Corporate Law

UNIT III CORPORATE ADMINISTRATION

DIRECTORS

Section 2(13) Director’ includes any person occupying the position of director, by whatever name called. Thus a director may be defined as a person having control over the direction, conduct, management or superintendence of the affairs of the company
Explanation (1) section 303 further provides that any person in accordance with whose directions or instructions the board of directors of a company is accustomed to act shall be deemed to be director of the company.
The important factor to determine whether a person is or not a director is to refer to the nature of the office and its duties.
Only individual can be director. No body corporate, association or firm can be appointed director of a company.(section 253)

LEGAL POSITION OF DIRECTOR

Director as agent-A company, as an artificial person, acts through directors who are elected representatives of the shareholders. They are, in the eyes of the law, agents of the company for which they act.

CASE:- VINEET KUMAR MATHUR V. UOI (1996) –Held director may make the company liable for contempt of court.

Director as trustee- director stand in fiduciary position with company. Directors are trustee of the company because they administer the asset of the company and perform duties in interest of company and not for their own personal benefit.

CASE: Alexander v. Automatic Telephone Co.(1990)-The directors of A ltd paid nothing on their shares but made all the other shareholder to pay Rs. 4 on each share as application ,allotment and call money. The fact was not disclosed to the shareholders. It was held that it was a breach of trust on the part of directors. They were required to pay to the company as much money as the other shareholders had paid.

Directors as managing partners- Sometime Company considers as large partnership and directors being charged with the responsibility of managing the affairs .By virtue of MOA and AOA directors enjoy vast power of management and act as the supreme decision maker.
Director as employee/officers of company-Position of director is considered as agent trustee of a company. They are not servant and employee of company, because they enjoy vast power.

CASE: R.R Kothandaraman v. CIT (1957) –director shall be entitled to remuneration and other benefits admissible to employees, in addition to his remuneration as director under the act.

Director are also treated as officer of the company for certain matters and bracketed with manager for this purpose.

KINDS OF DIRECTOR

1. Shadow Director- Those who are formally appointed as directors, any person, other than a professional adviser, with whose instructions the directors of the company normally comply is a shadow director. The significance of being a shadow director is that a shadow director has many of the legal responsibilities of a director.

2. Alternate director (section 313)-if a person originally appointed as director is absent from the state in which the meetings of the board are ordinarily held for a period of not less than 3 months, the BOD may, if so authorized by articles, or by company general meeting appoint a alternate director. He shall vacate office when original director returns, or cease to be director when term of original director expires.

3. Executive director- Executive directors are directors of the company who are involved in the day to day management of the company. As these individuals are involved in the management of the company they may, in practice, have specific titles within the company, for example, managing director, marketing director, finance director etc.

4. Non executive director- and perspective to the board. Non-executive directors are not involved in the day to day management of the company and are appointed from outside the company. The rationale behind appointing non-executive directors is that, as they are not involved in the day to day management of the company, they can bring an independent voice.

POWER OF DIRECTOR

Board of director derives their power from companies act, article of association, board of resolutions, resolution in the general manager, agreement or contract with the company.

General Powers of the Board (Section 291)

Ø Power of company is power of board of director(BOD).This power of BOD is subject to some restrictions-

1) BOD can’t do anything which a company can’t do.

2) BOD shall exercise its powers subject to the provisions contained in the Companies Act, or in the Memorandum or the Articles of the company or in any regulations made by the company in general meeting.

3) A suit can be filed by a director on behalf of the company only if so authorized by board of directors. In Nibro ltd v. National Insurance Co. Ltd, it has been held by the Delhi High court that unless a power to institute a suit is specifically conferred on a particular director, he has no power to institute a suit on behalf of the company.

4) Although shareholders can’t assume power of director but exceptionally majority shareholders can exercise power of directors in following cases-

Where director act malafidely against the interest of company
BOD become incompetent to act
When there is deadlock in BOD

Powers to be exercised at Board meetings (Section 292)

BOD has power to-

(a) make calls on shareholders in respect of money unpaid on their shares

(b) issue debentures

(d) invest the funds of the company

(e) make loans

f) delegate financial power to the committee of directors

g) Borrow money up to certain amount by resolution, to invest funds of the company and to make loan.

Power of BOD subject to the consent of general meeting(Section 293)

(a) sale or lease of the company’s undertaking

(b) extension of the time for payment of a debt due by a director

(d) borrowing of money beyond the paid-up capital of the company

(e) contributions to any charitable fund beyond Rs.50,000 in one financial year or 5% of the average et profits during the preceding three financial years, whichever is greater.

Power subject to the approval of cental government (Section297)

i) To make loan to the director of the company

ii) To make provision for increasing the remuneration of the director

iii) To invest in shares of another body corporate in excess of the percentage specified in Section 372.

iv) Contribute to charitable fund

v) Contribute to national defence fund

vi) Contribute to political party

DUTIES OF DIRECTOR

GENERAL DUTIES

i) Duty of care - Director should take due care of his functions. He should take such care as a man of ordinary prudence would take in his own case.

ii) Duty to act honestly in good faith-Director must act honestly and diligently in the interest of company .They must exercise their power bona fide.

CASE: COOK v. DEEK, the director of the company managed to obtain railway construction contracts in their own name instead of obtaining the same in the name of the company .it was held that director could not retain the benefit of the contract with themselves, and had to give the name of the company.

iii) Duty to disclose interest-where a director is personally interested in a transaction of the company, he is required to disclose his interest to the board. An interested director is neither to vote on the matter of his interest nor his presence shall count for the purposes of quorum.

iv) Duty to attend board meetings-the Act only says that the office of a director is automatically vacated if he fails to attend three consecutive meetings of the board or all meetings for a period of 3 months, whichever is longer. Moreover, a director’s habitual absence may become evidence of negligence.

v) Duty not to delegate- a director should not delegate his functions to another person. But delegation of functions may be made to the extent to which it is authorized by the Act or the constitution of the company. Director should perform their function personally.

Some other duties of director are:

Ø Duty to file return of allotment
Ø Duty not to indulge in insiders trading.

INSIDER TRADING

Insider trading is buying, selling or dealing in securities of a listed company by a director, member of management, employee of company, or by any person such as internal auditor, advisor, consultant, analyst etc, who has knowledge of material inside information which is not available to general public.

Insider trading can be of two types:

Ø Legal insider trading- It take place legally everyday, when corporate insiders-officers, directors or employees-buy or sell stock in their own companies within the confines of company policy and the regulation governing this trading.
Ø Illegal insider trading- It is buying or selling a securities ,in breach of a fiduciary duty or other relationship of trust ,and confidence, while in possession of material , non-public information about the security by the insider person.

v Insider trading leads to loose of confidence of investors in securities market as they feel market is pre-arranged and only few who have inside information get benefit and make profit from their investments.

v SEBI (Prohibition of Insider Trading) Regulations, 1992 has been passed for regulating insider trading. Main aim of this is to prevent misuse of any un-published price sensitive information by insider viz director, officer,auditor,lawyer,banker. Price sensitive information {regulation 2 (ha)} means which directly or indirectly relates to a listed company and which if published is likely to materially affect price of securities of such company.

CASE: Samir C Arora v. SEBI(83)2004- It was observed that activities like insider trading ,fraudulent trade practices and professional misconduct are absolutely detrimental to the interests of ordinary investors and are strongly deprecated(condemn) under SEBI Act,1992 and Regulation made there under. No punishment is too severe for those indulging such activities.

MEETING

Decisions regarding matters affecting the company are decided by calling meeting.

KIND OF MEETINGS

Statutory meeting
Annual general meeting
Extraordinary general meeting

STATUTORY MEETING (section 165)

A statutory meeting is a general meeting of the company which is held to provide an earlier opportunity to the members for discussing all the matters relating to formation of company .it is first meeting of shareholders of public company and is held once in the lifetime.

