KMBN201-

Business Environment & Legal Aspects

Unit-IV
For- MBA First Year/Second Sem Students of AKTU
By- Atul Raghuvanshi
Companies Act, 2013
What is a Company?
• A company is a legal entity formed by a group of
individuals to engage in and operate a business—
commercial or industrial—enterprise.
• A company may be organized in various ways for tax
and financial liability purposes depending on the
corporate law of its jurisdiction.
• The line of business the company is in will generally
determine which business structure it chooses such
as a partnership, proprietorship, or corporation.
What is a Company?
• These structures also denote the ownership structure
of the company.
• They can also be distinguished between private and
public companies. Both have different ownership
structures, regulations, and financial reporting
requirements.
• Section 2(20) of the Companies Act, 2013 defines a
company to mean a company incorporated under this
Act or under any previous company law.
Characteristic features a Company?
• Incorporated Association
• Legal Entity distinct from its members
• Artificial Person
• Limited Liability
• Separate Property
• Transferability of Shares
• Perpetual Succession
• Common Seal
• Lifting the corporate veil
Formation of a Company
• The formation of a company goes through a number of
steps, starting from idea generation to commencing of the
business. This whole process can be broken down into 4
major phases or steps, which we will be discussing in the
lines below.
• The major steps in formation of a company are as follows:
1.Promotion stage
2.Registration stage
3.Incorporation stage
4.Commencement of Business stage
Formation of a Company
Promotion
• In this stage the ideas are executed. The promotion
stage consists of the following steps:
1.Identify the business opportunity and decide on the
type of business that needs to be done.
2.Perform a feasibility study and determine the
economic, technical and legal aspect of executing the
business.
3.Interest shown by promoters towards the business
idea and supply of capital and other necessary
procedures to start the business.
Registration
• There are several steps involved in the registration phase,
and are as follows:
1.Memorandum of Association: A memorandum of
association (MoA) must be signed by the founders of the
company. A minimum of 7 members are required in case of a
public company and 2 in case of a private company. The MoA
must be properly registered and stamped.
2.Article of Association: Article of Association (AoA) is also
required to be signed and submitted. All members who
previously signed MoA, should also be signing the AoA.
3.The next step is preparing a list of directors which should be
filed with the Registrar of Companies.
Registration
1.Directors of the company should provide a written
consent agreeing to be directors, should be filed with
the Registrar of Companies (RoC).
2.The notice of address of the office needs to be filed.
3.A statutory declaration should be made by any
advocate of either the High Court or Supreme Court,
or a person of the capacity of Director, Secretary or
Managing Director. This declaration shall be filed with
the RoC.
Certificate of Incorporation
• Certificate of incorporation is issued when the
registrar is satisfied with the documents provided.
• This certificate validates the establishment of the
company in the records.
Memorandum of Association
• MOA full form – Memorandum of Association is a legal
document that explains why the organization was founded.
• It establishes the company’s authority and the terms under
which it works.
• It is a manual that includes all of a company’s laws and
regulations for its interactions with the outside world.
• Any business must have a Memorandum of Association that
specifies the extent of its activities.
• The organization cannot work outside the limits of the document
until it has been prepared. If the corporation goes beyond its
authority, the activity would be deemed supra vires and
therefore null.
Memorandum of Association
• It is the cornerstone upon which the business is built. The
Memorandum of Association lays out the company’s entire
organization.
• The memorandum is open to the media. Thus, all that is
expected of an individual who wishes to enter into
contracts with the corporation is to pay the required fees
to the Registrar of Companies and receive the
Memorandum of Association. He will learn all of the
company’s information from the Memorandum of
Association.
• It is the responsibility of everyone who does business with
the firm to be aware of its memorandum.
Articles of Association
• Articles of association form a document that specifies
the regulations for a company's operations and
defines the company's purpose.
• The document lays out how tasks are to be
accomplished within the organization, including the
process for appointing directors and the handling of
financial records.
Articles of Association
• Articles of association often identify the manner in
which a company will issue shares, pay dividends,
audit financial records, and provide voting rights.
• This set of rules can be considered a user's manual for
the company because it outlines the methodology for
accomplishing the day-to-day tasks that must be
completed.
Articles of Association
• While the content of the articles of association and
the exact terms used vary from jurisdiction to
jurisdiction, the document is quite similar throughout
the world and generally contains provisions on the
company name, the company's purpose, the share
capital, the company's organization, and provisions
regarding shareholder meetings.
