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    Corporate Laws (Sanskritians)

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    i cs) Choice Based Credit System Anil Kumar As per Vs yl tty 10th Edition 2021 6 PREFACE TO TENTH EDITION book building shares including dividend, general meetings, management of companies and powers of directors. Chapter 14 contains the concept and modes of winding up of companies. The Depositories Act contained in Chapter 15 makes the book relevant not only for under-graduate students but also those who have an interest in the securities market. The examination questions and case problems are given at the end of each chapter to enhance the utility of this book for the students preparing for their semester examinations. Feedback from readers is solicited and would be thankfully acknowledged. March 15, 2021 ANIL KUMAR PAPER BCH 2.3; CORPORATE LAWS Course Objective ‘To impart basic knowledge of the provisions of the Companies Act, 2013, and the Depesitories Act, 1996. Case studies involving issues in corporate laws are required to be discussed. Course Learning Outcomes Alter completing the course, the student shal be able to: COI: understand theregulatory aspectsand the broader proceduralaspests involvedin different types of companies covering the Companies Act, 2013 and Rules thereunder. (C02: follow the basic legal documents and their usage essential for oper~ ations and management of company. C03: enable the students to synthesis company processes, meetings and decisions CO4: equip the students with framework of dividend distribution and role of aueitors in a company C05:comprehendand evaluate working of depositories and their functions instock matkets Course Contents Unit I: Introduction Meaning and characteristics of a company; Lifting of corporate veil ‘Administration of Company Law [including NationalCompany Law Tribunal (NCLD) National Company Law Appellate Tribunal (NCLAT), Special Courts}; ‘Types of companies including private and public company, government company, foreign company. one person company, small company. associate company, dormant company and producer company; Association not for 7 1s SYLLABUS profit Illegal association; Formation of company, promoters, their legal Position and pre-incorporation contracts; Onlineregistrationof a company. ‘Unit I Documents and shares Memorandum of Association andits alteration, Articles of Association and its alteration, doctrine of constructive notice, doctrine of ultra vires and indoor management; Prospectus, Shelt and Red herring prospectus, mis- statement in prospectus: book building: Allotment and Forfeiture of share, Sweat Equity, ESOPS Bonus issue, and Further issue of shares, buyback and provisions regarding buybnck: Membership of company. ‘Unit IH: Management and Meetings Classification of directors-Additional, Altemate and Casual directors, Women directors, Independent dicector, Small shareholdes director: Director Kdentity Number (DIN); Appointment, Disqualficaions, Removal of directors;Legel postions, Powersand Duties; Key managerial personnel, Managing director, Manager and Whole Time Director; Board Meetings: iceting through video conferencing: Shareholder meetings: AGM aad EGM. Convening and Conduct of meetings: Requisites of a valid meeting; Resolutions; Posial ballot; e-voting, Unit FV: Dividends, Audit and Winding up Provisions relating to payment of Dividend, Company Auditaudltor’s qualification and disqualifiations, Auditor's appointment, Rotaticn of auditors, Auditor's removal, Auditors report and Aueitors powers. Winding Up. Concept and Modes of Winding Up; Previsions of winding up under Insolvency and Bankruptey Code, 2016. Unit V:"The Depositories Act, 1996 Definitions; Depositories system: Rights and obligations of depositories Participantsissersand beneficialowners Inquiry and inspections; Penalty Teaching Learning Process The teaching - learning processes play a vital roe in instilling in the stu dent the curiesity 10 study the subject law. It includes lectures through presentations of case laws, expert lectures, case study approach is widely followed, roe plays, sominars, tutorials, project based learning, Case laws comprehension and der skills of reasoning and analysis will be encouraged through teaching strategies. igher- Contents Proface to Tenth Edition Syllabus CHAPTER 1 (CHAPTER 2 (CHAPTER 3 CHAPTER 4 (CHAPTER 5 CHAPTER 6 ‘CHAPTER 7 CHAPTER 8 CHAPTER 9 CHAPTER 10 CHAPTER 1) CHAPTER 12: CHAPTER 13 + (CHAPTER 14 (CHAPTER 1 BCom (Hons BCom (Hon: B.Com (Hon BCom (Hons. : COMPANY : MEANING AND FEATURES ADMINISTRATION OF COMPANY LAW KINDS OF COMPANIES FORMATION OF COMPANY : MEMORANDUM OF ASSOCIATION + ARTICLES OF ASSOCIATION PROSPECTUS : SHARES AND SHARE CAPITAL + MEMBERS AND SHARFHOLDERS: DIRECTORS AND KEY MANAGERIAL PERSONNEL ‘SHAREHOLDERS MEETINGS auprr DIVIDEND PROVISIONS ‘WINDING UP OF COMPANIES THE DEPOSITORY SYSTEM .) Paper - May-June 2016 ) (CBCS) Paper - May 2017 ) (CBCS) Paper - Mey 2018, -) (CBCS) Paper - May 2019 AGE 15. 