Types of Companies, Lecture notes of Law

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Edited by:

Gopika Juneja

/DCOM

COMPANY LAW

Edited By Gopika Juneja

SYLLABUS

Company Law

Objectives: The objective of the course is to understand and evaluate the legal framework of Corporate Environment in India and to gain elementary knowledge of Indian Corporate Law.

Sr. No. Topics

1. Definition of company, characteristics of company, lifting the corporate veil, company distinguished

from partnership, kinds of companies, incorporation of company, promoter and their legal position.

2. Memorandum of Association: contents, alteration, Doctrine of ultra vires.

3. Articles of Association: contents, alteration, Doctrine of Indoor Management, Constructive notice of

memorandum and articles, Articles and memorandum- their relation and distinction, legal effect of

Memorandum and Articles.

4. Prospectus: Definition, contents, shelf prospectus, information memorandum, red herring

prospectus, abridged prospectus, Misstatements in prospectus and their consequences, statement in

lieu of prospectus, underwriting commission and brokerage,

5. Membership in a company: Members and shareholders, modes of becoming member, cessation of

membership, rights and liabilities of members.

6. Shares and share capital: kinds of share capital, alteration and reduction of capital, reorganization of

capital, voting rights.

7. Corporate Governance: Directors-Qualification; appointment and remuneration; disclosure; service

contracts; removal; retirement and disqualification; powers and fiduciary duties; Role and duties of

directors in relation to good corporate governance

8. Company meetings and proceedings: general meetings of shareholders, requisites of a valid

meeting, proxies, voting and poll, resolutions.

9. Borrowing power, debentures and charges: ultra vires borrowings, Prevention of oppression and

mismanagement: Principal of majority rule, remedial actions for prevention of oppression and

mismanagement.

10. Winding up: Meaning, Modes, and Consequences of winding up.

CONTENT

Unit 1: Nature of the Companies Act, 1956

Gopika Juneja, Lovely Professional University

1

Unit 2: Meaning and Nature of a Company

Gopika Juneja, Lovely Professional University

13

Unit 3: Kinds of Companies

Gopika Juneja, Lovely Professional University

28

Unit 4: Formation of Company

Gopika Juneja, Lovely Professional University

43

Unit 5: Memorandum of Association

Gopika Juneja, Lovely Professional University

54

Unit 6: Articles of Association

Sukhpreet Kaur, Lovely Professional University

74

Unit 7: Prospectus

Sukhpreet Kaur, Lovely Professional University

87

Unit 8; Membership in a Company

Sukhpreet Kaur, Lovely Professional University

102

Unit 9: Share and Share Capital

Sukhpreet Kaur, Lovely Professional University

116

Unit 10: Management of Company

Sukhpreet Kaur, Lovely Professional University

143

Unit 11: Corporate Governance

Manpreet Kaur, Lovely Professional University

175

Unit 12: Company Meetings and Proceedings

Manpreet Kaur, Lovely Professional University

187

Unit 13: Borrowing and Debentures

Manpreet Kaur, Lovely Professional University

204

Unit 14: Winding Up of Companies

Manpreet Kaur, Lovely Professional University

216

Company Law

Notes 1.1 Extent, Application and Scheme of the Act

1.1.1 Extent of the Act The Act extends to the whole of India except:

1. As regards the State of Nagaland, it applies, subject to such modifications, if any, as the Central Government may, by notification in the Official Gazette, specify [s.1 (3)];
2. As regards Goa, Daman and Diu, some of the provisions of the Act shall not apply or shall apply only with such exceptions and modifications or adaptations to any existing company registered under the Act and for such a period or periods as may be specified by notification by the Central Government in the Official Gazette (s.620B); and
3. As regards Jammu and Kashmir, some of the provisions of the Act as the Central Government may, by notification in the Official Gazette, direct, shall not apply or shall apply only with such exceptions and modifications or adaptations to any existing company or any company registered under the Act as may be specified, after the commencement of the Central Laws (Extension to Jammu and Kashmir) Act, 1968 (i.e., 15 August, 1968) (s.620C). 1.1.2 Application of the Act The Act applies to the following companies:
4. Companies formed and registered under the Companies Act, 1956.
5. Companies formed and registered under the previous company laws, i.e., the existing companies (s.561).
6. Companies registered but not formed under any previous company laws to the extent and in the manner declared in Part IX (dealing with ‘Companies authorized to register under the Act’) of the Act (s.562).
7. Unlimited companies registered as limited companies in pursuance of any previous company laws (s.563).
8. Unregistered companies for the purpose of winding up under Part X (dealing with ‘Winding up of Unregistered Companies,) of the Act (Ss.582, 583 and 589).
9. Foreign Companies (s.592 to 602).
10. Insurance companies, banking companies, electricity companies and any other company governed by any special Act for the time being in force, except as far as the provisions of the Companies Act, 1956 are inconsistent with the provisions of the Insurance Act, 1938; Banking Regulation Act, 1949; Indian Electricity Act, 1910; or the Electricity Supply Act, 1948; or any Special Act respectively. The provisions of the Companies Act, 1956 apply to these special classes of companies to the extent that such provisions are not inconsistent with those of the Special Acts governing them [clauses (a) to (d) of s.616].
11. Such corporate body incorporated by any Act for the time being in force as the Central Government may, by notification in the Official Gazette, specify on its behalf subject to such exceptions, modifications or adaptations as may be specified therein [clause (e) of s.616].

