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
Company is defined to mean a company formed and registered under the Companies Act, 1956. It doesnt give an idea what a company is. Therefore we need to understand it by the characteristics of a Company. A company:
is a registered association of persons and is a legal person in the eyes of law;
has a separate legal entity;
has a name recognized by/ under the law;
can acquire and dispose properties and assets;
can sue and be sued;
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.
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
has a minimum paid-up capital of 1 lac Rupees;
restricts the right to transfer its shares;
limits the number of its members to 50;
prohibits invitation to the public to subscribe for any shares in, or debentures of, the company;
prohibits any invitation or acceptance of deposits from persons other than its members, directors, or their relatives.
Public company means a company which
is not a private company;
has a minimum paid-up capital of 5 lac rupees; and
is a private company which is a subsidiary of a company which is not a private company.
HIERARCHY
The constitution of
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 ones 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
Sates 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. CLAUSE which divided into three sub-clauses (i) Main s (ii) s incidental and ancilliary to attainment of main s (iii) Other s.
A private company can commence any business stated in other s. A public company needs to comply with requirements of section 149 with regard to commencement of new business.
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.
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