Company Law Notes Sem 3 (1) PDF

Notes Companies act 2013 Sr. Unit Name No. 1 Formation and E-Registration of Company with ROC 2 Company Promotion and Constitution 3 Management and Administration 4 Independent Director 5...

Notes Companies act 2013 Sr. Unit Name No. 1 Formation and E-Registration of Company with ROC 2 Company Promotion and Constitution 3 Management and Administration 4 Independent Director 5 Company Meetings Note: These notes are only for the study purpose. Not for sale. 1  UNIT I: Formation and E-Registration of Company with ROC Meaning and Definition of Company: Literary meaning of the word ‘company’ is an association of persons formed for common object. A company is a voluntary association of persons recognised by law, having a distinctive name and common seal, formed to carry on business for profit, with capital divisible into transferable shares, limited liability, a corporate body and perpetual succession. Definition of Company: According to Section 2 (20) of Indian Companies Act, 2013. “Company means a company Incorporated under this act under any of the previous Company Laws.” An Artificial Person Created by Law Separate Legal Entity Perpetual Succession Characteristics of Company Common Seal Limited Liability Transferability of Shares Limitation of Work Voluntary Association for Profits Representative Management Termination of Existence Note: These notes are only for the study purpose. Not for sale. 2 Characteristics of Company: 1. An Artificial Person Created by Law: A company is a creation of law, and is, sometimes called an artificial person. It does not take birth like natural person but comes into existence through law. But a company enjoys all the rights of a natural person. It has right to enter into contracts and own property. It can sue other and can be sued. But it is an artificial person, so it cannot take oath, cannot be presented in court and it cannot be divorced or married. 2. Separate Legal Entity: A company is an artificial person and has a legal entity quite distinct from its members. Being separate legal entity, it bears its own name and acts under a corporate name; it has a seal of its own; its assets are separate and distinct from those of its members. Its members are its owners but they can be its creditors simultaneously as it has separate legal entity. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The shareholders are not agents of the company and so they cannot bind it by their acts. 3. Perpetual Succession: The life of company is not related with the life of members. Law creates the company and dissolve it. The death, insolvency or transfer of shares of members does not, in any way, affect the existence of a company. According to Tennyson- “For men may come, men may go, But I go on forever.” Note: These notes are only for the study purpose. Not for sale. 3 In the case of company it may be said that members may come and members may go but the company goes on. It is a legal person having come into being by law and only law can bring its end and none else. 4. Common Seal: On incorporation a company becomes legal entity with perpetual succession and a common seal. The common seal of the company is of great importance. It acts as the official signature of the company. As the company has no physical form, it cannot sign its name on a contract. The name of the company must be engraved on the common seal. A document not bearing the common seal of the company is not authentic and has no legal importance. 5. Limited Liability: The limited liability is another important feature of the company. If anything goes wrong with the company his risk is only to the extent of the amount of his shares and nothing more. If some amount is uncalled upon a share, he is liable to pay it and not beyond that. The creditors of a company cannot get their claims satisfied beyond the assets of the company. The liability of members of a company ‘limited by guarantee’ is limited to the amount of guarantee. 6. Transferability of Shares: A shareholder can transfer his shares to any person without the consent of other members. Under Articles of Association, a company can put certain restriction on the transfer of shares but it cannot altogether stop it. Private company can put more restrictions on the transferability of shares. Note: These notes are only for the study purpose. Not for sale. 4 7. Limitation of Work: The field of work of a company is fixed by its charter. The Memorandum of Association. A company cannot do anything beyond the powers defined in it. Its action is, therefore, limited. In order to do the work beyond the memorandum of association, there is a need for its alteration. 8. Voluntary Association for Profits: A company is a voluntary association of persons to earn profits. It is formed for the accomplishment of some public good and whatsoever profit is divided among its shareholders. A company cannot be formed to carry on an activity against the public policy and having no profit motive. 9. Representative Management: The shareholders of company are widely scattered. It is not possible for all the shareholders to take part in the management. They leave their task to the representatives the Board of Directors and the company is managed by Board of Directors. 10. Termination of Existence: A company is created by law, carries on its affairs according to law and ultimately is affected by law. Generally, the existence of a company is terminated by means of winding up. Lifting of the Corporate Veil: There is often talk about how a company is a ‘person’ in eyes of law. A company is treated as if it’s a human of it’s own kind. It is given mandate to provide various kinds of information such as minutes of meetings, number of directors, list of objects for what the company is formed and others. However, it is a person in eyes of law only. It is not a real Note: These notes are only for the study purpose. Not for sale. 5 person but a juristic person, and is under obligation to go through a different type of scrutiny. This artificiality of the company is in fact an addition to the personality of the company. The company’s personality is said to be different to that of their directors, promoters and other members. Relation between personality of company and personality of members is the added protection which the former gives to the latter. The company’s personality acts as a curtain to hide the faces of it’s members, which is usually taken advantage of to commit illegal acts. Thus, this paper looks to define, explore and establish the various aspects of the doctrine of lifting the corporate veil. The doctrine is a tool in hands of the Judiciary, that where this corporate personality maybe ignored in order to find the real culprit and hold him liable instead of holding the company liable. What is the principle of lifting the corporate veil? Company enjoys a separate position from that of position of it’s owners. It is artificial but yet a person in eyes of law. Problems arise when this position of the company is misused. It is not incorrect to say that, though the company is an unreal person, but still it cannot act on it’s own. There has to be some human agency involved so that company is able to perform it’s functions. When this human agency is working, in the name of the company, for achieving goals approved by law, the social order is not disturbed. But when this medium of operations begins to be tainted, conflicts arise. This authority rather becomes firing of bullets from someone else’s gun. When directors, or whosoever be in charge of the company, start committing frauds, or illegal activities, or even activities outside purview of the objective/articles of the company, principle of lifting the corporate veil is initiated. It is disregarding the corporate personality of a company, in order to look behind the scenes, to determine who the real culprit of the committed offence is. Thus, wherever this personality of the company is employed for the purpose of committing illegality or for defrauding others, Courts have authority to ignore the corporate character and look at the reality behind the corporate Note: These notes are only for the study purpose. Not for sale. 6 veil in order to ensure justice is served. This approach of judiciary in cracking open the corporate shell is somewhat cautious and circumspect. In the case United States v. Milwaukee Refrigerator Transit Company, it was stated “A corporation will be looked upon as a legal entity, as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.” Supreme Court of India had adopted the similar thinking in the case Tata Engineering And Locomotive Co. Ltd. vs. State of Bihar & Ors where the corporations petitioning had joined together and claimed protection under Article 286 of Constitution of India for non-imposition of taxon the sale or purchase of goods, the Apex Court held that “If their contention is accepted, it would really mean that what the corporations or companies cannot achieve directly, they can achieve indirectly by relying upon the doctrine of lifting the veil.” When can be the veil lifted? The doctrine, though one of the most used doctrines by Courts, is still, however, not running upon a hard-and-fast rule. The basis for invoking such operations does not follow a laid down policy. Howsoever, over the period of time, Courts and Legislatures throughout the globe have attempted to narrow down scope and applicability of the doctrine under following two heads:- 1) Statutory Provisions: The Companies Act, 2013 has been integrated with various provisions which tend to point out the person who’s liable for any such improper/illegal activity. These persons are more often referred as “officer who is in default” under Section 2(60) of the Act, which includes people such as directors or key-managerial positions. Few instances of such frameworks are as following:- Note: These notes are only for the study purpose. Not for sale. 7 A. Misstatement in Prospectus:- Under Section 26 (9), Section 34 and Section 35 of the Act, it is made punishable to furnish untrue or false statements in prospectus of the company. Through issuing prospectus, companies offer securities for sale. Prospectus issued under Section 26 contains key notes of the company such as details of shares and debentures, names of directors, main objects and present business of the company. If any person attempts to furnish false or untrue statements in prospectus, he is subject to penalty or imprisonment or both prescribed under the aforesaid sections, depending upon the case. Each of these sections create a distinct aspect that which