Unit 1: Nature of the Companies Act, 1956

9. Government Companies (s.617).^ Notes
10. Nidhis or Mutual Benefit Societies declared as such by the Central Government by notification in the Official Gazette [s.620A(2)].
11. Producer Companies (s.581A to 581ZT).

1.1.3 Non-applicability of the Act

The Companies Act, 1956 is not applicable to certain associations. These are:

1. Companies established under Special Acts of Parliament, such as Life Insurance Corporation of India, Indian Airlines Corporation, (s.616).
2. Partnership firms which are governed by the Indian Partnership Act, 1932.
3. Co-operative Societies which are governed by the Co-operative Societies Act, 1912.
4. Trusts which are governed by the Indian Trusts Act, 1882.
5. Societies registered under the Societies Registration Act, 1860.

1.1.4 Scheme of the Act

The scheme of the Act may be considered broadly under five heads, corresponding to the different parts it has. They are:

1. Formation of Company (Parts II to IV): The provisions of the Act relating to the formation of a company include: (a) Incorporation of a company. (b) Memorandum and articles of association. (c) Prospectus. (d) Issue of shares and debentures. (e) Certificate to commence business.
2. Management and Administration of Company (Part VI): Under this head, the following provisions are included: (a) Registered office and name of the company; (b) Members and debenture holders; (c) Meetings and proceedings; (d) Managerial personnel; (e) Managerial remuneration; (f) Accounts; (g) Audit; (h) Investigation; (i) Directors; (j) Managing directors; (k) Managers; (l) Arbitration, compromises, arrangements and reconstructions; (m) Prevention of mismanagement and oppression.
3. Winding up of Company (Part VII): The Act contains the following provisions as regards to the winding up of companies, viz., (a) Modes of winding up; (b) Winding up by the court; (c) Voluntary Winding up; (d) Winding up subject to the supervision of the court.
4. Miscellaneous Provisions (Parts V and VIII to XIII): These include: (a) Registration of charges; (b) Application of the Act to companies formed under previous company laws; (c) Winding up of unregistered companies; (d) Foreign companies; (e) Registration offices and officers and fees; (f) General. The Act is then followed by 15 schedules which, deal with various matters provided in the Act.
5. Producer Companies (Part IX A).

Self Assessment

Fill in the blanks:

1. .................................. is codified in the Companies Act, 1956.
2. Companies formed and registered under the ......................................

Unit 1: Nature of the Companies Act, 1956

3. The CLB shall consist of such number of members, not exceeding nine, as the Central^ Notes Government deems fit, to be appointed by that Government by notification in the Official Gazette.
4. The members of the CLB shall possess such qualifications and experience as may be prescribed.
5. One of the members of the Board shall be appointed by the Central Government to be the Chairman of the CLB.
6. No act done by the CLB shall be called in question on the ground only of any defect in the constitution of, or the existence of any vacancy in the CLB.
7. The CLB may, by order in writing, form one or more Benches from among its members and authorise each such Bench to exercise and discharge such of the Board’s powers and functions as may be specified in the order. Every order made or act done by a Bench in exercise of such powers or discharge of such functions shall be deemed to be the order or act, as the case may be, of the Board.
8. The CLB shall in the exercise of its powers and the discharge of its functions under the Act or any other law be guided by the principles of natural justice and shall act at its discretion.
9. The CLB shall have power to regulate its own procedure.

Appeals against the Orders of the CLB

Section 10 F provides that any person aggrieved by any decision or order of CLB may file an appeal to the high court within 60 days from the date of communication of the decision or order of CLB to him on any question of law arising out of the order. This period of 60 days may be extended by a further period not exceeding 60 days if the high court is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period of 60 days.