Articles-
• Company Name
• Purpose of the Company
• Share Capital
• Organization of the Company
Difference between MoA & AoA
Prospectus
• According to section 2(70) of Company's Act 2013,
Prospectus can be defined as "any document which is
described or issued as a Prospectus" and also any notice,
circular, advertisement or any other document acting as
an invitation to offers from the public.
• Such an invitation to offer should be for the purchase of
any securities of a corporate body.
• A Prospectus should be issued to public as an invitation
for subscribing public share or document. It can be issued
directly by the company or on the behalf of company.
Prospectus
• Every public company either issues a Prospectus or
files a statement in lieu of Prospectus. This is not
mandatory for a private company.
• But when a private company converts from private to
public company, it must have to either file a
Prospectus if earlier issued or it has to file a statement
in lieu of Prospectus.
• Section 30 of the Companies Act 2013 contains the
provisions regarding the advertisement of the
Prospectus.
Prospectus
• This section states that when in any manner the
advertisement of a Prospectus is published, it is
mandatory to specify the contents of the
memorandum of the company regarding the object,
member's liabilities, amount of the company's share
capital, signatories and the number of shares
subscribed by them and the capital structure of the
company.
A Prospectus should contain:
• Name and registered address of the office, its secretary, auditor, legal
advisor, bankers, trustees, etc
• Date of the opening and closing of the issue.
• Statements of the Board of Directors about separate bank accounts where
receipts of issues are to be kept.
• Statement of the Board of Directors about the details of utilization and
non-utilisation of receipts of previous issues.
• Consent of the directors, auditors, bankers to the issue, expert opinions.
• Authority for the issue and details of the resolution passed for it.
• Procedure and time scheduled for the allotment and issue of securities.
• The capital structure of the in the manner which may be prescribed.
A Prospectus should contain:
• The objective of a public offer.
• The objective of the business and its location.
• Particulars related to risk factors of the specific project, gestation
period of the project, any pending legal action and other important
details related to the project.
• Minimum subscription and what amount is payable on the premium.
• Details of directors, their remuneration and extent of their interest in
the company.
• Reports for the purpose of financial information such as auditor's
report, report of profit and loss of the five financial years, business
and transaction reports, statement of compliance with the provisions
of the Act and any other report.
Types of Prospectus
• Red Herring Prospectus
• Shelf Prospectus
• Abridged Prospectus
• Deemed Prospectus
Idea of Appointing Board of Dirctors
• A corporation is an artificial person which is intangible
and invisible.
• For making any decision and to have knowledge and
intention, a living person has a mind and hands by
which he carries out his actions.
• But a corporate body being an artificial person has
none of these.
• So it needs to act through a living person. Thus the
company's business is entrusted in the hands of
directors.
Idea of Appointing Board of Dirctors
• The supreme executive authority controlling the
management and affairs of a company vests in the
team of directors of the company, collectively known
as its Board of Directors.
• At the core of the corporate governance, practice is
the Board of Directors which oversees how the
management serves and protects the long-term
interests of all the stakeholders of the Company.
Idea of Appointing Board of Dirctors
• Directors' rights, roles, powers, and obligations are
defined by the Companies Act and the company's
articles of association.
• Section 291 of the Act states that the board of
directors has the authority to exercise all of the
powers and perform all of the actions and things that
the corporation is allowed to do, subject to the Act's
provisions.
Rights of Directors
• Rights that can only be exercised by passing
resolutions at a Board meeting (Section 292)
• Power to make calls on shareholders for money
unpaid on their shares that have not been paid.
• The authority to issue debentures
• Ability to borrow money in a way other than by
debentures
• The authority to invest the company's funds
Rights of Directors
• Having the ability to make loans
• Certain limitations on the Board's general powers
can be enforced, and in those situations, the Board
must obtain shareholder approval at General
Meetings. Restrictions are dealt with in parts 293,
294AA, and so on.
• Such rights, such as Section 294AA (appointment of
sole selling agents) and Section 295 (Loans to
Directors), can only be exercised with the consent
of the shareholders and the Central Government.