type of incorrect information furnishing would make such person liable for what amount or serving term. B. Failure to return application money:- Under Section 39 (3) of the Act, against allotment of securities, if the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, then such officers in default are to be fined with an amount of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less. C. Mis description of Company’s name:- The name of the company is most important. Usage of approved name entitles the company to enter into contracts and make them legally binding. This name should be prior approved under Section 4 and printed under Section 12 of the Act. Thus, if any representative of the company collect bills or sign on behalf of the company, and enter in incorrect particulars of the company, then such persons are to be held personally liable. Similar things happened in the case Hendon vs. Adelman where signatory directors were held personally liable for stating company’s name on a signed cheque as “L R Agencies Ltd” while the original name was “L & R Agencies Ltd.” D. For investigation of ownership of company:- Under Section 216 of the Act, the Central Government is authorized to appoint inspectors to investigate and report on matters relating to the company, and its membership for the purpose of determining the Note: These notes are only for the study purpose. Not for sale. 8 true persons who are financially interested in the success or failure of the company; or who are able to control or to materially influence the policies of the company. E. Fraudulent conduct:- Under Section 339 of the Act, wherever in case of winding up of the company, it is found that company’s name was being used for carrying out a fraudulent activity, the Court is empowered to hold any such person be liable for such unlawful activities, be it director, manager, or any other officer of the company. In the case Delhi Development Authority vs. Skipper Construction Company (P) it was stated that “where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. F. Inducing persons to invest money in company:- Under Section 36 of the Act, any person who makes false, deceptive, misleading or untrue statements or promises to any other person or conceals relevant data from other person with a view to induce him to enter into either of following:- i. An agreement of acquiring, disposing, subscribing or underwriting securities. ii. An agreement to secure profits to any of the parties from the yield of securities or by reference to fluctuations in the value of securities. iii. An agreement to obtain credit facilities from any bank or financial institution. In such circumstances, the corporate personality can be ignored with a view to identify the real culprit and make him personally liable under Section 447 of the Act accordingly. G. Furnishing false statements:- Under Section 448 of the Act, if in any return, report, certificate, financial statement, prospectus, statement or other document required, any person makes false or untrue statements, or conceals any relevant or material fact, then he is liable under Section 447 of the Act. Note: These notes are only for the study purpose. Not for sale. 9 If any document is sent from company to any place else, content of the documents are sent on the letter-head of the company, Now when this letter is received by any other person, he is supposed to be under assumption that he has received the letter from the company. This “any other person” here is persons appointed under the Act, such as Registrar of Companies (ROC). If he is furnished any false or untrue statement, that is also an offence. Thus, in order to determine the real guilty person, who allowed such documents being released in the name of the company is to be found by way of lifting the corporate veil. H. Repeated defaults: - Under Section 449 of the Act, if a company or an officer of a company commits an offence punishable either with fine or with imprisonment and this offence is being committed again within period of 3 years, such company and officer are to pay twice the penalty of that offence in addition to any imprisonment provided for that offence. 2) Judicial Pronouncements:- Though the Legislature has attempted to insert numerous provisions in the Act to make sure guilty person is pointed out as veil is pierced, there are instances where Judiciary has played it’s part better and kept a check that no guilty person, due to a mere technicality, walks free. Following are few such scenarios where Court may without any doubt lift the corporate veil:- A. Tax Evasion: - It’s duty of every earning person to pay respective taxes. Company is no different than a person in eyes of law. If anyone attempts to unlawfully avoid this duty, he is said to be committing an offence. When strict rules are laid down for human being, why leave company? One clear illustration was is Dinshaw Maneckjee Petit where the founding person of 4 new private companies, Sir Dinshaw, was enjoying huge dividend and interest income, and in order to evade his tax, he thus found 4 sham companies. His income was credited in accounts of these companies and these amounts were repaid to Sir Dinshaw but in form of a pretended loan. These loans entitled him to Note: These notes are only for the study purpose. Not for sale. 10 have certain tax benefits. It was rather held that purpose of founding these new companies was simple as means of avoiding super-tax. B. Prevention of fraud/ improper conduct:- It is obvious that no company can commit fraud on it’s own. There has to be a human agency involved to commit such acts. Thus, one may make efforts to prevent upcoming frauds. Similar thing was observed in the case Gilford Motor Co Ltd vs. Horne where, Horne was appointed as Managing Director of the company, provided he accepts the condition that he will not attempt to entice or solicit customers of the company while he is holding the post or even afterwards. However, shortly thereafter, he opened a company, in his wife’s name, which carried out a competing business to that of the first company, with himself being in management. When the matter was brought into the Court, it was held that the newfound company was mere cloak or sham, for purpose of enabling Sir Dinshaw to commit breach of his covenant against solicitation. C. Determination of enemy character:- The purpose behind formation of company is self- profit. A company will not attempt to do good towards society consciously. However, it may opt to cause damage instead. Similar things were observed in the case Dailmer Co Ltd vs. Continental Tyres & Rubber Co Ltd. The facts were such that a Germany based company was incorporated in England to sell tyres manufactures in Germany. The German company had however held the bulk of shares in this English company. As World War I broke out, the English company commenced an action to recover trade debt. The question was brought before House of Lords which decided the case against the claimant, stating that, company is not a real person but a legal entity, it cannot be a friend or an enemy. However, it may assume an enemy character when persons in de facto control of it’s affairs are residents of the enemy territory. Thus, the claim was dismissed. It was rather held in the case Sivfracht vs. Van UdensScheepvartthat, if in such scenarios where a company is suspected to be of enemy character or is proved to be of enemy character, then such granted monetary funds would be used as machinery to destroy the Note: These notes are only for the study purpose. Not for sale. 11 concerned State itself. That would be monstrous and against public policy of that concerned State. D. Liability for ultra-vires acts:- Every company is bound to perform in compliance of it’s memorandum of association, articles of association, and the Companies Act, 2013. Any action done outside purview of either is said to be “ultra-vires” or improper or beyond the legitimate scope. Such operations of the company can be subjected to penalty. The doctrine of ultra-vires acts against companies was evolved in the case Ashbury Railway Carriage & Iron Company Ltd v. Hector Riche where a company entered into a contract for financing construction of railway lines, and this operation was not mentioned in the memorandum. The House of Lords held this action as ultra-vires and contract, null and void. E. Public Interest/Public Policy:- Where the conduct of the company is in conflict with public interest or public policies, Courts are empowered to lift the veil and personally hold such persons liable who are guilty of the act. To protect public policy is a just ground for lifting the corporate personality. One such scenario is Jyoti Limited vs. Kanwaljit Kaur Bhasin&Anr., where it was held that corporate veil maybe ignored if representatives of the company commit contempt of the Court so punishment can be inflicted upon. F. Agency companies:- Where it is expedient to identify the principal and agent concerning an improper action performed by the agent, the corporate veil maybe neglected. Such as in the case of Bharat Steel Tubes Ltd vs IFCI where it was held that it doesn’t matter and it isn’t necessary that Government should be holding more than 51% of the paid-up capital to be the principal. In fact, in the case New Tiruper Area Development Corporation Ltd vs. State of Tamil Nadu where Government was holding mere 17.4% of the investment funds, it was found that Area Development Corporation was actually a public authority through the Government. It was created under a public- Note: These notes are only for the study purpose. Not for sale. 12 private participation to build, operate and transfer water supply and sewage treatment systems. G. Negligent activities:- Every company law distinguishes between holding and subsidiary companies. Holding companies under Indian company law are the companies which have right in composition of Board of Directors, or which have more than 50% of the total share capital of the subsidiary company. For example, Tata Sons is the holding company while Tata Motors, TCS, Tata Steel are it’s subsidiary companies. In cases where subsidiary companies have been found with tainted operations, Courts have power to make holding companies liable for actions of their subsidiary companies as well for breach of duty or negligence on their part. Such as in the case of Chandler vs Cape Plc where an employee brought an action against holding company ‘Cape Plc’ for not taking proper health and safety measures, even though employee was employed in it’s subsidiary company. Employee was appointed in the