Legal Aspects of Business Unit 12 Sikkim Manipal University Page No. 210 Unit 12 Companies Act, 1956 Structure: 12.1 Introduction Objectives 12.2 Formation of a Company Promotion Registration (Secs.12 and 33) Availability of name Floatation 12.3 Memorandum of Association Meaning and purpose Form and contents Alteration of memorandum 12.4 Articles of Association Meaning and purpose Registration of articles Subject matter of articles 12.5 Prospectus Contents of a prospectus Stock Exchange Board of India guidelines relating to disclosure on prospectus 12.6 Shares Classes of shares Preference share Equity share Cumulative Convertible Preference Shares (CCPs) Deferred or founder‟s shares Non-voting shares Sweat equity shares 12.7 Directors 12.8 General Meetings and Proceedings Need for meetings Statutory meeting (Sec.165) Annual General Meeting (AGM) (Secs.166-168) Extra-ordinary Meeting (EGM) Sec.169 12.9 Auditor
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Legal Aspects of Business Unit 12
Sikkim Manipal University Page No. 210
Unit 12 Companies Act, 1956
Structure:
12.1 Introduction
Objectives
12.2 Formation of a Company
Promotion
Registration (Secs.12 and 33)
Availability of name
Floatation
12.3 Memorandum of Association
Meaning and purpose
Form and contents
Alteration of memorandum
12.4 Articles of Association
Meaning and purpose
Registration of articles
Subject matter of articles
12.5 Prospectus
Contents of a prospectus
Stock Exchange Board of India guidelines relating to disclosure
on prospectus
12.6 Shares
Classes of shares
Preference share
Equity share
Cumulative Convertible Preference Shares (CCPs)
Deferred or founder‟s shares
Non-voting shares
Sweat equity shares
12.7 Directors
12.8 General Meetings and Proceedings
Need for meetings
Statutory meeting (Sec.165)
Annual General Meeting (AGM) (Secs.166-168)
Extra-ordinary Meeting (EGM) Sec.169
12.9 Auditor
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12.10 Winding up of Companies
Modes of winding up
Winding up by the court
12.11 Summary
12.12 Terminal Questions
12.13 Answers
12.1 Introduction
In the earlier units, you came to know about the Foreign Exchange
Management Act. In this unit you will study about the Companies Act, 1956.
The Companies Act, 1956 defines the word „company‟ as a company
formed and registered under the Act or an existing company formed and
registered under any of the previous company laws (Sec.3). This definition
does not bring out the meaning and nature of the company into a clear
perspective. Also Sec.12 permits the formation of different types of
companies. These may be (i) companies limited by shares, (ii) companies
limited by guarantee and (iii) unlimited companies. The vast majority of
companies in India are with limited liability by shares.
Objectives
After studying this unit, you should be able to:
Describe formation of company
Define shares and directors
Explain meetings and resolutions
Define auditor
Describe how to winding-up a company
12.2 Formation of a Company
The whole process of formation of a company may be roughly divided, for
convenience, into three parts. These are: (i) Promotion; (ii) Registration and
(iii) Floatation.
12.2.1 Promotion
Promotion is a term of wide import denoting the preliminary steps taken for
the purpose of registration and floatation of the company. The persons who
assume the task of promotion are called promoters. The promoter may be
an individual, syndicate, association, partnership or company.
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Who is a promoter? This term has not been defined under the Act,
although the term is used expressly in Secs.62, 69, 76, 478 and 519.
12.2.2 Registration (Secs.12 and 33)
Secs.12 states that, “any seven or more persons or where the company to
be formed will be a private company, two or more persons, associated for
any lawful purpose may, by subscribing their names to a memorandum of
association and otherwise complying with the requirements of this Act in
respect of registration form an incorporated company, with or without limited
liability.”
12.2.3 Availability of name
Sec.20 states that a company cannot be registered by a name, which in the
opinion of the Central Government is undesirable. Therefore, it is advisable
that promoters find out the availability of the proposed name of the company
from the Registrar of Companies. For the purpose, three names in order of
priority should be filed.
The following two documents, though not required to be filed for the purpose
of registration, are usually delivered along with the aforesaid documents.
(i) The address of the registered office of the company (Sec.146).
(ii) Particulars regarding directors, manager and secretary, if any (Sec.303).
These two documents are required to be submitted within thirty days of
registration of the company.