Rights of Directors
• Right to form an Audit Committee- Section 177
• Right to form Nomination and Remuneration
Committees, as well as a Stakeholder Relationship
Committee- Section-178
• Right to contribute to charitable or other funds-
Section-181
• Right of making a political contribution- Section-182
• Right to contribute to the National Defence Fund-
Section-183
Rights of Directors
Rights that can be exercised at a Board meeting or by passing
a resolution by publication in accordance with u/s 289
provisions-
• Section 224(6) gives the board of directors the authority to select the
company's first auditor within 30 days of the company's incorporation
• Section 224(6) gives the Auditor the authority to fill a casual vacancy in his
or her office if the vacancy is not caused by resignation.
• Additional Directors can be appointed if the Articles allow [Section 260].
• Other rights granted by the articles include revocation of securities,
payment of interim dividends, preliminary expenditures, use of a foreign
seal, capitalization of earnings, and the issuance of bonus shares.
• Individual directors who act without being empowered by the Board may
be ratified by the Board by passing an effective resolution of retrospective
effect if the Board deems it necessary.
Duties of Directors
• Duty to act towards the interest of the company
• Duty to not misuse assets of the company
• Duty to not pocket secret profits
• Duty to attend and participate in the meetings of the
company
Duties of Directors
Meetings
• Any formal meeting of limited company shareholders
is called a general meeting.
• The conduct of these meetings is governed by the
Companies Act 2013, the articles of association, and
any shareholders’ agreement that has been drawn up.
• General meetings are usually called by directors when
there is a need for shareholders to discuss and make
formal decisions on the following types of matters:
Meetings
• The appointment and removal of directors
• Changing directors’ powers
• Altering the articles of association
• Altering the shareholders’ agreement
• Reviewing annual accounts
• Company finances
• Changing the name of the company
• Changing the structure of the company
• Altering the objectives of the business
Meetings
• Altering the objectives of the business
• Issuing company shares
• Approving share transfers
• Creating new share classes
• Dissolving the company
• Legal claims and proceedings
• The appointment and removal of auditors
Meetings
• Members also have the power to require the directors
to call a general meeting.
• To do so, a request from members representing at
least 5% of the company’s paid-up share capital (or
voting rights, if the company is limited by guarantee)
must be made to the directors.
• If a general meeting is called, statutory rules require
that a notice period of at least 14 days is given to
every member. However, the company’s articles may
stipulate a longer notice period.
Meetings
• In some instances, a general meeting can be held on
short notice with the consent of a majority of
members holding at least 90% of the company’s
voting rights.
Notice of Meeting
• Notice of a general meeting must be provided to every
shareholder and it should contain the following information:
• date, time, and location of the meeting
• type of general meeting
• general nature of the business to be conducted
• intention to propose a special resolution (if applicable) and the
specific wording of the resolution
• a statement declaring that every shareholder has the right to
appoint a proxy
• date the notice is issued
• name of the individual calling the meeting
Taking minutes of meetings
• Aside from being a legal requirement, taking minutes is
extremely beneficial because it provides a written record of
everything that occurs in a meeting. This greatly reduces
the risk of mistakes, miscommunication, and
disagreements further down the line. Typically, minutes of
board meetings and general meetings should contain the
following details:
• company name and registered office address
• time, date, and location of the meeting
• names of all persons in attendance
• apologies for absences
Annual General Meeting
• The annual general meeting is defined under Section 96 of
the Companies Act, 2013.
• As the name suggests, an annual general meeting is one of
the general meetings held once a year.
• As per Section 96 of the Companies Act, 2013, all
companies have to hold an AGM within the stipulated
time.
• An AGM provides a chance for the members of the
company to review the workings of the company and
express their opinions on the management and workings of
the company.
Annual General Meeting
• Purpose of conducting an annual general meeting
• The main purpose of conducting an AGM is to transact the ordinary
business of the company. Ordinary business includes the following:
1.Consideration of financial statements and reports from the
directors and auditors.
2.Making declarations on dividends.
3.Appointing a replacement of director or directors in place of
those who have retired.
4.Appointing and setting up the amount of remuneration for
the auditors of the company.
5.It also includes annual accounts, crucial reports, and
audits.
Annual General Meeting
• Under corporate law, an annual general meeting is
regarded as one of the most important institutions for
protecting the members of the company. It is at this
meeting— even though it is held only once in a fiscal
year- that the members of the company get the
opportunity to question the management on matters
relating to the following:
1.The affairs of the company,
2.The business of the company, and
3.The accounts of the company.
