Company

Law

Module 2

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 Objectives

• Understand what a Company is

• Be familiar with the process of a company
formation
• Understand the statutory areas of a company
as laid out in the Companies Act.

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 What is a Company?
• A company is an artificial person created by
law. It is a voluntary association of individuals
for profits.
• As per the Companies Act
“a company means, ´ A company formed and
registered under this Act or an existing
company.”
•

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 Features of a Company
• Created by law: A company is created by law. There is no alternative way
to form a company without law. It is operated and maintained according
to Companies act-1994.
• Corporate artificial personality: A company is an artificial being invisible,
intangible and existing only in contemplation of law. It can make legal
claim to others in its own name and vice versa.
• Number of shareholders: In case of public limited company, the number
of shares of that company restricts the maximum number of shareholders
and the minimum number is seven. But in case of private limited company,
the maximum number of shareholders is fifty and minimum two.
• Perpetual succession: Joint stock company has a perpetual existence. A
joint stock company survives, even if all members are willing to shut down
the company or if all members die in natural calamities.
• Own seal: Company has its own common seal which is to be used in
preparing documents of the Company.

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 Feautures……
• Limited liability: The liability of a shareholder is limited to
the face value of the shares he holds. He has no further
liability if he has paid the full value of the shares that he
has subscribed.
• Transferability of shares: Public limited company can enjoy
the benefits of transferability of shares. However a private
limited company cannot do it.
• Separation of ownership from management and
administration: Partners in a firm are not only the owners
but they also take part in the management and
administration of the business. But this is not possible in a
joint stock company where the number of owners is huge.

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 Company Formation 4 Steps

1. Promotion of a Company:
• A business enterprise does not come into
existence on its own. It comes into existence as a
result of the efforts of an individual or group of
people or an institution. That is, it has to be
promoted by some person or persons. The
process of business promotion begins with the
conceiving of an idea and ends when that idea is
translated into action i.e., the establishment of
the business enterprise and commencement of
its business.

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 Step 2
Registration of a Company
• It is registration that brings a company into existence. A
company is properly formed only when it is duly
registered under the Companies Act.
Procedure of Registration
• In order to get the company registered, the important
documents required to be filed with the Registrar of
Companies are as follows.
• 1. Memorandum of Association:
• 2. Articles of Association:

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 Step 3
Certificate of Incorporation
• On the registration of Memorandum of
Association, Articles of Association and other
documents, the Registrar will issue a
certificate known as the ‘Certificate of
Incorporation‘. The issue of certificate is the
evidence of the fact that the company is
incorporated and the requirements of the
Companies Act have been complied with.

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 Step 4
Certificate of Commencement of Business
• As soon as a private company gets the certification of
incorporation, it can can commence its business.
• A public company can commence its business only after
getting the ‘certificate of commencement of business‘.
After the company gets the certificate of incorporation.
• a public company issues a prospectus for inviting the public
to subscribe to its share capital. It fixes the minimum
subscription. Then it is required to sell the minimum
number of shares mentioned in the prospectus.
• After completing the sale of the required number of shares,
issues a certificate known as ‘Certificate of Commencement
of Business’.

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 Create a MoA
• Memorandum of association
• It is the main document of the company. It defines the objectives, powers and its relationship
with the outside world. The company works within the framework of the memorandum. The
memorandum of association sets out the constitution of the company. It is so to speak, the
charter of the company and provides the foundation on which the structure of the company
is built. It enables persons who deal with the company to know its permitted range of
activities.
•
• The main content of memorandum of association are:
• Name clause:
• It includes about the name of the company. Name of the company should end with word
‘limited’ or ‘private limited’. Care should be taken while enclosing name of the company. The
names that already registered should not be used. Change in name of the company requires
special resolution and approval from the concerned department.
•

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Situation clause:
• It is also dominant clause. It must have registered office. All the official
communication may be sent by concerned office or other organizations in
a specified location. Therefore there is need to maintain registered office
location. Once the location is set then it is very difficult to change the
location

Object clause:
• It is important part of memorandum. It must clearly state the objective of
the company foe which it was established. It informs the members about
the objectives. It can carry out only those activities which meet the
objectives in the memorandum.

Functional clause:
• It includes the functions of the objectives of the company. It should be
within the objectives.

