ASSIGNMENT (COMPANY LAW)

Question 1 What do you understand by incorporation of company. Discuss the difference

between MOA and AOA.

SOLUTION 1 The word ‘Company’ has a strict legal meaning according to the provisions of the
Companies Act of 2013, a company refers to a company formed and registered under the
Companies Act. In common law, a company is a “legal person” or a “legal entity” which is
separate and capable of surviving beyond the lives of its members.

Incorporation of a company refers to the setting up of a company according to the provisions

laid out in the Companies Act of 2013. This article deals with the process of incorporation of a
Company, the advantages that an incorporated company would have over the Non-
Incorporated Companies and also the disadvantages of Incorporation of a Company.

Advantages of Incorporation of a Company

The advantages mentioned below are only enjoyed by the companies which are incorporated
according to the provisions laid out in the Companies Act of 2013. Non incorporated companies
do not enjoy these benefits.

Separate Legal Identity

Once a business is incorporated, it becomes a separate legal identity. An incorporated

company, unlike a partnership firm which has no identity of its own, has a separate legal
identity of its own which is independent of its shareholders and its members. The companies
can thus own properties in their name, become signatories to contracts etc.

According to Section 34(2) of the Companies Act, 2013, upon the issue of the certificate of
incorporation (which will be talked about later in the article), the subscribers to the
memorandum and other persons, who may from time to time be the members of the company,
shall be a body corporate capable of exercising all the functions of an incorporated company
having perpetual succession. Thus the company becomes a body corporate which is capable of
immediately functioning as an incorporated individual.
Perpetual Succession

The term perpetual succession means that the longevity of the company does not depend on its
members or their financial status. Even if all the members of the company go bankrupt or all of
them die, the company will not dissolve on its own unless it is made to dissolve on grounds
which are laid out in the act.

Transferable Shares

According to Section 82 of the Companies Act of 2013, the shares of a company are deemed to
be movable and transferrable in the manner provided by the articles of the company. This
enables the member to sell his shares in the open market and to get back his investment
without having to withdraw money from the company. This provides liquidity to the investor
and the stability of the company. In a partnership, on the other hand, a partner cannot transfer
his share in the capital of the firm except with the unanimous consent of all the partners.

Capacity to Sue

An incorporated company is also vested with the power of suing individuals and other
companies in its name.

Flexibility

Every company has complete independence to form policies suited to their organisation
provided they do not violate general principles of law and equity.

Limited Liability

The company being a separate entity, leading its own existence, its members are not liable for
its debts. The liability of the members is limited to his or her share in the company and the
liability ends there. No one is bound to pay more than what he has put in.

DIFFERENCE BETWEEN MOA AND AOA

Category Memorandum of Association Articles of Association
Purpose Outlines the company's fundamental Provides detailed rules and regulations for internal
objectives and scope of activities. management and governance.
Scope Covers broader aspects such as company Focuses on specific internal regulations, including
name, registered office, objects, liability rights and powers of shareholders, appointment of
clause, and capital clause. directors, voting procedures, and dividend
distribution.
Alteration Changes require shareholder approval Can be altered by passing an ordinary resolution in
through a special resolution and formal filing a general meeting of shareholders.
with the company registrar.
Binding Binds the company to the outside world, sets Primarily governs the relationships and conduct of
Nature limits of company's authority, and acts as a the company's directors, officers, and
source of information for external shareholders.
stakeholders.
Relationship Precedes the articles and holds superior Subordinate to the memorandum, providing the
importance. The articles must align with the framework for implementing the objectives and
provisions stated in the memorandum. activities outlined in the memorandum

Key Difference Between Memorandum of Association and Articles of

Association

The key difference between the Memorandum of Association and Articles of Association lies in their
respective roles and content within a company's constitution. Here are the main distinctions:

Purpose:

o Memorandum of Association: The memorandum outlines the company's fundamental

objectives and the scope of its activities. It defines the company's external relationships and acts
as a contract between the company and the outside world.
o Articles of Association: The articles provide detailed rules and regulations for the internal
management and governance of the company. They lay down the procedures for meetings,
appointment of directors, distribution of shares, etc.

Scope:

o Memorandum of Association: It covers broader aspects, including the company's name,

registered office, objects, liability clause, and capital clause.
o Articles of Association: It focuses on more specific internal regulations, such as the rights and
powers of shareholders, the appointment and removal of directors, voting procedures, and
dividend distribution.

Alteration:
 o Memorandum of Association: Any changes to the memorandum require the approval of the
shareholders through a special resolution and formal filing with the company registrar. These
changes are generally considered more significant and affect the company's fundamental
structure and objectives.
o Articles of Association: The articles can be altered by passing an ordinary resolution in a general
meeting of the shareholders. The changes usually relate to internal management matters and
can be more easily modified as per the company's evolving needs.