1.2.3 National Advisory Committee on Accounting Standards

Section 210 A provides that the Central Government may, by notification in the Official Gazette, constitute National Advisory Committee on Accounting Standards, to advise the Central Government on the formation and laying down of accounting policies and accounting standards, for adoption by companies or class of companies under the Companies Act, 1956.

1.2.4 The Securities and Exchange Board of India

Section 2(45B) provides that the Central Government may, by notification in the Official Gazette, establish the Securities and Exchange Board of India (in short - SEBI) for the protection of investors in securities.

Powers of SEBI

Section 55A provides that the provisions contained in sections 55 to 58, 59 to 84, 108, 109, 110, 112, 113, 116 to 122, 206, 206 A and 207 shall be administered by SEBI, so far as they relate to issue and transfer of securities and non-payment of dividend in case of: (i) Listed public companies; (ii) Those public companies which intend to get their securities listed on any recognised stock exchange in India.

Company Law

Notes (^) Section 209A provides that the books of account and other books and papers of every company shall be open to inspection during business hours, inter alia, by the officers of SEBI as may be authorised by it. However, an inspection may be made without giving any previous notice to the company or any officer thereof. Further, an inspection can be made in respect of matters covered under sections referred to in s.55A. Further, under s.621, a court may take cognizance of offence relating to the issue and transfer of securities and non-payment of a dividend, on a complaint in writing, by a person authorised by SEBI.

Task (^) Discuss the application of companies act in respect of J&K state. 1.2.5 Official Liquidator For the purpose of winding up of companies by the court, there shall be an official liquidator, who may be: appointed from a panel of professional firms of chartered accountants, advocates, company secretaries, cost and works accountants which the Central Government constitutes for the court. a body corporate, consisting of such professionals as may be approved by the Central Government. a whole time or a part time officer, appointed by the Central Government. 1.2.6 Advisory Committee Section 410 provides that for the purpose of advising the Central Government and the Company Law Board on the matters arising out of the administration of the Companies Act, 1956, as may be referred to it by the Central Government or the Company Law Board, the Central Government may constitute this Committee consisting of not more than 5 persons with suitable qualifications. The Central Government is, however, not bound to constitute an Advisory Committee. Moreover, even if an Advisory Committee is constituted neither the Central Government nor the Company Law Board is bound to accept its advice. 1.2.7 Courts According to section 2, the ‘Court’ means: (a) With respect to any matter relating to a company (other than any offence against the Act) the Court having jurisdiction under this Act with respect to that matter relating to that company, as provided in s.10; (b) With respect to any offence against this Act, the Court of a Magistrate of the First Class or, as the case may be, a Presidency Magistrate, having jurisdiction to try such offence.

Company Law

Notes 1.3 Some Important Definitions

Some important definitions related to companies act are: Officer : Section 2(30) provides that the term ‘Officer’ includes any director, manager or secretary or any person in accordance with whose directions or instructions the board of directors or any one or more of the directors is or are accustomed to act. Relative : Section 2(41) provides that the term ‘relative’ means, with reference to any person, any one who is related to such person in any of the ways specified in s.6, and no others. Section 6 provides that a person shall be deemed to be a relative of another, if, and only if: (i) They are members of a Hindu undivided family; or (ii) They are husband and wife; or (iii) The one is related to the other in the manner indicated in Schedule 1A. Schedule 1A provides the following list of relatives: (i) Father, Father’s father, Father’s mother. (ii) Mother (including step-mother), Mother’s mother, Mother’s father. (iii) Son (Including step son), Son’s wife, Son’s son, Son’s son’s wife, Son’s daughter, Son’s daughter’s husband. (iv) Daughter (including step-daughter), Daughter’s husband, Daughter’s son, Daughter’s son’s wife, Daughter’s daughter, Daughter’s daughter’s husband. (v) Brother (including step brother), Brother’s wife. Public Financial Institutions (S.4 A): The following financial institutions shall be regarded, for the purposes of the Act, as public financial institutions, namely: (i) The Industrial Credit and Investment Corporation of India Limited (ICICI), (ii) The Industrial Finance Corporation of India (IFCI), (iii) The Industrial Development Bank of India (IDBI), (iv) The Life Insurance Corporation of India (LIC), (v) The Unit Trust of India (UTI). Also, s.4A empowers the Central Government to specify other institutions, as it may think fit, to be a public financial institution by issuing a notification in the Official Gazette. However, no institution shall be so specified unless (i) it has been established or constituted by or under any Central Act; or (ii) not less than 51 per cent of the paid up share capital of such an institution is held or controlled by the Central Government. The Central Government has specified many other institutions to be public financial institutions. Some of these are: (i) The Infrastructure Development Finance Company Ltd., (ii) National Housing Board, (iii) Rural Electrification Corporation Ltd., (iv) Indian Railways Finance Corporation Ltd., (v) National Insurance Company Ltd., (vi) Power Finance Corporation Ltd., (vii) Small Industries Development Bank of India, etc. Section 4A is relevant in the context of Sections 94A and 224A.