Provisions

i) Meeting must be held within a period of not less than one month or within a period not more than 6 months from the date on which it is entitled to commence business.

ii) BOD shall, at least 21 days before the day on which meeting is to be held, send statutory report to every member of company.

iii) Accuracy of statutory report must be certified a)by at least 2 director ,one of whom is managing director, where there is one ,and b) by the auditor so far as cash receipt and payments on capital account are concerned.

iv) Copy to be sent to registrar after copies have been sent to members of company.

v) On default in holding statutory meeting in accordance with sec165 ,every director or other officer of company responsible for default shall be punishable with fine extending upto Rs. 5,000. This default can also be ground of winding up.

Annual General Meeting(AGM) (sec 166-168)

It is the regular meeting of members of a company held annually for the purpose company’s ordinary business. There should be not more than 15 month gap between one general meeting and next. Must be held by both public and private company.
First general meeting must be held within18 months from the date of incorporation, and then it will not be necessary to hold another general meeting either in the year of incorporation or following year. Exception-registrar may extend for any special reason, the time for holding AGM by 3 months.{section 166(1)}
If any company fails to hold AGM ,any member can apply to central government and on such application the central government may call or give direction for calling AGM(SECTION 167)
In case of default u/s 166 and 167 ,it is an offence and the company and every officer of company who is in default shall be punishable with fine, which may extend to Rs. 50,000 and in case default continues with a further fine of Rs. 2500 for each day of default
CASE: Kastoor Mal Banthiya v. State- The accused and his brother were the only two members and directors of a private company. during the period when a meeting should have been held his brother was lying ill and consequent failure to hold meeting was not considered to be a willful default.

Extraordinary General Meeting(SEC 169)

Every meeting of member other than the statutory meeting and AGM or any other adjournment thereof, is an extraordinary meeting. Such meeting is usually called by BOD for some urgent business which cannot wait to be decided till the next AGM.
The number of member entitled to requisition a meeting shall be: a) the holder of atleast 1/10^th of the paid up share capital of the company ,who have a right to vote in regard to that matter b)if no share capital then, the holder of 1/10^th of total voting power of company.
Requisition shall mention the matters for the consideration of which meeting is called.
Section 186 gives power to tribunal to order meeting to be called.

Procedure of valid meeting

Meeting should be called by proper authority – PROPER AUTHORITY is board of directors except when the meeting has in the event of default by the directors, has been called by requisitionists or by Central Government.
2. Notice (section 171-172)- Proper notice of the meeting should be given to the member. It should be given to every member {sec172 (2)}.

Case: Symth v. Darley- deliberate omission to give notice to a single member may invalidate the meeting.

Although accidental omission to give notice will not be fatal.
Notice should be in writing and must be given 21 days before the date of meeting.
Private company articles may contain its own special provisions as to duration of notice.

3. Contents of notice – Notice should specify the place and day and hour of the meeting and the meeting to be valid must be held at the place and time specified. Notice must contain a statement of the business to be transacted at the meeting.

Section 173 puts business into 2 categories:

General business- Business relating to:

i) consideration of accounts, balance sheet and the report of BOD and auditors

ii) declaration of dividend

iii) Appointment of directors and auditors and fixing their remunerations are general business.

Special business- Except the above mentioned business, all business to be conducted at AGM and all business at extraordinary general meeting are regarded as special business.

MAJORITY CONTROL AND MINORITY PROTECTION

Supremacy of the majority is the fundamental principle of company law. Generally, majority members are entitled to exercise powers of the company and control its affairs. A group of persons controlling 3/4^th of the votes would have a complete control of the company, and a little more than half the votes would give considerable influence allowing control over appointments to the Board.
Basic principle relating to administration of company is that the court will not in general interfere in the internal management of company.
The rule in FOSS V. HARBOTTLE
- Ø In this case 2 shareholder of company brought action against the directors alleging that by making certain fraudulent and illegal transactions, the director has caused loss to the company and prayed that the defendant be required to make good the loss to the company. The action was dismissed. It was held that individual shareholders had no right to bring action like that.
- Ø The acts of the directors were capable of confirmation by the majority members and held that the proper plaintiff for wrongs done to the company is the company itself and not the minority shareholders and the company can act only through majority shareholders.
There are certain exceptions to the rule in Foss v. Harbottle, where a shareholder could bring an action

1. Acts ultra vires

If a shareholder complains that a resolution has not been passed by the statutory majority, but the company takes the contrary stand, the shareholder can approach the court to determinate the validity of the resolution. Foss vs. Harbottle will apply only when the act done by the majority is one which the company is authorized to do by its memorandum.

2. Fraud on minority

When the act done is a fraud on the minority, any shareholder can bring an action for the same.

Case: Vadilal v. Maneklal, it has been held that there is no difference between theft and gross fraud and, therefore, even if the majority approves the transactions amounting to fraud , a shareholder can bring an action against the person committing fraud .

3. Act requiring special majority

There are certain act which can only be done by special resolution at the general meeting of shareholders. If the requirements of special majority are not fulfilled, any shareholder can restrain the company from acting on resolutions.

4. Wrongdoers in control

Where the person holding the majority of shares himself is the wrongdoer and manages to pocket the property of the company, a suit against the wrongdoer can be filed by any individual shareholder.

1. Individual membership rights

Where there is infringement of individual membership right rather than the corporate membership right, the individual shareholder has a right of action.

CASE: Joseph v. Jos, where the candidature of a shareholder for directorship is rejected by the chairman, it is an individual wrong in respect of which the suit is maintainable.

2. Oppression and mismanagement

Oppression refers to an act performed in a burdensome, harsh and wrongful manner. A shareholder can bring an action against the management of the company on the grounds of oppression and mismanagement.

v There must be balance between effective control of company and interest of small individual shareholders. For smooth functioning of company balance between majority and minority shareholder is essential.

PREVENTION OF OPPRESSION AND POWERS OF COURTS AND CENTRAL GOVERNMENT

Ø Aim is to safeguard the interest of investors in companies and also to protect the public interest.

Oppression word has not been defined under Companies Act. It is an act exercised in burdensome, harsh and wrongful manner. A shareholder can bring an action against the management of the company on the grounds of oppression and mismanagement.

Ø In case of oppression any member of company may file an application to Tribunal seeking relief that the affairs of company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member. Tribunal may make such order as it thinks fit.(section 397)
Ø Application to the tribunal for relief in case of mismanagement (section 398) can be made by any member who complains:

1) Affairs of company are being conducted in manner prejudicial to public interest or to the interest of company, or

2) Due to change in management of company, it is likely that affairs of company will be conducted as in clause 1.

Then may apply to tribunal for seeking relief.

CASE: Bajrang Prasad Jalan v. Mahabir Prasad Jalan, it was held the fact that the companies are family companies does not imply that no notices of meetings are required to be given. Not giving notice in such cases, not only amounted to not fulfilling requirement of law, but they were also acting mala fide. It was for the respondents, who had control over the affairs, to prove that the requirement of law had been complied with in holding the meetings.

Power of Tribunal

Upon application u/s 397 or 398, the tribunal may make such order as it think fit. Section 402 further states that without prejudice to generality of power of tribunal (to make such order as it think fit),any order to tribunal may provide for :

i) Regulation of conduct of company affair’s in future

ii) Purchase of shares or other interest of any members of company of any member or company

iii) Consequent reduction of company share capital if it purchase its own share;

iv) Termination, setting aside or modification of any agreement between the company and managing director, director or manager;

v) Termination, setting aside or modification of an agreement between company and other person, provided due notice given to party concerned and his consent has been obtained.

vi) Any other matter for which, in opinion of tribunal, it is just and equitable that the provision should be made.

Power of Central Government(sec 408)

Central Government is empowered to appoint its nominees to the board of directors of companies so as to prevent oppression and mismanagement. Number of members as Tribunal may order and also under direction of tribunal.
Central government may make appointment as it thinks fit, but the period should not be more than 3 years.
Such directors shall not be required to hold any qualification shares nor shall their period of office be liable to retirement by rotation., but Central Government may at any time replace any such director and appoint another in his place.
Central government may also issue appropriate directions to company as it may consider necessary or appropriate in regard to its affairs.
Such appointees may also be required to send reports to central government from time to time with regard to affairs of company.

Central government has been empowered to appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as central government may direct. It can be made where report has been made by registrar u/234.

