Companies Act 1956

Meaning of the Company

According to section 3(1) (i) of The Companies Act, 1956, Company means a company formed and registered under this Act or an existing company. A "Company" may be defined as a voluntary association of persons who have come together to carry on some business and sharing the profits, there from. It is an artificial person created by law, formed for the purpose of business, registered under law having an independent legal entity, a distinctive name, common seal and perpetual succession
Company - an association of many persons who contribute money or moneys worth to a common stock and employ it in some common trade or business (for common purpose) and who share the profit or loss arising there from

Characteristics of a Company
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Incorporated Association An artificial person created by law Separate Legal Entity:: Perpetual Existence /Succession Common Seal Limited Liability : By Shares, By Guarantee Free Transferability of shares One Share-One Vote Capacity to sue and being sued Separate Property Separate Management

Merits of a Company
i. Collection of huge financial resources ii. Limited liability iii. Free transferability of shares iv. Durability and stability v. Growth and expansion vi. Efficient management vii. Public confidence viii. Social benefits a. Democratization of management b. Dispersal of ownership c. Assumption of social responsibilities

Limitations of Company Organization

i. Lengthy and expensive legal procedures ii. Excessive government regulations iii. Lack of incentive iv. Delay in decision making v. Conflict of interest vi. Oligarchic management vii. Speculation viii. Growth of monopolistic tendencies ix. Influence government decisions

Lifting the Corporate Veil

Misrepresentation Investigations Fradulent Conduct Protection of Revenue Economic Offences Improper Uses Mere Sham

Company Vs Partnership
Company Regulated under Companies Act 1956 Exits after registration under Co.Act 1956 Managed by Directors, Board of Directors Property and rights is nontransferable to shareholders Partnership Partnership Act 1932 Registration not mandatory Every partner should take part in the management Transferable to any or all partners

Company Vs Partnership
Shares are transferable when the transferee becomes the member Shareholders is not the agenthas no power Member Public Pvt s Min 7 2 Max Bound by law No limit 50 and audited annually Only it can be dissolved (Wound by provisions of companies Act 1956) Shares cannot be transferred without the consent of all partners Each partner is an agenthas power Min-2 Max- banking 10 others 20 No statutory provisions Dissolved by death/ insolvency of partner or wound if it is for fixed period.

Types of Companies
i. Private Company Ii. Public Company iii. Government Company iv. Holding and Subsidiary companies V. Foreign Companies

Types of Companies
1. Basis of incorporation: Chartered company :The royal prerogative has power to create a corporation by the grant of a charter to persons assenting to be incorporated. E.g. Bank of England, East India Company Statutory Company : These are companies created by a special act of the Legislature E.g. Reserve Bank of India, State Bank of India, Life Insurance Corporation -- Registered or Incorporated Company: These are companies which are formed and registered under the companies Act, 1956. Private Company Public Company

2.Based on Liability a company limited by shares a company limited by guarantee an unlimited company 3. On the basis of Number of members Private Limited Company Public Limited Company 4. Based on Control Government Company Foreign Company Holding and Subsidiary Company Multi National Company

Government Company
Features of Government Company i. Registered under Indian Companies Act ii. Government holding of majority shares iii. Board of Directors representing the Government iv. Relatively free from Government procedures v. Overall control of the Government

Difference Min no. of members Max.no. of members Number of directors Issue of shares to public Transfera bility of shares Minimum Capital Holding director ship

Private Companies Minimum number of members in private company is two Maximum number of members in private company is 50 Minimum number of directors is two. Not allowed to issue public invitation for investing in the company Private co restricts the transfer of shares. The shares cannot be listed in stock exchanges The minimum paid up capital for a private company is Rs.100,000. Directorships held in private companies are excluded

Public Companies Minimum number of members in public company is seven No maximum limit of membership in public companies Minimum number of directors is three Public invitation of prospectus and public issue of shares, debentures and deposits allowed. A public company cannot put any restriction on the transfer of shares. Theyre freely transferable The minimum paid up capital of a public company is Rs.500,000 A person cannot hold directorship in more than 20 public companies

I. Promotion
Meaning of Promotion Promotion is the first stage in the formation of a company. Promotion involves identification of a business opportunity or idea, analysis of its prospects and taking steps in implement it through the formation of a Company. A company may have more than one promoter. The promoter may be an individual, firm, an association of persons or a body corporate.

