The Purpose
I have been in practice of company law for almost two decades and have gathered the working and practical knowledge of the same over this period. I want to share it in a series of articles. I want to explain it in a way the average person can understand. I also hope that this will help the students and businesspeople in a similar way.
Disclaimer
I would also like to make it clear that anything explained here should not be taken as a legal advice and anybody acting upon shall be solely responsible for his actions. Therefore, I caution the readers to take suitable legal help in specific cases.
Before knowing anything about a subject it helps if we know the history of the subject matter.
Assumptions
Before embarking on the subject matter I need to declare the assumptions which I would be following.
1. The company or corporate entity discussed is about the Companies as they are in India.
2. Wherever there is reference to Democracy or parliament it is about the Indian Democracy and the Parliament of India.
History
The industrial revolution in the England set the foundation for Companies (corporate legal entity separate from its constituents). Large sums of money were needed to finance long-term capital needs of industries and businesses. This money could be contributed by the members of public by buying shares in the company.
Idea of Limited Liability
That brought in the fundamental of limited liability. Limited liability means once a shareholder has paid fully for the shares taken by him then he need not pay anything on winding of the company if the venture failed altogether or the company incurred huge losses. This was an improvement over the partnership form of business where the partners were personally liable to pay for the liabilities of the firm if the venture failed. The partners had to honour the debts contracted by the firm from their own resources.
Is the Liability of Directors also Limited?
The position of a Director is of trusteeship and so long as he acts in good faith he is not personally liable for the losses of the company. However, if he acts carelessly and doesn’t exercise prudence he may be personally liable. Also a Director is personally liable to the creditors of the company if he binds himself by giving personal guarantee for the debts of the company.
Perpetual Succession
A company is registered by following procedure under the law. It can be wound up by following procedure under the law. Until wound up the company continues to exist. It is not affected by the death of its directors and members. The members can elect new directors in place of transferred directors and the show continues.
A partnership firm is dissolved when one or more partners leave the firm or die.
Separate Legal Existence
A company is a separate legal entity. It enjoys all the rights of a natural person and is subject to the liabilities as well. Despite a person holding all the shares of a company the company remains a separate legal entity. A transaction between a majority shareholder and a company is treated as between two separate people.
When a shareholder transfers his property to the company it will be subject to the stamp duty and registration as if the transaction were between two people at arms length.
Similarly the liabilities of the company cannot be said to be liabilities of its directors and shareholders.
What happens to shares of deceased member?
The shares held by a deceased member are transmitted to his legal heirs as per his will. In absence of will, however the legal heirs have to get a succession certificate from the Court of law.
There are two exceptions to this. One is if the deceased member held the shares jointly with others then the living members shall approach the company with the share certificates and a copy of death certificate. The company then removes the name of deceased member from the register of members and share certificates.
Second if the deceased member had nominated someone for shares held by him. In that case the shares are transmitted to the nominee on production of a request letter along with a copy of death certificate.
Why partly paid shares?
Now a question arises what was the need to have partly paid up shares to start with. If a company implementing a big industrial venture takes a long gestation period of say more than three years all the money is not needed at the beginning. However, it would be needed in a phased manner over the period of gestation. Issuing partly paid up shares ensures the company would get the funds when needed. If a shareholder fails to pay the money when called his shares would be forfeited. This acts as deterrent and makes a shareholder to honour his commitment.
Alternately if a company takes full amount in the beginning it will have surplus money which it would need to use fruitfully. If the money invested is lost because of one or other reason the venture would be in jeopardy.
Organisation of a company
A company is similar to a democracy. Here the pattern is slightly different from a true democracy so far as voting rights are concerned. In a democracy each citizen has one vote; whereas, in a company each share has one vote. Therefore, the majority or minority is decided by not the number of members (shareholders) but the quantum of shares held by them.
Decision making
The decisions of a company are taken in the same manner as in a democracy. The votes cast in favour should be more than the votes against. Even a single vote can turn the events. You may remember the 13 days Vajpayee Government at the center fell because of one vote.
Majority and minority can be explained in the following manner:
Simple Majority: 51%
A person or a group of persons holding a simple majority can pass ordinary resolutions.
Absolute majority: 76%
A person or a group of persons holding an absolute majority can pass special resolutions. Example of special resolutions is the resolutions which can change the constitution of a company like altering Memorandum and Articles of Association of a company.
Minority 49%
A person or group of persons holding shares between 25% and 49% cannot block any ordinary resolution. However, it can block a special resolution.
Minority 25%
A person or group of persons holding 25% or less shares cannot block any decision of a company unless the resolution needed to be passed is with 100% voting.