Binding Nature:

o Memorandum of Association: The memorandum has an external focus and binds the company
to the outside world. It sets the limits of the company's authority and acts as a source of
information for external stakeholders.
o Articles of Association: The articles primarily have an internal focus, governing the relationships
and conduct of the company's directors, officers, and shareholders. They serve as a contract
among these internal parties.

Relationship:

o Memorandum of Association: It precedes the articles and holds superior importance. The
articles must align with the provisions stated in the memorandum.
o Articles of Association: The articles are subordinate to the memorandum. They provide the
framework for implementing the objectives and activities outlined in the memorandum .
QUESTION 2 Discuss the kinds of directors and their power and duties under company law 2013

SOLUTION 2

The term “director” is defined under Section 2 (34) of the Companies Act 2013 as “a director appointed
to the Board of a company,” where “Board of Directors” or “Board” in relation to a Company refers to
the collective body of the firm’s directors. According to Chapter XI, Section 149 of the Companies Act
2013, every company must have a Board of directors, the composition of which should be as follows:

1. Public Company: A minimum of three and a maximum of fifteen directors should be

appointed. Also, at least one-third of the directors must be independent.
2. Private Company: Minimum of two and a maximum of fifteen directors are required for a
private company.
3. One Person Company (OPC): A minimum of one director must be appointed.
In every Company format, a maximum of 15 directors can be appointed (OPC, Public, Private). By passing
a special resolution in the company, the number of directors can be increased above 15. Out of all the
appointed directors, one must have resided for more than 182 days in India in the preceding calendar
year. Also, at least one of the directors among all the directors should be a woman director.

The Companies Act of 2013 recognizes the concept of an independent director, which was previously
solely part of the listing agreement. It refers to a director who is not a full-time director, the Managing
director, or a nominee director and meets the qualifications outlined in Section 149 of the Act.

According to sections 266A and 266B of the Companies Act of 1956, a Director Identification Number
(DIN) is a one-of-a-kind identification number assigned to existing and/or future directors of any
incorporated company. According to the requirements of the Companies Act, every director shall be
selected by the company in general meetings, provided they have been assigned the Director
Identification Number (DIN) and have submitted a statement that he/she is not disqualified to become a
director.

The Board of Directors appoints an additional director to serve until the next general meeting using the
Board’s inherent power. The Board of Directors may designate an alternate director to function as a
director in absence for a term of not less than three months and not more than the allowed period for
the director who is being replaced.

The Board may appoint as a director any individual nominated by any institution in accordance with the
terms of any extant legislation or other government regulation or shareholdings, such directors are
known as nominated directors.

As per Principle of Proportional, representation the articles of a company may allow for the
appointment of not less than two-thirds of the total number of directors of a company, and such
appointments may be made once every three years and casual vacancies of such directors shall be
addressed as specified in sub-section (4) of Section 161.

Powers of the directors of a company

Most corporations have not included a separate article or passed a resolution stating that directors do
not have the authority to conduct certain tasks. However, the Act requires a resolution at a general
meeting to specify this sort of power. The following decisions should be taken by the directors, but
generally also requires shareholder approval through a resolution:

 Loans to the directors

 Fixed-term employment contracts of directors for more than two years.
 Significant property transactions in which the directors have a personal stake.
 The issuance of the shares.
The directors are granted the above-mentioned powers collectively. Actually, the board is to delegate
authority to the concerned director in order to do this. This is permitted by both the Model Articles and
Table A of the Act.

Types of directors

Residential director

According to Section 149(3) of the Companies Act of 2013, every company must have one director who
has spent at least 182 days in India in the previous calendar year.

Independent director

According to Section 149(6), an independent director with reference to a company is one who is not a
managing director, whole-time director, or nominee director. Companies that must appoint an
independent director are mentioned in Rule 4 of the Companies (Appointment and Qualification of
Directors) Rules, 2014. The following companies must nominate at least two independent directors:

 Public Companies with Paid-up Share Capital of Rs.10 Crores or more;

 Public Companies with a turnover of Rs.100 crores or more;
 Public companies having total outstanding loans, debentures and deposits of Rs. 50 crores or
more.
Individuals qualified for independent directorship:
 1. Who, in the board’s viewpoint, is a person of integrity and possesses appropriate expertise
and experience;
2. 1. Who is or was a promoter of the Company or any of its Holding, Subsidiary, or Associate
Companies (HSA Companies);
2. Who is not connected to the company’s promoters or directors, or its HSA companies;

3. Who has or has not had a Pecuniary (Money) relationship with the company and its HSA
company, or their promoters or directors, during the two most immediately preceding fiscal
years or the current fiscal year;
4. None of whose relatives has or has had a financial relationship with the company, its HSA
company, or their Promoters, directors, amounting to 2% or more of the firm’s gross
turnover or total income, or fifty lakhs, or such greater amount as may be prescribed,
whichever is less, during the two most recent preceding fiscal years or during the current
fiscal year.
5. Who, neither he nor any of his relatives-

