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Legal Aspects of Business –Company Law

COMPANY LAW

Unit - II
Definition, Nature and Kinds of a Company

Definition: A company is an Association (Voluntary) of many persons who contribute

money or money‟s worth to a common stock & employs it in some common trade/ business
and share the profit or loss arising them.

Nature/ Characteristics of a Company

1. An artificial person created by law
It is an artificial person, because it does not take birth but created by law.
2. Separate legal entity:
- An entity separate from its members
- It has an independent corporate existence
- The Company‟s money & property belong to them not to the shareholders
Eg. Salomon Vs. Salomon & Co. case

3. Limited liability: If the company limited by shares, the liability of the members is
limited to the unpaid value of the share. (Eg. Face value: Rs.10, he paid Rs.7, yet to pay
only Rs.3).
4. Perpetual succession
- The company never dies, nor does it‟s life depends on the life of its members.
- The members may come and go but the company can go on forever (until dissolved),
it continues to exist even if all its human members are dead.
- A company,s exist persist irrespective of the change in the composition of its
membership.
5. Common seal: The company seal acts as the official signature of the company
6. Transferability of shares: Company shares are subject to certain conditions, freely
transferable.
7. Separate property: Being a separate person, company is able of owning, enjoying &
disposing of property in its own name.
8. Capacity of sue: A company can sue and be sued in its own corporate name.

Kinds of Companies
I. Classification on the basis of incorporation
1. Statutory companies
2. Registered companies
II. Classification on the basis of liability
1. Companies with limited liability
a. Companies limited by shares
b. Companies limited by guarantee
2. Companies with unlimited liability
III. Classification on the basis of Number of members
1. A private companies 2. A public companies
IV. Classification on the basis of control
1. Holding companies
2. Subsidiary companies
V. Classification on the basis of ownership
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1. Govt. companies
2. Non- Govt. companies
VI. Association not for profit
VII. One man company

I. Classification on the basis of incorporation

1. Statutory companies: - Created by a special act of the legislature, Eg.RBI, SBI, etc.
– These are mostly concerned with public utilities Eg. Railways.
2. Registered companies: -formed and registered under the companies‟ act 1956/2013.

II. Classification on the basis of liability

1. Companies with limited liability
a. Companies limited by shares
- Where the liability of the members of a company is limited to the amount of
unpaid/paid on the shares.
- The liability can be enforced during the existence of the company as also during the
winding up.
b. Company limited by guarantee
- The member‟s liability is limited to a fixed amount, which the members undertake to
contribute to the assets of the company.

2. Unlimited company
- Every member is liable for the debts of the company
- Their liability is unlimited
- These may/may not have share capital

III. Classification on the basis of Number of members

1. Private company (close corporation): Sec.3 (1)(iii), defined, a private company
has a minimum paid up capital of Rs.1,00,000 or more as prescribed and also.
a. Restricts the right to transfer its shares
b. Limited members (Max.200)
c. Prohibits any invitation to the public to subscribe for any shares/ debentures
d. Prohibits any acceptance of deposits from persons other than its members
e. Number of debenture holders in a private company may exceed 50
f. Joint holders of shares are treated as a single member

2. Public company
- Minimum paid up Rs.5 lakhs and maximum as prescribed
- Shares freely transferable
- It can invite the public to subscribe for shares

Distinction between a Public company and a Private company

S.N. Particulars Public Private
1 Minimum capital Rs.5,00,000 Rs.1,00,000
2 Minimum members 07 02 (1 person company)
3 Max. members Unlimited 200
4 No. of Directors Atleast 03 Atleast 02
5 Restriction on appointment Qualification approval It is not necessary
of directors from Registrar is must
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6 Restriction on invitation to Can invite the public Prohibited to invite

subscribe for shares public
7 Transferability of shares & Freely transferable Restricted
Debentures
8 Quorum 5 members must be 2 members must be
present present
9 Managerial remuneration Total remuneration No restriction (If it is not
should not exceed 11% a subsidiary of a public
on Net profit co.)
10 “Limited” title The word of “Limited” The word of “Private
should be added Limited” should be added
followed by company followed by company
name name
11 Special privileges No such privileges to It enjoy the following
Public limited privileges:
companies a. Need not issue
prospectus
b. Mini. 2 members
enough
c. May issue any kind of
shares
d. 2 directors enough
e. Statutory meeting and
reporting is not necessary
f. No restriction on
managerial remuneration
(If it is a subsidiary of
Public co. limited to 11%
on NP)
g. Can commence
business immediately on
incorporation

IV. Classification on the basis of Number of control

1. Holding company: If a company has control over the other company
2. Subsidiary company: If a company coming under the control of another
company (Holding company) called subsidiary company.
Other conditions:
a. Holding company must control the appointment and removal of the directors
of the subsidiary companies
b. Holding company must have the majority shares of the subsidiary company
c. Subsidiary company of another subsidiary co. – must come under the Holding
company.
Eg. H S S1 S2, Here S1 and S2 are the subsidiaries of H.

