Companies Act 2013

•Introduction
•Types of companies
•Incorporation
•Promoters’ Role
•Prospectus
•Share capital
•Rights of members
•Lifting the Corporate Veil
•Memorandum of Association
•Articles of Association
•Doctrine of Ultra Vires
•Doctrine of Indoor Management
•Doctrine of Constructive Notice
•Meetings and Proceedings
•Winding up
 Characteristics
• Artificial Person/ Corporate Personality
• Limited Liability
• Perpetual Succession
• Separate Property
• Transferability of Shares
• Capacity to sue and be sued
• Limitation of Action
• Separate Management
 Types of Companies
– Statutory Companies
– limited and unlimited Companies
– Public and Private Company
– Parent/ Holding and Subsidiary Company
– Government Company
– Small Company
– One Person Company (OPC)
– Foreign Company
– Dormant Company
 Types of Companies
• One-person company: only a natural person who is an
Indian citizen and resident in India can incorporate an
OPC or be a nominee for the sole member of an OPC.
• Private company: increases the limit of the number of
members from 50 to 200
• Small company: A small company has been defined as
a company, other than a public company.
– (i) Paid-up share capital ≤50 lakh INR or
– (ii) Turnover of not exceed two crore INR
• Dormant company: formed for a future project or to
hold an asset or intellectual property and has no
significant accounting transaction
Private Company:
• restricts the right to transfer its shares
• limits the number of its members to 200
• prohibits any invitation for any shares/ debentures/
acceptance of deposits from public
• have at least two directors.
• 'Private Limited' must be added at the end of its name
Public Company
• consists of at least seven members and three directors
• Invite public to subscribe to its share capital
• Free transferability of shares
• “Limited” must be added at the end of its name
Foreign company
• Incorporated in a country outside India and has a place
of business in India
Holding & Subsidiary Company
– Where a company controls the composition of Board of Directors of
another company, the latter becomes the subsidiary of the former; or
– When a company holds more than half of the equity capital of another
company, the latter becomes the subsidiary company of the former
Government Company
– not less than 51 per cent of the paid-up share capital is held by
– the Central Government, or
– any State Government or Governments, or
– partly by the Central Government and partly by one or more State
Governments.
– A subsidiary of a Government company is also a Government company
Statutory company
– Formed under an Act of Parliament or State Legislature.
– Immunity from Parliamentary scrutiny in day-today working.
– Freedom in regard to personnel, its employees are not civil servants.
– having characteristics of a corporation
– Independent finances- Obtains funds by borrowing and through revenue
derived from sale of goods/services.
– Commercial Audit - audit is entrusted to CAG.
– Operation on business principles
 Promoter’s Remuneration
• a lumpPromoter’s Remuneration
sum for the services rendered.
• may make profits on transactions
Promoter’s Remunerationentered by him
with the company after making full disclosure.
• may sell his own property to the company for cash
or against fully paid shares in the company at an
overvaluation after making full disclosure.
• may be given an option to under-right issue of the
company and earn commission thereon.
 Promoter’s Liability
Promoters’ Liability
• In case of default by a promoter in fulfilling his/her
duties, the company may rescind the contract, and if
the former has made some profits on any related
transaction, s/he may be compelled to account for it.
• also liable for misstatements made in the prospectus,
if any.
• A person who subscribes for any shares or debenture
in the company relying on the misstatement in the
prospectus can sue the promoter for the loss or
damages sustained by the former.
• punishable with imprisonment up to two years or with
fine up to Rs 50,000 , or both.
 Types of Prospectus
• Draft offer document
– first filed with SEBI.
– SEBI may specify changes, if any, to be made.
– Then filed with the Registrar of Companies or the Stock
Exchange.
– must be filed with SEBI at least 21 days before the company
files it with the ROC or Stock Exchange.
• Red herring prospectus
– does not have details of either the price or the number of
shares being offered or the amount the IPO aims to raise.
– is used in book building issues, where the details of the
final price are known only after the bidding is concluded.
 Share Capital
• Authorised share capital The total share capital, a company is supposed to issue,
during its life time.
• Issued capital Aggregate face value of the company’s shares offered for subscription
by the general public or by a private placement.
• Subscribed capital Substantial portion of the issued capital , subscribed for by all the
investors.
• Paid-up capital The amount of share capital paid by the shareholders in aggregate.