1. Holds or has held the post of Key Managerial Personnel (KMP) or has worked for the
Company or its HSA companies in any of the three fiscal years;
2. He or any of his relatives has an employee or owner or a partner in any of the three fiscal
years immediately preceding the fiscal year in which he is suggested to be hired, as an
auditor in the firm, Company Secretary in practice, Cost Auditor, Legal Consultant of the
company or its HSA companies;
3. Holds along with his relatives 2 per cent or more of the Company’s total voting power;
4. He or she has not been the Chief Executive or director of any Non-Profit Organization that
receives 25% of its revenue from the Company or HSA Companies or its Promoters or
directors, or that NGO owns 2% or more of the Company’s total voting power.
F. Who holds any other qualifications that may be needed.

Some general points:

 Tenure of an independent director

An independent director can serve for up to 5 consecutive years. He is also eligible for reappointment by
passing a special resolution, and this requires his reappointment in the Board’s Report. However, he
may not hold office for more than two consecutive terms, and he shall be ineligible to be appointed
after three years after ceasing to be an independent director.

 Independent director’s remuneration

According to Section 149(9) of the Act, an independent director is not eligible for stock options. They
may, however, be remunerated in the form of a fee as per Section 197(5) of the Act. Sitting fees for
Board of Directors and other committee meetings must not exceed Rs. 1,00,000 per meeting.
Small shareholders directors

A single director can be appointed by small shareholders in a listed company. However, this action
requires an appropriate procedure, such as issuing a notice to at least 1000 shareholders, or one-tenth
of the total shareholders.

Women director

According to Section 149 (1) (a) second proviso, certain kinds of corporations must have at least one
female director on their board. Such companies include any listed company and any public company,
having:

1. Paid-up capital of at least Rs. 100 crore, or more,

2. Turnover of Rs. 300 crore or higher.

Additional directors

Section 161(1) of the 2013 Act allows a company to designate any individual as an additional director.

Alternate directors

According to Section 161(2), a company may appoint an alternate director if the Articles of Incorporation
grant such authority to the company or if a resolution is approved. An alternate director is appointed if
one of the company’s directors is abroad from India for at least three months and in his/her absence,
the alternate director is appointed.

 The tenure of an alternate director cannot be longer than the term of the director in whose
place he has been appointed.
 Furthermore, he will be required to vacate the post if and when the original director returns
to India.
 Any changes to the term of office made during the absence of the original director will only
affect the original director and not the alternate director.
Shadow director

A person who is not appointed to the Board but whose instructions the Board is accustomed to act is
responsible as a director of the company unless he or she is offering advice in his or her professional
role.

Nominee directors

They can be nominated by certain shareholders, third parties via contracts, lending public financial
institutions or banks, or the Central Government in cases of tyranny or mismanagement.

Duties of a company’s directors under the Companies Act, 2013

Section 166 of the Companies Act 2013 stipulates the following duties of the directors of a Company:

1. A director must function in line with the company’s Articles of Association.

2. A director must act in the best interests of the company’s stakeholders, in good faith and
promote the company’s objectives.
3. A director shall use independent judgment in carrying out his responsibilities with due care,
skill and diligence.
4. A director should constantly be aware of potential conflicts of interest and endeavour to
avoid them in the best interests of the firm.
5. Before authorizing related party transactions, the director must verify that appropriate
considerations have taken place and that the transactions are in the company’s best
interests.
6. To assure that the company’s vigilance mechanism and users are not prejudicially affected
on such use.
7. Confidentiality of sensitive proprietary information, trade secrets, technology, and
undisclosed prices must be protected and should not be released unless the board has
approved it or the law requires it.
8. A company’s director may not assign his or her office, and any such assignment shall be
invalid.
9. If a corporate director violates the terms of this section, he or she will be fined not less than
one lakh rupees but not more than five lakh rupees.
The Companies Act of 2013 additionally assigns specific obligations to independent directors in order to
ensure the Board’s independence and fairness. An independent director is a member of the Board of
Directors who does not own any shares in the company and has no financial ties to it other than
receiving the sitting fees. According to the Companies Act of 2013, Schedule IV, an independent director
should:

1. Protect and support the interests of all stakeholders, particularly minority stakeholders.
2. In the event of a conflict of interest among the stakeholders, then he/she should act as a
mediator in that situation.
3. Provide assistance in delivering an impartial and fair decision to the Board of Directors.
4. Should pay adequate care to transactions involving related parties.
5. To honestly and impartially report any unethical behaviour, violation of code of conduct or
any suspected fraud in the company.
.