Functions of a Promoter
1. 2. 3. 4. 5. 6. 7. To Conceive Business Idea To make Detailed Investigation To Organize the Resources To Obtain the Consent of Persons Willing to Act as First Directors To Decide about the Name of the Company To Get the Necessary Documents Prepared To Arrange for Filling of the Necessary Documents with the Registrar

II. Incorporation by Registration

Application for availability of name: Three names in order of priority conforming to the provisions of the Act and the Guidelines issued by Department of Company Affairs in this regard: Name to end with the word(s) Limited or Private Limited, as the case may be, except: Section 25 Companies Govt. Companies (need not use Pvt. Ltd.) Producer Companies. Name should not be identical or too similar to the name of an already existing company. Should not include the name of a registered trade mark.

1) Memorandum of Association: Document that governs the relationship

between the company and the outside world a) Name clause: Governed by Emblems and Names Act 1950 Seal to be present on all business letters, notices etc b) Domicile clause: Ascertains domicile and nationality of a company c) Objects clause: Explains the utilization of shareholders funds Enables the person dealing with the company to ascertain its powers d) Liability clause: It states the liability of the members of the company is limited e) Capital clause: It must state the authorized of nominal share capital f) Association or Subscription Clause: It specifies the willingness of the subscribers to associate and form a company Violation of Memorandum of Association : Doctrine of the ultravires

Alteration of the Memorandum

Change of name Change of registered office Change of the Objects clause  To carry on its business more economically  To attain its main object by new or improved means  To enlarge or change the local area of its operation  To restrict or to abandon any of the objects specified in the memorandum  To sell or dispose of the whole or any part of the undertaking of the company  To amalgamate with any other company or body of persons

Articles of Association
Meaning and purpose: Articles of Association of a company and its bye laws are regulations which govern the management of its internal affairs and the conduct of its business. They define the duties, rights, powers and authority of the shareholders and the directors in their respective capacities and of the company is to be carried out. They are framed with the object of carrying out the aims & objects as set out in the memorandum of association.

Articles of Association
The articles of association of a company have a contractual force between the members inter se in relation to their rights as such members. Articles cannot supersede the objects as setout in the memorandum of association. The articles must be: (i) printed, (ii) divided into paragraphs, numbered consecutively, (iii) signed by subscribers to the memorandum in the presence of at least one witness who shall attest the signatures. Also, articles are to be stamped with requisite stamp and filed along with the memorandum.

Articles of Association
The Articles of Association (AA) contain the rules and regulations of the internal management of the company. 1. Powers, duties, rights and liabilities of Directors and Members 2. Rules for Meetings of the Company 3. Dividends 4. Borrowing powers of the company 5. Calls on shares 6. Transfer & transmission of shares 7. Forfeiture of shares 8. Voting powers of members, etc

Contents of Articles
1. 2. 3. 4. 5. 6. The business of the company; The amount of capital issued and the classes of shares into which the capital is divided, the increase and reduction of share capital; The rights of each class of shareholders and the procedure for variation of their rights; The execution or adoption of a preliminary agreement, if any; The allotment of shares; calls and forfeiture of shares for non-payment of calls; Transfer and transmission of shares;

Contents of Articles
7. 8. 9. 10. 11. 12. 13. Companys lien on shares; Exercise of borrowing powers including issue of debentures; General meetings, notices, quorum, proxy, poll, voting, resolution, minutes; Number, appointment and powers of directors; Dividends interim and final and general reserves; Accounts and audit; Keeping of books both statutory and others.

Distinction between Memorandum of Association & Articles of Association

Memorandum of Association 1.It is the charter of the company indicating the nature of its capital. It also defines the companys relationship with outside world. 2.It defines the scope of the activities of the company, or the area beyond which the actions of the company cannot go.

Articles of Association 1.They are the regulations for the internal management of the company & are subsidiary to the memorandum 2.They are the rules for carrying out the objects of the company as set out in the memorandum

Distinction between Memorandum of Association & Articles of Association 3.It, being the charter of the company, is the supreme document 3.They are subordinate to the memorandum. If there is a conflict between the articles & the memorandum, the latter prevails.

4.Every company must have its own 4.A company limited by shares need not have articles of its own. In such memorandum a case, Table A applies of sch I, sec 26. 5.Any act of the company which is 5.Any act of the company which is ultra vires the articles (but in intra ultra vires the memorandum is vires the memorandum) can be wholly void & cannot be ratified confirmed by the shareholders even by the whole body of shareholders

Inspection and copies of the Articles

A company shall, on being so required by a member, send to him within seven days of the requirement, on payment of five rupees, a copy of the articles. if a company makes default, the company and every officer of the company, who is in default, shall be punishable with fine up to Rs 5000 (s.39).

Alteration of Articles.
Section 31 provides that subject to the provisions of the Act and to the conditions contained in its memorandum, a company may, by special resolution alter or add to its articles must be filed with the Registrar within 30 days of the passing of the special resolution.

