the joint-stock companies were established, the object was that their shares should be capable of being easily transferred, [In Re. Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588].

(vii) Capacity to sue or be sued A company is a body corporate, can sue and be sued in its own name. To sue means to institute legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against the company are to be instituted in its name. Similarly, the company may bring an action against anyone in its own name. A company’s right to sue arises when some loss is caused to the company, i.e. to the property or the personality of the company. Hence, the company is entitled to sue for damages in libel or slander as the case may be [ Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj)]. A company, as a person distinct from its members, may even sue one of its own members. A company has a right to seek damages where a defamatory material published about it, affects its business. Where video cassettes were prepared by the workmen of a company showing, their struggle against the company’s management, it was held to be not actionable unless shown that the contents of the cassette would be defamatory. The court did not restrain the exhibition of the cassette. [ TVS Employees Federation v****. TVS and Sons Ltd., (1996) 87 Com Cases 37 ]. The company is not liable for contempt committed by its officer. [ Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129 Com Cases 192 Mad ]. (viii) Contractual Rights A company, being a legal entity different from its members, can enter into contracts for the conduct of the business in its own name. A shareholder cannot enforce a contract made by his company; he is neither a party to the contract nor be entitled to the benefit derived from of it, as a company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on contracts made by his company. The distinction between a company and its members is not confined to the rules of privity but permeates the whole law of contract. Thus, if a director fails to disclose a breach of his duties towards his company, and in consequence, a shareholder is induced to enter into a contract with the director on behalf of the

company which he would not have entered into had there been disclosure, the shareholder cannot rescind the contract. Similarly, a member of a company cannot sue in respect of torts committed against the company, nor can he be sued for torts committed by the company. [ British Thomson-Houston Company v. Sterling Accessories Ltd ., (1924) 2 Ch. 33]. Therefore, the company as a legal person can take action to enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are distinct from those of its constituent members. (ix) Limitation of Action A company cannot go beyond the power stated in its Memorandum of Association. The Memorandum of Association of the company regulates the powers and fixes the objects of the company and provides the edifice upon which the entire structure of the company rests. The actions and objects of the company are limited within the scope of its Memorandum of Association. In order to enable it to carry out its actions without such restrictions and limitations in most cases, sufficient powers are granted in the Memorandum of Association. But once the powers have been laid down, it cannot go beyond such powers unless the Memorandum of Association, itself altered prior to doing so. (x) Separate Management As already noted, the members may derive profits without being burdened with the management of the company. They do not have effective and intimate control over its working, and they elect their representatives as Directors on the Board of Directors of the company to conduct corporate functions through managerial personnel employed by them. In other words, the company is administered and managed by its managerial personnel. (xi) Voluntary Association for Profit A company is a voluntary association for profit. It is formed for the accomplishment of some stated goals and whatsoever profit is gained is divided among its shareholders or saved for the future expansion of the company. Only a Section 8 company can be formed with no profit motive.