Task (^) “No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Company Law Board is empowered to determine”. Discuss

Unit 1: Nature of the Companies Act, 1956

Officer Who is in Default: Section 5 provides that for the purpose of any provision in this^ Notes Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression ‘officer who is in default’ means all the following officers of the company, namely: (i) The managing director or managing directors; (ii) The whole time director or directors; (iii) The manager; (iv) The secretary; (v) Any person in accordance with whose directions or instructions the board of directors of the company is accustomed to act; (vi) Any person charged by the board of directors with the responsibility of complying with any provision, provided the person so charged has given his consent in this behalf to the board of directors; (vii) Where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the board of directors in this behalf or where no director is so specified, all the directors. (viii) Where the board of directors exercises any power under clause (f) or clause (g), it shall, within 30 days of the exercise of such powers, file with the Registrar a return in the prescribed form.

Self Assessment

8. The provisions of the Act relating to the formation of a company are discussed in parts ................................. of the act. (i) II to IV (ii) III to IV (iii) Parts I to II (iv) Parts IV to V
9. Property of the company belongs to .................................... (i) Company (ii) Shareholders (iii) Members (iv) Promoters
10. In the case of company, audit is ...................................... (i) Compulsory (ii) Optional (iii) Situational (iv) None of the above
11. The companies which are formed under special Act are called as .................................. (i) Chartered Companies (ii) Statutory Companies (iii) Registered Companies (iv) None of these

Unit 1: Nature of the Companies Act, 1956

To ensure better management of companies, the Central Government accord approval for^ Notes the appointment and reappointment of persons as Managing Directors, Whole-time Directors or Managers of a public limited or private limited company which is a subsidiary of a public limited company, under Section 269 read with Section 388 of the Companies Act. In 1988, the Government dispensed with the requirement of the approval for appointment of managerial personnel in respect of cases which fulfill the conditions as prescribed in Schedule XIII of the Act. This Schedule can be modified to suit the changing needs of the time and circumstances in keeping with this policy of regulation by exception.

1.5 Keywords

CLB : Section 10 E enables the Central Government to constitute the Board of Company Law Administration (CLB). Officer : Section 2(30) provides that the term ‘Officer’ includes any director, manager or secretary or any person in accordance with whose directions or instructions the board of directors or any one or more of the directors is or are accustomed to act. SEBI : Section 2(45B) provides that the Central Government may, by notification in the Official Gazette, establish the Securities and Exchange Board of India (in short - SEBI) for the protection of investors in securities. The Central Government : The Central Government is the supreme authority responsible for the administration of company law.

1.6 Review Questions

1. What is the extent of the Companies Act, 1956?
2. Enumerate the companies to which the Companies Act, 1956 is applicable.
3. Enumerate the associations to which the Companies Act, 1956 is not applicable.
4. Describe the scheme of the Companies Act, 1956.
5. Outline the set up of Company Law Administration.
6. What are the different authorities by which the administration of the Companies Act, 1956 is carried out?
7. Write an explanatory note on Company Law Board.
8. Discuss about “Societies registered under the Societies Registration Act, 1860.”
9. What do you mean by Official Liquidator.
10. Write short notes on: (i) Public Financial Institutions (ii) SEBI (iii) Advisory Committee (iv) Meaning of (a) officer, (b) relative, (c) officer who is in default.

Company Law

Notes (^) Answers: Self Assessment

1. Company law 2. Companies Act, 1956
2. Part IX
3. Partnership firms which are governed by the Indian Partnership Act, 1932.
4. Company law 6. (c)
5. (a) 8. Parts II to IV
6. Company 10. Optional
7. Statutory Companies 12. True
8. False 14. True
9. False 16. True

1.7 Further Readings

Books (^) Aggarwal, Rohini (2003), “Student’s Guide to Mercantile and Commercial Laws,” Taxmann’s, New Delhi. Avtar Singh, Company Law , Eastern Publishers. Begrail, Ashok K, Company Law , Vikas Publishing House, Delhi. Kapoor, N.D, Company Law , Sultan Chand & Sons, New Delhi. M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Business Law , Tata Mc. Graw Hill Pvt. Ltd, Delhi. S. S. Gulshan, Business Law , Excel Books, New Delhi, 2006.