CORPORATE SOCIAL RESPONSIBILITY

Corporate entities have redefined their role in society. From raw idea of ‘profit maximization’, its objective was changed to ‘profit optimization’. It can be attributed by various social and economic concerns.
It could be marked as beginning of theory of corporate social responsibility (CSR). CSR is now presented as comprehensive business strategy, arising mainly from performance considerations and stakeholder pressure.
Companies consider their interaction with stakeholder and impact of its business on society as significant issue.
Companies are responsible for current and immediate future level of Carbon dioxide in the atmosphere. The main focus would be on to search for new arenas which can utilize the strengths of capitalism and reduce emission of carbon dioxide.
There has been right of concept of sustainable development. A huge task is contemplated to Green parties and supporting international entities to strike balance between preservation future development opportunities and conflict of interest through a low carbon technology revolution.

UNIT 1V : WINDING UP OF COMPANY

Winding up of a company is the process whereby its life is ended and its property administered for benefit of its creditors and members.

-An administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

-Winding up precedes dissolution.

Kinds of winding up

WINDING UP BY TRIBUNAL- Company may compulsory wind up under the order of the court. Section 433gives the cases in which company may be wound up by the court.

i) Special resolution-If company has, by special resolution, resolved that it be wound up by the court. But court power is discreationary and may not be exercised where winding up would be opposed to the public or company’s interests.

ii) Default in holding statutory meeting-If a company has made a default in delivering the statutory report to the registrar or in holding the statutory meeting, it may be ordered to be wound up. The petition for winding up on this ground can be presented either by the Registrar or by a contributory.

If it is brought by any other person e.g., creditor, it must be filed before expiration of 14 days after the last day on which the statutory meeting ought to have been held. (Section439 (7)).Power court is discretionary.

iii) Failure to commence business- If company does not commence its business within a year from its incorporation or has suspended business for a whole year, it may be ordered to wound up. Power is discretionary and exercised only when there is a fair indication that there is no intention to carry on business.

CASE: MURLIDHAR V BENGAL STEAMSHIP CO.

To carry business, company employs a steamer and 2 flats. Flats were acquired by govt. during World War 1 and co. was not able to replace them immediately due to rise in price. Result was suspension of business for more than a year. It was held that “the suspension of business for whole year is sufficiently accounted for and does not furnish an indication that there is no intention to carry on the business”.

iv) Reduction in membership- If number of members is reduced in case of

Public company, below 7, and in case of Private company below 2, the

Company may be wound up.

v) Inability to pay debts – Company may be ordered wound up if it is unable to pay debts(section 434).There should be no dispute regarding the petitioner ‘s claim .If the amount claim is genuinely disputed by the company ,the winding up petition is liable to be dismissed.

CASE: M/s Ultimate Advertising & Marketing, New Delhi v. G.B Laboratories Ltd,Kanpur,it was held that there was a bona fide dispute regarding the claim of interest and ,therefore the winding up petition was dismissed.

vi) Just and equitable – Court can order winding up of company if it is of

opinion that it is just and equitable that the company should be wound up. It

is discreationary power of court and there must be really strong ground for

Liquidating a company. Circumstances in which court have previously dissolved companies are:

Ø When there is deadlock in management of a company.
Ø When main object of company failed to materialize or it has lost its substratum.

CASE: German Date Coffee Co., Re:- A company was formed for the purpose of manufacturing coffee from dates under a patent which is granted by govt. ofGermany .The German patent was never granted and the company embarked upon other patent. But it was held since main object of company had failed; therefore it was just and equitable that the company should wound up.

Ø When company cannot carry its business except at losses.
Ø Where the principle shareholders have adopted an aggressive or oppressive policy towards minority.
Ø Where company formed in fraud or illegal purposes.
Ø Where the conduct of company comes in conflict with public interest.

Consequences of winding up (sec444- 447)

After winding up order, tribunal shall within a period of not exceeding 2 weeks from the date of passing of order, send an intimation about winding up to the liquidator
After that, a certified copy of order must be filed with registrar.
Once winding up order is passed it will deemed to be a notice of discharge to the officers and employees of the company.
The winding up order shall operate in favor of all the creditors in all contributors
After it, no suit or legal proceeding shall commence against company with prior leave of the tribunal.

2. VOLUNTARY WINDING UP(sec 484-521)

Under this company and its creditors are left to settle their affairs without going to a court ,although they may apply to the court for directions or orders, as and when necessary.

Circumstances of voluntary winding up(sec 484)

a) when the period for duration of company as mentioned in its articles has expired; or

b) the company in general meeting passes resolution requiring the company to be wound up voluntarily.

c) If the company passes a special resolution that the company be wound up voluntarily,

KINDS OF VOLUNTARY WINDING UP

i) Member’s voluntary winding up(sec 489-498)-when the company is solvent and is able to pay its liabilities in full, it need not consult the creditors or call their meeting .Its directors at a meeting of the board may make a declaration of solvency of the company.

ii) Creditor’s Voluntary Winding Up(sec 499-509)-where the declaration of the company is not made and delivered to registrar in a voluntary winding up it is a case of creditors voluntary winding up. The company shall call meeting of creditor, on which there is to be held general meeting of company at which resolution for winding up is proposed (sec 500).Notice of meeting of creditors to be advertise once at least in official gazette, and once at least in 2 newspapers circulating in the district where registered office or principle office of company is situated.(sec 500(2))

3. WINDING UP SUBJECT TO SUPERVISION OF THE COURT

When company has by special resolution resolved to wind up voluntarily, the court may make an order that the voluntary winding up shall continue, but subject to supervision of court and with such liberty for creditors, contributors or others to apply to the court and generally on such terms and conditions, as the court thinks just.

LIABILITIES OF PAST MEMBERS

Every present and past member is liable as contributory in the event of winding up of the company.

Contributory-Section 428, contributory means every person liable to contribute to the assets of a company in the event of its being wound up, and it includes the holder of any shares, which are fully paid up.

Section426 explains nature of liability of members according to which member shall be liable to contribute. This provision is subject to the following qualification:

i) Past member shall not be liable to contribute if he has ceased to be member for one year or more before the commencement of winding up ;

ii) Past member shall not liable to contribute in respect of any debt or liability of company contracted after he ceased to be a member.

iii) No past member shall be liable to contribute unless it appears to tribunal that present members are unable to satisfy the contributions required to be made by them in pursuance of this act(1^st present member should pay ,after that past member liability arises)

iv) Company limited by shares, no contribution shall be required from any past or present member exceeding the amount ,if any ,unpaid on shares in respect of which he is liable as such member;

v) Company is limited by guarantee, no contribution shall be required from any past or present member exceeding the amount undertaken to be contributed by him;

Liability of a director or a manager, in his capacity as such, may be there, in addition to his liability as a member as stated above.

PAYMENT OF LIABILITIES (section 528)

All the debts payable on a contingency, and all the claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company. A just estimate of value of such debts or claims as may be subject to any contingency or may sound only in damages, or for some other reasons may not bear a certain value.

RECONSTRUCTION AND AMALGAMATION

Ø Reconstruction occurs when the whole of the undertaking and property of an existing company is transferred to a new company, formed for the purpose.
Ø Amalgamation occurs when there is combination or blending of two or more companies into one company. In such a case, the shareholders of the companies which have been blended or combined also become entitled to the interests in the company which holds the blended undertakings.
Ø Both reconstruction and amalgamation may be there whether the company is going concern or is being wound up.
Ø When an application is made to the tribunal for sanctioning compromise or arrangement for the purpose of a scheme for reconstruction or amalgamation ,the tribunal may, either by an order sanctioning the compromise or arrangement or by a subsequent order,make provisions for all or any of the following matters:

i) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company;

(ii) the allotment or appropriation by the transferee company of any shares, debentures policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;

(iii) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;

(iv) the dissolution, without winding up, of any transferor company;

(v) the provision to be made for any persons who, within such time and in such manner as the Court directs dissent from the compromise or arrangement; and

(vi) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

Within 30 days after making such order, concerned company shall cause a certified copy to be filed with registrar for registration.