Limitation on power to alter Articles

1. 2. 3. 4. Must not exceed the powers given by the memorandum or conflict with the other provisions of the memorandum. Must not be inconsistent with any provision of the companies Act or any other statue. Must not include anything which is illegal, or opposed to public policy or unlawful. The alteration must be bona fide for the benefit of the company as a whole. The alteration will not be bad merely because it inflicts hardship on an individual shareholder.

Limitation on power to alter Articles

5. There cannot be alteration of the articles so as to compel the existing members to take or subscribe for more shares or in any way to contribute to the share capital, unless they given their consent in writing The amended regulation in the Articles of Association cannot operate retrospectively, but only from the date of amendment.

6.

Doctrine of Constructive Notice

Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum & the Articles of Association. These documents, on registration with the Registrar, assume the character of public documents. This is known as constructive notice of Memorandum and Articles

Doctrine of Indoor Management

There is one limitation to the doctrine of constructive notice of the Memorandum & the Articles of company. The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned, everything has been regularly done. They are presumed to have read these documents & to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum & the Articles. They can presume that all in being done regularly. This limitation of the doctrine of constructive notice is known as the doctrine of indoor management.

Registration of the Company Certificate of Incorporation Commencement of Business Statement In Lieu of Prospectus Section 70 If a company does not want
to issue a prospectus to the public for subscription of the shares, this statement is required to be issued to the public for necessary information. It must be signed by every person named in it as director or by his agent authorized in writing: The nature of the information of this document is more or less similar to that given in the prospectus. A copy of this statement must be filed with registrar within prescribed time (3 months). This provision does not apply to private company. It is generally done when the Promoters of the Company can manage capital from private contacts.

Prospectus Red Herring Prospectus is a document submitted

by a company (issuer) who intends on having a public offering of securities (either stocks or bonds). Most frequently associated with an Initial Public Offering (IPO), this registration statement must be filed with the Securities and Exchange Board of India

 Prospectus : Section 2(36) "prospectus" means 6 any document

prescribed or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate. Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things: (a) It invites subscription to shares or debentures or invites deposits. (b) The aforesaid invitation is made to the public. As per Section 67, Invitation to public includes: invitation to any section of the public howsoever selected provided the invitation is made to all the members of that section of public indiscriminately. Invitation calculated to be made available even to those who do not receive the same. Invitation to 50 or more persons.

Liability for Mis-statements in a Prospectus

Civil Liability Civil Liability (Sec.62 & (Sec.62 & 56) 56)

Criminal Liability (Sec. 63)

Criminal Liability (Sec. 63)

Against the Company

Against the Promoters, Directors, other Officers and Experts

Against the Company

Against the Promoters, Directors and Other officers (not available against experts)

Contract

Claim for Rescission of Damages

Fine upto Rs. 50,000

Damages

Compensation DamagesCompensation under Imprisonment Fine upto Both under Sections and 56 Imprisonment Sections 62 62 upto 2 years Rs.50,000 Fine upto upto 2 years Rs.50,000 and 56

Both

Share and Share Capital

According to Section 2(46), A Share represents a unit into which capital of a company is divided. However, courts have held that a share is not merely a unit of capital, it represents a bundle of rights and obligations. Holder of a share is entitled to certain rights (say, right to receive dividends, to receive notice of meetings, to participate in the proceedings of a meeting, to elect directors) and is also subjected to a number of obligations (say, to abide by Articles of Association, to maintain decorum of the meetings).

Types of shares
Section 86. New issues of share capital to be only of two kinds. The share capital of a company limited by shares formed after the commencement of this Act, or issued after such commencement, shall be of two kinds only, namely: (a) equity share capital; and (b) preference share capital. Types of Preference Shares 1.Cumulative or Non-cumulative 2.Redeemable and Non- Redeemable 3.Participating Preference Share or non-participating preference shares

S.N Basis of Preference share o distinction 1. Voting rights

Equity Share

The holder of these shares do not Generally equity share holders enjoy enjoy any voting right except at voting rights. their class meeting

2.

Payment dividend

of The holders of these shares have the Equity share holders get the preference right as to the payment dividend, after the payment to of dividend preference share holders.

3.

Repayment of The holders of these shares have the Repayment of equity share capital capital preference right as to the repayment is made after making repayment to of preference share capital profaner share holder. Rate dividend of The rate of dividend is fixed The rate of dividend may vary year to year shares are non

4. 5. 6.