Policy Framing
In a parliamentary democracy the citizens elect the Members of Parliament. The parliament while in session, make policy decisions by passing laws. These acts are passed with simple majority. Amendments to the Constitution needs passing of acts with specific majority of 2/3.
Likewise a Board of Directors assembled at a meeting is called Board and collectively make policy decisions by passing resolutions. Board resolutions are passed with simple majority unless specifically needed to pass unanimous resolution (all Directors voting for the resolution and none against it).
Conduct of Meetings
The speaker of the House is responsible for conduct the proceedings/ business of the house in an orderly manner. Likewise a Chairman of a company is responsible for the conduct of meetings of the Board and Members.
Here there are some basic differences in Company vs. Parliamentary democracy. The Chairman can also be a Managing Director in a company; whereas, in a parliamentary democracy there is divorce between the position of a speaker and the Prime Minister. The prime minister cannot be the speaker and the speaker cannot be the prime minister. Both are constitutional positions and are held by different persons.
Management
A member of parliament has no say in the day-to-day working of the Government. The Prime Minister with his cabinet colleagues and the team of bureaucrats is responsible for to run the affairs of the Government.
An ordinary director has no say in the day-to-day affairs of the company. The Managing Director with the team of executive and whole time directors and the senior staff of the company implement the decision of the Board.
Source of Power
A parliament derives it law making power from the Constitution and the Company derives it power from the Memorandum and Articles of Association.
A parliament cannot pass a law beyond its power (not delegated to it by the Constitution). A company’s Board cannot take a decision to start a business not included in its Memorandum of Association.
A parliament is bound and shall recognize the fundamental and other rights of the citizens while passing a law so it is not ultra virus (beyond power) the constitution. Similarly, a Company’s Board has to keep in mind the laws governing the businesses it wants to embark on. If a particular business needs a specific license it should get that first and then only it can start that business.
Redressal
If a law passed by the parliament is ultra virus the constitution any citizen can approach a High Court or the Supreme Court to get an order for declaring it ultra virus.
Similarly if a company acts ultra virus its Memorandum and Articles of Association and the Laws applicable to it any shareholder can approach a competent court of law to restrain the company and its directors.
Thursday, November 19, 2009
COMPANY LAW AT A GLANCE
INTRODUCTION
The Companies Act, 1956 is a law enacted by the Indian Parliament to regulate Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations, but not including co-operative societies.
The Indian Parliament inherits its lawmaking powers from the constitution of India which empowers it to make laws on the subjects listed in the Union List of the Seventh Schedule to the Constitution.
Company is defined to mean a company formed and registered under the Companies Act, 1956. It doesn’t give an idea what a company is. Therefore we need to understand it by the characteristics of a Company. A company:
1. is a registered association of persons and is a legal person in the eyes of law;
2. has a separate legal entity;
3. has a name recognized by/ under the law;
4. can acquire and dispose properties and assets;
5. can sue and be sued;
6. has perpetual succession (shareholders and directors may change but the company continues to exist till wound up by following the procedure laid down by the law.
7. has a common seal which can be affixed as signature of the company under the authority of a Board resolution;
TYPES OF COMPANIES UNDER THE COMPANIES ACT, 1956:
1. Private company
2. Public company
Private company is a company which
1. has a minimum paid-up capital of 1 lac Rupees;
2. restricts the right to transfer its shares;
3. limits the number of its members to 50;
4. prohibits invitation to the public to subscribe for any shares in, or debentures of, the company;
5. prohibits any invitation or acceptance of deposits from persons other than its members, directors, or their relatives.
Public company means a company which
1. is not a private company;
2. has a minimum paid-up capital of 5 lac rupees; and
3. is a private company which is a subsidiary of a company which is not a private company.
HIERARCHY
The constitution of India is the Supreme Law of the Land.
Parliament can pass a law under the powers granted by the Constitution on it. A law which infringes on the fundamental rights of the citizens is ultra vires (Beyond one’s powers).
The Companies Act, 1956 is an act made by the parliament to consolidate and amend the law relating to companies.
A Memorandum of Association is the charter of the company and restricts its rights. A company cannot indulge in a business not contained in its memorandum of Association. Section 9 of the Act provides that the Act shall override memorandum, articles, etc.(contracts)
The clauses of Memorandum are:
I. NAME CLAUSE
States the name of the company as registered with the RoC.
Name of a company can be changed during its lifetime any number of times by complying with the provisions of the Act.
Application for new name justifying the need be filed in Form No. 1A. After the name is made available a special resolution need to be passed and filed in Form No. 23 to get a fresh certificate for change of name.