V. Classification on the basis of Ownership

1. Govt. Company: A company in which not less than 51% of the paid up share
capital held by (a) The Central Govt. or (b) State Govt. or (c) Partly Central and
partly by State.
Rules: - Appointment of auditors – Auditors should be appointed by Central
Govt. on the advice of Auditor General of India.
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Legal Aspects of Business –Company Law

- Audit report to be submitted to Auditor General of India

- Annual report to be placed before parliament
- 51% of paid up share should be held by the Govt.

2. Foreign company: Any company incorporated outside India, which has an

established place of Business in India.
Rules:
a. Documents: Every foreign company, within 30 days of its establishment in
India, shall file with the Registrar the following documents.
i. Certificate copy of the Charter, AoA, MoA, etc.,
ii. Full address & Principal office
iii. A list of directors and Secretaries
iv. The name & address of any person reside in India
b. Books of Accounts – as Indian company
c. Obligation to furnish the country of incorporation
d. Documents to be delivered to registrar

VI. Association not for Profit: The Central Govt. may grant a license to an association
for
a. Promoting commerce, science, religion, charity or any other useful object
b. Using its profit for its objective and not for payment of dividend

VII. One Man Company (OPC –One Person Co.): This is a company in which, one man
holds the whole of the share capital of the company. Some dummy members may be
appointed to satisfy the statutory requirements.

VIII. Illegal association: If the number of members in an association/ orgn. exceeds the
limit and it is not registered under the companies act 1956 is called an illegal
company or association.
FORMATION OF A COMPANY

Formation of the company means incorporating or creating the company.

Project ‘MCA-21’ - Ministry of Corporate Affairs has launched a programme for managing
the work relating to filing of documents, etc. with ROCs etc. and getting approvals from
Ministry of Corporate Affairs. The physical filing of all forms has been discontinued and
converted into electronic filing. This project is termed as Project „MCA-21‟.

Incorporation of Company
1. Provisions relating to filing of applications, documents, inspection, etc., through
electronic form
- Applications and required documents shall be filed through the electronic form and
authenticated in such manner as may be specified in the rules.
- „Certificate Filing Centers‟ (to be operated by professionally qualified
persons/CA/ICWA/CS) will facilitate e-filing of documents.
- Every director will have to obtain DIN (Director’s Identification Number.
- Filing of forms and application will be through internet
- Payment of fees can be through internet through credit card/ net banking
- Office of ROC, Regional Director and Delhi HQ will process the documents and
applications submitted electronically by companies.
- Issuance of certificated and approvals will continue to remain on paper. This will be
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dispatched by post or courier to applicant.

2. Documents to be filed with the Registrar: The following documents duly stamped
together with the necessary fees are to be filed with the Registrar of Companies.
a. The Memorandum of Association
b. The Articles of Association
c. Agreements & appointment of Managerial persons
d. A list of directors
e. A declaration about the formalities and should be signed by the following
persons
i. An advocate of Supreme court/ High court
ii. An attorney
iii. Secretary or Chartered accountant
iv. A person named in articles as director
f. Notice about the situation of the Registered office

3. Certificate of Incorporation
If the Registrar satisfied with the documents, which are submitted, he retains them
and issues a “Certificate of Incorporation” (of the formation of the company), the
Registrar is not required to carry out any investigation about the truthfulness of the
given documents.
4. Conclusiveness of Certificate of Incorporation
A certificate of incorporation given by the Registrar is the conclusive evidence that
means the company has fulfilled all the requirements - this is known as Rule in
Peel’s case.

Ref. case:
- The date mentioned in the certificate of Incorporation (CoI) is the date of the Birth of
the company
- Even though the company got CoI, its illegal activities cannot be legalized

5. Effect of Registration
- The company becomes a distinct legal entity
- It acquires a perpetual succession
- It‟s property is not the property of its shareholders

6. Business commencement certificate

Private limited company can commence business immediately after its incorporation;
but Public limited company can commence business after getting Business
commencement certificate.

# Promoter: He is a person do all the necessary preliminary work and takes preliminary
essential decisions (such as whether it should be a private/ public co., capital, etc.).

# Pre- incorporation/ Preliminary contracts

If any contracts agreed before incorporation (Before getting CoI) by the promoter is
called Pre-incorporation or Preliminary contracts.
- The company is not liable for the acts of the promoters done before its incorporation
Conditions:
- Company not bound by pre-incorporation contracts
- Company cannot enforce pre-incorporation contract
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- Promoters are personally liable.

