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COMPANY LAW FOR THE AVERAGE PERSON

CS Ramanuj Asawa 
on 20 January 2009

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COMPANY LAW FOR THE AVERAGE PERSON

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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.

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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.

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Before knowing anything about a subject it helps if we know the history of the subject matter.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Similarly the liabilities of the company cannot be said to be liabilities of its directors and shareholders.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Majority and minority can be explained in the following manner:

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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.

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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.

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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.

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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.

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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).

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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.

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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.

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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.?

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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.

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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.

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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.?

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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.

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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.

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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.

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Category Corporate Law
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