year 1959 in the subsidiary company while he had discovered the fact that he is suffering from asbestosis in year 2007. When he was aware of his condition it was that the subsidiary company was no longer in existence, thus, he brought action against the holding company, which was still in existence. This matter was held to be maintainable. Rather, holding company was held guilty and made liable as it owed duty of care towards employees. It was for the first time where a holding company, despite the fact that it’s a legal entity separate from that of its subsidiary, is however liable for actions of it’s subsidiary. Types of Company: INTRODUCTION: The Companies Act, 2013 provides for the kinds of companies that can be promoted and registered under the Act. The three basic types of companies which may be registered under the Act are: Note: These notes are only for the study purpose. Not for sale. 13 (a) Private Companies; (b) Public Companies; and (c) One Person Company (to be formed as Private Limited).. Section 3 (1) of the Companies Act 2013 states that a company may be formed for any lawful purpose by— (a) seven or more persons, where the company to be formed is to be a public company; (b) two or more persons, where the company to be formed is to be a private company; or (c) one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration (2) A company formed under sub-section (1) may be either— (a) a company limited by shares; or (b) a company limited by guarantee; or (c) an unlimited company. Classification of Companies (i) Classification on the basis of Incorporation: There are three ways in which companies may be incorporated. (a) Statutory Companies: These are constituted by a special Act of Parliament or State Legislature. The provisions of the Companies Act, 2013 do not apply to them. Examples Note: These notes are only for the study purpose. Not for sale. 14 of these types of companies are Reserve Bank of India, Life Insurance Corporation of India, etc. (b) Registered Companies: The companies which are incorporated under the Companies Act, 2013 or under any previous company law, with ROC fall under this category. (ii) Classification on the basis of Liability: Under this category there are three types of companies: (a) Unlimited Liability Companies: In this type of company, the members are liable for the company’s debts in proportion to their respective interests in the company and their liability is unlimited. Such companies may or may not have share capital. They may be either a public company or a private company. (b) Companies limited by guarantee: A company that has the liability of its members limited to such amount as the members may respectively undertake, by the memorandum, to contribute to the assets of the company in the event of its being wound-up, is known as a company limited by guarantee. The members of a guarantee company are, in effect, placed in the position of guarantors of the company’s debts up to the agreed amount. (c) Companies limited by shares: A company that has the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them is termed as a company limited by shares. For example, a shareholder who has paid `75 on a share of face value ` 100 can be called upon to pay the balance of `25 only. Companies limited by shares are by far the most common and may be either public or private. (iii) Other Forms of Companies (a) Associations not for profit having license under Section 8 of the Companies Act, 2013 or under any previous company law; Note: These notes are only for the study purpose. Not for sale. 15 (b) Government Companies; (c) Foreign Companies; (d) Holding and Subsidiary Companies; (e) Associate Companies/Joint Venture Companies (f) Investment Companies (g) Producer Companies. (h) Dormant Companies PRIVATE COMPANY: As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,— (i) restricts the right to transfer its shares; (ii) Except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member: Provided further that the following persons shall not be included in the number of members;— (A) persons who are in the employment of the company; and Note: These notes are only for the study purpose. Not for sale. 16 (B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, and (iii) prohibits any invitation to the public to subscribe for any securities of the company; It must be noted that it is only the number of members that is limited to two hundred. A private company may issue debentures to any number of persons, the only condition being that an invitation to the public to subscribe for debentures is prohibited. The aforesaid definition of private limited company specifies the restrictions, limitations and prohibitions, which must be expressly provided in the articles of association of a private limited company. As per proviso to Section 14 (1), if a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, such company shall, as from the date of such alteration, cease to be a private company. A private company can only accept deposit from its members in accordance with section 73 of the Companies Act, 2013. The words ‘Private Limited’ must be added at the end of its name by a private limited company. As per section 3 (1), a private company may be formed for any lawful purpose by two or more persons, by subscribing their names to a memorandum and complying with the requirements of this Act in respect of registration. Section 149(1) further lays down that a private company shall have a minimum number of two directors. The only two members may also be the two directors of the private company. PUBLIC COMPANY By virtue of Section 2(71), a public company means a company which: (a) is not a private company; Note: These notes are only for the study purpose. Not for sale. 17 (b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed. Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles As per section 3 (1) (a), a public company may be formed for any lawful purpose by seven or more persons, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration. A public company may be said to be an association consisting of not less than 7 members, which is registered under the Act. In principle, any member of the public who is willing to pay the price may acquire shares in or debentures of it. The securities of a public company may be quoted on a Stock Exchange. The number of members is not limited to two hundred. It may be noted that in case of a public company, the articles do not contain the restrictions provided in Sections 2(68) of the Act. As per section 58(2), the securities or other interest of any member in a public company shall be freelytransferable. However, any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. The concept of free transferability of shares in public and private companies is very succinctly discussed in the case of Western Maharashtra Development Corpn. Ltd. V. Bajaj Auto Ltd 154 Com Cases 593 (Bom). It was held that the Companies Act, makes a clear distinction in regard to the transferability of shares relating to private and public companies. By definition, a “private company” is a company which restricts the right to transfer its shares. In the case of a public company, the Act provides that the shares or debentures and any interest therein, of a company, shall be freely transferable. The provision contained in the law for the free transferability of shares in a public company is founded on the principle that members of the public must have the freedom to purchase and, every shareholder the freedom to transfer. The incorporation of a company in the public, as distinguished from the private, realm leads to specific consequences and the imposition of obligations envisaged in law. Those who promote and manage public companies assume those obligations. Corresponding to those obligations are rights, which the law recognizes as inherent in the members of the public who subscribe to shares. Section 8 Company: Any person or an association of persons intending to be registered as a limited company for charitable purpose can apply for registration of section 8 company. However, it shall prove to the satisfaction of the Central Government that: Note: These notes are only for the study purpose. Not for sale. 18 (a) its objects includes promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; (b) the company on incorporation intends to apply its profits, if any, or other income in promoting such object; and (c) the company intends to prohibit the payment of any dividend to its members. After perusal, the Central Government may issue license with such conditions as it deems fit and allow the registration of such person or association of persons as a limited company without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”. The power of the Central government is delegated to the Registrar of Companies (‘ROC’) having Jurisdiction over the area where the Registered office of the company is proposed to be situated. Hence, the application for registering such company is to be made to the ROC. Steps to incorporate new Section 8 Company: 1. Make an application. To incorporate a new company under section , an application shall be made in Form no. INC.12. And application shall be accompanied with following documents: (i) draft Memorandum of association (MOA) and Articles of association (AOA) of the Company, in Form no. INC-13. Ensure to affix the photographs of the subscribers in subscriber pages of MOA and AOA ; (ii) Declaration (in Form no. INC-14) by an Advocate, a Chartered Accountant, Cost Accountant or Company Secretary in practice, that the draft memorandum and articles of association have been drawn up in conformity with the provisions of section 8 and rules made there under and all the requirements under section 8 have been complied with. It shall be on appropriate stamp paper of the State and duly notarised; (iii) an estimate of the future annual income and expenditure of the company for next three years, specifying the sources of the income and the objects of the expenditure; Note: These notes are only for the study purpose. Not for sale. 19 (iv) A declaration (in Form no. INC-15) by each of the persons making the application. It shall be on appropriate stamp paper of the State and duly notarised; and (v) Form no. INC-9 from each subscribers and first directors, on appropriate stamp paper of the State and duly notarised 2. Approval of other authorities. The Registrar of Companies may require the applicant to furnish the approval or concurrence of any appropriate authority, regulatory body, department or Ministry of the Central or State Government(s). 