# Provisional contracts
It refers to contracts entered into by a public company after its incorporation but
before it is to be issued the certificate of commencement of business.
MEMORANDUM OF ASSOCIATION

It is a fundamental document defines its raison d’etre (i.e. reason for existence)
Features:
a. It contains fundamental conditions
b. Regulates the external affairs of the company
c. Lays down the area of operation
d. Reason for existence
e. Possible scope of the company

Content of Memorandum of Association

1. Name clause: The name of a company followed by limitation/ private limited and its
identity and symbol of its existence is given in the Memorandum of Association (MoA).
Rules/ Conditions:
a. Undesirable name to be avoided
- As per the opinion of the Central Govt. the company must avoid
i. Too similar to the name of another company
ii. Misleading
b. Injunction if identical name adopted
c. „Limited‟ or „Private Limited‟ as the last word of words of the name
d. Prohibition of use of certain names – such as
i. Emblem and Name of United Nations Organisation, WTO, etc.,
ii. Indian National flag, the name, emblem, official seal etc.,
iii. Emblem and seal of Central & State Govt. and President of India
e. Use of some key words according to authorized capital
S.N Key word Authorized Capital
1 Corporation 5 Crores
2 International, Global, Universal, Asia, Continental – 1 Crore
being first word
3 Hindustan, India, Bharat – Being first word 50 Lakhs
4 Industries/ Udyog 1 Crore
5 Enterprise, Products, Business, Manufacturing 10 Lakhs

Publication of Name:
- Paint its name with address, it should be placed on the outside of the registered office
- It should be in legible character
- It should be used in all business letters, bill heads, invoices, receipts, etc.

2. The Registered office clause

Every company should have the registered office at the time of registration. All
communications and notices are to be send to that address.
Notice of situation of the registered office and every change shall be given to
Registrar within 30 days after the date of incorporation
Incase of default, the director will be punished with fine of Rs.500 for every day
during which the default continues.
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3. The objects clause:

The objects clause of a company shall be clearly stated in Memorandum, it defines
the scope of the company and any alteration could be made only as per the law.
It enables the subscriber to know the purpose of their investment and enables the
creditors to know the persons involved in company activities.
The object clause in Memorandum of every company has to state (i) Main object and
(ii) Other object.

4. The Capital clause

- The Registered/ authorized/ Nominal capital should be stated
- It also be stated the amount of shares, its type etc.

5. The Liability clause

The liability of its members is stated in this clause, whether they are limited by share
or limited by guarantee.

6. The Association clause

- Declaration of all the directors & members/ subscribers is stated
- The names, addresses & description of the subscribers and number of shares taken by
each one of them is mentioned

The MoA shall be signed by at least 7 subscribers in case of public company (2 in case
of private company). Their signature shall be attested by at least 1 witness (the witness
should not be the relative/ another subscriber).

Alteration of Memorandum – Alteration of Conditions:

1. Change of name
- The company may change its name with the approval of the Central Govt.
- Mere changing the word „Private‟ to „Public‟ or vice versa, need not get the approval
- The company may change its name be ordinary resolution and shall change its name
with 12 months of its registration as per the direction of the Central Govt.
- If the company does not follow the direction given by the Govt., shall be punishable
with fine of Rs.100 for every day during which the default continues.
- Where the company changes its name, the Registrar shall enter the new name & issue
a fresh certificate of incorporation in new name.

2. Change of registered office

a. Change of Registered office from one place to another within a state:
- The company has to give an application to the Regional Director for getting
confirmation order

- The Regional Director issues the order and it should be send to the Registrar within 2
months for getting approval.
b. Change of Registered office from one state to another
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-It is possible by passing a special resolution
3. Alteration of Objects
The objects of a company may be altered by special resolution, so as to enable the
company:
a. To carry on its business more economically or more efficiently
b. To attain its main purpose by new/ improved means
c. To enlarge its operation
d. To amalgamate with any other company

4. Change in liability clause

- A company limited by shares/ guarantee cannot change its liability clause in the
memorandum
- It is possible to give additional liability to its members

5. Change in capital clause: The Company may change in the capital clause about
increase, reduction or re-organisation.

Doctrine of Ultra Vires (Ultra- Beyond; Vires- Power): It means that the company doing
of the act is beyond the legal power and authority of the company. Ultra Vires act is void.

Ultra vires the directors: They do beyond their powers, but within the powers of the
company
Ultra vires the articles: If an act or transaction is done beyond the articles.

EXCEPTIONS:
 An act, which is intra vires to the company but outside the authority of the directors may be
ratified by the shareholders in proper form.
 An act which is intra vires to the company but done in an irregular manner, may be validated by
the consent of the shareholders.
 If an act ultra vires to the articles of association, the Articles may be altered to make it intra
vires. Any act which is consequential to the object clause but not mentioned in the MOA, unless
prohibited by the Companies Act.
 Some activities not specifically mentioned in the MOA, but deemed impliedly as within
authority of the company. Eg: Raising Capital by borrowing.

Doctrine of constructive notice (OR) constructive Notice of Memorandum and Articles

• These documents, on registration with the Registrar, assume the character of public documents.
• The Memorandum and the Articles are open and accessible to all.
• It is the duty of every person dealing with a company to inspect these documents and see that it
is within the powers of the company to enter into the proposed contract.