Convertibility Redemption

Preference shares can be converted The equity into equity shares convertible

The preference are redeemable The equity shares are not during the life time of the company redeemable during the life time of the company

Allotment of Shares
Allotment is an acceptance to an offer for purchase of shares.
Where allotment does not conform to the statutory requirements, it is called irregular allotment. For allotment to be valid, following requirements must be satisfied: A copy of prospectus or statement in lieu of prospectus must have been delivered to Registrar of Companies. Application money must not be less than 5% of the nominal value. Minimum subscription (i.e., at least 90% of the issue) must have been received. Application money must be kept deposited in a Scheduled Bank till the minimum subscription has been received. Shares must have been listed on the stock exchanges mentioned in the Prospectus.

 Buy-back of shares (77A) A corporation's repurchase of stock or bonds it has issued. In the case of stocks, this reduces the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company. This is usually considered a sign that the company's management is optimistic about the future and believes that the current share price is undervalued. Reasons for buybacks include putting unused cash to use, raising earnings per share, increasing internal control of the company, and obtaining stock for employee stock option plans or pension plans. Issue of Bonus shares Sweat Equity and Employee Stock Options (15A) "employees stock option" means the option given to the whole-time directors, officers or employees of a company, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price Share certificate A share certificate is a document issued under the common seal of the company and it states the extent of the interest of its holder in the company's capital. This certificate is usually given free of charge to every member whose name is entered in the register of members. It indicates the name, address and other particulars of the holder, the number of shares and the amount paid up on share held by him.

MEETINGS

Meetings of share holders:

Meetings of directors

Meetings of creditors and debenture holders

General meetings

Class meetings

Statutory meetings

Annual general meetings

Extra ordinary meetings

Meetings of Shareholders. Statutory Meeting (Section 165) Statutory meeting is the first meeting of the shareholders of a

company. This meeting is held only once in the life time of the company. Objectives: To approve the preliminary contracts specified in the prospectus of the company with modification if any. To discuss the success of floating the project of the company. Provisions: 1. Time: Every company , shall , within a period of not less than ONE month and not more than SIX months from the date on which the company is entitled to commence the business, hold the Statutory meeting 2.Notice: The company must give notice to its member at least 21 clear days before holding the statutory meeting stating time, date and place of meeting. 3. Statutory Report: The Directors of the co., are required to send a report called statutory report to every member of the company along with the notice of the meeting at least 21 days before the date of the meeting. CONTENTS: 1. Allotment of Shares: The total number of share allotted, distinguishing fully paid or partly paid up and the extent to which they are so paid up, shares issued otherwise than for cash. 2. Cash Received: Total amount of cash received by the company in respect of all the shares allotted. 3. Abstract of Receipt and Payment Account 4. Names, addresses and occupations of the companys Directors, Auditors and all other managerial personnel. 5. To approve the preliminary contracts specified in the prospectus of the company with modification if any. 6. The extent to which the Underwriting Contracts has been carried out and the reasons thereof. 7. The calls in arrears, if any, due from any Director and the Managers of the co. 8. Commission and brokerage paid to any Director or Manager on the issue of shares or debentures of the company. Certification of Statutory report: By not less than two directors , one of whom shall be the Managing Director. The Auditor of the co shall certify the particulars regarding the issue of shares, receipts and payment etc. And a copy of certified statutory report must be sent to the Registrar of company immediately after it is sent to the members of the company. Penalty: Maximum of Rs. 5000/-

Quorum For A Meeting

Dictionary least number of members required to carry on a meeting or for doing business. Minimum number of members required in order to consider a meeting valid. Generally, Articles provide for larger quorum. But not smaller than statutory minimum ,i.e., Five members personally present in case of Public Limited and two for a Private limited.

Resolutions
Questions which generally come for consideration at the general meeting of a company are presented in the form of proposals called Motions. A motion proposed by the chairman of the meeting/any other member . After discussions put to vote, final result accepted becomes Resolutions. Kinds of resolutions: a)Ordinary resolution[sec.189(1)]Is passed in a general meeting by a simple majority of votes. Votes cast in person/by proxy , and required notice of resolution duly given.I t is required for.., matters concerning with Name Clause, Capital Clause.., for appointing auditors and fixation of their remuneration., appointing of first directors who are liable to retire by rotation.., for increasing/decreasing in number of directors.., appointment of managing director, removal of a director , for winding up of a company voluntarily in certain events, appointing and fixing of remuneration of liquidators b)Special resolution[sec189(2)] Is required for changing the place of registered office from one state to another.., for alterations of Objects clause,omission/addition of private from name.., alteration of Articles.., conversion of any portion uncalled capital into reserved capital.., for payment of interest out of capital.., applying to Central Govt for an inspector to investigate in company affairs.., for applying in court to wind up., for authorizing a liquidator to accept shares as consideration for transfer of its assets.., and for disposal of books and papers of a company in voluntary winding up after completion of the process. c)Resolutions requiring special notice[sec190]. Its only a different kind of ordinary resolutions of which notice of the intention to move a resolution has to be given. Notice shall be given not less than 14days before the meeting to the members as notice of meeting is given/by advertisement. Is required for appointment of an auditor other than retiring ones.., to re-appoint the retiring auditor, for removal of a director before expiry of his period.., for appointment of a director in place of who is removed. Passing of Resolutions by Postal Ballot[sec.192-A]a listed company may conduct it by postal ballot. It has send a notice along with a draft resolution explaining the reasons, which should be returned within a period of 30days from the date of posting of the ballot.