II. REGISTERED OFFICE CLAUSE
A company must have a registered office.
All the statutory records and books of account should be kept at the registered office.
A signboard should be affixed outside the registered office.
The registered office is the only place statutorily recognized for serving of notices on a company.
Registered office can be shifted by filing form No. 18 (within 30 days) after following provisions of the act.
By passing Board resolution if shifting is within the local limits of city town or village.
By passing special resolution when the shifting is outside local limits;
If the shifting is within the same state but to the jurisdiction of another ROC then approval of Regional Director is required.
If the shifting is to another state then the Registered office clause needs to be altered by passing special resolution and a petition be made to the Central government (delegated to the CLB) for approval of the alteration.
III. OBJECT CLAUSE which divided into three sub-clauses (i) Main objects (ii) Objects incidental and ancilliary to attainment of main objects (iii) Other Objects.
A private company can commence any business stated in other objects. A public company needs to comply with requirements of section 149 with regard to commencement of new business.
Object clause can be altered by passing special resolution and confirmation of the Central Government (delegated to the RoC).
LIABILITY CLAUSE specifies that the liability of members is limited.
CAPITAL CLAUSE states the Authorised capital and the nominal value and number of shares
Capital can be divided into Equity and Preference shares
Equity is risk capital. Holders get voting rights and thereby participate in management of the company by appointment of directors and passing ordinary special resolutions. The also share whatever remains after the outsiders (including preference shareholders) are paid off in full.
Equity shares with differential voting rights:
Private companies can issue Equity shares with differential voting rights without any restriction.
CONTROL OF THE COMPANY
26% holding (holders can block special resolutions)
49% holding (holders can block special resolutions)
51% holding is 100% (simple majority – holders can pass ordinary resolutions)
With 76% the holders have absolute control over the company.
Minority shareholders are protected by law if the majority indulges in unlawful activities to harm the interest of the company/ minority.
Public companies have certain limitations on issue of Equity shares with differential voting rights.
Preference shareholders get fixed dividend and get back their capital on expiry of the period for which the preference shares are issued. They get voting rights when the dividend falls in arrears.
SUBSCRIPTION CLAUSE contains the particulars of subscribers.
All the clauses of memorandum of association are alterable by passing necessary ordinary/ special resolution and complying with the provisions of the act except the subscription clause which remains the same forever.
ARTICLES OF ASSOCIATION are the code for internal working of the company.
They lay down the rules for running of the company.
Outsiders dealing with a company are protected by the law of indoor management.
A public company can be registered without articles of association. In that case Table A shall apply fully.
A private company must have its own articles of association as the conditions constituting a company as private limited must be mentioned in its Articles of association.
There are certain matters which if included in the articles can be
All the clauses of articles of association are alterable by passing special resolution and complying with the provisions of the act except the subscription clause which remains the same forever.
MEMBERSHIP
Membership of a company can be acquired by
subscribing to the memorandum of association,
applying for shares in writing in the company and getting the shares allotted; and
transfer / transmission.
operation of law i.e. pursuant to an order passed by a court of law.
RIGHTS OF MEMBERS
To elect director and thus to participate in the management through them.
To vote on the resolutions at meetings of the company.
To convene EGMs (Members holding 10% voting power)
To enjoy the profits of the company in the shape of dividends.
To apply to the court in the case of oppression & mismanagement.
To apply to the court for winding up of the company.
To get Rights and bonus shares
To share in the surplus on winding up.
To get a copy of annual report, memorandum and articles and other documents
ANNUAL GENERAL MEETING / EXRA ORDINARY GENERAL MEETING
First AGM within 18 months of incorporation;
There should not be a gap of more than 15 months between two AGMs.
Gap between close of the year and AGM should not be more than 6 months; it can be nine months for the first AGM.
There should be one AGM every year
AGM should be held during office hours on a day which is not a public holiday and at the registered office or within the local limit of the city, town or village.
Any other meeting of members between two AGMs is called Extra Ordinary General Meeting.
Extra Ordinary General Meeting can be held on public holidays and at place other than the registered office.
RESOLUTIONS OF GENERAL MEETINGS
Ordinary resolutions are passed with simple majority;
Special resolutions are passed when the votes cast in favour are not less than three times the votes cast against a motion (resolution). The motion should state that the resolution should be passed as special resolution.
DECISIONS AT GENERAL MEETINGS
Votes on the first instance are by show of hands;
A member entitled to attend a meeting is entitled to appoint a proxy to attend and vote on his behalf;
A private company, by its articles, may restrict that a proxy should be a member.