Articles of Association
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Legal Aspects of Business –Company Law
The Articles of association or Articles are the rules, regulations and bye-laws for the
internal management of the affairs of a company.

Forms and Signature of Articles (Sec.30)

1.Printed 2. Divided into paragraphs 3. Signed by each members with one witness
4. Printed on computer laser printer and it should be accepted by the Registrar.

Contents of Articles

Contents of Articles
1.Share capital, rights of shareholders, 10. General meetings and proceedings
payment of commissions etc.
2. Lien on shares (lien on a share means 11. Voting rights of members, proxies
that the member would not be permitted to
transfer his shares unless he pays his debt
to the company.)
3. Calls on shares (demand made by the 12. Directors appointment, remuneration,
company on its share holders to pay whole qualification, powers, etc.
or part of the balance remaining unpaid on
each share at any time during the life time
of a company")
4. Transfer of shares (an existing 13. Managers
shareholder transfers issued shares to
another person)
5. Transmission of shares (passing of 14. Secretary
property in shares to the legal heirs. In the
event of death of the shareholder)
6. Forfeiture of shares (Shares may be 15. Dividend and reserves
forfeited if call is not paid
within the stipulated time)
7. Conversion of shares in to stocks 16. Accounts, audit and borrowing powers
8. Share warrants 17. Capitalisation of profits
9. Alteration of capital 18. Winding up
# A public company may have its own Articles of association. If it does not have its own
Articles, it may adopt Table A given in Schedule I to the Act.

Alteration of Articles: Companies have been given full power to alter their articles, unless
otherwise it is restricted by any provision.
Procedure of alteration: - By passing special resolution
- Alterations should be informed to the Registrar within 30 days of its passing

Limitations to Alteration
1. Must not be inconsistent or go beyond with the companies act
2. Must not conflict with the Memorandum
3. Must not sanction any illegal
4. Must be for the benefit of the company
5. Must not increase the liability of members
6. Alteration by special resolution only
7. Approved of Central Govt. is must – when Public co. is converted to Private co.
8. Alteration leads to breach of contract is valid
9. Must not result in expulsion (removal) of a member
10. No power of the Tribunal to amend articles
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11. Alteration may be with retrospective (show) effect

Doctrine of Indoor Management

The outsiders of company presume that all the activities of the company is being done
regularly and within the scope of the MoA and AoA. This is known as “Doctrine of Indoor
management” or “The rule in Royal British bank Vs. Turquand” or “Turquand rule”.
Exception:
 Knowledge of Irregularity
Where a person dealing with a company has actual or constructive (useful or beneficial) notice of the
irregularity as regards internal management, he cannot claim the benefit under the rule of indoor
management
 Negligence
Where a person dealing with a company could discover the irregularity if he had made proper inquiries,
he cannot claim benefit under the rule of indoor management
 Forgery
A company can never be held bound for forgeries committed by its officers.
 Acts outside the Scope of apparent authority
If an officer of a company enters into a contract with a third party and if the act of the officer is beyond
the scope of his authority, the company is not bound.

Memorandum of Association and Articles of Association – Distinction

PROSPECTUS
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Any document inviting deposits from the public or inviting offers from the public for the
subscription of shares or debentures of a company is a prospectus.

# Private Company need not issue a Prospectus, because it is prohibited from making any
invitation to the public to subscribe for any shares or debentures of the company.

Features
1. It is an Invitation/ Ad./ Circular to the public to subscribe for any shares or debentures
of the company
2. It should be in writing (Ads. In TV/ Films is not a prospectus)
3. Invitation to the public – any invitation made to its friends or relatives to subscribe
shares is not a prospectus
4. Offer to the public
5. Must be dated
6. Must be signed by the Directors and Registered to the Registrar.

Red- herring Prospectus or Information memorandum

It is a circular issued to the public prior to filling or issuing prospectus. Generally,
it does not have complete particulars about price and number of shares to be issued.

Content of the Prospectus

The important content of Prospectus is as follows

A. Part I of Schedule II
1. General information
1.Name & Address of Reg. office 7.Date of Opening & Closing of issue
2.Consent of the Central Govt. about 8.Name & address of Auditors and lead
present issue and about its financial managers
soundness
3.Name of its Regional stock exchange 9.Name & Address of Trustee
4.Provision relating to punishment for 10.Rating from CRISIL or any other
fictitious application agency
5.Declaration about refund of the issue, 11. Underwriting of the issue
if Minimum subscription is not attained
6.Declaration about allotment of shares

2. Capital structure of the company

a. Authorised, Issued, subscribed and paid-up capital
b. Size of present issue – its reservation (Preferential allotment)
c. Paid up capital – after the present issue or after the conversion of debenture
3. Terms of the Present issue
a. Terms of payment b. Rights of the instrument holder
c. How to apply – availability of forms, etc. d. Any special tax benefits, if any.
4. Particulars of the Issue
a. Object b. Project cost c. Sources of finance

5. Company management and project

1.History, objects and present business 7.Collaboration agreement, if any
of the company
2.Promoters & their Background 8.Infrastructure facility for Raw
material, power, water etc.
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3.Subsidiary of the company 9.Schedule of implementation of project
4.Name & address of Directors 10.Nature of product & marketing etc.
5.Location of Project 11.Future prospectus and development
6.Plant, Machinery & Technology used

6. Particulars about the company and its subsidiaries (Sister concerns)

7. Outstanding litigation relating to – (a) Operation and finance of the company

(b) Particulars of default, etc.