3. To decide on granting of license under section 8. The Registrar will wait for 30 days for objections, if any, of any person pursuant to notice published in newspapers. The Registrar may also consult necessary authorities and regulatory bodies. Thereafter, the Registrar of Companies at its discretion, may grant the licence. And such licence may contain conditions as deemed necessary by the Registrar. The Registrar may direct the company to insert in its memorandum, or in its articles, or partly in one and partly in the other, such conditions of the license as may be specified by the Registrar in this behalf. Effect of Registration: The Section 8 Company shall enjoy all the privileges and be subject to all the obligations of limited companies. [Section 8(2)]. A firm can be a member of a section 8 company. To alter the provisions of its memorandum or articles of association, section 8 company will have to obtain the previous approval from the Central Government. Revocation of licence: The Central Government may, by order, revoke such licence granted under section 8, if: a) the company contravenes section 8; or b) the company contravenes the conditions subject to which licence is issued; or Note: These notes are only for the study purpose. Not for sale. 20 c) affairs of the company are conducted in a fraudulent manner or in violation of object of the company or prejudicial to the interest of the public. Further, the Central Government may direct the company to change its status from section 8 company to either private or public limited company. And also direct it to change its name to include the word “Limited” or words “Private Limited”. However, before making order, the Central Government shall give reasonable opportunity of hearing to the company. Upon receiving such an order, where the licence granted to a company registered under section 8 has been revoked, the company shall intimate to the Registrar and apply in Form no. 2.23 to convert its status and change of name accordingly. The revocation of licence does not absolve the company from the punishment that may follow under the Act. On revocation of licence the Central Government may, in public interest, order such company to be wound up or amalgamate with another company registered under this section having similar objects. However, before making order, the Central Government shall give reasonable opportunity of hearing to the company. Where the licence is revoked and the Central Government is satisfied that in public interest, such company shall amalgamate with another company registered under section 8 and having similar objects, then the Central Government may order details of amalgamation like forming a single company, transfer of assets and liabilities etc. This right of the Central Government prevails even if they are contrary to other provisions of the Companies Act, 2013. Winding up of section 8 company: Upon winding up or dissolution of section 8 company and after satisfaction of its debts and liabilities, if there remains any asset then the same shall be transferred, as per direction of the National Company Law Tribunal either to another section 8 company with similar object or to the credit of the Rehabilitation and Insolvency Fund formed under section 269. Note: These notes are only for the study purpose. Not for sale. 21 ONE PERSON COMPANY (OPC): Backgorund of OPC With the implementation of the Companies Act, 2013, a single person could constitute a Company, under the One Person Company (OPC) concept. The new Companies Act, 2013 has done away with redundant provisions of the previous Companies Act,1956, and provides for a new entity in the form of one person company (OPC), while empowering the Central Government to provide a simpler compliance regime for small companies. The introduction of OPC in the legal system is a move that would encourage corporatisation of micro businesses and entrepreneurship. In India, in the year 2005, the JJ Irani Expert Committee recommended the formation of OPC. It had suggested that such an entity may be provided with a simpler legal regime through exemptions so that the small entrepreneur is not compelled to devote considerable time, energy and resources on complex legal compliance. OPC is a one shareholder corporate entity, where legal and financial liability is limited to the company only. Difference between a Sole Proprietorship and an OPC The fundamental difference between a sole proprietorship and an OPC is the way liability is treated in the latter. A one-person company is different from a sole proprietorship because it is a separate legal entity that distinguishes between the promoter and the company. Note: These notes are only for the study purpose. Not for sale. 22 The promoter’s liability is limited in an OPC in the event of a default or legal issues. On the other hand, in sole proprietorships, the liability is not restricted and extends to the individual and his or her entire assets. Position of OPC in India under the Companies Act, 2013 The Companies Act, 2013 classifies companies on the basis of their number of members into One Person Company, private company and public company. As stated above, a private company requires a minimum of 2 members. In other words, a One Person Company is a kind of private company having only one member. As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only one person as a member. Section 3(1)(c) lays down that a company may be formed for any lawful purpose by one person, where the company to be formed is to be One Person Company that is to say, a private company. In other words, one person company is a kind of private company. A One person company shall have a minimum of one director. Therefore, a One Person Company will be registered as a private company with one member and one director. By virture of section 3(2), an OPC may be formed either as a company limited by shares or a company limited by guarantee; or an unlimited liability company. Contract by One Person Company Section 193 (1) provides that where One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are recorded in a memorandum or are recorded in the Note: These notes are only for the study purpose. Not for sale. 23 minutes of the first meeting of the Board of Directors of the company held next after entering into contract. However, above said provision shall not apply to contracts entered into by the one person company in the ordinary course of its business. As per section 193 (2), the company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within a period of fifteen days of the date of approval by the Board of Directors. As per section 152 (1), in case of a One Person Company an individual being its member shall be deemed to be its first director until a director or directors are duly appointed by the member in accordance with the provisions of that section. Benefits of One Person Company: 1. The concept of One person company is quite revolutionary. It gives the individual entrepreneurs all the benefits of a company, which means they will get credit, bank loans, access to market, limited liability, and legal protection available to companies. 2. Prior to the new Companies Act, 2013 coming into effect, at least two shareholders were required to start a company. But now the concept of One Person Company (OPC) would provide tremendous opportunities for small businessmen and traders, including those working in areas like handloom, handicrafts and pottery. 3. Earlier they were working as artisans and weavers on their own, so they did not have a legal entity of a company. But now the OPC would help them do business as an enterprise and give them an opportunity to start their own ventures with a formal business structure, Further, the amount of compliance by a one person Note: These notes are only for the study purpose. Not for sale. 24  company is much lesser in terms of filing returns, balance sheets, audit etc. Also, rather than the middlemen usurping profits, the one person company will have direct access to the market and the wholesale retailers. The new concept would also boost the confidence of small entrepreneurs. SMALL COMPANY: As recommended by the Dr. JJ Irani Committee, the concept of small companies has been introduced in the Companies, Act, 2013. The recommendation of the Irani committee in this regard was as under: “The Committee sees no reason why small companies should suffer the consequences of regulation that may be designed to ensure balancing of interests of stakeholders of large, widely held corporates. Company law should enable simplified decision making procedures by relieving such companies from select statutory internal administrative procedures. Such companies should also be subjected to reduced financial reporting and audit requirements and simplified capital maintenance regimes. Essentially the regime for small companies should enable them to achieve transparency at a low cost through simplified requirements. Such a framework may be applied to small companies through exemptions, consolidated in the form of a Schedule to the Act.” Small company is a new form of private company under the Companies Act, 2013. A classification of a private company into a small company is based on its size i.e. paid up capital and turnover. In other words, such companies are small sized private companies. As per section 2(85) ‘‘small company’’ means a company, other than a public company,— (i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or Note: These notes are only for the study purpose. Not for sale. 25 (ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees: Provided that nothing in this definition shall apply to— (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act; GOVERNMENT COMPANIES: Section 2(45) defines a “Government Company” as any company in which not less than fifty one per cent. Of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company. Notwithstanding all the pervasive control of the Government, the Government company is neither a Government department nor a Government establishment [Hindustan Steel Works Construction Co. Ltd. v. State of Kerala (1998) 2 CLJ 383]. Since employees of Government companies are not Government servants, they have no legal right to claim that the Government should pay their salary or that the additional expenditure incurred on account of revision of their pay scales should be met by the Government. It is the responsibility of the company to pay them the salaries [A.K. Bindal v. Union of India (2003) 114 Com Cases 590 (SC)]. Note: These notes are only for the study purpose. Not for sale. 26 When the Government