Ø Case: Marshall Sons & Co. (India) Ltd. V. Income tax officer, Supreme court held:

Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation /transfer shall take place. While sanctioning the scheme, it is open to the court to modify that date and prescribe such date as it think fit. If the court merely sanctions the scheme presented to it but does not prescribe any specific date ,then the date of amalgamation or transfer is the date specified in the scheme as “transfer date”.

In above case, the scheme had mentioned Jan 1, 1982 as date of amalgamation and that was held to be the transfer date.

Ø Central Government may order amalgamation in national interest under section 396.

Corporate law

UNIT 1 :FORMATION ,REGISTRATION AND INCORPORATION OF COMPANY

Companies Act 1956 was previously governed by Joint Stock companies Act of 1850.

-Company means a company formed and registered under Companies Act 1956.COMPANY is a ‘LEGAL PERSON’ or LEGAL ENTITY’ separate from and capable of surviving beyond the lives of its members.It is a legal device for the attainment of any social or economic end and to a large extent publicly and socially responsible.

NATURE OF COMPANY

1. INDEPENDENT CORPORATE EXISTENCE - A company has a separate legal entity and is not effected by changes in its membership. Therefore , a company can contract, sue and be sued in its incorporated name and capacity.

CASE :- SALOMAN V. SALOMAN & CO. 1897 AC 22. One S incorporated a company to take over his personal business of manufacturing shoes and boots. The seven subscribers to the memorandum were all his family members, each taking only one share. The Board of Directors composed of S as managing director and his four sons. The business was transferred to the company at 40,000 pounds. S took 20,000 shares of 1 pound each and debenture worth 10,000 pounds. Within a year the company came to be wound up and the state if affairs was like this: Assets- 6,000 pounds; Liabilities- Debenture creditors-10,000 pounds, unsecured creditors- 7,000 pounds.

It was argued on behalf of the unsecured creditors that, though the co was incorporated, it never had an independent existence. It was S himself trading under another name, but the House of Lords held Salomon & Co. Ltd. must be regarded as a separate person from S.

PERPETUAL EXISTENCE- Since company has existence independent of its members ,it continues to be in existence despite death, insolvency or change of members.
COMMON SEAL –Company is not natural person ,therefore ,it cannot sign like natural person. The common seal acts as the official seal of the company.
LIMITED LIABILITY-The liability of every shareholder of a company is limited to the amount of nominal value of shares held by them.
TRANSFERABILITY OF SHARES –Shares are transferable by its members except in case of a private limited company ,which may have certain restrictions on such transferability.
CAPACITY FOR SUITS – A company can sue and be sued in its own name . The names of managerial members need not be impleaded .
SEPARATE PROPERTY-The company is capable of holding and enjoying property in its own name.
NOT A CITIZEN- A company is not a citizen in the same sense as an individual. However it has nationality, domicile , residence.

CASE: STATE TRADING CORPORATION OFINDIAV. CTO AIR 1963 SC 1811 SC held that a company though a legal person is not a citizen neither under the provisions of the Constitution nor under the Citizenship Act.

KINDS OF COMPANY

1. PUBLIC COMPANY-A public company means a company which –

(i) has a minimum paid-up capital of Rs.500000 or such higher paid-up capital, as may be prescribed

(ii) is a private company which is a subsidiary of a company which is not a private company. {SECTION 3(1)(IV)}

Every public company,existing on the commencement of the Companies(Amendment)Act, 2000, with a paid-up capital of less than Rs. 5,00,000 shall, within a period of 2 years from such date of commencement, enhance its paid up capital to Rs. 5,00,000.

Public companies invite the public at large to participate and subscribe for the shares or debentures of the company.

2. PRIVATE COMPANY- A private company is normally what the Americans call a ‘close corporation’. According to Section 3(1), a private company means a company which has a minimum paid-up capital of Rs. 1,00,000 or such higher paid- up capital as may be prescribed, and by its Articles-

(i) restricts the right to transfer its shares, if any. The restriction is meant to preserve the private character of the company

(ii) limits the number of its members to 50 not including its employee-members

(iii) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company

(iv) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

Ever private company, existing on the commencement of the Companies(Amendment)Act, 2000, with a paid-up capital of less than Rs. 1,00,000 shall, within a period of 2 years from such date of commencement, enhance its paid up capital to Rs. 1,00,000.

Private Companies do not involve participation of public in general.

IMPORTANT NOTE: Companies (Amendment) Bill, 2003 states that if a company , private or public fails to enhance its minimum paid up capital (i.e one lakhs rupees or five lakhs rupees) each director or manager or shareholder will have unlimited liability.

3. UNLIMITED COMPANY-A company in which the liability of shareholders is not restricted only to the nominal value of shares paid.

4. LIMITED LIABILITY COMPANY- A company in which the liability of shareholders is restricted only to the value of unpaid calls on shares .

5. GOVERNMENT COMPANY-SECTION 617 of Companies Act 1956 “ a government company means any company in which not less than 51% of paid up capital is held by the central government , or by any State Government or governments ,or partly by central government and partly by one or more State Government and includes a company which is subsidiary of government company”.

6. FOREIGN COMPANY- A foreign company is one that is incorporated outsideIndiabut has place of business or business operations inIndia.

7. HOLDING COMPANY-Section 4(4) A company is known as the holding company of another company if it has control over that other company.

8. SUBSIDIARY COMPANY- Section 4(1) A company is becomes a subsidiary company when other company controls 51% or more of its paid up share capital, has right to appoint directors on its board , or is a subsidiary of another subsidiary company.

9. LISTED COMPANY – A public company which has any of its securities listed in any recognized stock exchange.

10. UNLISTED COMPANY- A whose securities are not listed on recognized stock exchange for trading.

PROMOTERS

-Companies Act 1956 does not define promoter .

-Promoters are the persons who promote i.e form or float a company.

-PROMOTER means any person who is party to the preparation of prospectus ,control the management of company, appoint directors but does not include any person acting in a professional capacity in procuring formation of company. A promoter may be an individual , association , partner or company.

CASE : TWYCROSS V. GRANT (1877) –It was held that promoter is “one who undertakes to form a company with reference to a given project and to set it going, and who undertakes the steps to accomplish that purpose”.

DUTIES OF PROMOTERS

Companies act provide no provisios regarding the duties of promoters. But legal trends have emerged following duties :

-Two fiduciary duty

Promoter cannot make directly or indirectly any profit at expense of company he promotes without knowledge and consent of the company ,and if he does so company can compel him to account for it.
A promoter is not allowed to derive a profit from sale of his own property to the company unless all material facts are disclosed.also he should disclose to the company any interest he has in the transaction entered into by him.

- Promoter has duty to originate scheme for formation of company. He gets memorandum and article of association prepared.

LIABILITIES

1. Section 56 lays down matters to be stated and reports to be sent out in the prospectus . he may be held liable for the non –compliance of the provisions of this section.

2. Under section 62 , a promoter is liable for any untrue statement in the prospectus to a person who has subscribed for any shares or debentures on the faith of the prospectus. Such a person may sue the promoter for compensation for any loss.

3. Promoter is criminally liable under section 63 for the issue of prospectus containing untrue statements. Section 68 imposes severe penalty on promoter who make untrue statements in a prospectus with a view to obtaining capital.

4. A promoter may be liable to public examinations like other director if court so directs on a liquidators report alleging fraud in the promotion or formation of company.

5. A company may proceed against promoter on a action for deceit or breach of duty u/s 543.

Also promoter can be compelled to hand over any secret profit which he has made without full disclosure to company.

INCORPORATION

MODE OF INCORPORATION

Company comes into existence only when the same is registered and certificate on incorporation of the company issued by the registrar.

Procedure of incorporation- Section33(1) Application for registration has to be made to the registrar of the state in which the registered office of the company is to be situated. It is to be accompanied by:

Memorandum of association of the company
article of association of the company
the agreement if any ,which the company proposes to enter into with individual for its managing or whole time director.

Above document are to be accompanied by declaration that all requirement of companies act have been complied. Declaration has to be made by advocate of supreme court or high court ,an attorney or a pleader entitled to appear before high court, chartered accountant practicing inIndia, or any person named in article as director, manager or secretary of company.

If registrar is satisfied that all requirement are complied then he shall retain and register the memorandum and article, if any and agreement.

