Quick Revision Law Notes for PCC and IPCC !!!

Compulsory registration under the Companies Act

Pursuant to section 11(2) of the Companies Act, 1956, where more than twenty persons jointly desire to carry on any business (Ten person in case of banking company) with the object of acquisition of gain, they can go about to pursue that objective only if they form a company and get it registered under the provisions of the Act.

What is a company?

Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. It is a juristic person having a separate legal entity distinct from the members who constitute it, capable of rights and duties of its own and endowed with the potential of perpetual succession.

As per definition given by Companies Act, 1956, a 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws.

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The incorporation (birth) and winding up and dissolution (death) of a company are governed by the provisions of the Companies Act, 1956. Therefore each company is subject to the provisions of the Companies Act, 1956, as may be amended from time to time. The following procedure involves for incorporation of a company.

STEP WISE FORMALITIES FOR FORMATION OF A NEW COMPANY

Persons desirous of forming a company must adhere to the step by step procedure as discussed below:—

I. Selection of type of the company.

II. Selection of name for the proposed company.

III. Apply for Directors Identification Number and Digital Signatures, if does not have

IV. Drafting of Memorandum and Articles of Association.

V. Stamping, digitally signing and e-filing of various documents with the Registrar.

VI. Payment of Fees.

VII. Obtaining Certificate of Incorporation.

VIII. Preparation and filing of Prospectus/Statement in lieu of Prospectus and e-Form 19/20 (in case of public companies) for obtaining the certificate of commencement of business.

IX. Obtaining Certificate of Commencement of business (in case of public limited companies).

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COMMENCEMENT OF BUSINESS

The date of incorporation of a company may not be the date of commencement of business. A private company and a public limited company not having share capital are not required to comply with any other formalities and may commence its business activities immediately after obtaining the certificate of incorporation from the concerned Registrar of Companies.

A private limited company, which has converted into public limited company, is also not required to obtain certificate of commencement of business.

Requirement for obtaining commencement of business certificate

A public limited company having share capital cannot commence business until it has obtained the certificate to commence business (COB) from the concerned Registrar of Companies.

Normally a new company will comply with the required formalities and obtain the commencement of business certificate (COB) from the Registrar as soon as possible after formation because it cannot commence any business activities or exercise its borrowing powers without it.

ACTION REQUIRED ON THE PART OF THE COMPANY TO OBTAIN COB (Refer Section 149)

1.       WHERE A COMPANY NOT ISSUES PROSPECTUS FOR PUBLIC SUBSCRIPTION

For obtaining a certificate to commence business, the following actions are required to be taken:—

(i)  the company shall file with the Registrar a statement in lieu of prospectus (SLP) (signed by every director) electronically at the MCA portal in the form given in Schedule III to Act together with the E-Form 62 and shall pay the prescribed fee by online or offline as per Schedule X of the Companies Act, 1956.

(ii) the directors should pay the value of the shares to the extent money is payable in cash with application/allotment;

(iii) a duly certified declaration shall be filed electronically at the MCA portal in the E-Form 20 and a stamped copy shall be simultaneously filed with the Registrar signed by a director/secretary or by secretary in practice where there is no secretary, to the effect that the requirements of section 149(2) have been complied with.

(iv) the company shall not allot any share or debenture at least for three days after filing of statement in lieu of prospectus with the Registrar. [Section 70(1)];

(v) the company shall pay the prescribed filing fee by online or offline under Schedule X on SLP and on e-Form 20 to the Registrar of Companies.

The Registrar of Companies shall then issue the requisite certificate of commencement of business.

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How to become a member

A person may become a member of a company in any of the following manner:

1. Membership by subscripttion to the Memorandum

A person subscribing to the Memorandum shall become a member of the company on its incorporation and remains so till the company accepts his surrender of shares or he transfers shares.

In that case, an entry in the Register of members is not necessary and mere allotment on the basis of subscripttion to Memorandum will suffice to constitute him as a member. Therefore, a subscriber is deemed to be a first member of the company and his membership is beyond revocation after the issue of certificate of registration.

2. Membership by agreement in writing

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PROSPECTUS

The provisions regarding prospectus are applicable to both listed and unlisted public limited companies.

A private company cannot invite public to subscribe for its shares in or debentures, therefore, it cannot issue prospectus. [Section 3(1)(iii)]

Meanings of 'prospectus' and 'abridged prospectus'

The term 'prospectus' under section 2(36) means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting offers from the public or inviting offers from the public for the subscripttion or purchase of any shares in, or debentures securities of a body corporate.

The term 'abridged prospectus' under section 2(1) means a memorandum containing such salient features of a prospectus as may be prescribed.

Only a public company has power and privilege to issue prospectus to public for subscripttion of shares in or debentures of the company. The prospectus issued by a public company shall contain matters specified in Part I of Schedule II to the Companies Act, 1956. If a public company does not issue a prospectus with reference to its formation then it has to file a statement in lieu of prospectus (SLP) with the concerned Registrar of Companies as desired by Section-70.