• ESOP An employee-owner scheme that provides a company’s workforce with an
ownership interest in the company.
• Sweat equity shares Equity shares issued by a company to its directors or employees
at discount, or consideration other than cash, for providing their know-how or
making available rights in the name of IPRs or value addition to the company.
• Right issue A preferential subscription right that entitles a company’s existing
security holders to buy additional securities (shares) directly from the company in
proportion to their existing holding.
• Bonus shares Additional shares given to current shareholders without any additional
cost in proportion to their holdings.
 Rights of Members
Members (equity shareholders) enjoy the following rights:
• Right to Obtain Copies of Basic Documents
• Right to Transfer Shares
• Right to Vote
• Right to Call Extraordinary Meeting
• Right to Receive Notice of a General Meeting
• Right to Appoint Proxy
• Right to Dividend, Rights Shares and Bonus Shares
• Right to Obtain Copy of Financial Statements
• Right to Appoint Auditor
• Right to Appoint and Remove Directors
• Right to Inspect Registers
• Right Against Oppression and Mismanagement:
• Right to Final Distribution on Winding Up
 Ceasing to be a Member
• Forfeiture and sale of shareholding for non-payment of a call
• Transfer of their shares, which is duly registered
• Death of the shareholder, resulting in transmission to the
personal representative
• Compulsory acquisition through selective capital reduction
• Deregistration of the company
• Sale of shares under company lien
 Lifting the Corporate Veil
• Company is a legal person distinct from its members [Salomon v.
Salomon and Co. Ltd. (1897) A.C 22], referred to as the ‘Veil of
incorporation”
• in a number of circumstances, the Court will pierce the corporate
veil to reach the person behind the veil or to reveal the true form
and character, disregarding the Salomon principlel
• the law will not allow the corporate form to be misused or
abused
• Broadly there are two types of provisions for the lifting of the
Corporate Veil-
– Judicial Provisions- include Fraud Character of Company, Protection of
revenue, Single Economic Entity etc and
– Statutory Provisions- include Reduction in membership, Misdescription
of name, Fraudulent conduct of business, Failure to refund application
money, etc
 Steps for formation of a company
• Type of Company
• Availability of Name
• MOA and AOA duly signed, and stamped
• Details of first directors
• The agreement, if any with any individual for
appointment as its Managing or whole-time director.
• Notice of Registered address
 Memorandum of Association
• It sets out the constitution of the company.
• Identifies scope and limitations of proposed company
• enables the shareholders, creditors, and those who deal
with the company to know what is the permitted
• Difficult to amend
• defines as well as confines the power of the company.
• Consists of:
– Name Clause
– Registered Office / Situation Clause
– Object Clause- main objects and other objects
– Liability Clause- limited by share or guarantee
– Capital Clause.
– Association Clause
 Doctrine of ultra vires
• An act or transaction
– which may not be illegal
– is beyond company's power
• is incapable of ratification.
• Act which is intra vires the company but outside the
authority of directors may be ratified by shareholders
• Act ultra vires to AOA but intra vires to MOA can be ratified
by altering AOA
• Injunction to restrain the company from doing an ultra vires
act
• Personal liability of the directors
• Ultra vires contracts are void ab initio
• does not create a relationship of a debtor and creditor
 Articles of Association
• Articles are by-laws or rules and regulations for the
management of its internal affairs and conduct of
business.
• Deals with the rights of the members inter se.
• Includes:
– Powers, duties, rights and liabilities of directors and
members
– Voting powers
– Rules regarding meetings, dividends, borrowing etc
– Share capital, issue, transfer, forfeiture of shares
– Accounting, audit, winding up etc
• Articles are subordinate to and controlled by
Memorandum.
 Doctrine of Constructive Notice
• memorandum and articles are public
documents, open and accessible to all
• It is the duty of every person dealing with a
company to inspect its public documents and
make sure that his contract is in conformity
with their provisions
• He will be presumed to know the contents of
those documents.
 Doctrine of Indoor Management
• lays down that persons dealing with a company
– once they are satisfied that the transaction is in
accordance with the memorandum and articles of
association
– need not inquire whether internal proceedings
relating to the contract are followed correctly,
– are entitled to assume that the officers of the
company have observed the provisions of the articles.