Accounts & Audits

Accounts [Sec.209] Every company has to maintain proper books of account at its registered office All sums of money received and expended by the company and the matters in respect of which expenditure takes place Sales & purchases of goods Asset & liabilities In case of production, processing, manufacturing activities, such particulars relating to utilization of material & labor Sec.541(2) Necessary to exhibit & explain the transaction and financial position of business of the company Preparation and Presentation of final statement of Account Sec.211 Schedule VI Preparation of Balance Sheet and Profit & Loss Account of Company (True & Fair) Why Audit?? A Company carries on business with capital provided by persons who are not in control of use of the money supplied by them. They would, therefore like to see that their investment are safe are being used for intended purpose The annual account of company present a true & fair view of state of affairs of the company Outlines of Objective of an Audit Detection of fraud & Detection of technical errors Detection of errors of principle

Auditor
Appointment (Sec.226)  Chartered Accountant within the meaning of The Chartered Accountant s Act 1949  A practicing CA  A certificate holder in an erstwhile Part B state which entitled him to act as an auditor of company in the territories of that state. Rights  Right of access to books & accounts(Sect 227(1)).  Right to obtain Information or Explanation(Sect 227(1)).  Furnish all necessary information  Right to inspect Branch Accounts(Sec228(2))  He/ she can refer though audit had done by somebody else.  Right to receive notices.(Sect.231)  All notices of and other communications relating to any general meeting of a Company.  Right of attend general meeting(Sect.231)  Right of Remuneration  As work is over Duties of Auditor (Sect.227)  According to the information provided to him he should interpret in the manner so required.  Balance sheet and Profit & loss account gives a true and view of the companys affairs as at the end o financial year.  Whether he has obtained all the information & explanations required by him for the purpose of his audit.  Proper books of Account & returns to be maintained.  Finally make Qualified Reports.

   

    

The first auditor appointed by the BOD may be removed by passing an ordinary resolution but get the nomination for that place within 14 days. Permission of Central Govt. Retiring an auditor before the expiry of the term only an ordinary resolution of which a special notice has been given to the effect that the retiring auditor shall not be reappoint is sufficient. It empower the Central Govt. to issue necessary directions for conducting Cost Audit of companys engaged in production, processing, manufacturing mining activities. Specified in the order of the Govt. Conducted by Cost Accountant (Cost & Works Accountant Act. 1959) C.A. if cost accountant not available & the Central Govt. issues a notification to this effect. Appointed By BOD with the approval of Central Govt. It empowers the Central Govt to appoint auditors for conducting a Special Audit where the Central Govt is of opinion. That affairs of a company are not being managed in accordance with sound business or prudent commercial practices That company is being managed in a manner likely to cause serious injury or damage to the interest of the trade, industry, business to which it pertains That financial position of a company. Special Auditor make report to members of the company & same for Central Govt. Central Govt has to take decision on the Report if not then a copy will circulate to members .

DIRECTOR
1. Appointment First Director [Sec.254] -: By the Promoters of the company Subsequent Appointment [Sec.255] -: By the members & subscribers to memorandum at AGM Additional Director [Sec.260] -: By the Board of Directors Casual Vacancies [Sec.262] -: By the Board of Directors Alternate Directors [Sec.313] -: By the Board of Directors Appointment of Director [Sec.255] -: By Third Parties Appointment of Director [Sec.408] -: By Central Government 2. Qualification The act prescribes no academic, professional or share qualifications Articles may provide for any qualifications Where share qualification is fixed by articles then the Act provides:  Qualification share must be taken within 2 months after appointment.  Nominal value of qualification shares must not exceed Rs.5000.