12.2.4 Floatation
When a company has been registered and has received its certificate of
incorporation, it is ready for „floatation‟, that is to say, it can go ahead with
raising capital sufficient to commence business and to carry it on
satisfactorily.
Sec.70 makes it obligatory for every public company to take either of the
following two steps: (i) Issue a prospectus in case public is to be invited to
subscribe to its capital, or (ii) Submit a „statement in lieu of prospectus‟ in
case capital has been arranged privately. It must be done at least 3 days
before allotment.
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Self Assessment Questions
1. The persons who assume the task of promotion is known as
__________
(a) Acceptors
(b) Motivators
(c) Promoters
(d) None
2. How may partners involved in the case of private company?
(a) 2
(b) 4
(c) 5
(d) 7
12.3 Memorandum of Association
12.3.1 Meaning and purpose
The Memorandum of Association of a company is its charter which contains
the fundamental conditions upon which alone the company can be
incorporated. It tells us the objects of the company‟s formation and the
utmost possible scope of its operations beyond which its actions cannot go.
Thus, it defines as well as confines the powers of the company. If anything
is done beyond these powers, that will be ultra vires (beyond powers of) the
company and so void.
The memorandum serves a two-fold purpose. It enables shareholders,
creditors and all those who deal with the company to know what its powers
are and what is the range of its activities. Thus, the intending shareholder
can find out the field in, or the purpose for which his money is going to be
used by the company and what risk he is taking in making the investment.
Also, any one dealing with the company, say, a supplier of goods or money,
will know whether the transaction he intends to make with the company is
within the objects of the company and not ultra virus its objects.
12.3.2 Form and contents
Sec.14 requires that the memorandum of a company shall be in such one of
the Forms in Tables B, C, D and E in Schedule I to the Act, as may be
applicable in the case of the company, or in Forms as near thereto as
circumstances admit. Sec.15 requires the memorandum to be printed,
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divided into paragraphs, numbered consecutively and signed by at least
seven persons (two in the case of a private company) in the presence of at
least one witness, who will attest the signature. Each of the members must
take at least one share and write opposite his name the number of shares
he takes. Sec.13 requires the memorandum of a limited company to contain:
(i) the name of the company, with „limited‟ as the last word of the name in
the case of a public company and „private limited‟ as the last words in the
case of a private company; (ii) the name of the State, in which the registered
officer of the company is to be situated; (iii) the objects of the company,
stating separately „Main objects‟ and „other objects‟; (iv) the declaration that
the liability of the members is limited; and (v) the amount of the authorised
share capital, divided into shares of fixed amounts. These contents of the
memorandum are called compulsory clauses and are explained below:
The name clause. The promoters are free to choose any suitable name for
the company provided:
(a) the last word in the name of the company, if limited by shares or
guarantee is „limited‟ unless the company is registered under Sec.25 as
an „association not for profit‟ [Sec.13(1) (a) & Sec.25].
(b) In the opinion of the Central Government, the name chosen is not
undesirable [Sec.20(1)].
Too similar name. In case of too similar names, the resemblance between
the two names must be such as to be calculated to deceive. A name shall
be said to be calculated to deceive where it suggests some connection or
association with the existing company.
Publication of name (Sec.147). Every company shall: (a) paint or affix its
name and the address of its registered office and keep the same painted or
affixed, on the outside of every office or place of business in a conspicuous
position in letters easily legible and in the language in general use in the
locality.
12.3.3 Alteration of memorandum
Sec.16 provides that the company cannot alter the conditions contained in
memorandum except in the cases and in the mode and to the extent
express provision has been made in the Act. These provisions are explained
herein below:
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Change of name. Sec.21 provides that the name of a company may be
changed at any time by passing a special resolution at a general meeting of
the company and with the written approval of the Central Government.
However, no approval of the Central Government is necessary if the change
of the name involves only the addition or deletion of the word „private‟ (i.e.,
when public company is converted into a private company or vice versa).
The change of name must be communicated to the Registrar of Companies
within 30 days of the change. The Registrar shall then enter the new name
on the register in the place of the old name and shall issue a fresh certificate
of incorporation with necessary alterations [Sec.23(1)]. The change of name
becomes effective on the issue of fresh certificate of incorporation.