– It is no part of duty of any outsider to see that the
company carries out its own internal regulations
– Exceptions include:
• Knowledge of irregularity, negligence and forgery
• Recent cases include:
Doctrine of Constructive Notice Vs
Doctrine of Indoor Management
– Doctrine of constructive notice
• can be invoked by the company against the person
dealing with it
• protects a company against outsiders
– Doctrine of Indoor Management
• can be invoked by the person against the company
• protects outsiders against the actions of a company
• is a possible safeguard against the possibility of abusing
the doctrine of constructive notice
 Board of Directors
• Only individual, and not a body corporate, association or
firm, shall be appointed as director.
• "An individual who direct, control, manage, superintend the
affairs of the company in the form of the board of
directors.“
• Selected as per Companies Act and AOA, from shareholders
or non-shareholders
• Acts collectively as a Board
• frame the general policy of the company
• direct its affairs
• appoints the company officers
• ensures that they carry out their duties and
• recommend to the share holders regarding distribution of
dividend.
 Types of Directors
Executive Directors or Whole-Time Directors (MD, Technical Directors)
– have employment stake in the company. They wield substantial power, enjoy
maximum remuneration, perquisites, fees, commission and allowances
Non-executive or part-time Directors
– professionals and serve on the board of many companies.
– get only sitting fees and
– wield little or no powers
Nominee Directors
• Appointed by FIs, or Banks
• Powerful tool of project supervision, monitoring and control.
Independent Directors
– Do not have any material pecuniary relationship or transaction with the
company.
– Entitle to receive director's remuneration.
Government Directors
– Appointed by the Central Government on the recommendation of the CLB.
– To safeguard the interest of the company or its shareholder or in public
interest.
 Managing Director
• is entrusted with substantial power of management
and includes a director occupying the position of MD,
by whatever name called
• Powers exercised subject to the superintendence,
control, and direction of the company's board of
directors.
• A person who is not a director of the company must
be first appointed as an additional director
• may have dual capacity that of an employee and agent
 Legal Position of Directors
• A single director can’t bind the company unless
such powers are delegated to him by the
board.
• To some extent directors are also the trustees
of the company's properties.
• not in the employment of the company and are
not entitled to any remuneration beyond sitting
fees.
• A director can hold an office or place of profit
in the company in addition to his usual
directorship
 Appointment of Directors
• First directors may be named in the Articles or
subscriber to the memorandum shall be first directors.
• One third of the total directors are liable to retire by
rotation every year and are eligible for re-appointment
in the General Meeting. [Section 256]
• Directors who have been longest in the office to retire
first.
• Directors nominated by financial institutions or by the
Central Govt. u/s 408 are not liable to retirement.
• MD and Whole-time director shall not be liable to
retire by rotation.
 Small Shareholder's Director
• A public company having a paid up capital of
Rs.5 crore or above may have a director from
amongst small shareholders.
• Shareholders not less than 1/10th (or 100) of
the total shareholders may elect suo-moto or
upon a notice served at least 14 days before the
AGM.
• Listed company shall elect small shareholder's
director through postal ballot
• unlisted company on the recommendation of
the majority of small shareholders.
 Small Shareholder's Director
• Hold office for a maximum period of three years.
• Same person may be reappointed for another
term if so decided.
• He is treated as director for all purposes but
cannot be appointed as MD or whole-time
director.
• No individual can hold office of Small
Shareholder's Director at the same time in more
than 2 companies.
 Types of Company Meetings
• Shareholders Meetings:
– Statutory Meeting
– Annual General Meetings
– Extraordinary General Meetings:
– Convened by directors suo moto between two AGMs.
– Convened by directors on requisition
• Meetings of the Board of Directors.
• Meetings of the Board Committee.
• Class Meetings of
– Shareholders.
– Debenture holders.
– Creditors.
– Meetings of the Contributories in winding up
 Statutory Meetings [Section 165]
• within one month and not more than six months from
the date of commencement of business
• Failure to hold Statutory Meeting renders the company
liable to be wound up
• not applicable to a private company
• The board shall send statutory report, at least 21 days
before the day on which the meeting is held
Annual General Meeting [Section 166]
• Once in every calendar year
• not more than 15 months shall elapse between two
AGMs.
• First AGM may be held within 9 months from the date
its incorporation.