Annual General Meeting
• It is only at this meeting that the members of the
company have the chance not to re-elect those
directors in whom they have lost faith or confidence.
Further, as auditors also retire at this meeting,
members of the company have another opportunity
to think about the re-election of these auditors.
Annual General Meeting
• The three rules of conducting an annual general meeting
1.The meeting must be conducted on an annual basis.
2.A maximum duration of 15 months is permitted between
holding two annual general meetings.
3.The meeting must be conducted within six months of
preparing the balance sheet.
• If any of these rules are not complied with, the same will
be said to be an offence under the Companies Act, 2013.
It has been discussed in the upcoming passages.
Taking minutes of meetings
• any proxies present
• proposals put forth for consideration
• proposed resolutions
• decisions that were taken (i.e. resolutions that were
passed)
• names of persons who supported or opposed any
proposed resolutions
• queries and objections raised
• any other matters raised or discussed during the course of
the meeting
• signature of director or company secretary
Resolution
• A company resolution is a legally binding decision made by
directors or shareholders. If a majority vote is achieved in
favour of any proposed resolution, the resolution is
‘passed’.
• Shareholders can pass ordinary resolutions or special
resolutions at general meetings. Alternatively, certain
resolutions can be passed in writing, without the need to
call and attend a general meeting.
• All types of collective decisions of directors are simply
referred to as ‘resolutions’ or ‘board resolutions’. These
decisions can be made at board meetings or in writing.
Types of Resolutions
• There are 3 types of resolutions available to limited company
shareholders:
• Ordinary resolutions – Passed by a simple majority (above 50%)
of shareholders’ votes. Members cast their votes on a show of
hands or poll. Used for all types of decisions, unless the
Companies Act, the articles of association, and/or a
shareholders’ agreement stipulates the need for a special
resolution. The majority of ordinary resolutions must be filed
with Companies House.
• Special resolutions – Passed by a 75% majority of shareholders’
votes at a general meeting. Members cast their votes on a show
of hands or poll. Used for extraordinary business decisions that
cannot be passed by an ordinary resolution.
Companies Act, 2013
• Written resolutions – Used when a general meeting is
not required to pass an ordinary resolution or special
resolution.
• Any written ordinary resolution must be passed by a
simple majority of shareholders’ votes.
• Written special resolutions require a 75% majority
vote. Shareholders cast their votes by signing the
written resolution (if it is distributed on paper) or
indicating their decision via email or online (if it is
distributed by email on a website).
Auditor
• Who is an Auditor?
• Auditors are professionals who work for a company to
check whether it is following the correct legal and
ethical guidelines. They also help the company to
make changes to its policies and procedures if
necessary. They also help the company to make
changes to its policies and procedures if necessary. In
addition, they can help to spot any potential financial
problems that a company may be facing.
Rights of an Auditor
• Right to access at all the times to the books and accounts
and vouchers of the company whether kept in head office of
the company or elsewhere and shall be entitled to require
from the office of the company such information and
explanation as the auditor may think necessary for the
performance of his duties as auditor.
• The auditor shall make a report to the members of the
company on the accounts audited by him and on every
balance sheet or profit and loss account which are laid
before the company in general meeting. The said accounts
give the information required by the act in the manner so
required by and gives a true and fair view.
Rights of an Auditor
• Right to receive notice of and to attend every general meeting of
the company.
• Right to speak to such general meeting when the accounts are
being discussed.
• He has right to be indemnified for any liability incurred by him in
defending himself against civil and criminal proceedings by the
company.
• Right to visit branches of the company to audit the accounts if no
other auditor has been appointed to audit branch accounts.
• Right to take legal and technical advice wherever necessary.
• Right to receive remuneration for the work done by him.
• Right to sign the report.
• Right to keep the working notes with him.
Liabilities of An Auditor
1.If an auditor is guilty of negligence in the execution of
his duty, he may be held liable to make good any
damage resulting from that negligence.
2.An auditor is appointed to detect frauds, errors etc.
He is responsible on account of negligence in
performance of his duties.
3.Any clause in the agreement between the company
and the auditor whereby the auditor is freed from
liability has been declared void.
Liabilities of An Auditor
4. If in the course of the winding up of a company it
appears that the auditor has been guilty of any
misfeasance or breach of trust in relation to the
company, he may be held liable as an officer of the
company.