1 32 56 B 105 132 165 7 222 255 273 285 30 3I7 320 323 325 CHAPTER COMPANY : MEANING AND FEATURES + Meaning of Company ‘¢ Characteristics of Company + Doctrine of Lifting the Corporate Vel Meaning of Company In general, company means an association of persons for a common object. ‘The term ‘company's derived from the Latin word—corr means with or together, panis means bread, and originally referred to an asseciation of persons who take their meals together. Company as a form of business is traditionally called joint-stock company’, ‘By a company is meant an association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is capital of the company The persons who contribute it or to whom it belongs are members. The proportion of capital which each member is entitled is his share. Shares are always transferable, although right to transfer them is often more or less restricted." However, joint contribution of capital isnot sufficient to deseribe acompany. Jn partnership firms? also, the capital is brought jointly by the partners, Company different from partnership firms, is not merely an association of persons, it is an incorporated association of persons ereated by law to carry on the expressly laid down objects. A company exists only in the 2. Infact one may come across a partnership frm e ale propestersh fee using the word ‘Company as apart fis name, eg, Frank Brothers & Compas, Gokaldas & Company, Legal such rms are not companies a (COMPANY : MEANING AND FEATURES. ‘contemplation of law. Law ercates it and law alone can dissolve it. may bbeformed by an Act of Parliament, or by Royal Charter, or by registration under company law. ‘The essential feature of company is that itis an incorporated association ‘created by the law. Chief Justice Marshal of US.A. has defined a company as “a person. artificial, invisible, intangible and existing only inthe eyes of the law. Being a mere creature of law, it possesses only those properties ‘which the charter of its creation confers upon it either expressly or as incidental to its very existence.” Company as a form of doing business has its origin in 1600 A.D. when the East india Company was established by way of a Royal Charter in England, Subsequently, the legislative developments in the mid-nineteenth century in the UK give rise to the modern form of company. At present, company has become a pre-dominant form of doing the business. This is on account of numerous advantages which a company has. Corporate laws world over have regulations regarding formation and functioning of companies. In India, the Companies Act of 2013 (known as the Indian Companies Act, 2013) contains the law relating to companies. The Companies Act being the Act of the Central Legislature (Je. Parliament) applies to companies throughout India on @ uniform basis, Indian Companies Act, 2013 The Companies Act, 2013 was passed to consolidate and amend the law relating to companies. The Act comprises of 7 schedules, 29 chapters and 470 sections. The Act extends to the whole of India. The Act of Parliament received the assent of the President on the 29th August,2013. The Act has. become applicable from financial year 2014-15. Nature and Scope of Act The Companies Act is the Act of the Central Legislature which applies to companies throughout India cn a uniform basissubject to special provisions in specified states and UTs made and notifications issued by the Central Government. The provisions of this Act appty to: (@) Companies incorporated under this Act or under any previous eom= pany law; (0) Insurance companies, except insofar as thesaid provisions are incon- sistent withthe provisionsof the Insurance Act, 1938 or the Insurance Regulatory and Development Authority Act, 1999; ‘COMPANY : MEANING AND FEATURES. a (© Banking companies, except insofar as the said provisions are incon- sistent with the provisions of the Banking Regulation Act, 1949; (4, Companies engagedin the generation or supply of lect, except iniolaras the aul provisios are kigousutent ws the provisos ob the Electricity Act, 200% (©) Any other company governed by any special Act for the time being in foree, except insofar as the said provisions are inconsistent with the provisions of such special Act; and (P Such body corporate, incorporated by any Act for the time being in Force, subject tosuch exceptions, modifications or adaptation, asmay be specified in the notification issued by the Central Government. ‘Machinery for Administration of the Act “The Central Govemment has the overall responsibility for administration and enforcement of the Companies Act. The Ministry of Corporate Aifairs (MCA) of the Government of India is the nodal agency authority which has been given various powers under the Act. Most of the powers are vested to the authorities created under the Act 1, Tribunal: National Compaay Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are quosi-judicial bodies to administer the provisions of the Companies Act. The Tribunal ‘exercises such powers which are conferred on it by the Companies Act, 2013 and any other law for the time being in force. Regional Directors: The Rezional Directors are appointed by the Central Government who arein-chargeoftherespectiveregions.cach region comprising a number of States and Union Territories. They supervise the working of the offices of the Registrars of Companies and the Official Liquidators working in their regions. They also maintain liaison between the respective State Governments and the Central Government in matters relating to the administration of the Companies Act, 2013. 