• Subsequent AGM should be held on the earliest of the
following:
– 15 months from the last AGM;
– The last day of the calendar year; or
– 6 months from the close of the financial year
• Registrar may extend time by not more than 3 months
• the officer in default punishable with fine up to Rs
50,000 and Rs 2,500 for every day of the default.
• Delay in completion of audit or annual accounts not a
special reason justifying extension
 Time and Place of holding AGM
• Every AGM called after giving 21 days notice must be
held on a day other than a National holiday.
• Should be held on a working day, during business
hours, at the Registered Office of the company, or
• a place within the city, town, or village in which
registered office is situated.
• An adjourned meeting accidentally can be held on a
holiday
• Time of subsequent AGMs may be fixed by the Article
or by a resolution in the AGM.
 EGM
• Every general meeting of company with exception to
Statutory Meeting and AGM is called an EGM.
• Arises for special business and cannot be deferred to
the next AGM.
• Articles contain provisions empowering the board for
calling an EGM.
• If there are not within India directors capable who are
not sufficient in number to form a quorum any
director or two members may call an EGM.
 Calling of EGM on Requisition
• The board shall on requisition of members holding
1/10th of the paid up capital or voting right, forthwith
call an EGM.
• The requisition shall set the matters for consideration,
duly signed and deposited at the registered office of
the company.
• If the EGM is not called within 21 days of the
requisition the meeting may be called on a day not
later than 45 days from the date of deposit of
requisition:
– By requisitionists themselves; or
– By 1/10th of the shareholders or members holding
1/10th of voting right.
 Calling of EGM by CLB [Sec186]
• If, for any reason it is impracticable to call an EGM, the
CLB may, either of its own or on an application of any
director or member:
• order a meeting of the company;
• and give such ancillary or consequential directions as
the CLB thinks expedient.
• A meeting so called shall be deemed to be a meting of
the company duly called, held and conducted.
• The CLB will interfere very sparingly, and only when
the application of a meeting is made bona fide in the
larger interest of the company.
 Meeting of Board of Directors
• interval between two meetings may be more than
three months.
• at least four board meetings in a year with a maximum
time gap of four months between two meetings. (LA -
Clause 49)
• Notice of every meeting of the board shall be given in
writing to every director for the time being in India,
and at his usual address in India to every director.
 Board Meetings…
• For sine die adjournment and to transact new
business a fresh notice would be required.
• may be held at any time and place convenient to
directors, outside the business hours and even on
public holiday unless Articles provides otherwise.
• agenda containing business to be transacted is
circulated preferably along with the notice at least
a week before the date of meeting.
 Resolutions
Ordinary resolution
• passed by a simple majority (>50% of cast votes including
the casting vote)
• required to:
• declaring dividend,
• appointment of auditors,
• electing directors, or
• to pass the annual accounts.
Special Resolution
• Passed by 3/4ths majority
• Required to:
– Alter MOA, AOA, Objectives, Reducing share capital etc
Special Notice
 Winding Up of a Company
• Its life for some unavoidable circumstances is
put to an end; and
• its property is administered for the benefit of
its creditors and members.
• Modes of Winding up:
– Compulsorily i.e. by the Tribunal (NCLT)
– Voluntarily
 Compulsory Winding Up
• Inability to pay its debts
• acted against the interests of the sovereignty and integrity
of India, the security of the State, friendly relations with
foreign states, public order, decency or morality
• scheme of revival and rehabilitation of a sick company is not
approved by the creditors
• the affairs of the company have been conducted in a
fraudulent manner/company was formed for fraudulent and
unlawful purposes or the persons concerned in the
formation of the company or management of its affairs have
ben guilty of fraud, misfeasance or misconduct in
connection therewith
• If the company has defaulted in filing with the ROC its
financial statements or annual returns for immediately
preceding the five consecutive financial years
• Any other just and equitable ground
•
 Voluntary Winding Up
• expiration of its duration, if any, fixed by its ‘Articles’
or
• on the occurrence of any event in respect of which
the articles provide that the company should be
dissolved
• passes a special resolution that the company be
wound up voluntarily
• Procedure for voluntary winding up
• Declaration of solvency
• Meeting of creditors
• Appointment of company liquidator
• Liquidator to submit his report on the progress of
winding up
• Report of the liquidator to the Tribunal
• Final meeting of members and dissolution of the
company