Certificate of Incorporation-Company comes into existence from the date of incorporation mentioned in the certificate of incorporation. It is the conclusive prove that all requirements of the act have been complied with.

PRE-INCORPORATION CONTRACTS – Contract made by the company before its incorporation.

-A company cannot be sued on its pre-incorporation contract

- A company cannot sue on its pre-incorporation contract

-Agent may sometime incur personal liability

Ratification of a pre-incorporation contract – Company is neither bound by nor can have the benefit of a pre-incorporation contract. But this is subject to the provisions of the Specific Relief Act, 1963.

Section 15 of the Act provides that where the promoters of a company have made a contract before its incorporation for the purposes of the company, and if the contract is warranted by the terms of incorporation, the company may adopt and enforce it. In Vali Pattabhirama Rao v. Ramanuja Ginning and Rice Factory, a promoter of a company acquired a leasehold interest for it. He held it for sometime for a partnership firm, converted the firm into a company which adopted the lease. The lessor was held bound to the company under the lease.

Section 19 of the Specific Relief Act provides that the other party can also enforce the contract if the company has adopted it after incorporation and the contract is within the terms of incorporation.

Consequences of incorporation- A private company commence its business at any time after incorporation{section149(7)(a)}.In case of public company Section149 requires the obtaining of ‘The certificate of commencement of business’ from registrar before the company can commence its business. Certificate shall be issued upon fulfillment of following conditions:

1. Minimum subscription should have been obtained.

2. Every director should have paid amount payable on application and allotment of shares taken by him.

3. no money should be due to be refunded to applicant.

Declaration by one of the director or secretary is to be given in prescribed form ,to the director that all requirements are fulfilled.

-When company having share capital has not issued a prospectus, it cannot commence the business unless: 1. statement in lieu of prospectus has been filed. 2. Every director has paid cash on application and allotment money for shares taken by him.

When necessary requirements have been satisfied, the registrar shall certify that the company is entitled to commencement of business.

Disadvantages of incorporation

Ø LIFTING OF CORPORATE VEIL

Company is regarded as separate entity from its member. But sometime its necessary to look at the person behind the corporate veil. It is one of the disadvantages of incorporation.

Lifting of corporate veil is done in following cases:

1) Determination of character- Separate corporate personality may be ignored for determining the legal character of company. In Daimler Co Ltd. v. Continental Tyre and Rubber Co., a company was incorporated in England for the purpose of selling tyres manufactured in Germany by a German company. The German company held the bulk of the shares in the English company and all the directors of the company were Germans, resident in Germany. During the First World War the English company commenced an action to recover a trade debt. And the question was whether the company had become an enemy company and should therefore be barred from maintaining the action.

The House of Lords held that though the company was registered in England it is not a natural person with a mind or conscience. It is neither loyal nor disloyal; neither friend nor enemy. But it would assume an enemy character if the persons in de facto control of the company are residents of an enemy country.

2) .Fraud or improper conduct-When corporate personality used as an instrument of fraud, the principle of corporate personality may be disregarded and doctrine of piercing the corporate veil may be applied in the interest of justice. Case: Gilford Motor Co v. Horne, H was appointed at the managing director of the plaintiff company on the condition that he shall not solicit the customers of the company. He formed a new company which undertook solicitation of plaintiff’s customers. The company was restrained by the Court.

Holding and Subsidiary company-Separate corporate personality may be ignored in holding and subsidiary company. The holding and its subsidiary are two distinct legal entities, and holding company cannot be held liable for the act of the subsidiary company. Section 212 to 214, however, contain exception to this rule, according to which the accounts of the holding and the subsidiary companies are to be presented in a manner that a complete joint picture of these companies is available. (CASE: State of UP v. Renusagar Power Co)
To avoid welfare legislation and tax-When the cloak of corporate personality is used for circumventing tax obligation or to evade tax or avoiding welfare legislation. CASE: State of UP v. Renusagar Power Co, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise and Hindaloco and Renusagar was treated as one.
Under statutory provisions –When the statute itself contemplates the lifting of the veil. CASE: L.I.C of India v.Escort Ltd., it has been held that when the lifting of corporation veil is necessary or permissible under a certain statute, the courts may do that. But even in such a case the corporate veil may be lifted.

Ø FORMALITY AND EXPENSES- Incorporation is a very expensive affair and requires a number of formalities to be complied with. As compared to it formation of partnership is very simple.
Ø COMPANY IS NOT CITIZEN- Company though legal person, is not citizen either under the constitution ofIndia or under the citizenship act.

CASE: STATE TRADING CORPORATION OF INDIA V. CTO AIR 1963 SC 1811 SC held that a company though a legal person is not a citizen neither under the provisions of the Constitution nor under the Citizenship Act.

MEMORANDUM OF ASSOCIATION

- It is the charter of the company indicating the permitted range of its enterprise.

- MOA is divided into 5 clauses :

1. NAME CLAUSE –The first clause of the memorandum is required to state the name of the proposed company. the name of incorporation is the symbol of its personal existence. any suitable name may be selected subject to these restrictions:

Resembling name not allowed.
Name should not be undesirable in opinion of central government.
If member liability is limited then the last name used must be limited, and in case of a private company “private limited”.

-exception: Central Government may by license allow to drop the word limited from its name subject to following conditions: a) company formed for promoting art,commerce,science ,religion,charity,or any other useful object, and

b) The company should apply its income in promoting its objects and must prohibit the payment of dividends to its members.

2. REGISTERED OFFICE CLAUSE -

The memorandum must specify the State in which the registered office of the company shall be situate (sec 146). Within 30 days of incorporation or commencement of business, whichever is earlier, the exact place where the registered office is to be located must be decided and sent to the Registrar for recording of the same. Notice of change in registered office shall be communicated to the registrar for his record within 30 days after the date of incorporation of company or after the date of change, as the case may be. Section 17A {Companies (Amendment) Act 2000} has been inserted providing for change in registered office within a state.

3. OBJECT CLAUSE-

Memorandum must state the object of the company, because a company can do acts and make transactions which are within the objects of the company and cannot do anything which is outside its object. Object clause must be divided into 2:

ü Main object- this sub clause has to state the main object of the company and objects incidental or ancillary to the attainment to main object.

ü Other object- States objects which are not included in above clause.

DOCTRINE OF ULTRA VIRES

Company should devote itself only to the objects set out in Memorandum of Association and no other. An act or contract which is outside the object of the company,i.e an ultra vires act done by the company is void. An ultra vires act cannot be validated by ratification, even by a unanimous consent of the shareholders.

CASE: Ashbury Railway Carriage & Railway Co. v. Riche, where company defined its objects: 1) to make and sell railway carriages etc; 2) to carry on the business of mechanical engineers and general contractors. The company contracted with Riche to finance the construction of a railway line in Belgium and subsequently repudiated it as one beyond its powers. Riche brought an action for breach of contract. The House of Lords held that the contract was ultra vires and void. They were of the opinion that general terms like general contractors must be taken in reference to the main objects of the company which otherwise would authorize every kind of activity making the memorandum meaningless.

CASE: LAKHMANASWAMI V. L.I.C, donation made as charity was held ultra vires and the directors were held personally liable to compensate the money.

Act of the company is ultra vires if it is not

a) Essential for the fulfillment of the objects stated in the memorandum;

b) Incidental or consequential to that attainment of its objects

c) Which the company is authorized to do by the Company’s Act, in course of its business.

--When the company cannot carry out the objects for which the company was formed i.e. its substratum is gone, it has to be wound up. CASE: German Date Coffee Co. Ltd , A company was formed for the purpose of manufacturing coffee from dates under a patent which is granted by govt. ofGermany .The German patent was never granted and the company embarked upon other patent. It was held that since the achievement of the main object of the company had become impracticable, its substratum had gone and company was to be wound up.

4. LIABILITY CLAUSE

It states the nature of liability that the member incurs. If the company liability is to be incorporated with limited liability, the clause must state that the liability of members shall be limited by shares. No member can be called upon to pay anything more than the nominal value of the share held by him, or remaining value of shares which is unpaid.