Public companies can not allotment shares unless S.L.P. filed with ROC

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Meaning of Final dividend

Dividend is said to be a final dividend if it is declared at the annual general meeting of the company. Final dividend once declared becomes a debt enforceable against the company.

Compulsory requirement for making provisions for depreciation before payment of dividend

As desired by section 205 of the Act, no company can pay dividend in any year without charging depreciation in the profit and loss account for the current year and that there is no balance of un provided depreciation of any earlier year or years.

However, the Central Government has power to allow any company in the public interest to pay dividend for any financial year out of the profits for that year or any previous financial year without providing for depreciation. [Section 205(1)(c)] The application is required to be filed to the Central Government electronically in E-form-23AAC.

Guidelines for providing depreciation before payment of dividend….

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CALLS, FORFEITURE AND RE-ISSUANCE OF SHARES

CALLS

Board Meeting resolution is required for raising calls

A company issuing shares to its members calls the money due on shares at intervals depending upon the funds requirements for implementing the project, whereas the shareholders also prefer to pay the amount on their shares in installments.

As per Section 292(1)(a) power to make calls is a general power of board and exercised by the Board in its meeting by means of a 'resolution'. The Board, in making a call, must observe the provisions of the articles, otherwise the call will be invalid, and the shareholder is not bound to pay. A call is a demand upon its shareholders to pay the whole or part of the balance still due on each class of shares allotted or held by them made at any time during the life of the company. The balance may be payable as and when called for in one or more calls. The prospectus and the articles of a company generally specify the amount payable at different times, as call(s).

A call may also be made by the liquidator in the course of winding up of the company.

CALL IS A DEBT DUE TO THE COMPANY

Under section 36(2) of the Act all moneys payable by any member to the company on the shares held by him under the memorandum or articles is a debt due from him to the company. In the event of default in payment of a valid call, the company can enforce payment of such moneys by legal process and forfeit the shares if the call is not paid. The liability of members is enforceable only after a proper notice which is called 'call letter' is given to him in accordance with the articles.

PRE CONDITIONS OF A NOTICE FOR PAYMENT OF CALLS…..          

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TRANSFER AND TRANSMISSION OF SHARES

Meaning of transfer and transmission

The word 'transfer' is an act of the parties by which title to property is transferred from one person to another. The word 'transmission' is referable to devaluation of title by operation of law. It may be by succession or by testamentary transfer.

Transfer Deed is compulsory

Section 108 provides that a company shall not register a transfer of shares of, the company, unless a proper transfer deed in Form 7B as given in the Companies (Central Government's) General Rules and Forms, 1956 duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company, alongwith the certificate relating to the shares, or if no such certificate is in existence, alongwith the letter of allotment of the shares:

Validity of unstamped/non-cancelled stamped on transfer deed

Section 108 requires that where share transfer form is delivered to the Board it should be duly stamped. It means stamp of adequate value should be affixed and cancelled on transfer deed.

Determination of valuation of shares for affixing stamps on the transfer deed

It was held in Union of India v Kulu Valley Transport Ltd. (1958) that in case shares are not quoted, the value of the shares for the purpose of stamp means the price that the shares would fetch at the time of transfer or consideration agreed, whichever is higher.

However, no transfer duty is applicable for transfer of shares in case of shares are in D-mat form.

Value of share transfer stamps to be affixed on the transfer deed

Stamp duty for transfer of shares is 25 paise for every Rs. 100 or part thereof of the value of shares as per Notification No. SO 130(E), dated 28-01-2004 issued by the Ministry of Finance, Department of Revenue, New Delhi.

Validity of transfer deed …..

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Meaning/Definition of charge

The term charge has not been defined under the Companies Act, 1956. Section 124 states that the expression "Charge" includes a mortgage.

However, the language of section 125 use the expression "so far as any security on the company's property or undertaking is conferred thereby" makes it clear that a charge is nothing but security of its property by the company in favour of a creditor with the intent of securing his debt.

Types of charges

Basically, there are two types of charges:—

            1. Fixed charge: A fixed charge is a charge that without more fastens on ascertained and definite property or property capable of being ascertained and defined. A company cannot dispose the property without the consent of the charge holder.

            2. Floating charge: A floating charge is a charge on the variable property i.e. the property which keeps on changing. A special feature of this charge is that it is un identifiable with respect to the exact property on which the charge would operate until the crystallisation of the charge. A floating charge is a present security, which affects all the assets of the company expressed to be included in it. A floating security is not a future security; it is a present security, which presently affects all assets of the company expressed to be included in it.

These charges may be created in favour of the charge holders as per terms and conditions agreed by them, like:—

(a) Pari passu charge: In pari passu charge, security is shared between two or more lenders in proportion of their out standings. It is created with the prior consent of the existing charge holders of the company.

(b) Exclusive charge: In exclusive charge the security on the particular property is provided to a particular lender only.

(c) Further charges: In such cases with the consent of the first charge holders on particular assets may be provided to the further charge holders on the basis of second charge, third charge, etc. It means in case of liquidation of assets the first charge holder shall have right to recover his amount due on the company and any surplus remain on realisation of such properties shall be recovered by the second charge holder and so on.

REGISTRATION OF CHARGES…….

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