8. Management perception of risk factors – Reg. availability of raw materials,

fluctuations in foreign exchange rate, marketing, etc.

B. Part II of Schedule II
1. General information
a. Consent of Directors, Auditors, Advocates, Managers, Bankers & Registrar
b. Expert‟s opinion
c. Change of any directors of auditors, if any, in the last 3 years and its reasons
d. Authority for the issue
e. Procedure and time schedule for allotment and issue of certificates
f. Name & address of Company secretary, Legal adviser, etc.

2. Financial information
a. Report by the auditors – About profit and loss, Assets & liabilities and Rate of
dividend paid by the company during the preceding 5 financial years.
b. Reports by the Accountants – on the profits or losses of the business for the
preceding 5 financial years and about the assets and liabilities of the business
(Not more than 120 days before the date of issue of prospectus).

3. Statutory and other information

a. Minimum subscription
b. Expenses of the issue, fees structure etc.,
c. Commission and brokerage
d. Previous issue for cash

e. Previous public issue- Date of allotment, closing date, date of refund etc.,
f. Issue of shares otherwise than for cash
g. Debentures and redeemable preference shares and other instruments issued by
the company outstanding as on date of prospectus
h. Options to subscribe
i. Details of purchase of property
j. Rights of members regarding Voting, dividend etc.,
k. Restrictions, if any, on transfer of shares/ debentures
l. Material contracts and inspections.

Misstatement in prospectus & their consequences

If there is any misstatement of a material fact in a prospectus, there may arise

Liability for misstatements in Prospectus

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I. Civil liability II. Criminal liability (Sec.63 & 68)

Against the company Against the directors

Promoters and experts

Recession of Claim for Damages Compensation Damages for

Contract damages sec.62 & 56 Non-compliance

For fraudulent For innocent

Misrepresentation misrepresentation

I. Civil liability
A person who has been induced to subscribe for shares on the faith of a
misleading prospectus has remedies against the company, promoters and experts.

1. Remedies against the company

If there is a misstatement or withholding of material information in a
prospectus and if it induced, the share-holder can
a. Rescind/ recession of the contract
b. Claim damages from the company, if the statement is fraudulent/ innocent
a. Recession of the contract (Rescind the contract)
A person can apply to the court for the recession of the contract, if such
statements in the prospectus are false, fraudulent, or withholding of material
information but he will have to surrender all the shares to the company. The contract
can be rescinded in the following conditions are satisfied:
i. The statement must be a material misrepresentation of fact
ii. The statement must have induced the shareholder to buy them
iii. The statement must be untrue
iv. If the shares should not be purchased in open market (If so, recession
is not possible)
v. The omission of material fact must be misleading.
b. Damages for deceit (dishonesty)
- The affected person entitled to sue the company for damages
- He must prove the same matter
- He cannot both retain the shares and get damages against the company

2. Remedies against the Directors, promoters and experts – Their liabilities

a. Liability for damages for misstatement in prospectus – should pay the
compensation.
Defenses of Directors:
i. Withdrawal of consent
ii. Absence of consent
iii. Ignorance of untrue statement
iv. Reasonable ground for belief
v. Statement of experts
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b. Liability for damages for omission
c. Liability under general law: If the mistake is done in the following nature
- Knowingly
- Without belief in its truth
- Recklessly, not caring whether it was true or false

II. Criminal Liability

Where a prospectus contains any untrue statement, every authorised person is
punishable with imprisonment upto 2 years of fine upto Rs.50,000 or both.
Criminal activities:
a. Issue and allotment of shares in fictitious names
b. Fraudulently inducing persons to invest money
c. Issuing application for shares without memorandum

DIRECTORS
Directors: A person having control over the direction, contact, management of the affairs of
the company. Only an individual can be a director.
Appointment of directors

Appointment of
First Appointment of Directors by the
Directors Directors by Central
Third Parties Government

Appointment of
directors by the Appointment of
company Directors by
Directors

1.First directors:
• If the first directors are not named in the Articles, the number of directors and the
names of the directors shall be determined in writing by the subscribers of the
Memorandum or a majority of them.
• If the first directors are not appointed in the above manner, the subscribers of the
Memorandum who are individuals become directors of the company.
2. Appointed of directors by the company:
Directors must be appointed by shareholders in general meeting.
- Director ID number by CG
- Hold the office as a director and filed with the registrar within 30 days of his appointment
- At least one dir. Stayed in India for 182 days
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- 1/3 should be the Board strength as independent person.
- Rotation director
3. Appointed of directors by directors:
(a) As additional directors:
Any additional directors appointed by the directors shall hold office only up to the date of the
next annual general meeting of the company.
(b) In a casual vacancy:
Reason of death, resignation, disqualification, or failure of an elected director to accept the
office for any reason other than retirement by rotation.
(c) As alternate director :
a resolution passed by the company in the general meeting.