engages itself in trading ventures, particularly as Government companies under the company law, it does not do so as a State but it does so in essence as a company. A Government company is not a department of the Government. FOREIGN COMPANIES: As per section 2(42), “foreign company” means any company or body corporate incorporated outside India which— (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner Sections 379 to 393 of the Act deal with such companies. Section 380 of the Act lays down that every foreign company which establishes a place of business in India must, within 30 days of the establishment of such place of business, file with the Registrar of Companies for registration: (a) a certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company and, if the instrument is not in the English language, a certified translation thereof in the English language; (b) the full address of the registered or principal office of the company; (c) a list of the directors and secretary of the company containing such particulars as may be prescribed; (d) the name and address or the names and addresses of one or more persons resident in India authorized to accept on behalf of the company service of process and any notices or other documents required to be served on the company; Note: These notes are only for the study purpose. Not for sale. 27 (e) the full address of the office of the company in India which is deemed to be its principal place of business in India; (f) particulars of opening and closing of a place of business in India on earlier occasion or occasions; (g) declaration that none of the directors of the company or the authorised representative in India has ever been convicted or debarred from formation of companies and management in India or abroad; and (h) any other information as may be prescribed. Every foreign company has to ensure that the name of the company, the country of incorporation, the fact of limited liability of members is exhibited in the specified places or documents as required under Section 382. Section 381 requires a Foreign Company to maintain books of Account and file a copy of balance sheet and profit and loss account in prescribed form with ROC every calendar year. These accounts should be accompanied by list of place of business established by the foreign company in India. Section 376 of the Companies Act, 2013 provides further that when a foreign company, which has been carrying on business in India, ceases to carry on such business in India, it may be wound up as an unregistered company under Sections 375 to 378 of the Act, even though the company has been dissolved or ceased to exist under the laws of the country in which it was incorporated. HOLDING, SUBSIDIARY COMPANIES AND ASSOCIATE COMPANIES: On the basis of control companies can be classified into holding, subsidiary and associate companies. Note: These notes are only for the study purpose. Not for sale. 28 Holding company: As per Section 2 (46), holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies. Subsidiary company: Section 2 (87) provides that subsidiary company or subsidiary, in relation to any other company (that is to say the holding company), means a company in which the holding company— (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies, shall not have layers of subsidiaries beyond the prescribed limit. (Proviso to be notified) For the above purpose,— (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; (c) the expression “company” includes anybody corporate; Note: These notes are only for the study purpose. Not for sale. 29 Associate company: As per Section 2(6), “Associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. Explanation to section 2(6) provides that “significant influence” means control of at least twenty per cent. Of total share capital, or of business decisions under an agreement. To add more governance and transparency in the working of the company, the concept of associate company has been introduced. It will provide a more rational and objective framework of associate relationship between the companies. Further, as per section 2 (76), Related party includes ‘Associate Company’. Hence, contract with Associate Company will require disclosure/approval/entry in statutory register as is applicable to contract with a related party. INVESTMENT COMPANIES: As per explanation (a) to section 186, “Investment Company” means a company whose principal business is the acquisition of shares, debentures or other securities. An investment company is a company, the principal business of which consists in acquiring, holding and dealing in shares and securities. The word ‘investment’, no doubt, suggests only the acquisition and holding of shares and securities and thereby earning income by way of interest or dividend etc. But investment companies in actual practice earn their income not only through the acquisition and holding but also by dealing in shares and securities i.e. to buy with a view to sell later on at higher prices and to sell with a view to buy later on at lower prices. Note: These notes are only for the study purpose. Not for sale. 30 If a company is engaged in any other business to an appreciable extent, it will not be treated as an investment company. The following two sets of legal opinions are quoted below as to the meaning of an investment company: (i) According to one set of legal opinion, an “investment company” means company which acquires and holds shares and securities with an intent to earn income only from them by holding them. On the other hand, another school of legal opinion holds that “an Investment Company means a company, which acquires shares and securities for earning income by holding them as well as by dealing in such shares and other securities”. (ii) According to Section 2(10A) of the Insurance Act, 1938, an investment company means a company whose principal business is the acquisition of shares, stocks, debentures or other securities. PRODUCER COMPANIES: Section 465(1) of the Companies Act, 2013 provides that the Companies Act, 1956 and the Registration of Companies (Sikkim) Act, 1961 (hereafter in this section referred to as the repealed enactments) shall stand repealed. However, proviso to section 465(1) provides that the provisions of Part IX A of the Companies Act, 1956 shall be applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act, 1956 has not been repealed until a special Act is enacted for Producer Companies. In view of the above provision, Producer Companies are still governed by the Companies Act, 1956. Companies (Amendment) Act, 2002 had added a new Part IXA to the main Companies Act, 1956 consisting of 46 new Sections from 581A to 581ZT. Note: These notes are only for the study purpose. Not for sale. 31 According to the provisions as prescribed under Section 581A(l) of the Companies Act, 1956, a producer company is a body corporate having objects or activities specified in Section 581B and which is registered as such under the provisions of the Act. The membership of producer companies is open to such people who themselves are the primary producers, which is an activity by which some agricultural produce is produced by such primary producers. Objects of Producer Companies: In terms of Section 581B(1) of the Companies Act, 1956, the objects of a producer company registered under this Act may be all or any of the following matters: (a) production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the members or import of goods or services for their benefit. (b) processing including preserving, drying, distilling, brewing, vinting, canning and packaging of the produce of its members. (c) manufacturing, sale or supply of machinery, equipment or consumables mainly to its members. (d) providing education on the mutual assistance principles to its members and others. (e) rendering technical services, consultancy services, training, research and development and all other activities for the promotion of the interests of its members. (f) generation, transmission and distribution of power, revitalisation of land and water resources, their use, conservation and communications relatable to primary produce. (g) insurance of producers or their primary produce. Note: These notes are only for the study purpose. Not for sale. 32 (h) promoting techniques of mutuality and mutual assistance. (i) welfare measures or facilities for the benefit of the members as may be decided by the Board. (j) any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) above or other activities which may promote the principles of mutuality and mutual assistance amongst the members in any other manner. (k) financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) above, which include extending of credit facilities or any other financial services to its members. Further, under Section 581B(2) it has also been clarified that every producer company shall deal primarily with the produce of its active members for carrying out any of its objects specified above. DORMANT COMPANIES: The Companies Act, 2013 has recognized a new set of companies called as dormant companies. As per section 455 (1) “where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company”. Explanation appended to section 455(1) says that for the purposes of this section,— (i) “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two Note: These notes are only for the study purpose. Not for sale. 33 financial years, or has not filed financial statements and annual returns during the last two financial years; (ii) “significant accounting transaction” means any transaction other than— (a) payment of fees by a company to the Registrar; (b) payments made by it to fulfill the requirements of this Act or any other law; (c) allotment of shares to fulfill the requirements of this Act; and (d) payments for maintenance of its office and records. As per section 455(2), the Registrar on consideration of the application shall allow the status of a dormant company to the applicant and issue a certificate in such form as may be prescribed to that effect. Section 455(3) provides that the Registrar shall maintain a register of dormant companies in such form as may be prescribed. According to section 455(4), in case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies. Further a dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an active company on an application made in this behalf accompanied by such documents and fee as may be prescribed. [Section 455(5)] Note: These notes are only for the study purpose. Not for sale. 34 FORMATION OF COMPANY: 1. A company may be formed for any lawful purpose by- a. seven or more persons, where the company to be formed is to be a public company; b. two or more persons, where the company to be formed is to be a private company; or c. one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration: Provided that the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber‘s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles: Provided further that such other person may withdraw his consent in such manner as may be prescribed: Provided also that the member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed: Provided also that it shall be the duty of the member of One Person Company to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed: Provided also that any such change in the name of the person shall not be deemed to be an alteration of the memorandum. 