Change of registered office. The procedure depends on whether the
change is within the jurisdiction of same registrar of companies (Sec.146) or
whether the shifting is to the jurisdiction of another registrar of companies in
the same state (Sec.146 and Sec.17A). This may include:
(a) Change of registered office from one premises to another premises
in the same city, town or village. The company may do so anytime. A
resolution passed by the Board of directors shall be sufficient. However,
notice of the change should, within 30 days after the date of the change,
be given to the Registrar who shall record the same (Sec.146).
(b) Change of registered office from one town or city or village to
another town or city or village in the same State (Sec.146). In this
case, the procedure is:
(i) a special resolution is required to be passed at a general meeting
of the shareholders;
(ii) a copy of it is to be filed with the Registrar within 30 days.
(iii) Within 30 days of the removal of the registered office, notice of the
new location has to be given to the Registrar who shall record the
same.
(c) Shifting of the registered office from one place to another within
the same state (Sec.17A): The shifting of the registered office by a
company from the jurisdiction of one registrar of companies to the
jurisdiction of another registrar of companies within the same state shall
(in addition to requirements under Sec.146) also require confirmation by
the Regional Director. For this purpose, an application is to be made in
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the prescribed form and the confirmation shall be communicated within
four weeks. Such confirmation is required to be field within two months
with the registrar of companies who shall register and certify the same
within one month. Such certificate shall be conclusive evidence of the
compliance of all requirements under the Act.
Activity 1:
The Board of Directors of a public company met on three times in
the previous year, the fourth meeting though called, but not held for
want of quorum on two occasions successively. Discuss whether
any provisions of the Companies Act have been contravened.
Self Assessment Questions
3. _________ tells us the objects of the company‟s formation and the
utmost possible scope of its operations beyond which its actions
cannot go.
(a) Memorandum of understanding
(b) Memorandum of association
(c) Memorandum of unions
(d) None
4. _____________ provides that the company cannot alter the conditions
contained in memorandum except in the cases and in the mode and to
the extent express provision has been made in the Act.
12.4 Articles of Association
12.4.1 Meaning and purpose
The articles of association of a company and its bye laws are regulations
which govern the management of its internal affairs and the conduct of its
business. They define the duties, rights, powers and authority of the
shareholders and the directors in their respective capacities and of the
company and the mode and form in which the business of the company is to
be carried out. The Articles of association of a company have a contractual
force between company and its members as also between the members
inter se in relation to their rights as such members. They are subordinate to
and are controlled by memorandum. Articles cannot supersede the objects
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as set out in the memorandum of association [Birds Investments Ltd.
v. C.I.T. (1965) 35 Comp. Cas. 147 Cal.]
12.4.2 Registration of articles
Sec.26 states that a public company limited by shares may register articles
of association signed by the subscribers to the memorandum. If, however, it
does not register its own articles, then the articles given in Table A of
Schedule I automatically becomes applicable. Further, even if it does
register articles of its own, Table A will still apply automatically unless it has
been excluded or modified. There are actually three possible alternatives in
which such company may adopt articles: (i) it may adopt Table A in full or,
(ii) it may wholly exclude Table A and set out its own regulations in full, or
(iii) it may set out is own articles and adopt part of Table A. The alternatives
(ii) and (iii) are often employed; and partial adoption of Table A has
particular advantage for small companies, because of economy in printing
and also because any provision of Table A is legally beyond any doubt.
12.4.3 Subject matter of articles
The articles of a company usually deal with the following matters:
1. the business of the company;
2. the amount of capital issued and the classes of shares into which the
capital is divided; the increase and reduction of share capital;
3. the rights of each class of shareholders and the procedure for variation
of their rights;
4. the execution or adoption of a preliminary agreement, if any;
5. the allotment of shares; calls and forfeiture of shares for non-payment
of calls;
6. transfer and transmission of shares;
7. company‟s lien on shares;
8. exercise of borrowing powers including issue of debentures;
9. general meetings, notices, quorum, proxy, poll, voting, resolution,
minutes;
10. number, appointment and powers of directors;
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Self Assessment Questions
5. Change of name must be communicated to the Registrar Companies
within ________________ of the change.