4. Appointed of directors by third parties:

• Give power to the debenture-holders or other creditors, e.g., a banking company or
financial corporation, who have advanced loans to the company to appoint their
nominees to the Board.
• The number of directors so appointed shall not exceed 1/3rd of the total number of
directors, and they are not liable to retire by rotation.
5. Appointed by proportional representation:
Appointment of not less than 2/3rd of the total number of directors of a public company or of a
private company which is a subsidiary of a public company according to the principle of
proportional representation.
6. Appointed of directors by the Central Government:
The appointment will be for a period not exceeding 3 years on any one occasion.
Central Government to appoint such number of directors on the Board of a company as the
Tribunal may, by order in writing, specify as necessary to effectively safeguard the interests
of the company or its shareholders or the public interest.

Powers of Directors
A. General powers of the board (Sec.291)
- Board of Directors is empowered to do all acts and things as the company is
authorities to exercise and do.
- The Board shall not do any acts, which are to be done in company general meeting
- The Board shall exercise its power subject to the provision given in the
companies act, MoA and AoA.
B. Powers to be exercised at Board meetings (Sec.292)
The directors are empowered to do the following as the resolution passed in the
meeting.
a. Make call on shareholders for unpaid shares
b. Issue debentures
c. Borrow money through public deposits (Except debentures)
d. Invest the funds of the company and
e. Make loans
f. Can delegate the last three (c, d, & e) powers to a committee/ managers
C. Power to be exercised with the approval of company in general meeting
(Sec.293)
a. To sell, lease or dispose of the whole of the undertaking of the company
 16
Legal Aspects of Business –Company Law
b. To remit or give time for payment of any debt due
c. To invest the compensation received by the co. for compulsory acquisition
d. To borrow money
e. To contribute to charitable and other funds, which are not directly relating to the
business of the company

Duties of Directors
1. Fiduciary duties – as fiduciaries, the directors must
a. Exercise their powers honestly and bonafide for the benefit of the company
b. They should not make any secret profit
c. Should not involve any matters, which are against to the development of the
company
d. Should not involve any matters of his personal interest

2. Duties of care, skill and diligence (Case: City equitable fire insurance Co. ltd.)
- Directors should carry out their duties with reasonable care, skill and diligence
- The std. of care, skill and diligence is depends upon the nature of the company any
circumstances, such standards of care depending upon the following:
* The type and nature of work *Division of powers
* General usage and customs *Directors work gratuitously or
remuneratively
3. Other duties of directors:
a. To attend board meetings
b. Not to delegate his functions except to the extend
c. To disclose his interest regarding any contract

Liabilities of Directors
1. Liability to third parties
a. Under the act – Directors are personally liable for the following activities as
per the act
 Failure to repay the application money (If minimum subscription is not
attained)
 Loss or damage is incurred due to irregular allotment of shares
 Failure to repay the application money for which the stock exchange is not
recognized
 On failure by the company on pay a bill of exchange, pro-note, cheque etc.,
where the company is not mentioned in liable clause
b. Independently of the act
 Signing a negotiable instrument without mentioning the company‟s name
 Any activity done in the name of the company
2. Liability to the company
a. Ultra vires acts – The Directors is personally liable to the company for the any
ultra vires act relating to payment of dividend, etc.
b. Negligence – Personally liable for any loss/ damage arises due to negligence
c. Breach of trust – liable to the company for any loss from breach of trust
d. Misfeasance – (Willful misconduct) – Liable for willful misconduct
3. Liability for breach of statutory duties
Liable for the breach of statutory duties, ie., maintenance of proper accounts, filing of
returns, observation of some statutory formalities, etc.
4. Liability for acts of his co-directors: A Director are not liable for the act of his co-
directors provided he has no knowledge of that matter.
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Legal Aspects of Business –Company Law
WINDING UP

According to Prof. Gower, winding up of a company is process whereby its life is

ended and its property administered for the benefit of its creditors and members. Otherwise
called Liquidation of a company or dissolving the company.