3. Registrar of Companies (ROC): Registrars of Companies (ROCS) ‘appointed by the Central Government under the Companies Act, 2013.are the full-time officers appointed in various States and Union Territories who are vested with the primary duty of registering com- panies floated inthe respective States and the Union Territories and ‘ensuring that such companies comply with statutory requirements under the Act. The offices of ROC function as registry of records relating to the companies registered with them, which are available 2 TAXHANN® 4 ‘COMPANY : MEANING AND FEATURES forinspection by members of the publicon paymentof the prescribed fee. The Central Government exercises administrative control over these offices. 4. Official Liquidators: Oficial Liquidators are the whole-time officers ofthe Central Government who are appointed to conduetthe winding tp of companies by the Tribunal. They exercise such powers and perform such duties as may be entrusted to them by the Tribunal and the Central Government. 58. Special Courts: The Central Government may establish as many’ Special Courts as may be necessary, for the purpose of providing speedy trial of offences under this Act. Special Court consists of a single judge who is appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working. Definition of Company under the Companies Act, 2013, ‘Section 2(20) of the Companies Act defines a company as ‘company means a company incorporated under this Act or under any previous company. law", Thus, a company formed and registered under the Companies Act, 1956 or under any former Indian Companies Act is a company. Company means ‘a company formed and registered under the Indian| Companies Act, 2013 or under any previous company law’, Company and Body Corporate “Body corporate’ means a corporate entity which is incorporated under a statute and has a perpetual succession with a common seal. and isa legal entity separate from the members constituting it* The term ‘body corpo- rate’ is wider than the ‘company’ and includes: ‘+ Companies registered under the Companies Act, 2013 or any former Indian Companies Act + Foreign Companies {© Corporations formed under special Act of the Parliament or of State Legislatures or of a foreign country ‘* Public financial institutions as defined in section 2(72) of Companies Act, 2013 “3 BelorepassingolheCompants At, 2013, Indian Companies Ac; 1956 the lnian Cranes [ACL Te50, the Indian Corupanen Act 186, the Ian Companies Ac. 1882 and he adit Companis Ae. 191 were neenactmentsintndaforregstrationand regulation ofeompanis ‘These have sine boon repealed. 4 Ramaiva A, "Guédeto she Companies Act Sixt edition, pp. 5455, COMPANY : MEANING AND FEATURES 3 # Nationalised Banks ‘¢ Limited Liability Partnerships registered under the Limited Liability Partnership Act, 2008. However, ‘body corporate’ does not include: (A) A co-operative society registered under any law relating to. co-oper- ative societies, and (& Any other body which the Central Government may, by notification in the Official Gazette, specify in this behalf, ‘may be noted that company isa body corporate but all body corporates! ‘are not companies, Characteristics of Company 1, Incorporated Association: Company is an incorporated association ‘of persons which is created by registration under the Companies Act, 2013 (or any former Indian Companies Act). For forming a public ‘company at least seven persons and for a private company at least ‘two persons are required. These persons subscribe their names to the memorandum of association and also comply with other legel requirements of the Act in respect of registration to Form and ineor- porate a company. Artificial Legal Person: ‘The registration of a company under the ‘Companies Act grants a legal entity to the company enabling it to ischarge functions akin to aperson suchas the tight to acquire and ispose of the property, to enter into contract with third parties in its own name, and to sue and be sued in its own name. A company can enter into partnership with one or more individuals or another ‘company. It can buy shares or debentures of another company. Although, a company does not exist in the physical form—has no body, no soul and no conscience, it has most of the attributes of a person. It exists but in the eyes of the law. So, a company can be deseribed as an artificial legal person. It has « nationality, domicile ‘and residence but cannot ask for enforcement of those fundamental rights which are exclusively available to national citizens, Not being 4 natural person, it cannot enjoy the rights under the Constitution of India or Citizenship Act 2 oNNYIKYL 6 ‘COMPANY : MEANING AND FEATURES ae] eed ened aa