3. Disqualification According to Sec.274, in following cases directors get disqualified if, 1) He is found to be of an unsound mind 2) He is an undischarged insolvent 3) He has applied to be adjudicated as an insolvent and his application is pending 4) He has been convicted by a court involving moral turpitude and sentenced to imprisonment for not less than 6 months 5) He has not paid any call in respect of shares of the company held by him 6) He has been disqualified by an order of the court under sec.203 of this act 7) He is already a director of a public company which a) has not filed the annual accounts and annual returns for any continuous three financial years b) has failed to repay its deposits or interest thereon on due date 4. Remuneration If article permits remuneration, it becomes an authority to pay remuneration to directors from the funds of the company It is not restricted to pay out of profit The amount of remuneration & mode of payment can be determined from the provisions of Sec.198 and 309. In a public company, remuneration given shall not exceed 11% of the net profit of that company in that particular year

5. Retirement In a Public company, two third of the directors are liable to retire by rotation in every AGM. Out of these one third of the directors shall retire from office at every AGM. However, the retiring directors are eligible for re-appointment unless the articles provide. 6. Vacation of Office The office of a director shall become vacant if, 1) He fails to obtain qualification shares within 2 months of his appointment 2) He absents himself from 3 consecutive meetings of the board of directors 3) He is found to be of unsound mind 4) He applies to be adjudicated as an insolvent 5) He is adjudged an insolvent 6) He is convicted by a court involving moral turpitude and sentenced to imprisonment for not less than 6 months 7) He fails to pay any call in respect of shares of the company 8) He accepts a loan from the company without the permission of the central government 9) His period of appointment has expire 7. Removal A director of the company may be removed before the expiry of his term by 1) 2) 3) Shareholders Central Government Company Law Board

8. Resignation If the article permits -: Director may resign at any time and his resignation will take effect without any need for its acceptance by board of directors If the article not permits -: In this case also director can resign at any time. No matter whether the company accepts it or not 9. Powers of Directors To control the work of offices of company like managing directors, managers, secretary, etc. To manage the affairs of the company They have right to recommend the payment of dividend They can transfer some of its powers to the MD Powers which can be Exercised : To make calls on shares and debentures To issue shares and debentures To invest funds of the company To make loans To appoint secretary, manager, etc. To fill up casual vacancy in the office of directors, auditors, etc To appoint MD of the company

10. Duties To decide the amount of minimum subscription To see that all the money received from applicants for shares is deposited in the bank To prepare a statutory report To send a copy of statutory report to every member of the company To approve the Balance and Profit & Loss Account before they are submitted to the Auditors for their reports To pay dividends only out of divisible profit of the company To manage affairs of company efficiently To see that Board Meetings are held at least once in every 3 months.

Winding Up of Companies
Meaning of Winding Up: Process of putting an end to the life of a company. In the course of such a dissolution, its assets are collected and debts are paid off. Winding up is the prior stage and dissolution is the next. It is the end of legal personality of the company. Modes of Winding Up u/s 425: Compulsory Winding up of the Company (by NCLT) On passing of a special resolution (438(a)) 75% members attending and voting Failure to hold statutory meeting or Delivery of Statutory Report (438(b)) with in six months Failure of the company to commence business (433(c)): within 1 year Reduction in number of members below minimum (433(d)): 7 Public & 2 Private When sick industrial company is unable to make its net worth exceed its accumulated losses within a reasonable time (433(e)): Just and equitable (433(f)): Discretionary Power of NCLT Company unable to achieve its objective; Business only giving loss and no profit; Existing assets insufficient to meet existing liabilities; Object illegal; original object was fraud

Petition for Compulsory Winding up (439(1)): can be made by any one of the following: By company itself (484) By Creditor/Debenture Holders (439 (2)) Contributory (428): who is liable to contribute to the assets of the company in the event of Winding Up of the company Commencement of Winding Up: Liquidation: done by official liquidator under supervision of Tribunal who is attached to High Court and is appointed by the Central Government. eg. CA, CS, Lawyers. Appointment of Official Liquidator (448(1)): A member from the panel of the professional firms of chartered accountants, advocates, company secretaries, cost and work accountants which the central government may constitute. Body corporate approved by central government. Whole-time or part-time officer appointed by the central government. Terms of Appointment and Remuneration of Official Liquidator: Acc. to Central Govt. rules Remuneration: First Charge on Realization of Assets Duties: To submit preliminary report To takeover companys assets To convene meetings of creditors and contributories To keep proper books To submit accounts To submit information in pending liquidation