Online links (^) http://www.indialawinfo.com/bareacts/soga.html www.en.wikipedia.org www.webopedia.com

Company Law

Notes 2.1 Definition of a Company

The Companies Act, 1956 defines the word ‘company’ as a company formed and registered under the Act or an existing company formed and registered under any of the previous company laws (s.3). This definition does not bring out the meaning and nature of the company into a clear perspective. Also s.12 permits the formation of different types of companies. These may be (i) companies limited by shares, (ii) companies limited by guarantee and (iii) unlimited companies. The vast majority of companies in India are with limited liability by shares. Therefore, it is advisable to define the term ‘company’ keeping in mind this type of company. However, a brief description of other types of companies will be given later in unit 3. Lord Lindley has described the company as “an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business; and who share the profit and loss (as the case may be) arising therefrom”. The common stock so contributed is denoted in money and is ‘the capital’ of the company. The persons who contribute to it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his ‘share’. The member may sell his share in the company, thus, withdrawing himself and making someone else a member to whom he transfers shares. Thus, shares in a company are transferable. As a natural consequence of transferability of shares, the company has what is commonly known as perpetual succession. With the withdrawal or death of a member of a company, the latter does not come to an end. The life of the company is independent of the lives of the members of the company. Members may come and members may go, the company continues until it is dissolved. Gower, L.C.B. in his book entitled The Principles of Modern Company Law gives an interesting example. He says, ‘During the war all the members of one private company, while in general meeting, were killed by a hydrogen bomb. But the company survived, not even a hydrogen bomb could have destroyed it’. Section 34(2) gives the effect of registration of a company by identifying the features it acquires as a consequence thereof. The section provides that: “From the date of incorporation mentioned in the certificate of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in the Act. Self Assessment Fill in the blanks:

1. An existing company formed and registered under any of the previous company laws ........................................
2. The persons who contribute to it, or to whom it belongs, are ...................................
3. Members may come and members may go, the company continues until it is ....................................
4. ................................. gives the effect of registration of a company by identifying the features it acquires as a consequence thereof.

Unit 2: Meaning and Nature of a Company

2.2 Characteristics of Company^ Notes

On the basis of the above observations, we may spell out the following characteristic features of a company.

2.2.1 Incorporated Association

A company must be incorporated or registered under the Companies Act. Minimum numbers required for the purpose is 7, in case of a public company and 2, in case of a private company (s.12). It may also be mentioned that as per s.11, an association of more than 10 persons, in case of banking business and 20 in case of any other business, if not registered as a company under the Companies Act, or under any other law for the time being in force, becomes an illegal association.

2.2.2 Artificial Person

A company is created with the sanction of law and is not itself a human being, it is therefore, called artificial; and since it is clothed with certain rights and obligations, it is called a person. A company is accordingly, an artificial person.

2.2.3 Separate Legal Entity

Unlike partnership, company is distinct from the persons who constitute it. Section 34 (2) says that on registration, the association of persons becomes a body corporate by the name contained in the memorandum. Lord Macnaghten in the famous case of Salomon v. Salomon & Co. Ltd. (1897) AC 22 observed that: A company is at law a different person altogether from the subscribers…..; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the profits, the company is at law not the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. The facts of the famous Salomon’s case were as follows: Salomon carried on business as a leather merchant. He sold his business for a sum of £30,000 to a company formed by him along with his wife, a daughter and four sons. The purchase consideration was satisfied by allotment of 20,000 shares of £1 each and issue of debentures worth £10,000 secured by floating charge on the company’s assets in favour of Mr Salomon. All the other shareholders subscribed for one share of £1 each. Mr Salomon was also the managing director of the company. The company almost immediately ran into difficulties and eventually became insolvent and winding up commenced. At the time of winding up, the total assets of the company amounted to £6,050; its liabilities were £10,000 secured by the debentures issued to Mr Salomon and £8,000 owing to unsecured trade creditors. The unsecured sundry creditors claimed the whole of the company’s assets, viz. £6,050 on the ground that the company was a mere alias or agent for Salomon. Held : The contention of the trade creditors could not be maintained because the company being in law a person quite distinct from its members, could not be regarded as an ‘alias’ or agent or trustee for Salomon. Also the company’s assets must be applied in payment of the debentures as a secured creditor is entitled to payment out of the assets on which his debt is secured in priority to unsecured creditors.