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Capital clause:
• It includes the amount of authorized capital which can be utilized by the company. It includes the
amount of share capital and the considerations of issuing and subscribing the share capital. It must
include the nature of shares and face value of share with the prices of shares.

Liability clause:
• Memorandum must clearly state that the liability of shareholders up to the extent of face value of
shares. In company limited by guarantee it must state the guarantee sum too.

Association and subscription clause:

• It states that the member themselves agreed to organize and carry out business. In case of private
company at least one signature from promoter and in case of public company at least 7 signatures
is needed.

Agreement clause:
• According to company act 2063, clause 18 .p., public company is required to do following things.
– If promoter or any other partner is entitled to subscribe share, they must pay in each.
– If Company is to enquire any property from promoter at the time of commencement of its
transaction.
– If Company itself is to bear expenses incurred on the corporation.

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 Share Capital
• The Joint Stock Company is a big form of
business organization.
• The amount required by the company for its
business activities is raised by the issue of
shares.
• The amount so raised is called ‘Share Capital’
(or capital) of the company.
• The persons who buy the shares of company
are called ‘Shareholders’.
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 Types of Share Capital
Share Capital Limited by Shares shall be of two
kinds

I. Equity Share Capital

• With Voting right
• With differential rights as to dividend, voting etc.
II. Preference Share Capital
• Entitled to the proceeds of winding up of a
company. No voting rights.

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 Loan Capital
The part of a company's capital employed that is
• not equity capital,
• earns a fixed rate of interest instead of dividends,
• and must be repaid within a specified period,
• irrespective of the company's financial position.

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 The Companies Act 1956 vs 2013

• Act 1956 allowed companies to borrow from

directors, relatives of shareholders and
shareholders.
• Act 2013 allows only Directors, Banks and
Financial Institutions

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Financing a Company

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 Types of Financing
• Equity Shares

• Preference Capital

• Internal Funding

• Term Loans

• Debentures

• Venture Capital

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 Try this……..
• Saloman Vs. Saloman & Co. Ltd. (1895 - 99) Facts -
Saloman sold his business to a company named Saloman &
Company Ltd., which he formed. Saloman took 20,000
shares. The price paid by the company to Saloman was £
30,000, but instead of paying him, cash, the company gave
him 20,000 fully paid shares of £ 1 each & £ 10,000 in
debentures. The company wound up & the assets of the
company amounted to £ 6,000 only. Debts amounted to £
10,000 due to Saloman & Secured by debentures and a
further £ 7,000 due to unsecured creditors. The unsecured
creditors claimed that as Saloman & Co. Ltd., was really the
same person as Saloman, he could not owe money to
himself and that they should be paid their £ 7,000 first.

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 Verdict is …….
• Judgment- 1. A Company is a "legal person" or
"legal entity" separate from and capable of
surviving beyond the lives of, its members. 2. The
company is not in law the agent of the
subscribers or Trustee for them. 3. Saloman was
entitled to £ 6,000 as the company was an
entirely separate person from Saloman. 4. The
unsecured creditors got nothing.

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 One more to practice…
• MacauraVs. Northern Assurance Co. Ltd.
(1925) Facts - M was the holder of nearly all
the shares except one of a timber company.
He was also a substantial creditor of the
company. He insured the company's timber in
his own name. The timber was destroyed by
fire & M claimed the loss from Insurance
Company.

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 Verdict is…….
• Judgment- 1. The Insurance Company was
not held liable to him. 2. A shareholder cannot
insure the company's property in his own
name even if he is the owner of all or most of
the company's shares.

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 Auditor
• Auditors are specialists who review the
accounts of companies and organisations to
ensure the validity and legality of their
financial records. They can also act in an
advisory role to recommend possible risk
aversion measures and cost savings that could
be made; preparing reports, commentaries
and financial statements.

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 Appointment of Auditors
• After incorporation of a company in the first
annual general meeting, an Auditor must be
appointed by the Board of Directors.
• The Auditor will typically hold term till the
conclusion of 6th AGM or 5 years.
• The appointment of an Auditor can also be
made for a period of 1 year, renewable at each
annual general meeting.