Powers: To be exercised by sanction of court ( 457(1)) Institute and defend suits, prosecutions in the name and on behalf of the company Carry on business for the beneficial winding up Sell movable & immovable property by public action or private contract Raise money on the security of any asset of the company Do all other acts necessary to wind up & to distribute assets To be exercised without the sanction of the court(457(2)) Do all acts & execute in the name of the company all deeds, receipts and documents Inspect records & returns on the files of the Registrar Draw, accept, make & endorse bill of exchange To appoint agents where necessary Statement of Affairs of Company: after Winding Up it is to be submitted by the Directors to Official Liquidator containing: Debts and liabilities of the Company Assets of a Company showing separately cash in hand and in Bank and Negotiable Instrument Name and Address (along with official Address) of Directors Winding up of Unregistered Company: An unregistered company can be wound up under the Companies Act. Such company can not be wound up voluntarily or under the supervision of the court. If the foreign company carrying on business in India, ceases to do so, it can be wound up according to the procedure applicable unregistered company. Voluntary Winding Up (484 (1)): It means winding of the company by the members themselves without intervention of the court . It can be done under the following circumstances: By an ordinary resolution of the members passed in general meeting cases. By special resolution pass by members Time fixed by the Articles for duration of Company has expired and the articles specifying an event on occurrence of which the company is dissolvent and such event occurred

Members Voluntary Winding Up (488): Company is solvent, can pay its debt within 3 years from the commencement of its business. Creditors Voluntary Winding Up: Assumption that Company is insolvent. Appointment of Liquidator: by company in MVWU and by Creditor in CVWU Vacancy in Office of Liquidator: by death or resignation. Filled by Company/NCLT/Creditors Notice of Appointment of Liquidator: ROC by Company within 10 days Only individual can be appointed as Liquidator: not body corporate No gratification for appointment of Liquidator: fine up to Rs. 10000/Power of NCLT to appoint Liquidator: Can appoint or remove the Liquidator Liquidators Remuneration: Fixed at General Meeting in case of MVWU and by committee of inspection in case of CVWU Provisions for VWU: a) Appointment of Committee of Inspection having 5 members by Creditors in case of CVWU only. b) Power of Board after appointment of Liquidator: cease to exist Meeting of Creditors: if company found insolvent by Liquidator in case of MVWU Meeting of members and creditors: at end of year in case of MVWU. Similarly in case of CVWU but the members and creditors meet separately. Distribution of Property of Company: with equal progress b/w lenders and creditors Statement of Affairs by Directors: same as under NCLT Powers of Liquidator: Same as of Official Liquidator. Additional Powers by sanction of NCLT/Special Resolution: Pay any classes of Creditors in full, make compromise or arrangements with creditors and compromise on liabilities, damages etc. Final Report by Liquidator: to NCLT

Difference between MVWU and CVWU: a) MVWU: solvent; CVWU: assumption of insolvency; b) MVWU: Liquidator appointed by members; CVWU: by creditors; c) MVWU: no committee of inspection ; CVWU: there is one; d) MVWU: meeting of members only; CVWU: members and creditors; e) Liquidators Remuneration: Fixed at General Meeting in case of MVWU and by committee of inspection in case of CVWU Dissolution: name of the Company struck off from ROC. Dissolved company cab be revived within 2 years from the date of dissolution by NCLT.

Majority Powers and Minority Rights

Foss Vs Harbottle Exceptions: 1. Act is illegal or ultra vires 2. Fraud on the minority 3. Majority Share Holder is the wrongdoer 4. Infringement of Individual membership right

Prevention of Oppression and Mismanagement

Meaning of Oppression Section 397 of the companies act, 1956 provides relief to the oppressed minority. Basically oppression means exercise of power in an unjust manner. The Court has power to make such orders under section 397 read with section 402 as it thinks fit, if it comes to the conclusion that 1) the companys affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members; and 2) the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up, and 3) That to wind up the company would unfairly prejudice the petitioners. Relief under Section 397 Not Available under the following situations: 1) Where there are minor acts of mismanagement 2) Where a shareholder holding 30% of shares of a company is denied access to or inspection of books of accounts of the company. This is because this right is recognized by the Companies Act.

Meaning of Mismanagement: Generally if the affairs of a company are being running by the Board in a manner which is prejudicial to the interest of the company or to the public it is said to be mismanaged. Relief under Section 398: - Any members of a company who complain: that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company may apply to the NCLT. The NCLT may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. Persons Entitle to Apply (399) (a) In the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, (b) In the case of a company not having a share capital, not less than one-fifth of the total number of its members. Powers of National Company Law Tribunal [Section 420] 1) The regulation of the conduct of the companys affairs in future 2) The purchase of the shares of any member of the company by the company. 3) In the case of purchase of the shares by the company, consequent reduction of its share capital. 4) The termination, setting aside or modification of an agreement between the company and managing director, or any other director, and manager. 5) The termination, setting aside or modification of any agreement with any person, provided due notice has been given to him and his consent obtained 6) Any other matter for which, in the opinion of the NCLT, it is just and equitable that provision should be made.