2. A company formed under sub-section (1) may be either a. a company limited by shares; or b. a company limited by guarantee; or c. an unlimited company. Note: These notes are only for the study purpose. Not for sale. 35 Promotion is the primary stage in any business in which an individual or a group of people conceive an idea is put into practice with the help of his or their own resources, influence and skill. The term generally refers to the sum total of all the activities connected with the formation of a company. The person who undertakes all these activities is known as the promoter. Meaning and Definition of a Promoter: We have already noted that the person who take all necessary steps to create a company and set it going is known as a promoter. He takes an active part in the formation of a company. The Promoter need not be an individual. A firm, a company or an association can be the promoter of a company. Even two or three persons can also act as the promoters of the same company. Thus, anyone can become the promoter of a company provided he performs all the acts necessary to the formation of a company. The question as to whether a person is a promoter or not, is not a question of law but a question of fact. In this context, Bower, L.J., in Whaley Bridge Co. V. Green rightly observed as follows: “It is not a term of law but of business operations familiar to the commercial world by which a company generally brought into existence”. Therefore, the Act does not define the term promoter. But a number of judicial decisions have tried to explain the term. Definition of Haney: “Promoter is a person who conceives the idea, studies the prospects of the business critically, chalks out an attentative scheme of organisation, brings together the requisite men, materials, machinery, money and managerial ability and float the enterprise”. Note: These notes are only for the study purpose. Not for sale. 36 As per Section 2(69) of Companies Act, 2013 the term Promoters is defined as:- “Promoter” means a person— (a) who has been named as such in a prospectus or is identified by the Company in the annual return referred to in section 92; or (b) who has control over the affairs of the Company, directly or indirectly whether as a shareholder, director or otherwise; or (c) in accordance with whose advice, directions or instructions the Board of Directors of the Company is accustomed to act: Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity FUNCTIONS OF A PROMOTER: The definitions cited above clearly brings out the peculiar functions of a typical promoter. They are as follows: 1. Promotion of an Idea: It is the promoter who has to conceive the idea of forming a company. This is the first step towards the formation of a company. 2. Detailed Investigation: The promoter, after forming an idea should make a thorough and detailed investigation of the prospects of the business. It should be done with reference to the sources of supply, nature of demand, extent of competition, capital requirements of the present and future etc. He can also take the help of technical experts. 3. Verification: The promoter should also verify whether the advises or comments or reports made by the experts are free from bias. He should also consult with other impartial and disinterested experts and should see whether the idea is commercially viable. Note: These notes are only for the study purpose. Not for sale. 37 4. Assembling: After verification of the idea, the promoter should go ahead with the promotion of the projected company. He should find out the first directors and the subscribers to the Memorandum. 5. Financing the Proposition: The promoter, at this stage, has to prepare a plan setting out the mode of getting the necessary finance. He should arrange for finance to meet the preliminary expenses. He should negotiate with the vendors if it proposes to buy an existing business. He should also arrange for underwriting contracts. He should estimate the required capital and the availability of bank loan etc., and also the cost of raising the capital. 6. Presentation of the Proposition: Finally, after making necessary arrangements and modes of raising finance, he gets the necessary documents such as Memorandum etc. printed, filed with the Registrar and then arranges for their publication. He should take the aid of legal experts in preparing the documents and should see that the documents are strictly in accordance with the provisions of the Companies Act. Who can be a Promoter? Just like the companies Act does not define the term promoter, it does not specify who can act as promoter. Generally speaking, the first persons who are desirous of acquiring control over the affairs of a company are its promoters. They generally appoint themselves as the first directors. But even a company, firm or syndicate can act as a promoter. In many cases, the vendor of the property or business which the company is to acquire, himself acts in the capacity of a promoter. Mere employees or contractors or a solicitor who prepares the documents are not promoters. A person may become the promoter even after incorporation of the company if he does all the acts concerned with the raising of capital or publishing the prospectus. Note: These notes are only for the study purpose. Not for sale. 38 Legal Position of the Promoter: The legal status of a promoter is incapable of precise statement because the law is very silent on this debatable question. Lindley, L.J., while describing his position in Wigpool Iron Ore Company’s case rightly remarked that “the promoter is not an agent for the company nor a trustee for it before its formation…..”. The reason is obvious. An agent can act only for an existing principal. As the company is not in existence at the time when the promoter started his work, he can’t be considered as a trustee of the company. As such, a promoter stands in a fiduciary relation to it. Promoters, being in a fiduciary position, may not make, either directly or indirectly, any profit at the expense of the company he promotes. Difference Between Pre Incorporation Contracts & Provisional Contracts: A company being an artificial person can contract only through its agents. A contract will be binding on a company only, if it is made on its behalf by any person acting under its authority, express or implied. The powers of the company are defined by its Memorandum of Association and any contract made beyond the limits laid down in the Memorandum of Association, will be ultra vires to the company and void even if all the shareholders assent to it.’ Contracts made before the incorporation of company is called pre-incorporation contracts. Contracts made after incorporation, but before the company becomes entitled to commence business are called provisional contracts. Provisional contracts are no more valid as provisions relating to commencement of business have been omitted by Companies (Amendment) Act, 2015. The contracts after the incorporation should be within the purview of Memorandum of Association. Now check more details Note: These notes are only for the study purpose. Not for sale. 39 for Difference Between Pre Incorporation Contracts & Provisional Contracts from below…. Pre Incorporation Contracts Preliminary contracts or Pre Incorporation Contracts are contracts purported to be made on behalf of a company before its incorporation. Before incorporation, a company is non-existent and has no capacity to contract. Consequently, nobody can contract as agent on its behalf because an act which cannot be done by the principal himself cannot be done by him through an agent. Hence, a contract by a promoter purporting to act on behalf of a company prior to its incorporation never binds the company because at the time the contract was concluded the company was not in existence. Pre-Incorporation Contracts Provisional Contracts A contract entered into by the promoters Any contract made by a company before on behalf of a proposed company i.e. the date at which it is entitled to before incorporation of a company commence business A Pre-Incorporation contract is governed A Provisional Contract is governed by by Specific Relief Act, 1963. Companies Act, 2013. The term Pre-Incorporation Contract is The term Provisional Contract is not relevant for public as well as private relevant for Private Company company The term Pre-Incorporation Contract is The term Provisional Contract is not relevant for every company, even though relevant for a company not having share it has no share capital capital. A Pre-Incorporation contract is not A provisional contract becomes binding binding unless the company adopts the on the company when it obtains the contract. certificate of commencement. Note: These notes are only for the study purpose. Not for sale. 40 Contracts made after incorporation of business: A company can do all such acts, as by its Memorandum, it is expressly or impliedly authorised, to do. Any purported act, which is not so authorized, is ultra vires the company, and the company cannot enforce it, nor can the other party enforce it against the company. Such a contract cannot be ratified even if every member of the company assents to it, as it is void ab initio. This rule is commonly known as the Doctrine of Ultra Vires. ‘Ultra vires’ means “beyond the powers”. The powers of the company are derived from its Memorandum of Association and the statute constituting it. Consequently, only those contracts which are intra vires or within the powers of the company will be valid and binding. Procedure for Incorporation of a Company under Companies Act, 2013: 1. Obtain Digital Signatures Nowadays various document prescribed under the Companies Act, 2013, are required to be filed with the digital signature of the Managing Director or Director or Manager or Secretary of the Company, therefore, it is compulsorily required to Obtain a Digital Signature Certificate from authorized DSC issuing authority for at least one director to sign the E-forms related to incorporate like form INC.1 and other documents. 