The court may examine into his conduct and compel
him to contribute such sum to the assets of the
company by way of compensation in respect of the
breach of the trust as the court thinks fit.
Liabilities of An Auditor
• If the dividends have been improperly declared and paid of
the accounts audited by him and which did not show a true
and fair picture and were incorrect and misleading, he will be
liable to refund such an amount.
• Where a prospectus is issued inviting persons to subscribe
for shares or debentures of a company, an auditor is liable in
respect of an untrue statements which is made by him as an
expert, to pay compensation t every person who subscribes
for any shares or debentures on the faith of the prospectus
for any loss or damages, he may have sustained by reason of
untrue statements included therein.
Duties of an Auditor
• To make the report to the members of the company on the accounts
examined by him which should contain all the matters as the companies
act.
• Auditor should perform his duties as per articles of association of the
company.
• He should certify the statements included in prospectus whenever the
same is issued.
• He should certify the contents of the statutory report.
• To comment on all such material violations of the law or sound accounting
practices which can reasonably effect directly or indirectly the fortune of
the accounts of the company.
• An auditor must know the provisions of memorandum and articles of
association of the company.
• He not only should verify the arithmetic accuracy of the accounts but
should check the fairness of accounts as well.
Winding Up of a Company
• According to Section 270 of the Companies Act, 2013,
a company can be wind up in two ways. They are:
1. Compulsory Winding up of Company by Tribunal
2. Voluntary Winding up of Company
Compulsory Winding up of Company by Tribunal
• According to Section 271 of the Companies Act, a Tribunal
may issue an order to wind up a company in the following
circumstances, as detailed in Section 271(1) of the
Companies Act, 2013.
• Sick Company
• Special Proposal
• Acts against the State
• Fraudulent Conduct of Business
• Failure to file financial statements with the Registrar
• It is just and equitable to wind up.
Procedure of Modes of Winding up of a Company-
Compulsory Winding up of Company by Tribunal
• A petition is use to make an application to the Tribunal in the
winding up of a company under Section 272 of the statute.
• The following individuals are entitled to file this petition:
• The Company;
• Any creditor or creditors, including any contingent or
potential creditors;
• Any Contributors to that company;
• The Registrar; and
• Any person authorized by the Central Government to do so.
Procedure
• The following is the procedure for compulsory
winding up of company by tribunal:
• Appointment of a Liquidator to the Company under
Section 275 to examine the Company’s debts and
credits in order to verify the Company’s eligibility for
forced winding up by the Tribunal.
• Following the appointment, Liquidators as per section
281 of the Act to make a report to the Tribunal.
Procedure
• The Tribunal issues orders to the liquidators in
dissolving the Company under Section 282 of the Act.
And according to which, the company’s property
undergo shift into custody in order to satisfy the
creditors and contributors first.
• Finally, the Court issues the order for dissolution
under Section 302 of the Act, after carefully reviewing
the audits and reports provided by the liquidator to
the Court in the interest of resolving the obligations
owed to creditors and other contributors.
Voluntary winding up of a company
• Section 304 of the Companies Act, 2013, specifies two
statutory conditions in which a company may be voluntarily
wind up. They are;
• If the company’s general meeting approves a resolution
requiring the company to be wind up voluntarily as a
consequence of the expiration of the time for its duration, if
any, as per its articles, or the occurrence of any event for
which the articles prescribe that the company may be
dissolve; or
• If the board of directors approves a special resolution
requesting that the firm is wind up voluntarily.
Procedure
• Convene a board meeting with the directors and
approve a resolution with a statement by the directors
that they have inquired into the accounts of the
business and that the company has no obligations or
that the company will pay from the proceeds of the
assets sold in the voluntary winding up of the
company.
• Notices calling for the general meeting of the
Company proposing the resolutions should be in
writing. In addition with a relevant explanatory
statement.
Procedure
• Pass the ordinary resolution for the Company’s winding up
by a simple majority in the general meeting; or the
exceptional resolution by a 3/4 majority. The Company’s
liquidation will begin on the date the resolution.
• A creditors’ meeting should take place on the same day or
the following day after the resolution to wind up passes. If
two-thirds of the creditors agree that winding up the
company is in the best interests of all stakeholders, the
company can be wind up voluntarily.
• A notification for appointment of liquidator must be file with
the registrar within 10 days. After passing the resolution for
company winding up.