eas pei Peron “ompany a Independent [Legal Ent [ Perpetual | Separate Exitence Property 43, Independent Legal Entity: A company has a legal entity distinct and separate from its constituent members (shareholders) Its an au- ‘tonomous body, sef-controlling and self-governing. It can hold and deal with any type of property of which it is the owner, in any way itlikes. It can enter into contracts, open a bank account in its own zname, sue and be sued by its members as well as outsiders. ‘The rights and obligations of a company are distinet from its con- stituent members. ‘Sharcholders are not, in the eyes of thelaw, part ‘owners of the undertaking. The underiaking is something different from the totality ofthe shareholders”*A member cannot dam any ‘ownership rights in the assets of the company either individually or Joimily during the existence of the company oin ts winding up. The property of the company is tobe used for the benefit of the company and not for the personal benefit of the shareholders. A director of 2 company can be the office bearer of the trade union Of the workers of the same company. A shareholder, if otherwise qualified. can be the auditor of the same company. At the same time, the members of the company canenter into contracts with the company in the same manner as any other individual can, 5, Shorty Treasury Commissioner (1948) (COMPANY: MEANING AND FEATURES 7 A company can be held liable for criminal acts. It can be held liable for breach of law and can be made to pay fine. However, no impris- onment of a company is possible. Itcan be charged with conspiracy to defraud or may be convicted of making use of false documents intent to deceive. It can also be held lable for torts committed byits employees in the course of their employment. ‘On account of the independent corporate existence, the creditors of company are creditors of the company alone and their remedy lies against the company and its property only and not against any ofits members, Law recognizes the existence of the company quite irrespective of the motives, intentions, scheme or conduct of the in- dividual shareholders. A director or a managing director cannot be held personally liable for the payment of arrears of taxes or salaries of employees due by the company. Similarly, shareholders cannot be held liable for the wrongs or misdeeds of the company, ‘The principle of separate legal entity of the company was judicially recognized by the House of Lords in 1867 in the ease of Oakes v. Turquand and Hording (1867) Iwas then held that since an in porated company has a legal personality distinct from that of its ‘membecs,a creditor of sucha company has remedy only against the company and not against an individual sharehokler. Thus, creditor of anincorporated companyhas remedy only against thecompany for his debts and not any of the members of whom itis composed, The position was further clarified by the House of Lords in the famous ease of Salomon ¥. Salomon & Co, Lic. (1897), The facts of the case are as follows: ‘Mr: Salomon was ihe owner of prosperousshioc business He loated acompany Salomon Co Lid withonly sevensharcholders- himself, his wife, daughter and four sons. The newiy formed company pur~ chased the sole proprietorship business of Mr, Salomon for £40000. ‘The purchase consideration was paid by the company by allotment 0f £20,000 sharesand £ 10,000 debentures and the balancein cash ‘| ‘Mr. Salomon. The debentares carried a floating charge on the asets of the company. “The company went into Iquidation within a year due to trade depression. On winding up, assets ofthe company were running short ‘ofits liabilities by £11,000. The unsecured creditors of the company contended thatthe company, though incorporated underthe Act had never an independent existence itwasin fact Salomon underthename of a company. On this ground, the creditors ciimed priority for the ‘payment of their debts aver the debenture-holders (Mr. Salomon), Iwhereas 3s per the law secured creditors are given precedence for the payment wien a company fs wound wp. © Gower LOB, (COMPANY : MEANING AND FEATURES "The ples ofthe unsecured creditors that Miz Salonion and Salonion& Co.areoneand thesame wasnt accepiedby the court Itwas held that the existence ofa company & quite independent and distinct from its members. hareheldersmayalso be the creditors fhe company. The ‘company is at law a different person altogether from the subscribers to the memorandum, and though it may be that after incorporation the business is preckely the same as before, the same persons are ‘managers, and the same hands receive the profits, the company is ‘not inlaw their agent or trustee. There snothing in the Act requiring that the subscribers o the Memorandum should be independent for ‘unconnected, or that they or any of them should take a substantial interest in the undertaking, or that they should have amind or will of their own, or that there should be anything like a balance of power in the consitution of the company.” Hence the pes ofthe unsecured

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