Proxies are allowed to vote on resolutions but they have no right to speak;
ORDINARY BUSINESS OF ANNUAL GENERAL MEETING
Following are the items of ordinary business of Annual General Meeting
Adoption of Audited accounts, reports of Directors and auditors thereon
Declaration of Dividend
Re-appointment of Directors retiring by rotation (If the Articles provide retirement by rotation)
Re-appointment of Audiotors
All other businesses at AGM are considered Special.
All businesses at Extra Ordinary General Meeting are considered Special.
NOTICE OF GENERAL MEETINGS
Notice of a general meeting shall be served on all members.
Notice period for a General Meeting is 21 days. A Private company can provide for shorter notice by its articles.
Explanatory statement for items of special business shall be annexed to notice. A private company can do away with Explanatory statement if the articles so provide.
Directors’ Report, Auditors’ Report and audited accounts should be sent alongwith the notice calling an Annual General Meeting.
MANAGEMENT
Board of directors
First directors
First directors are named in the articles of association; in default the subscribers to the memorandum and articles of association are treated as first directors. However, it is not practically possible to incorporate a company without explicitly appointing directors.
Additional Director
A director appointed by the Board to hold the office till the date of next annual general meeting; If not appointed at the AGM he will cease to be a director;
Nominee Director
Appointed by a Financial Institution / Bank / Government to protect the interest of the appointee or the public in general.
Alternate Director
A person appointed to act for a director during his absence from the state in which the meetings of the Board are held.
Managing Director
A director entrusted with substantial powers of management. MD can be appointed for life in a private company; A public company can appoint MD for five years at a time (can re-appoint for any number of times).
Executive / Wholetime Director
The working Directors are called Executive / Wholetime Director(s). Normally they get remuneration from the company for the services they render.
REMUNERATION
No restriction on payment of remuneration to directors of private companies.
CESSATION OF DIRECTORS
A director can resign from office by tendering his resignation to the board.
A director holding the office of Managing or wholetime director has to be relieved from his office by the Board.
A director can be removed from office by complying with the provisions of the Act.
A director who absents himself from three consecutive meetings of the Board or all meetings held in a period of three months vacates the office of director.
VALIDITY OF ACTS OF DIRECTORS
Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles:
Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated.(290)
Form No. 32 is required to be filed (within 30 days with normal filing fees and additional fees thereafter) for Change in Directors. Change means appointment, cessation, change in designation etc.
Board meeting
Decisions of the company are taken at meetings of the board where resolutions can be passed by a simple majority.
Every company needs to hold four meetings in a year;
one meeting in each quarter; and
there shall not be a gap more than three months between two meetings.
Notice of board meetings along with the details of agenda to be discussed has to be given in writing to every director in India and at the registered address of a director not in India.
Every director attending a meeting of the Board shall record his attendance.
Two directors or one third of total strength whichever is higher can form a valid quorum.
Directors need to disclose their interest in the resolution before the Board.
Interested Directors of private companies can participate and vote in the subject/ resolutions they are interested.
A director can cease to be director if he absents himself from three consecutive meetings of the Board without seeking leave of absence.
POWER OF BOARD
All the powers which can be exercised by the company except those reserved for General meetings. Board can delegate its powers to individual directors/ officers with the following exceptions:
power to make calls
power to authorize buy back of shares
power to issue debentures
power to borrow money
power to invest the funds of the company
power to make loans
The powers to invest and the power to make loan can be delegated by the board after specifying the monetary limit.
ISSUE AND ALLOTMENT OF SHARES
Authorised share capital
Can be increased by passing special/ ordinary resolution as the case may be ( See the provision in the Capital Clause and the Articles of Association. If the Authorised share capital is described in the Articles then you need to amend the Articles and irrespective of the requirement of ordinary or special resolution you have to pass special resolution for amending the Articles).
File Form No. 5 duly stamped (and Form 23 if the resolution passed is Special).
The nominal value of shares can be increased / decreased (consolidation/ sub division) by passing appropriate resolution and filing of Form No. 5 (and Form 23 if the resolution passed is Special).
Stamping is not necessary if the total amount of authorized share capital is not increased.
Issue of shares
A private company cannot offer it shares to public. However, it can offer its shares to friends, relatives, business associates of directors.
Compliance/ Filing of Return
Return of allotment has to be filed within 30 days of allotment in Form 2. Delay attracts penalty which may be upto Rs. 5000/- per day of delay.
SHARE CERTIFICATE
Share certificate is a document which shows ownership of the shares mentioned therein. Stamp duty for issue of share certificate is 0.1% on the value of shares in Maharashtra. Different rates of stamp duty are prescribed by different states as it is levied by the State stamp Act.