2. Obtain Director Identification Number [Section 153] As per 153 of the Companies Act, 2013, every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number in form DIR.3 to the Central Government in such form and manner and along with such fees as may be prescribed. Note: These notes are only for the study purpose. Not for sale. 41 Therefore, before submission of e-Form INC.1 for availability of name, all the directors of the proposed company must ensure that they are having DIN and if they are not having DIN, it should be first obtained. 3. Name availability for proposed company As per section 4(4) read with Rule-9 of Companies (Incorporation) Rules, 2014, application for the reservation/availability of name shall be in Form no. INC.1 along with prescribed fee of Rs. 1,000/-. In selection of Company name should be in accordance with name guidelines given in Rule-8 of Companies (Incorporation) Rules, 2014. Note: MCA has prescribed certain rules for name availability so it is advisable to check guidelines for the same before applying for name. Refer Rule-8 of Companies (Incorporation) Rules, 2014. After approval of name ROC will issue a Name availability letter w.r.t. approval for availability of name for a proposed company. Validity of Name approved by ROC: As per section 4(5), maximum time for which name will be available has been prescribed in the law itself under section 4(5). The name will be valid for a period of 60 Days from the date on which the application for Reservation was made. Note: The applicant cannot start business or enter into any agreement, contract, etc. in the name of the proposed company until and unless a certificate of registration is issued by the registrar of companies as per the provisions of the Companies Act, 2013 and the rules made there under. 4. Preparation of the Memorandum of Association (MOA) and Articles of Association (AOA) Note: These notes are only for the study purpose. Not for sale. 42 Drafting of the MOA and AOA is generally a step subsequent to the availability of name made by the Registrar. It should be noted that the main objects should match with the objects shown in e-Form INC.1. These two documents are basically the charter and internal rules and regulations of the company. Therefore, it must be drafted with utmost care and with the advice of the experts and the other object clause should be drafted in a very broader sense. As per section 4(6) the memorandum of a company shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be applicable to such company. As per section 5(6) the articles of a company shall be in respective forms specified in Tables F, G, H, I and Jin Schedule I as may be applicable to such company. 5. Application for incorporation of a private company As per Rule-12 of Companies (Incorporation) Rules, 2014, application for incorporation of a private and Public company, with the Registrar, within whose jurisdiction the registered office of the company is proposed to be situated, shall be filed in Form no. INC 7 [Rule 12 to 18] along with Form no. INC.22 for situation of registered office of the Company, (as the case selected in form no. INC 7) and DIR -12 with the following attachments: Form no. INC 7 Attachments: (Read with Section 7 of Companies Act, 2013) i. Memorandum of Association as per Table A of schedule I ii. Articles of association as per Table F of Schedule I iii. Declaration in Form No. INC-8 by Professionals. (As per Rule-14 of Companies (Incorporation) Rules, 2014, A declaration in the prescribed form by an advocate, a CA, CMA or CS in practice who is engaged in the formation of the company, and by a person Note: These notes are only for the study purpose. Not for sale. 43 named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules made there under in respect of registration and matters precedent or incidental thereto have been complied with;) iv. Affidavit from each of the subscriber to the Memorandum in Form No. INC-9 as per Rule-15 of Companies (Incorporation) Rules, 2014, (an affidavit from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief;) v. Proof of residential address (the address for correspondence till its registered office is established;) vi. For verification of signature of subscribers [Pursuant to rule 16 (1)(q) of companies (Incorporation) Rules, 2014 in form no. INC – 10 vii. NOC in case there is change in the promoters (first subscribers to Memorandum of Association) viii. Proof of Identity (the particulars of name, including surname or family name, residential address, nationality and such other particulars of every subscriber to the memorandum and the particulars of the persons mentioned in the articles as the first directors of the company along with proof of identity, as may be prescribed, and in the case of a subscriber being a body corporate, such particulars as may be prescribed;) ix. Entrenched Articles of Association, if any. Note: These notes are only for the study purpose. Not for sale. 44 Note: Where the articles contain the provisions for entrenchment, the company shall give notice to the Registrar of such provisions in Form No. INC.7, as the case may be, along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 at the time of incorporation of the company. x. PAN Card (in case of Indian national) xi. Copy of certificate of incorporation of the foreign body corporate and proof of registered office address xii. Certified true copy of board resolution/consent by all the partners authorizing to subscribe to MOA xiii. Optional attachment, if any xiv. Form no. DIR.12: As per Rule-17 of Companies (Incorporation) Rules, 2014, the particulars of each person mentioned in the articles as first director of the company and his interest in other firms or bodies corporate along with his consent to act as director of the company shall be filed in Form No.DIR-12 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014. Along with the above details in the Form no.INC.7, Form no.DIR 12 to be filed with the following attachments: Attachments: 1. Declaration by first director in Form INC-9 is mandatory to attach in case of a new company. 2. Declaration of the appointee Director, in Form DIR-2; Note: These notes are only for the study purpose. Not for sale. 45  3. Interest in other entities of director it is mandatory to attach in case number of entities entered is more than one. 4. Optional attachment(s), if any xv. Form no. INC 22: As per Rule 25 of Companies (Incorporation) Rules, 2014, verification of registered office shall be filed in Form No.INC.22 along with the fee. Section 12(2) of the Companies Act, 2013 states that the Company shall furnish to the Registrar verification of its registered office within a period of thirty days of its incorporation in such manner as may be prescribed. Section 12(4) of the Companies Act, 2013 states that Notice of every change of the situation of the registered office, verified in the manner prescribed, after the date of incorporation of the company, shall be given to the Registrar within fifteen days of the change, who shall record the same. Along with the above details in Form No. INC.7, Form no.DIR.22 to be filed with the following attachments: Attachments: 1. Proof of Registered Office address (Conveyance/Lease deed/Rent Agreement along with the rent receipts) etc.; or (the notarized copy of lease / rent agreement in the name of the company along with a copy of rent paid receipt not older than one month; or the authorization from the owner or authorized occupant of the premises along with proof of ownership or occupancy authorization, to use the premises by the company as its registered office); and Note: These notes are only for the study purpose. Not for sale. 46  1. Copies of the utility bills as mentioned above (not older than two months) (the proof of evidence of any utility service like telephone, gas, electricity, etc. depicting the address of the premises in the name of the owner or document, as the case may be, which is not older than two months) 2. List of all the companies (specifying their CIN) having the same registered office address, if any; 3. Optional attachment, if any PURPOSE OF THE E-FORM 7 From above we can easily understand that lots of Information is to be arranged for Incorporation of a Company under Companies Act, 2013. So it is also important to understand the purpose of E-Form INC-7. E-Form INC-7deals with incorporation of a new company (other than OPC). This E- Form is accompanied by supporting documents such as details of Directors/subscribers, the Memorandum of Association (MoA) and Articles of Association (AoA) and evidence of payment of stamp duty. Once the E-Form is processed and found complete, a company is registered and CIN is allocated. Please note the following: 1. User is required to file E-Form INC-7 for incorporation of Company other than OPC within sixty days from the date of application of reservation of name in E- Form INC-1. 2. It is suggested that E-Form DIR-12 and E-Form INC-22 should be filed together at the time of filing of E-Form INC-7 when address for correspondence is the address of registered office of the company. 3. In case the address for correspondence is not the address of the registered office of the Company, user is required to file INC-22 within 30 days of its incorporation. Note: These notes are only for the study purpose. Not for sale. 47  4. Stamp duty on E-Form INC-7, Memorandum of Association (MoA) and Articles of Association (AoA) can be paid electronically through the MCA portal and in such case submission of physical copies of the uploaded E-Form INC-7, MoA and AoA to the office of ROC is not required. 5. Payment of stamp duty electronically through MCA portal is mandatory in respect of the States which have authorized the Central Government to collect stamp duty on their behalf. 6. Now eStamp duty payment is to be done online through MCA portal for all the states. 