(a) 20 days
(b) 15 days
(c) 10 days
(d) 30 days
6. Article of association of a company have a contractual force between
(a) Company and government
(b) Company and its owners
(c) Company and its members
(d) None
12.5 Prospectus
A prospectus, as per Sec.2(36), means any document described or issued
as prospectus and includes any notice, circular, advertisement or other
document inviting deposits from the public or inviting offers from the public
for the subscription or purchase of any shares in or debentures of a body
corporate. Thus, a prospectus is not merely an advertisement; it may be a
circular or even a notice. A document shall be called a prospectus if it
satisfies two things: (1) It invites subscriptions to share or debentures or
invites deposits. (2) The aforesaid invitation is made to the public.
12.5.1 Contents of a prospectus
Sec.56 lays down that the matters and reports stated in Schedule II to the
Act must be included in a prospectus. The format of a prospectus is divided
into three parts. In the first part brief particulars are to be given about
matters mentioned below:
1. General information. Under this head information is given about
(i) Name and address of registered office of the company.
(ii) Name/(s) of stock exchange/(s) where application for listing is made.
(iii) Declaration about refund of the issue if minimum subscription of
90 per cent is not received within 90 days from closure of the issue.
(iv) Declaration about the issue of allotment letters/refunds within a
period of 10 weeks and interest in case of any delay in refund, at the
prescribed rate, under Sec.73. (v) Date of opening of the issue.
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(vi) Date of closing of the issue. (vii) Name and address of auditors and
lead managers. (viii) Whether rating from CRISIL or any rating agency
has been obtained for the proposed debentures/preference shares
issue. If no rating has been obtained, this should be answered as „No‟.
(ix) Names and address of the underwriters and the amount underwritten
by them.
2. Capital structure of the company. (i) Authorised, issued, subscribed
and paid-up capital. (ii) Size of the present issue, giving separately
reservation for preferential allotment to promoters and others.
3. Terms of the present issue. (i) Terms of payment. (ii) How to apply.
(iii) Any special tax benefits.
4. Particulars of the issue. (i) objects. (ii) Project cost. (iii) Means of
Financing (including contribution of promoters).
5. Certain prescribed particulars in regard to the company and other
listed companies under the same management which made any capital
issue during the last 3 years.
6. Outstanding litigations relating to financial matters or criminal
proceedings against the company or directors under Schedule XIII.
12.5.2 Stock Exchange Board of India guidelines relating to disclosure
on prospectus
Every prospectus submitted to Stock Exchange Board of India (SEBI) for
vetting shall, in addition to the requirements of Schedule II to the Act,
contain/specify certain particulars as are announced from time to time.
Self Assessment Questions
7. ___________ lays down that the matters and reports stated in Schedule
II to the Act must be included in a prospectus.
8. SEBI stands for
(a) Stock Exchange Board of India
(b) State Exchange Board of India
(c) Stock Exchange Bank of India
(d) None
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12.6 Shares
Sec.2(46) defines a share “as a share in the share capital of a company and
includes stock except where a distinction between stock and share is
expressed or implied”. This definition does not bring out the meaning of a
share in its true perspective.
A share of a company in the hands of a shareholder signifies a bundle of
rights and obligations [Viswanath v. East India Distilleries (1957) 27 Comp.
Cas. 175]. But a share is not a negotiable instrument [C.I.T. v. Associated
Industrial Dev. Co. (1969) 2 Comp. L.J. 19]
Sec.83 requires that each share in a company having a share capital must
be distinguished by its appropriate number.
The Companies (Amendment) Act, 1999 amended Sec.82 to the effect that
for the word „shares‟, the words „shares and debentures‟ shall be
substituted.
12.6.1 Classes of shares
The most common classes of shares are: (1) Preference; (2) Equity or
Ordinary; and (3) Deferred or Founders‟. A public company and a private
company which is a subsidiary of a public company may not issue shares
other than equity, preference and Cumulative Convertible Preference
Shares (CCPS).
12.6.2 Preference share
A preference share is one which carries the following two rights over holders
of equity shares: (i) a preferential right in respect of dividends at a fixed
amount or at a fixed rate and (ii) a preferential right in regard to repayment
of capital on winding up.
12.6.3 Equity share
„Equity share‟ means a share which is not preference share (Sec.85). The
rate of dividend is not fixed. The Board of Directors recommend the rate of
dividend which is then declared by the members at the Annual General
Meeting. Before recommending dividend on equity shares, the Board of
Directors have to comply with the provisions of law as regards depreciation,
transfer of a minimum amount to reserves, etc.
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The holders of equity shares have voting rights in proportion to the paid-up