Share certificate shall be issued within 3 months of allotment/ 2 months of the date of lodgement of duly completed transfer deed.
Share transfer attracts stamp duty @0.25% of the consideration throughout India as the power falls under the Central Stamp Act..
Share certificate has to be lodged along with duly executed transfer deed for transfer.
Duplicate share certificate can be issued on execution of proper documents (affidavit and indemnity) in case of loss/ mutilation.
CHARGE
When a company hypothecates or mortgage its assets in favour of any person that person is said to have a charge on the assets of the company.
A charge created on the company’s assets need to be registered with the ROC.
A pledge does not fall in the category of charge requiring registration.
Form 8 needs to be filed for registration of charge within 30 days with normal filing fees and within 60 days with additional fees. If filed beyond 60 days, a petition u/s141 shall be filed before the CLB for condonation of delay.
Similar provision applies for modification of charge.
For registration of satisfaction the time limit is 30 days. If file beyond the 30 days time, a petition u/s141 shall be filed before the CLB for condonation of delay
ACCOUNTS AND AUDIT
Every company has to get its accounts audited by auditor who shall be a practicing chartered accountant;
The Balance sheet and Profit and loss account of a company shall be signed by its manage or secretary, if any, and by not les than two directors, one of whom shall be MD if there is one.
First Auditors are appointed by the Board within one month of incorporation of a company.
Subsequent Auditors are appointed by the members at AGM.
Auditors report should be read at the AGM. Other parts of Annual report can be taken as read.
BOOKS OF ACCOUNT TO BE KEPT BY COMPANY
The Companies Act, 1956 does not list out the Books of account to be kept by a company. However, it specifies the contents of the books of account.
In effect a company can keep only a cash book, ledger and stock records and fixed assets register to meet the requirement of the law.
However, for convenient working the companies maintain different registers and ledgers to meet the specific requirement of the business segment they are in and also to comply with the requirements of fiscal legislations like the Income Tax Act, Customs and Central Excise Act, Sales Tax Act (VAT), etc.
Section 209 (1) Every company shall keep at its registered office proper books of account with respect to -
All sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place;
All sales and purchases of goods by the company;
The assets and liabilities of the company;
In the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account;
For the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein,- (a) if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions;
If such books are not kept on accrual basis and according to the double entry system of accounting;
The books of account and other books and papers shall be open to inspection by any director during business hours.
Balance sheet and Profit and Loss account needs to be prepared as per schedule VI.
Disclosures need to be made in accordance with the applicable accounting standards
Depreciation need to be charged in accordance with the Schedule XIV
CASE OF COMPULSORY WINDING UP
If a company is unable to pay its debts (sum exceeding one lakh rupees).
REGISTRAR OF COMPANIES
It is a public office which
Make available names for incorporation of new companies
Incorporate companies
Grant approvals wherever required under the Companies act, 1956
Receive and record the documents filed by companies
Make them available for inspection by the public (on payment of fees)
Prosecute defaulting companies/ directors
Carry inspection of companies
HOLDING AND SUBSIDIARY COMPANY
Company A is Holding company and Company B is subsidiary of Company A; If
Company A controls the Composition of Board of directors of Company B;
Company A holds more than half in nominal value of equity share capital of Company B ;
Company B is subsidiary of Company C which is Subsidiary of Company A.
Disclaimer:
This article is written to help average people and students understand what a company is and what is allowed and not allowed under the Companies Act, 1956. The author is not responsible to anyone taking any action on the basis of this article.
The Companies Act, 1956 is a law enacted by the Indian Parliament to regulate Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations, but not including co-operative societies.
The Indian Parliament inherits its lawmaking powers from the constitution of India which empowers it to make laws on the subjects listed in the Union List of the Seventh Schedule to the Constitution.
Company is defined to mean a company formed and registered under the Companies Act, 1956. It doesn’t give an idea what a company is. Therefore we need to understand it by the characteristics of a Company. A company:
1. is a registered association of persons and is a legal person in the eyes of law;
2. has a separate legal entity;
3. has a name recognized by/ under the law;
4. can acquire and dispose properties and assets;
5. can sue and be sued;
6. has perpetual succession (shareholders and directors may change but the company continues to exist till wound up by following the procedure laid down by the law.
7. has a common seal which can be affixed as signature of the company under the authority of a Board resolution;
TYPES OF COMPANIES UNDER THE COMPANIES ACT, 1956:
1. Private company
2. Public company
Private company is a company which
1. has a minimum paid-up capital of 1 lac Rupees;
2. restricts the right to transfer its shares;
3. limits the number of its members to 50;
4. prohibits invitation to the public to subscribe for any shares in, or debentures of, the company;
5. prohibits any invitation or acceptance of deposits from persons other than its members, directors, or their relatives.