Modes of Winding up
There are Three modes of winding-up
1. Winding-up by the court i.e., Compulsory winding-up (Sec.433 to 483)
2. Voluntary winding-up (Sec.484 to 521)
a. Members‟ voluntary winding-up
b. Creditors‟ voluntary winding-up
3. Winding-up subject to supervision of court

1. Compulsory winding-up or winding-up by the Tribunal (Sec.433 to 483)

Winding-up of a company under the order of a Tribunal, such as
a. Special resolution of the company
b. Default in delivering the statutory report to the Registrar or in holding statutory
meeting
c. Failure to commence or suspension of business without proper reason
d. Reduction in membership – Reducing the minimum members‟ strength (2 or 7)
e. Inability to pay its debts
f. Just and equitable – It means that the Tribunal has the power to winding-up of a
company under judicial discretion depending upon the facts and circumstances, such
as circumstances are as follows:
1. When the substratum (Object or foundation) of a company is
gone That is the company failed to fulfill its objectives etc.,
a. Basis for the survival of the company is gone
b. Main objectives of the company has failed or impracticable
c. Carrying on its business at a loss and no hope for profit
d. Available assets are insufficient to meet the company debts
2. Oppression (Domination) of minority shareholders
3. There is deadlock in the management of the company
4. Where public interest is likely to be prejudiced
5. When the company carry out fraudulent or illegal business
6. Where the company does not carry on any business or does not have any property
7. Acting against the interest of the state (Govt.)
8. Winding-up of a sick company

2. Voluntary winding-up (Sec. 484 to 520)

Winding-up by the member creditors of a company, without interference by the Tribunal.
The members of creditors of a company settle their affairs without going to the Tribunal.
a. Members’ voluntary winding-up
A declaration of solvency (Sec.488) is made by its members about winding-up in the Board
meeting. The majority of the Directors at a Board meeting shall make the declaration about
the winding-up, at the time the company should not have any debt or able to clear all debts
within 3 years from the commencement of winding-up.

b. Creditors’ voluntary winding-up: The Company can be wound up by the resolution passed
by the creditors at the general meeting.

Members’ and Creditors’ voluntary winding-up – a comparison

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Legal Aspects of Business –Company Law
Particulars Members’ Creditors’
1.Declaration of solvency Issued by members There is no such declaration
2.Control of winding-up Members‟ control Creditors‟ control
3.Meetings No meeting with creditors Meeting with creditors
4.Appointment of liquidator Appointment by the Appointed by the Creditors
company & remuneration & Remuneration fixed by the
fixed by company committee
5.Committee of inspection There is no committee of There is committee for
inspection inspection
6.Powers of the Liquidator Power is limited with the Power is limited with the
resolution passed in the resolution passed in the
company committee or Tribunal.

Extra Question:
When does a private company become a public company?
1. Conversion by default
When a default is made by a private company in complying with the essential
requirements of a private company.
i.e., - Restriction on transfer of shares
- Limitation of the number of members to 50 etc.
2. Conversion by choice/ volition (freedom to decide)
A private company can become a public company by altering its articles. It
should be informed/ filed to the registrar within 30 days, through prospectus.
And also:
- File a copy of the resolution altering the articles, with in 30 days to registrar
- Take steps to raise its membership to at least 07 and increase the number of
directors
- Altering the regulations to essential for a public company

When does a Public company become a private company

- A special resolution should be passed in the board meeting and alteration
should be made in the articles. Such alteration should be approved by
central government.
- A print copy of such alteration shall be filed to registrar within one month of
the date of receipt of approval.
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Legal Aspects of Business –Company Law
Corporate Governance
It refers to “The process, mechanism, principles and structure by which the business and
affairs of the company are directed and managed and governed effectively. Its goal is to
enhance long term shareholder value through improving corporate performance and
accountability while taking into account the interest of other shareholders”.

Corporate Governance is the system by which business corporations are directed and
controlled. The Corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as the board, managers,
shareholders and other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs

The Corporate governance structure specifies the relations and the distribution of rights and
responsibilities, among primarily three groups of participants, viz. the Board of directors,
managers and shareholders.

Principal actors in corporate governance

Principal actors involved in corporate governance include the governing or regulatory body.
This consist of:
Internal key actors – Chief Executive Officer, the Board of Directors,
Management & Shareholders and Employees.
External key actors – Suppliers, Creditors, Investors, Lenders, Customers, Society and
Government.
Stakeholders
The stake holders are the principal players in inception, sustainability, development and growth
of any organisation. They are the Shareholders, Employees, Suppliers, Customers, Lenders,
Investors, Banks, Government and Community at large.