BORROWING POWERS OF A COMPANY

Every trading company has an implied power to borrow, as borrowing is implied in the object for which it is incorporated. A trading company can exercise this power even if it is not included in the Memorandum. However non-trading company has no implied power to borrow and such power can be taken by it implied power to borrow and such power can be taken by it by including a clause to that effect in the Memorandum.

Restrictions on borrowing power

A public company can borrow only after the receipt of Commencement Certificate. [Section 149(1)].But a private company can borrow immediately after the incorporation The Board of Directors may borrow moneys by passing a resolution passed at the meetings of the Board. The board may delegate its borrowing powers to a Committee of Directors. Such a resolution should specifically mention the aggregate amount up to which the moneys can be borrowed by the Committee, the Managing Director, Manager or any other principal officer of the company on such conditions as it may prescribe [Section292 (1) (c)] The moneys borrowed together with the moneys already borrowed by the company (excluding loans obtained from banks i.e. working capital) shall not exceed the aggregate of the paid up capital and the free reserves.[Section 293(1)(d)] It may be noted that a company may borrow in excess of its paid up capital and free reserves if it is so consented and authorized by the shareholders at a general meeting.

Transactions, which are not borrowing

Temporary loans (repayable within six months or on demand) obtained from the companys banker in the ordinary course of business. Borrowing of money by a banking company in the ordinary course of business. Hire purchase and leasing transactions. Purchase of machinery on deferred payment.

ultra vires borrowing: A Company is said to resort to ultra vires borrowing if it exceeds the authority given to it in this respect by the Companies Act, the Memorandum and the Articles of the company. An act of borrowing by the company maybe ultra vires (outside the power of) the company or ultra vires the directors or ultra vires the Articles. Void ab initio borrowings - Where such loan is ultra vires the company, such loan is null and void and does not create an actionable debt. Any securities given in respect thereof are inoperative. Thus, the lender cannot sue the company for the return of the loan and shall be under an obligation to return back the securities, if any. However, if the lender has acted in good faith that is without any knowledge that the company borrowed the money beyond its powers, he may have the following remedies 1.Injunction- If the company has not spent the money so borrowed, the lender may obtain an injunction order against the company restraining it from spending the amount and recover the same. 2.Restitution- If the money has been invested in some particular asset, he may claim that asset, or if such asset cannot be ascertained he may claim that any increase in the assets as a result of such borrowing be restored to him in the even of a winding up. 3.Subrogation- If the money has been applied in paying off some debts of the company, he is entitled to step into the shoes of the creditors so paid off and can rank as a creditor of the company to the extent of the money so applied. 4.Suit for breach of warranty- The lender may sue the directors personally for breach of implied warranty of authority and claim damages for the same. 5.Ratification of borrowing- If the borrowing power exercised by the company is ultra vires the Memorandum, that is beyond the powers given to its by the Memorandum, such borrowing cannot be ratified afterwards in any way, even by a unanimous resolution of the shareholders in a general meeting. But if the borrowing is ultra vires the Articles, but intra views the Memorandum the act of borrowing can be ratified by the shareholders in general meeting by altering the Articles or by passing a resolution as per Articles.

Features of Debentures
The rates of interest payable on debentures is fixed. The rates of interest payable on the face value of the debentures. The debenture holders do not have any voting right to participate in management. The holder of debentures are paid interest before the payment of profit to preference share holder. Debentures may be convertible

S. Basis of distinction No 1. 2. 3. 4. Capital Vs Loan Status of holder Right to vote Charge on Assets

Shares A share is a part of owner' fund Shareholder are owners Shares carry the right to vote

Debentures A Debenture constitutes a loan Debenture holders are creditors Debentures did not carry the right to vote

Shares are not secured against any Non convertible debenture issued for a charge period exceeding 18 months are always have a charge No fixed dividend payable despite Fixed rate of interest payable even in the profits absence of profit is repayable before

5. 6. 7. 8. 9.

Return

Repayment of capital Principal amount is repayable after Principal amount debenture holder Preference share Reward Investment Convertibility for Reward is the payment of dividend

Reward is the payment of interest

Equity shares can not be convertible Debentures can be convertible

Restriction on issue Section 79, of the companies Act The is no restriction imposed on issue of at discount 1956, imposes certain restriction on debentures at discount. issue of shares at discount Trust deed Share Trust Deed is not required to Debentures Trust Deed is required to be be executed executed.

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