Public company means a company which
1. is not a private company;
2. has a minimum paid-up capital of 5 lac rupees; and
3. is a private company which is a subsidiary of a company which is not a private company.
HIERARCHY
The constitution of India is the Supreme Law of the Land.
Parliament can pass a law under the powers granted by the Constitution on it. A law which infringes on the fundamental rights of the citizens is ultra vires (Beyond one’s powers).
The Companies Act, 1956 is an act made by the parliament to consolidate and amend the law relating to companies.
A Memorandum of Association is the charter of the company and restricts its rights. A company cannot indulge in a business not contained in its memorandum of Association. Section 9 of the Act provides that the Act shall override memorandum, articles, etc.(contracts)
The clauses of Memorandum are:
I. NAME CLAUSE
States the name of the company as registered with the RoC.
Name of a company can be changed during its lifetime any number of times by complying with the provisions of the Act.
Application for new name justifying the need be filed in Form No. 1A. After the name is made available a special resolution need to be passed and filed in Form No. 23 to get a fresh certificate for change of name.
II. REGISTERED OFFICE CLAUSE
A company must have a registered office.
All the statutory records and books of account should be kept at the registered office.
A signboard should be affixed outside the registered office.
The registered office is the only place statutorily recognized for serving of notices on a company.
Registered office can be shifted by filing form No. 18 (within 30 days) after following provisions of the act.
By passing Board resolution if shifting is within the local limits of city town or village.
By passing special resolution when the shifting is outside local limits;
If the shifting is within the same state but to the jurisdiction of another ROC then approval of Regional Director is required.
If the shifting is to another state then the Registered office clause needs to be altered by passing special resolution and a petition be made to the Central government (delegated to the CLB) for approval of the alteration.
III. OBJECT CLAUSE which divided into three sub-clauses (i) Main objects (ii) Objects incidental and ancilliary to attainment of main objects (iii) Other Objects.
A private company can commence any business stated in other objects. A public company needs to comply with requirements of section 149 with regard to commencement of new business.
Object clause can be altered by passing special resolution and confirmation of the Central Government (delegated to the RoC).
LIABILITY CLAUSE specifies that the liability of members is limited.
CAPITAL CLAUSE states the Authorised capital and the nominal value and number of shares
Capital can be divided into Equity and Preference shares
Equity is risk capital. Holders get voting rights and thereby participate in management of the company by appointment of directors and passing ordinary special resolutions. The also share whatever remains after the outsiders (including preference shareholders) are paid off in full.
Equity shares with differential voting rights:
Private companies can issue Equity shares with differential voting rights without any restriction.
CONTROL OF THE COMPANY
26% holding (holders can block special resolutions)
49% holding (holders can block special resolutions)
51% holding is 100% (simple majority – holders can pass ordinary resolutions)
With 76% the holders have absolute control over the company.
Minority shareholders are protected by law if the majority indulges in unlawful activities to harm the interest of the company/ minority.
Public companies have certain limitations on issue of Equity shares with differential voting rights.
Preference shareholders get fixed dividend and get back their capital on expiry of the period for which the preference shares are issued. They get voting rights when the dividend falls in arrears.
SUBSCRIPTION CLAUSE contains the particulars of subscribers.
All the clauses of memorandum of association are alterable by passing necessary ordinary/ special resolution and complying with the provisions of the act except the subscription clause which remains the same forever.
ARTICLES OF ASSOCIATION are the code for internal working of the company.
They lay down the rules for running of the company.
Outsiders dealing with a company are protected by the law of indoor management.
A public company can be registered without articles of association. In that case Table A shall apply fully.
A private company must have its own articles of association as the conditions constituting a company as private limited must be mentioned in its Articles of association.
There are certain matters which if included in the articles can be
All the clauses of articles of association are alterable by passing special resolution and complying with the provisions of the act except the subscription clause which remains the same forever.
MEMBERSHIP
Membership of a company can be acquired by
subscribing to the memorandum of association,
applying for shares in writing in the company and getting the shares allotted; and
transfer / transmission.
operation of law i.e. pursuant to an order passed by a court of law.
RIGHTS OF MEMBERS
To elect director and thus to participate in the management through them.
To vote on the resolutions at meetings of the company.
To convene EGMs (Members holding 10% voting power)
To enjoy the profits of the company in the shape of dividends.
To apply to the court in the case of oppression & mismanagement.
To apply to the court for winding up of the company.
To get Rights and bonus shares
To share in the surplus on winding up.