7. User is required to scan the photograph of every subscriber with MOA and AOA. DUTY OF REGISTRAR TO SCRUTINISE THE DOCUMENTS: If after filling the Requisite forms for incorporation with the Registrar of Companies along with fees, ROC is satisfied with the contents of the documents filed, ROC will issue the Certificate of incorporation in Form no.INC 11 as directed by Rule-18 of Companies (Incorporation) Rules, 2014. Declaration at the time of commencement of business As per Rule-24 of Companies (Incorporation) Rules, 2014, the declaration filed by a director shall be in Form No. INC.21 along with the fee as and the contents of the form shall be verified by a Company Secretary in practice or a Chartered Accountant or a Cost Accountant in practice: Provided that in the case of a company requiring registration from sectoral regulators such as Reserve Bank of India, Securities and Exchange Board of India etc, the approval from such regulator shall be required. Note: These notes are only for the study purpose. Not for sale. 48 Pursuant to Section 11(1)(a) of the Companies Act, 2013 and Rule 24 of the Companies (Incorporation ) Rules, 2014, Declaration prior to the commencement of business or exercising borrowing powers in Form No. INC.21 along with the following attachments: a. Specimen signature in form INC.10. b. Certificate of Registration issued by the RBI (Only in case of Non-Banking Financial Companies)/ from other regulators c. (Optional attachment(s) (if any) Additional Information: As per Rule-16(1) of Companies (Incorporation) Rules, 2014, Particulars of every subscriber to be filed with the Registrar at the time of incorporation: a. Name (including surname or family name) and recent Photograph affixed and scan with MOA and AOA, b. Father’s/Mother’s/ name, c. Nationality, d. Date of Birth: e.cPlace of Birth (District and State): f. Educational qualification: g. Occupation: h. Income-tax permanent account number: Note: These notes are only for the study purpose. Not for sale. 49 i. Permanent residential address and also Present address (Time since residing at present address and address of previous residence address (es) if stay of present address is less 24 than one year) similarly the office/business addresses. j. E-mail id of Subscriber; k. Phone No. of Subscriber; l. Fax no. of Subscriber (optional) Explanation.- information related to (i) to (l)shall be of the individual subscriber and not of the professional engaged in the incorporation of the company; m. Proof of Identity: For Indian Nationals:  PAN Card (mandatory) and any one of the following  Voter’s identity card  Passport copy  Driving License copy  Unique Identification Number (UIN) For Foreign nationals and Non Resident Indians  Passport n. Residential proof such as Bank Statement, Electricity Bill, Telephone / Mobile Bill: Provided that Bank statement Electricity bill, Telephone or Mobile bill shall not be more than two months old. o. Proof of nationality in case the subscriber is a foreign national. Note: These notes are only for the study purpose. Not for sale. 50 p. If the subscriber is already a Director or Promoter of a Company(s), the particulars relating to: 1. Name of Company 2. Corporate Identity Number 3. Whether Interested as a Director or Promoter q. the specimen signature and latest photograph duly verified by the banker or notary shall be in the prescribed Form No. INC.10. Note: These notes are only for the study purpose. Not for sale. 51  UNIT II Company Promotion and Constitution Memorandum of Association: A Memorandum of Association (MoA) represents the charter of the company. It is a legal document prepared during the formation and registration process of a company to define its relationship with shareholders and it specifies the objectives for which the company has been formed. The company can undertake only those activities that are mentioned in the MoA. As such, the MoA lays down the boundary beyond which the actions of the company cannot go. MoA helps the shareholders, creditors and any other person dealing with the company to know the basic rights and powers of the company. Also, the contents of the MoA help the prospective shareholders in taking the right decision while thinking of investing in the company. MoA must be signed by at least 2 subscribers in case of a private limited company, and 7 members in case of a public limited company. Format of MoA The format of a MoA is specified in Table A to Table E depending upon the type of company. A company can adopt the table applicable to it; for instance, Table A is for a company limited by shares, and Table B is for a company limited by guarantee and having share capital etc. The prescribed forms are as follows: 1. Table B. Memorandum of Association of a company limited by shares. Note: These notes are only for the study purpose. Not for sale. 52 2. Table C. Memorandum of Association of a company limited by guarantee and not having a share capital. 3. Table D. Memorandum of Association of a company limited by guarantee and having a share capital. 4. Table E. Memorandum of Association of an unlimited company. MoA consists of the following clauses: 1. Name Clause: This clause specifies the name of the company. The name of the company should not be identical to any existing company. Also, if it is a private company, then it should have the word ‘Private Limited’ at the end. And in case of public company public company, then it should add the word “Limited” at the end of its name. For example, ABC Private Limited in case of the private, and ABC Ltd for a public company. 2. Registered Office Clause: This clause specifies the name of the State in which the registered office of the company is situated. This helps to determine the jurisdiction of the Registrar of Companies. The company is required to inform the location of the registered office to the Registrar of Companies within 30 days from the date of incorporation or commencement of the company. 3. Object Clause: This clause states the objective with which the company is formed. The objectives can be further divided into following 3 subcategories:  Main Objective: It states the main business of the company  Incidental Objective: These are the objects ancillary to the attainment of main objects of the company Note: These notes are only for the study purpose. Not for sale. 53  Other objectives: Any other objects which the company may pursue and are not covered in above (a) and (b) 4. Liability Clause: It states the liability of the members of the company. In case of an unlimited company, the liability of the members is unlimited whereas in case of a company limited by shares, the liability of the members is restricted by the amount unpaid on their share. For a company limited by guarantee, the liability of the members is restricted by the amount each member has agreed to contribute. 5. Capital Clause: This clause details the maximum capital that a company can raise which is also called the authorized/nominal capital of the company. This also explains the division of such capital amount into the number of shares of a fixed amount each. 6. Subscription Clause: Under this clause, the subscribers of the Memorandum will have to make a declaration. After the declaration, the names, addresses and descriptions of the subscribers signatures is sufficient. But it is to be noted that one subscriber cannot attest the signature of another subscriber. Each subscriber has to pay for the shares for which he has subscribed. After registration of the company, he cannot repudiate his liability to subscribe, even on the ground that his signature was taken by misrepresentation. The memorandum must be signed by at least 7 subscribers in case of a public company and at least by 2 subscribers in case of a private company, and one subscriber in case of One Person Company. 7. Nomination Clause: This is an additional clause which has been introduced in the case of One Person Company. Memorandum of such OPC must contain the name of the person who, in the event of death of the subscriber, shall become the member of the company. Note: These notes are only for the study purpose. Not for sale. 54 Contents of MoA: Name Clause Registered Nomination Office Clause Clause Contents of MoA Subscription Object Clause Clause Capital Liability Clause Clause ALTERATION OF MEMORANDUM (SECTION 13): A Company can alter its memorandum by a special resolution, and after complying requirement of Section 13. Change in Name: Any Change in name of the company shall be subject to sub – section (2) and (3) of Section 4, which we have discussed in an earlier post here under heading Name of Company. Any such change of name shall have effect only after approval of Central government in writing. This approval is not required in case of conversion of company from one class to another, like Public Company converting into One Person Company. In case of change in name, the registrar shall enter replace new name for old name in its register and shall issue a fresh Certificate of Incorporation. The change in name shall be effective only on issue of this fresh certificate of incorporation. Note: These notes are only for the study purpose. Not for sale. 55 Shifting of Registered Office from one State to Another: Any alteration relating to place i.e. state of registered office shall take effect only after approval by the Central Government. The Central Government shall dispose of the application for approval of shifting of registered office from one state to another within sixty days. This alteration should have consent of the creditors, debentures – holders, and other persons concerned with the company. The company should have made sufficient provision for the discharge of all its debts and obligations or adequate security should have been provided for such discharge. This is duty of Central Government, before giving approval of the application to satisfied itself about such consent and such sufficient provision to discharge debts and obligations. It is not clear, what will happen in case of pendency of such application beyond this statutory period of sixty days. A certified copy of such order by Central Government approving the alteration shall be filed by the company with the Registrar of each States. The Registrar of the State, where registered office is being shifted shall issue a fresh certificate of Incorporation. Alteration of Objects: A Company, which has raised money from public and has a unutilized amount out of money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company. The prescribed details in respect of this special resolution shall be published in newspapers (one in English and another in local language) which are in circulation at place where registered office of the company is situated. These details shall also be placed on the Website of the company, if any. These details shall indicate the justification for such change in objects of the company. Note: These notes are only for the study purpose. Not for sale. 56 All dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having cont