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 Rotation of Auditors
• Individuals as an Auditor cannot be appointed
as an Auditor for a term of more than 5 years.
• A firm of Auditors cannot be appointed as
Auditors for more than two terms of 5 years.
• An Auditor who has completed his/her term
of 5 years will also not be eligible for re-
appointment for 5 years from completion of
his/her term.

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 Audit Work
Audit report should include the following:
• Whether company is maintaining proper books and records
or not.
• Whether financial explanations from company staff are
received or not .
• Whether financial statements are prepared in accordance
with requirements of companies act or not.
• Whether balance sheet is giving true and fair view or not.
• Whether profit and loss account is giving true and fair view
or not.
• If there are branches, whether statements from branch
auditors under Sec. 228 are properly received or not.

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 Duties of Auditors
• Duty to give report.
• Duty to certify statutory report.
• Duty to assist government inspector.
• Duty with regard to public deposits.
• Duty to certify prospectus.
• Duty to conduct an inquiry with regard to
matters mention in the section.

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 Rights of an Auditor
• Company auditor has rights to access the books and
records of the company. He can refer to any book.
• Company auditor has right to get explanations from
company staff. If such explanations are not received he
qualifies his report.
• Company auditor has right to receive notice of general
meetings. He can attend the general meetings.
• Company auditor has right to visit branches. But there
should be no separate auditors to those branches and
it should be a home branch.

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• Company auditor has right to seek legal and technical advises. But,
in his report, he should express his own opinion but not that of
experts concern.
• Company auditor has right to claim remuneration. His remuneration
will be fixed by appointing authority and it will be paid by company.
• Company auditor has right to refuse to commence the audit. Till
making the records up to date, he cannot start his work.
• Company auditor has right to question the board. Board also should
give explanation to him.
• Company auditor has right to qualify his report. If he comes across
any dis-satisfactory point, he can mention the same in his report.
• Company auditor has right of indemnity. He can reimburse
expenses incurred by him in connection with conduction of audit
work.

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 Case Study on Audit Fraud
• Throughout the late 1990s, Enron was almost
universally considered one of the country's most
innovative companies – with a new theory of
replacing hard assets in favor of the world of e-
commerce.
• The company continued to build power plants
and operate gas lines, but it became better
known for its buying and selling gas and
electricity futures
• its annual revenues rose from about $9 billion in
1995 to over $100 billion in 2000.

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 Enron and the reputation of Arthur Andersen

• The revelation of accounting irregularities at Enron in the

third quarter of 2001 caused regulators and the media to
focus extensive attention on Andersen. The magnitude of
the alleged accounting errors, combined with Andersen's
role as Enron's auditor and the widespread media
attention, provide a seemingly powerful setting to explore
the impact of auditor reputation on client market prices
around an audit failure.
• Perhaps most damaging to Andersen's reputation was their
admission on January 10, 2002 that employees of the firm
had destroyed documents and correspondence related to
the Enron engagement.

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• In 2002, the firm voluntarily surrendered its
licenses to practice as Certified Public
Accountants in the United States after
being found guilty of criminal charges relating
to the firm's auditing of Enron, an energy
corporation based in Texas,
which filed for bankruptcy in 2001

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 Directors
• A director of a company is a person who is
responsible for managing the company's
business activities. Even small companies
must have at least one director. Larger
companies may have many directors who
collectively manage the business of the
company. They are often referred to as a
'board of directors'.

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 Duties of a Director
• To convene Statutory, Annual General Meeting
(AGM) and also Extraordinary General Meetings;
• To prepare and place at the AGM, along with
the balance sheet and, profit and loss account, a
report on the company's affairs, including the
report of the Board of Directors;
• To authenticate and approve annual financial
statement;
• To appoint first auditor of the company;
• To appoint cost auditor of the company;
• To make a declaration of solvency in the case of
a Members' voluntary winding up;
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 Liabilities
The liability of a Director to the company may arise from:

• Breach of fiduciary duty: Where a Director acts dishonestly

to the interest of the company, he will be held liable for
breach of fiduciary duty
• For e.g. in a case where the Directors, in order to forestall a
take-over bid, transferred the unissued shares of the
company to trustees, to be held for the benefit of the
employees, and an interest-free loan from the company
was advanced to the trustees to enable them to pay for the
shares, it was held to be a wrongful exercise of the fiduciary
powers of the Directors.