To get a copy of annual report, memorandum and articles and other documents
ANNUAL GENERAL MEETING / EXRA ORDINARY GENERAL MEETING
First AGM within 18 months of incorporation;
There should not be a gap of more than 15 months between two AGMs.
Gap between close of the year and AGM should not be more than 6 months; it can be nine months for the first AGM.
There should be one AGM every year
AGM should be held during office hours on a day which is not a public holiday and at the registered office or within the local limit of the city, town or village.
Any other meeting of members between two AGMs is called Extra Ordinary General Meeting.
Extra Ordinary General Meeting can be held on public holidays and at place other than the registered office.
RESOLUTIONS OF GENERAL MEETINGS
Ordinary resolutions are passed with simple majority;
Special resolutions are passed when the votes cast in favour are not less than three times the votes cast against a motion (resolution). The motion should state that the resolution should be passed as special resolution.
DECISIONS AT GENERAL MEETINGS
Votes on the first instance are by show of hands;
A member entitled to attend a meeting is entitled to appoint a proxy to attend and vote on his behalf;
A private company, by its articles, may restrict that a proxy should be a member.
Proxies are allowed to vote on resolutions but they have no right to speak;
ORDINARY BUSINESS OF ANNUAL GENERAL MEETING
Following are the items of ordinary business of Annual General Meeting
Adoption of Audited accounts, reports of Directors and auditors thereon
Declaration of Dividend
Re-appointment of Directors retiring by rotation (If the Articles provide retirement by rotation)
Re-appointment of Audiotors
All other businesses at AGM are considered Special.
All businesses at Extra Ordinary General Meeting are considered Special.
NOTICE OF GENERAL MEETINGS
Notice of a general meeting shall be served on all members.
Notice period for a General Meeting is 21 days. A Private company can provide for shorter notice by its articles.
Explanatory statement for items of special business shall be annexed to notice. A private company can do away with Explanatory statement if the articles so provide.
Directors’ Report, Auditors’ Report and audited accounts should be sent alongwith the notice calling an Annual General Meeting.
MANAGEMENT
Board of directors
First directors
First directors are named in the articles of association; in default the subscribers to the memorandum and articles of association are treated as first directors. However, it is not practically possible to incorporate a company without explicitly appointing directors.
Additional Director
A director appointed by the Board to hold the office till the date of next annual general meeting; If not appointed at the AGM he will cease to be a director;
Nominee Director
Appointed by a Financial Institution / Bank / Government to protect the interest of the appointee or the public in general.
Alternate Director
A person appointed to act for a director during his absence from the state in which the meetings of the Board are held.
Managing Director
A director entrusted with substantial powers of management. MD can be appointed for life in a private company; A public company can appoint MD for five years at a time (can re-appoint for any number of times).
Executive / Wholetime Director
The working Directors are called Executive / Wholetime Director(s). Normally they get remuneration from the company for the services they render.
REMUNERATION
No restriction on payment of remuneration to directors of private companies.
CESSATION OF DIRECTORS
A director can resign from office by tendering his resignation to the board.
A director holding the office of Managing or wholetime director has to be relieved from his office by the Board.
A director can be removed from office by complying with the provisions of the Act.
A director who absents himself from three consecutive meetings of the Board or all meetings held in a period of three months vacates the office of director.
VALIDITY OF ACTS OF DIRECTORS
Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles:
Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated.(290)
Form No. 32 is required to be filed (within 30 days with normal filing fees and additional fees thereafter) for Change in Directors. Change means appointment, cessation, change in designation etc.
Board meeting
Decisions of the company are taken at meetings of the board where resolutions can be passed by a simple majority.
Every company needs to hold four meetings in a year;
one meeting in each quarter; and
there shall not be a gap more than three months between two meetings.
Notice of board meetings along with the details of agenda to be discussed has to be given in writing to every director in India and at the registered address of a director not in India.
Every director attending a meeting of the Board shall record his attendance.
Two directors or one third of total strength whichever is higher can form a valid quorum.
Directors need to disclose their interest in the resolution before the Board.
Interested Directors of private companies can participate and vote in the subject/ resolutions they are interested.
A director can cease to be director if he absents himself from three consecutive meetings of the Board without seeking leave of absence.
POWER OF BOARD
All the powers which can be exercised by the company except those reserved for General meetings. Board can delegate its powers to individual directors/ officers with the following exceptions:
power to make calls
power to authorize buy back of shares
power to issue debentures
power to borrow money
power to invest the funds of the company
power to make loans
The powers to invest and the power to make loan can be delegated by the board after specifying the monetary limit.