CAPITAL CLAUSE

It states the amount of nominal capital of the company and number and value of the shares into which it is divided. Minimum capital requirement of public company is 5 lakh rupees or such higher as may be prescribed and private company is required to have a minimum paid up capital of 1 lakh rupees or such higher as may be prescribed.(section 3)

PROCEDURE FOR ALTERATION OF MOA

1. Alteration of name

A company may change its name at any time by passing a special resolution and with the prior approval of the Central Government. Where a company has been registered with a name which is undesirable, the same may be changed by an ordinary resolution and with the prior approval of the Central Government in writing. If the name is considered undesirable by the central government ,the central government may direct the company to change its name within 12 months of its registration, and then the company will have to make change within 3 months of such direction.(section 22). When a company changes its name, the Registrar of Companies has to enter the new name in the register and a new certificate of incorporation must be issued with necessary alterations

2. Alteration in registered office (Section17)

Alteration in registered office clause can be made when following requirement are fulfilled:

i) passing of a simple resolution, and

ii) confirmation of the same by central government on petition.

Before confirming the alteration, the central government must be satisfied that sufficient notice has been given to every debenture holder and every other person whose interest is likely to be effected. By alteration. Notice of registration is also to be given to registrar to able him to state his objection. Section 17A {Companies (Amendment) Act 2000} has been inserted providing for change in registered office within a state. Also section 18 states alteration to be registered within 3 months and effect of failure of registration is given u/s19.

ARTICLE OF ASSOCIATION

Article of association is a document containing rules and regulations for the administration of the company. The matters contained in the articles include issue and transfer of shares, general meeting, voting rights, directors,their appointment and powers and winding up etc.

Articles of Association in case of some companies, has to be registered along with the memorandum. As per sec 26, companies which must have articles are:

1) Unlimited companies;

2) Companies limited by guarantee;

3) Private companies limited by shares.

This document contains rules, regulations and bye-laws for the general administration of the company. Schedule I of the Act sets out tables of model forms of articles for different companies.

Ø Article of association to be registered must
- be printed
- be divided into paragraphs numbered consecutively, and
- Signed by each subscriber of MOA ,in presence of at least one witness .

Importance of Articles of Association

Under sec 36, the memorandum and the articles when registered, shall bind the company and its members to the same extent as if it had been signed by them and had contained a covenant on their part that the memorandum and the articles shall be observed.

With respect to the above section, the importance of articles of association can be summed up as follows:

1) Binding on members in their relation to the company- the members are bound to the company by the provisions of the articles just as much as if they had all put their seals to them.

2) Binding on company in relation to its members- just as members are bound to the company, the company is bound to the members to observe and follow the articles.

3) Neither company, nor members bound to outsiders- articles bind the members to the company and company too the members but neither of them is bound to an outsider to give effect to the articles.

4) Binding between members inter se- the articles define rights and liabilities of the members. As between members inter se the articles constitute a contract between them and are also binding on each member as against the other or others. Such contract can be enforced only through the medium of the company.

ARTICLES IN RELATION TO MEMORANDUM

The memorandum contains the fundamental condition upon which the company is incorporated. The articles are the internal regulation and management of the company.
MOA is a dominant instrument, whereas AOA is subordinate to MOA.If there is conflict between the two provisions contained in the 2 instrument, the provision of MOA prevail.
Article can be altered by a special resolution .since MOA contains fundamental conditions, for alteration the approval of central government may required in addition to special resolution.

ALTERATION OF THE ARTICLES (section 31)

SECTION 31 ,a company can alter its articles by special resolution. The power of alteration of articles conferred by sec 31 is almost absolute. It is subject only to two restrictions-

It must not be in contravention with the provisions of the Act.
It is subject to the conditions contained in the memorandum of association.

CASE: Andrews v. Gas Meter Co Ltd , it was held that since there was no express prohibition on the issue of preference shares. The power of alteration of article is subject only to what is clearly prohibited by the memorandum, expressly or impliedly. So alteration of articles authorizing the issue of preference shares by the company was valid.

Alteration should be bona fide and for benefit of company- Power to alter article is very wide, but the same must be exercised bona fide and for benefit of the company. When the alteration is bona fide and for the benefit of company as a whole, although it is injurious to an individual member, the alteration is valid. CASE: Sidebottom v.Kershaw Leese &Co., the articles of a private company were altered enabling the directors to require a shareholder, who was running a competing business to sell his shares to them at their full value. The alteration was held to be valid.

Alteration in breach of contract- a company may change its articles even if the alteration would operate as a breach of contract. If the contract is wholly dependant on the articles, the company would not be liable in damages if it commits breach by changing articles. But if the contract is independent of the articles, the co will be liable in damages if it commits breach by changing articles. CASE: Southern Foundries Ltd v. Shirlaw, where a Managing Director was appointed for a term of ten years, but was removed earlier under the new articles on amalgamation with another company, the company was held liable for breach of contract.

EFFECT OF MEMORANDUM AND ARTICLE

Section 36 contains provision regarding the binding force of the MOA and AOA. The memorandum and the articles when registered, shall bind the company and its members to the same extent as if , it had been signed by them and had contained agreement on their part that the memorandum and the articles would be observed. The importance of articles of association and memorandum of association can be summed up as follows:

1) Binding on members in their relation to the company- The members are bound to the company by the provisions of the articles just as much as if they had all put their seals to them.

2) Binding on company in relation to its members- Just as members are bound to the company, the company is bound to the members to observe and follow the articles .

3) Neither company, nor members bound to outsiders- Articles bind the members to the company and company too the members but neither of them is bound to an outsider to give effect to the articles.

4) Binding between members inter se- The articles define rights and liabilities of the members. As between members inter se the articles constitute a contract between them and are also binding on each member as against the other or others. Such contract can be enforced only through the medium of the company.

DOCTRINE OF CONSTRUCTIVE NOTICE

The memorandum and the articles of association of every company are registered with the Registrar of Companies. The office of the Registrar is a public office. Hence, MOA and AOA become public documents. It is therefore the duty of person dealing with a company to inspect its public documents and make sure that his contract is in conformity with their provisions.

-Every person who enters into any contract with a company will be presumed to know the contents of the memorandum of association and the articles of association. This is known as the doctrine of constructive notice.

CASE: Kotla Venkataswamy v. Ramamurthy- The articles of a company provided that its deeds etc should be signed by the managing director, the secretary and a working director on behalf of the company ,the plaintiff accepted a deed of mortgage executed by the secretary and a working director only. The plaintiff could not claim his deed. It was held that if the plaintiff had consulted the articles, she could have known that the deed needed signature of 3 specified officers. The fact that the plaintiff had acted in good faith , and her money had been utilized by company, could not change the position.

- India the courts with a view to protect the innocent third parties acting in good faith have not relied upon the doctrine seriously. CASE: Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas, court allowed an overdraft incurred by the managing agent of a company when under the articles the directors had no power to delegate their borrowing power. Court saying that temporary loans should be kept outside the purview of relevant provision.

DOCTRINE OF INDOOR MANAGEMENT

This doctrine is an exception to the principle of constructive notice. The doctrine of indoor management relates to internal matters. A person dealing with a company is bound to read only the public documents. He will not be affected by any irregularity in the internal management of the company. The rule of indoor management had its genesis in Royal British Bank v. Turquand- The directors of the company borrowed a sum of money from the plaintiff. The company’s articles provided that the directors might borrow on bonds such sums as may from time to time be authorized by a resolution passed at a general meeting of a company. The shareholders claimed that there was no such resolution authorizing the loan and, therefore, it was taken without their authority.

The company was however held bound for the loan. Once it was found that the directors could borrow subject to a resolution, the plaintiff had the right to assume that the necessary resolution must have been passed.

EXCEPTION TO THE DOCTRINE OF INDOOR MANAGEMENT

Knowledge of irregularity-A person who has actual knowledge of the internal irregularity cannot claim the protection of this rule, because he could have taken steps for self-protection. A person who himself is a party to the inside procedure, such as a director is deemed to know the irregularities, if any. CASE: Howart v. Patent Ivory Manufacturing Co., The director could not defend the issue of debentures to themselves because they have knowledge of internal irregularity that the extent to which they are lending money to the company required the assent of the general meeting which they had not obtained.
Suspicion of irregularity: Where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of indoor management.
Forgery - Rule in Turquand’s case does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery.