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Ultra vires acts:

• Directors are supposed to act within the parameters of the

provisions of the Companies Act, Memorandum and
Articles of Association.
• The Directors shall be held, personally, liable for acts
beyond the aforesaid limits, being ultra vires the company
or the Directors.
• For e.g. where the Directors pay dividends or interest out of
capital, they will be liable to indemnify the company for any
loss or damage, suffered due to such act.

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Negligence:
As long as the Directors act within their powers with
reasonable skill and care, as expected of them as prudent
businessmen, they discharge their duties to the company.
But, where they fail to exercise reasonable care, skill and
diligence, they shall be deemed to have acted, negligently, in
discharge of their duties and, consequently, shall be liable for
any loss or damage, resulting there from.
However, error of judgment will not be deemed as negligence.
The Directors cannot be absolved of their liability for
negligence by any provisions in the Articles of Association.

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Mala fide acts:
• Directors are the trustees for the money and property
of the company, handled by them, as well as for
exercise of the powers, vested in them.
• If they dishonestly or in a mala fide manner, exercise
their powers and perform their duties, they will be
liable for breach of trust and, may be required to make
good the loss or damage, suffered by the company
• They are also accountable to the company for any
secret profits they might have made in course of their
performance of duties on behalf of the company.

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 Company Meeting
• A company meeting may be defined as a
concurrence or coming together of at least a
quorum of members in order to transact
either ordinary or special business of the
company.
•

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Types of Meeting

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 I. Shareholders’ Meeting
• The shareholders are the real owners of the
company, but due to certain limitations they
cannot take part in the management of the
company.
• They leave this to their representatives called the
directors.
• For controlling the board of directors and their
activities ‘shareholders’ ‘meetings’ are held from
time to time. Meeting of shareholders can be
further classified as under.
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 (i) Statutory Meeting
• Every public company having share capital must
convene a general meeting of shareholders
within a period of not less than one month and
not more than six months after the date on which
it is authorized to commence its business. This is
the first meeting of the shareholders of the
company and it is held once in the whole life of
the company.
• Notice to be given at least 21 days before the
meeting with the name specified as Statutory
Meeting.

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 (ii) AGM
• Annual General Meeting It is a meeting of shareholders
which is held once in a year. The object of holding this
meeting is to review the progress and prospects of the
company and elect its office-bearers for the coming
year.
• The first annual general meeting of the company is
held within 18 months of its incorporation.
• Subsequent annual general meeting must be held by
the company each year within six months of the closing
of the financial year.
• 21 days notice can be given, but if all board members
agree- it can be called within a day.

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 (iii) EGM
• Extraordinary meeting is a general meeting
which is held between two Annual General
Meetings. Extraordinary General Meeting is
Called to discuss any particular matter of
urgent importance to the company. This
meeting is called for the consideration of any
specific subject, decision of which cannot be
postponed to the next Annual General
Meeting.
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 II Directors’ Meetings-
BOD
• Board Meeting happens at least once every 3
months
• At least 4 meetings every financial year
• Notice has to be given to ALL the directors
• Agenda needs to be fixed prior to the meeting
• Quorum of atleast 2 directors or 1/3rd of the
total number of directors.

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 (iii) Meeting of Committee
• The Board of Directors may form certain committees
and delegate some of its powers to them. These
committees should consist of only directors.
• The delegation of powers to such committees is to
be authorised by the Articles of Association and
should be subject to the provisions of the Companies
Act.
• matters like Allotment, Transfer, Finance are handled
by sub-committees of the Board of Directors.

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 III Special Meetings
(i) Class Meetings
When the meeting of a particular class of
shareholders takes place such as preference
shareholder meeting.
Such a meeting can be attended only by that class
of shareholders.
Such a meeting is called for the alteration in the
rights and privileges of the shareholders and for the
purpose of conversion of one class of shares into
another.
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 (ii) Creditors Meeting
• The meetings of creditors are called when the
company proposes to make a scheme for
arrangement with its creditors.

• Creditors meeting are also organized in the

case of creditor’s voluntary winding up.

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 Rights of Shareholders
1. Amendment of AOA or MOA (by convening a
GM)
2. Attending and casting vote at general meeting
3. Transfer of shares
4. Protection of minority shareholders
5. Receiving dividends
6. Protection of minority shareholders (by
reporting to Company Law Board)

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