ISSUE AND ALLOTMENT OF SHARES
Authorised share capital
Can be increased by passing special/ ordinary resolution as the case may be ( See the provision in the Capital Clause and the Articles of Association. If the Authorised share capital is described in the Articles then you need to amend the Articles and irrespective of the requirement of ordinary or special resolution you have to pass special resolution for amending the Articles).
File Form No. 5 duly stamped (and Form 23 if the resolution passed is Special).
The nominal value of shares can be increased / decreased (consolidation/ sub division) by passing appropriate resolution and filing of Form No. 5 (and Form 23 if the resolution passed is Special).
Stamping is not necessary if the total amount of authorized share capital is not increased.
Issue of shares
A private company cannot offer it shares to public. However, it can offer its shares to friends, relatives, business associates of directors.
Compliance/ Filing of Return
Return of allotment has to be filed within 30 days of allotment in Form 2. Delay attracts penalty which may be upto Rs. 5000/- per day of delay.
SHARE CERTIFICATE
Share certificate is a document which shows ownership of the shares mentioned therein. Stamp duty for issue of share certificate is 0.1% on the value of shares in Maharashtra. Different rates of stamp duty are prescribed by different states as it is levied by the State stamp Act.
Share certificate shall be issued within 3 months of allotment/ 2 months of the date of lodgement of duly completed transfer deed.
Share transfer attracts stamp duty @0.25% of the consideration throughout India as the power falls under the Central Stamp Act..
Share certificate has to be lodged along with duly executed transfer deed for transfer.
Duplicate share certificate can be issued on execution of proper documents (affidavit and indemnity) in case of loss/ mutilation.
CHARGE
When a company hypothecates or mortgage its assets in favour of any person that person is said to have a charge on the assets of the company.
A charge created on the company’s assets need to be registered with the ROC.
A pledge does not fall in the category of charge requiring registration.
Form 8 needs to be filed for registration of charge within 30 days with normal filing fees and within 60 days with additional fees. If filed beyond 60 days, a petition u/s141 shall be filed before the CLB for condonation of delay.
Similar provision applies for modification of charge.
For registration of satisfaction the time limit is 30 days. If file beyond the 30 days time, a petition u/s141 shall be filed before the CLB for condonation of delay
ACCOUNTS AND AUDIT
Every company has to get its accounts audited by auditor who shall be a practicing chartered accountant;
The Balance sheet and Profit and loss account of a company shall be signed by its manage or secretary, if any, and by not les than two directors, one of whom shall be MD if there is one.
First Auditors are appointed by the Board within one month of incorporation of a company.
Subsequent Auditors are appointed by the members at AGM.
Auditors report should be read at the AGM. Other parts of Annual report can be taken as read.
BOOKS OF ACCOUNT TO BE KEPT BY COMPANY
The Companies Act, 1956 does not list out the Books of account to be kept by a company. However, it specifies the contents of the books of account.
In effect a company can keep only a cash book, ledger and stock records and fixed assets register to meet the requirement of the law.
However, for convenient working the companies maintain different registers and ledgers to meet the specific requirement of the business segment they are in and also to comply with the requirements of fiscal legislations like the Income Tax Act, Customs and Central Excise Act, Sales Tax Act (VAT), etc.
Section 209 (1) Every company shall keep at its registered office proper books of account with respect to -
All sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place;
All sales and purchases of goods by the company;
The assets and liabilities of the company;
In the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account;
For the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein,- (a) if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions;
If such books are not kept on accrual basis and according to the double entry system of accounting;
The books of account and other books and papers shall be open to inspection by any director during business hours.
Balance sheet and Profit and Loss account needs to be prepared as per schedule VI.
Disclosures need to be made in accordance with the applicable accounting standards
Depreciation need to be charged in accordance with the Schedule XIV
CASE OF COMPULSORY WINDING UP
If a company is unable to pay its debts (sum exceeding one lakh rupees).
REGISTRAR OF COMPANIES
It is a public office which
Make available names for incorporation of new companies
Incorporate companies
Grant approvals wherever required under the Companies act, 1956
Receive and record the documents filed by companies
Make them available for inspection by the public (on payment of fees)
Prosecute defaulting companies/ directors
Carry inspection of companies
HOLDING AND SUBSIDIARY COMPANY
Company A is Holding company and Company B is subsidiary of Company A; If
Company A controls the Composition of Board of directors of Company B;
Company A holds more than half in nominal value of equity share capital of Company B ;
Company B is subsidiary of Company C which is Subsidiary of Company A.
Disclaimer:
This article is written to help average people and students understand what a company is and what is allowed and not allowed under the Companies Act, 1956. The author is not responsible to anyone taking any action on the basis of this article.
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