CASE: Official Liquidator v. Commr of Police, the Madras High Court held the company liable where the Managing Director had forged the signature of two other directors.

4. Ignorance of articles- A person who at the time of making the transaction doe not have knowledge of the company’s articles ,he cannot rely on those articles and plead that the articles conferred an ostensible authority on the agent with whom he deals.

UNIT 2

PROSPECTUS {section 2(36)}

Any document described 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.

CONTENTS OF PROSPECTUS

I. General information like name address stock exchange, policy of refunding of shares, date of opening and closing of issue.
II. Capital structure i.e.

Authorized capital-This is the maximum limit which a company can raise by issue of share capital during its lifetime.
Issue capital –part of authorized capital which company uses to raise funds.
Subscribed capital-part of issued capital which has been subscribed by the public.
Called up capital- It is the portion of issue price of share which a company has demanded.
Paid up share capital- It is the portion of called up capital which is paid by shareholder. The portion of called up capital which is not paid by shareholders are called unpaid calls or calls in arrears.

III. Prospectus has to be dated
IV. Prospectus has to be registered with registrar of company
V. Registrar has power to refuse to register the prospectus
If it is not dated.
The copy of prospectus is not signed by people who are authorized to sign.
Its inconsistent with any act or statute.

STATEMENT IN LIEU OF PROSPECTUS(Section 70&schedule III)

Public company may not issue public invitation or a prospectus, to procure money, if the promoter can procure capital through private contacts. In such a case the company may prepare statement in lieu of prospectus, containing particulars set out in Part 1 of schedule III.A copy of this has to be delivered to registrar for registration at least 3 days before the first allotment of shares or debentures. It has to be signed by every director.

KINDS OF PROSPECTUS

Shelf Prospectus- Shelf prospectus is a prospectus issued by any financial institution or bank for one or more issues of the securities or bank for one or more issues of securities or class of securities mentioned in that prospectus ,for instance ,bonds issued in series by IDBI and ICICI. This helps in saving time and reduce financial burden. A shelf prospectus shall be valid for one year from the date of opening of first offering of shelf prospectus.
Abridge Prospectus- a shorter description of the prospectus and contains all the prominent features of a Prospectus. It go together with the application form of public issues. In other words it is executive summary of prospectus.
Red Herring Prospectus- The shares are offered to the public in price range .Shareholder can apply at the price suitable to them; all the information except the price of share is mentioned.

REMEDIES FOR MISSTATEMENTS

Rescission of the contract-When the consent of the party is obtained by a misrepresentation, he has right to avoid such a contract u/s 19 of Indian Contract Act. The shareholder can also sue the company for rescission of the contract. Under this remedy the contract is cancelled and the money given by the shareholder refunded. Under Section 75 of the Contract Act, a person who lawfully rescinds a contract is entitled to compensation for any damage which he has sustained through non-fulfillment of the contract.

The right to avoid contract comes to an end in the following circumstances:

i) If the rescission of the voidable contract is not made within reasonable time.

ii) When the winding up of a company commences .

iii) When the shareholder entitled to rescind the contract ,does an act ,which indicates that he has waived his right of rescission of contract.

Damages for fraud (deceit)- Anyone who has been induced to invest money in a company by a fraudulent statement in a prospectus can sue the person responsible for issuing it. He must prove the same matters in claiming damages for deceit as in claiming rescission of the contract. He cannot both retain the shares and get damages against the company. He must show that he has repudiated the shares and has not acted as a shareholder after discovering the fraud or misrepresentation. CASE: DERRY V. PEEK ,it was held that since there was no intention to deceive ,the could not be held liable for deceit.
Compensation under section 62 ,Companies Act- Every director, promoter and every person authorizes the issue of the prospectus is liable to pay compensation to the aggrieved party for loss or damage he may have incurred by reason of any untrue statement in the prospectus.

The persons who are liable to pay compensation are

(a) directors at the time of issue of prospectus

(b) persons who have authorized themselves to be named as directors in the prospectus

(d) persons who have authorized the issue of prospectus

Defence to civil liability available to director{sec 62(2)}

a) That he withdrew his consent before the issue of the prospectus and it was issued without his consent or authority.

b) That he was ignorant of the untrue statement contained in the prospectus, he on becoming aware of any untrue statement therein withdrew his consent to the prospectus and gave reasonable public notice of the withdrawal and of the reason therefore, he is not liable.

c) That prospectus was issued without his knowledge and on becoming aware of its issue, he forthwith gave reasonable public notice of that fact,he is not liable.

d) Statement made by an expert who is competent to make it and had given his consent and not withdrawn it, the director is not liable .

SECURITIES

Section 2 (h) of Securities Contracts (Regulation) Act,1956

Securities” include—

i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

ii) Derivative;

iii) Units or any other instrument issued by any collective investment scheme to the investors in such schemes.

iv) Security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

v) units or any other such instrument issued to the investors under any mutual fund scheme;

vi) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;

vii) Government securities,

(viii) Such other instruments as may be declared by the Central Government to be securities;

ix) Rights or interests in securities;

CASE: PCS Industries v. SEBI (2002), it was held that unit issued by a mutual fund is a ‘security’ as definition of ‘security’ is an inclusive definition.

Section 2(46) of companies act defines share as “share in share capital of a company ,and include stock except where a distinction between stock and share is expressed or implied.

Shares have been declared as movable property and there transfer has to be made in the manner prescribed by articles of the company. Application for share is an offer. The offer is accepted by allotment of shares. Thus, when a company allots shares ,there arises a contract between applicant and a company. On allotment such person becomes a shareholder of the company.

Shares held by person represents 2 things: 1.it shows the extent of interest of shareholder in the company. 2. it indicate the extent of liability of shareholder.

RULES REGARDING ALLOTMENT OF SHARES

v Allotment should be made by proper authority

v It should be made within reasonable time

v It must be communicated, i.e valid communication of acceptance of offer .

v Allotment must be absolute, unconditional and must conform to terms and conditions of application.

STATUTORY RESTRICTIONS ON ALLOTMENT

No allotment unless minimum subscription received (Section 69). The prospectus minimum subscription.
The amount payable on application of each share shall not be less than 5% of the nominal amount of each share(section69(3))
All the money received from applicant for shares shall be deposited and kept in a scheduled bank {sec 69(3)} - until certificate of commencement of business is obtained u/s 149 or where certificate has already been obtained,until entire amount of minimum subscription is received..
If minimum subscription is not received within 120 days after the first issue of prospectus, all money received from applicants for shares shall be repaid them without interest. If not repaid within 130 days after the issue of prospectus, the directors of the company shall be jointly and severally liable to pay money with interest 6%per annum from expiry of 130^th day.{sec69(5)}
A company having share capital which does not issue prospectus ,shall have to deliver to the registrar for registration a statement in lieu of prospectus at 3 days before the issue of shares or debentures.(sec 70)
Irregular allotment shall be voidable at the instance of the applicant within 2 months of the allotment. (sec 71)
No opening of subscription list can be there until beginning of the 5^th day after the issue of the prospectus ,or such later time ,if any, as may be specified in the prospectus.(sec72)
Listing of all public issues with the stock exchange has been made compulsory by the amendment in section 73.

SWEAT EQUITY SHARES(sec 79A)

It means shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know –how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Conditions to be fulfilled:

Ø It must be authorized by a special resolution.
Ø Resolution specifies no. of share, current market price, consideration,if any and class of directors or employees to whom sweat equity shares are to be issued.
Ø Not less than one year ,at the date of issue ,has elapsed since the date on which the company was entitled to commence business
Ø Should be issued in accordance with regulations made by SEBI.

SHARE CERTIFICATE

-It is document issued by a company under its common seal specifying the number of shares held by a member and the amount paid on each share {sec 84(1)}. It is an evidence of title of a member of the shares.

Share certificate must contain the name and registered office of the company. It must bear the common seal of the company. It must contain the signatures of at least 2 directors who are authorized to sign and also the counter signature of the secretary of company.

Ø A share certificate creates two kinds of estoppels against the company issuing such certificate:

Estoppels as to payment-If certain amt is indicated as having been paid in respect of certain shares ,the company is not allowed to allege that such amt has not been paid.
Estoppels as to title-When a co. issues a share certificate in favor of a person and he happens to be registered owner of such certificates, the company is estopped from denying the validity of the certificate.

Ø Issue of Duplicate share certificate(sec 84(2)}: - it is issued in following situations

i) certificate is proved to be destroyed or lost

ii) Certificate having been defaced or mutilated or torn ,is surrendered to company.

SHARE WARRANT

It is a document by a public limited company under its common seal to its shareholders in respect of fully paid shares, stating that the bearer of the instrument is

entitled to the shares mentioned therein. Private limited company cannot issue share warrant.

TRANSFER OF SHARES

According to section 82, shares of any member in a company shall be movable property, transferable in manner provided by the articles of the company.

● Is a statutory right;

● Regulated by articles;

● If a company does not have articles, Table A would apply,

● Where the Articles do not provide for transfer of shares and also expressly exclude application of Table A, general law relating transfer of movable property will govern.

CASE: Lyle & Scott Ltd v. Scott’s Trustees, the articles provided that a person desiring to transfer his shares must inform the secretary about the same, and must sell his shares to a member, who is willing to buy them. A shareholder agreed to sell his shares to an outsider, without informing the secretary. It was held the shareholder was bound by the articles, and he could not transfer the share against the articles.

Procedure of transfer(section 108)

A transfer of shares is not to be registered except on production of instrument of transfer, as required by section108 .Requirement of section 108 are:

1. An instrument of transfer in prescribed form;

2. and duly stamped;

3. executed both by transferee and transferor;

4. has to be delivered to the company;

5. along with the share certificates relating to the shares, which have to be transferred.

SHARE CAPITAL

Share capital means the capital raised by a company by the issue of shares. Capital means amount of money involved in running the business.
According to section 83, each share in a company having a share capital shall be distinguished by its appropriate number.:

Provided that nothing in this section will apply to shares held with a depository.

The capital of a company may be of two kinds-

1. Equity share capital-

(i) with voting rights

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed.

Shares with differential rights- it means a share that is issued with differential rights in accordance with the provisions of Section 86.

2. Preference share capital -it means, in the case of a company limited by shares, that part of the capital of the company which carries a preferential right as to-

(a) Payment of dividend during the lifetime of the company

(b) Repayment of capital on winding up

Other different form of capital are:

Authorized or nominal share capital-This is the nominal value of the shares which a company is authorized to issue by its Memorandum of Association.

Issued share capital-issued capital is the nominal value of the shares which are offered to the public for subscription.

Subscribed share capital – that part of issued share capital which has been subscribed

Called-up capital-this is that part of the issued capital which has been called up on the shares.

Paid-up capital-this is that part of the issued capital which has been paid up by the shareholders or which is credited as paid-up on the shares

Uncalled capital-this is the remainder of the issued capital which has not yet been called.

Reserve capital-this is that part of the uncalled capital of a company which can be called only in the event of its winding up.

Capital reserve – this reserve can be used to write off capital losses such as discount on issue of shares, underwriting, commission etc.

REDUCTION OF SHARE CAPITAL (SECTION 100-105)

According to section 100, company has power to reduce its share capital by passing a special resolution and by obtaining confirmation of tribunal . Circumstances in which reduction of share capital may be provided are:

i) To reduce liability on shares which have been remained unpaid.

ii) To cancel the capital which has been lost

iii) To pay off the capital which is in excess of its need.

Protection of interest of creditors and shareholders

The tribunal may confirm the reduction of share capital after the company protects the interest of its creditors as desired by the tribunal.

CASE: RE, OCL INDIA LTD –there was objection by some creditors on reduction of petitioner company capital .Company secured dues of these creditors. It was further complied with directions of court to keep certain amt in fixed deposit in the name of registrar of court. Court then approved reduction of capital. Consequently, alteration in MOA proposed by special resolution was also affirmed

The fact of the tribunal order confirming reduction has to be got registered with the registrar.
After the reduction of the liability of a member is to pay the difference between what he has already paid, or is deemed to have paid, and the amount of the share as fixed on reduction.

Buy-back of shares-a company may purchase its own shares, subject to fulfillment of conditions laid down in Section 77A, purchase its own shares. Buy back can only be done out of i) free reserve ii) security premium account; or iii) the proceed of any shares or other specified securities

DEBENTURES

According to Section 2(12), ‘debenture’ includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.
Debenture certificate indicates the debt owed by the company to a debenture holder against the loan taken by the company.

KIND OF DEBENTURES

Redeemable debentures-debentures are usually issued on the condition that they shall be redeemed after a certain period. Such debentures are known as redeemable debentures. They may be re-issued after redemption in accordance with the provisions of Section 121.
Irredeemable or perpetual debentures-when debentures are irredeemable, they are called perpetual debentures.
Bearer debentures/unregistered debentures-these debentures are payable to the bearer. These are regarded as negotiable instruments and are transferable by delivery and a bona fide transferee for value is not affected by the defect in the title of the prior holder.
Registered debentures-these are debentures which are payable to the registered holders. A holder is one whose name appears both on the debenture certificate and in the company’s register of debentures.
Convertible debentures-these debentures give an option to the holders to convert them into preference or equity shares at stated rates of exchange, after a certain period.
Non-convertible debentures-these debentures do not give any option to their holders to convert them into preference or equity shares. They are to be duly paid as and when they mature.
Secured debentures-debentures which create some charge on the property of the company are known as secured debentures.
Unsecured or naked debentures.-debentures which do not create any charge on the assets of the company are known as unsecured debentures. The holders of these debentures like ordinary unsecured creditors may sue the company for recovery of debt.

FLOATING CHARGE

A floating charge is an equitable charge which is created on some class of property which is constantly changing, e.g., a charge on stock-in-trade, trade debtors, etc. The company can deal in such property in the normal course of its business until the charge becomes fixed on the happening of an event. The main idea behind floating charge is to allow the company to carry on its business in the ordinary course as if no charge had been created. Debentures usually create a floating charge on the assets of a company.

CASE: Government Stock, etc. Co. v. Manila Rail Co., the company issued debentures creating a floating charge over its assets. Thereafter, it mortgaged some of the property before the debenture holder took any step to enforce their securities. It was held that the mortgagee had priority over the debenture holder, so far as the mortgaged property was concerned.

REMEDIES OF DEBENTURE HOLDER

When company makes default in payment, debenture holder has following remedies:-

He may sue the company just like any other creditor for recovery of money
He may appoint a receiver to take control of assets if terms of charge so authorize. If he does not have such power, he may obtain order from court for appointment of the receiver or manager.
He may bring an action through trustee and sell the charged property through them, if such a power is given under the debentures trust deed.
In case of unsecured debentures if he wishes, petition under Section 433(e) for the winding up of the company on the ground that the company is unable to pay its debts.

Corporate law

Companies Act 1956 was previously governed by Joint Stock companies Act of 1850.

NATURE OF COMPANY

INDEPENDENT CORPORATE EXISTENCE - A company has a separate legal entity and is not effected by changes in its membership. Therefore , a company can contract, sue and be sued in its incorporated name and capacity.( SALOMAN V. SALOMAN & CO. 1897 AC 22)
PERPETUAL EXISTENCE- Since company has existence independent of its members ,it continues to be in existence despite death, insolvency or change of members.
COMMON SEAL –Company is not natural person ,therefore ,it cannot sign like natural person. The common seal acts as the official seal of the company.
LIMITED LIABILITY-The liability of every shareholder of a company is limited to the amount of nominal value of shares held by them.
TRANSFERABILITY OF SHARES –Shares are transferable by its members except in case of a private limited company ,which may have certain restrictions on such transferability.
CAPACITY FOR SUITS – A company can sue and be sued in its own name . The names of managerial members need not be impleaded .
SEPARATE PROPERTY-The company is capable of holding and enjoying property in its own name.
NOT A CITIZEN- A company is not a citizen in the same sense However it has nationality, domicile , residence. (STATE TRADING CORPORATION OF INDIA V. CTO AIR 1963 SC 1811)