4 P’s of Corporate governance

People – Purpose – Process - Performance
Corporate governance has the integrated frame work, where the people are formally either
trained or helped to develop to work for a definite and defined purpose in applying the
systematic processes consistently to give the constant growth by better performance.
 People – Shareholders, Employees, Suppliers, Customers, Lenders, Investors, Society
and Government
 Purpose – Established, Measurable, Actionable and Communicated
 Process – Established, Integrated, Documented, Automated, Implemented and
Maintained
 Performance – Measured, Analyzed and Communicated
Principles / Elements of Corporate Governance

1. Rights and equitable treatment of shareholders

Organisations should respect the rights of shareholders and help shareholders to
exercise those rights.
2. Interest of other stakeholders
Organisations should recognise that they have legal and other obligations to all
legitimate stakeholders.
3. Role and responsibilities of the board
The board needs a range of skills, ability to understand various business issues and
ability to challenge management performance
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Legal Aspects of Business –Company Law
It needs to be of sufficient size and have an appropriate mix of executive and non-
executive directors. The key roles of chairperson and CEO should not be held by the
same person.
4. Integrity and ethical behaviour
Organisations should develop a code of conduct for their directors and executives that
promotes ethical and responsible decision making
5. Disclose and transparency
Organisations should clarify and make publicly known the roles and responsibilities
of board and management to provide shareholders with a level of accountability.

COMPETITION ACT 2002

The Competition bill having been passed by both the houses of Parliament received the assent of the
President on 13th January 2003. It came on the Statute book as ―The Competition Act 2002‖ and
replaces the MRTP (Monopolies and Restrictive Trade Practices) Act 1969.

Objectives of the Act

An act to provide, keeping in view of the economic development of the country, for the
establishment of a commission
 To prevent practices having adverse effect on competition,
 To promote and sustain competition in markets,
 To protect the interests of consumers; and

 To ensure freedom of trade carried on by other participants in markets, in India, and

 For matters connected there-with or incidental there to.

Main focus/ Major Prohibitions of the Competition act 2002 – U/S. 3

to 6 Or
Core of the law relating to Competition

Sec.3 – Prohibition of entering into anti-competitive agreements

The enterprises or persons shall not enter into any agreement in respect of production, supply,
distribution, storage, acquisition or control of goods to affect competition (to have an appreciable
adverse effect on competition) in India. If so, it is void.

That is:- Any agreement entered into between enterprises/ Associations of enterprises to
 Directly or indirectly determines purchase or sale prices
 Limits or controls production, supply, markets, technical development, investment or
provision of services
 Shares the market based on geographical locality, type of goods or services, number of
services among them.
 Directly or indirectly results in bid rigging/ collusive bidding/ Cartel

Bid rigging is a form of fraud in which a commercial contract is promised to one party even
though for the sake of appearance several other parties also present a bid.
Collusive bidding refers to agreements by contractors or suppliers in a particular trade or area
 21
Legal Aspects of Business –Company Law
to cooperate to defeat the competitive bidding process in order to inflate prices to artificially
high levels.
Bid-rigging/ Collusive bidding: Any agreement between enterprises engaged in similar
production, reducing the competition or purposefully affects the process of bidding.
Cartel: An association of producers, sellers or distributors, who by agreement among
themselves, limit or control production, distribution or sale of goods.

Sec.4 – Prohibition of Abuse of dominant position

Sec.4 prohibits abuse of dominant position by any enterprise, such as
a. Directly or indirectly impose unfair or discriminatory – Selling the goods at ‗Predatory‘ price
(Sale of goods at a price which is below the cost to eliminate competition)
b. Limits or restricts production of goods
c. Indulges in practices resulting in denial or market access
d. Concluding contract
e. Uses its dominant position
f. Operate independently of competitive forces prevailing in the relevant market
g. Affect its competitor or consumers in its favour

Sec.5 & 6– Regulation of Combinations

Combination – The acquisition of one or more enterprises by one person or merger or amalgamation
of enterprises shall be a combination.
No person or enterprise shall enter into a combination which causes or is likely to cause an
appreciable adverse effect on competition within the relevant market in India and such a combination
shall be a void.
No combination shall come into effect until 210 days have passed from the day on which the
notice has been given to the Commission under sub-section or the commission has passed orders,
whichever is less.
The Commission shall, after the receipt of notice, deal with such notice in accordance with
the provisions contained in Secs.29, 30 and 31. These sections deal with
(i) Procedure for investigation of combination (Sec.29)
(ii) Inquiry into disclosures (Sec.30) and
(iii) Orders of the Commission on certain combinations (Sec.31)
 22
Legal Aspects of Business –Company Law

Combination in the following forms

 Acquisition of control, shares, voting rights or assets
 Acquisition of control over production, distribution or trading
 Merger or amalgamation

Competition Commission of India

The Central Government has established a Commission called ―Competition Commission of
India‖ for the purpose of implementation the Competition act, 2002.

Duties of Commission
a. To eliminate practice having adverse effect on competition
b. To promote and sustain competition
c. To protect the interests of consumers, and
d. To ensure freedom of trade carried by other participants in markets in India

Powers and Functions of Commission

1. Inquiry into certain agreements – any alleged contravention of the provisions
The Commission shall, while determining whether agreements have an appreciable adverse
effect on competition under Sec.3, have due regard to all or any of the following factor, namely:-
a. Creation of barriers to new entrants in the market
b. Driving existing competitors out of the market
c. Foreclosure of competition (Anti-competitive practices) by hindering (Obstruct) entry into
the market
d. Accrual (increase) of benefits to consumers
e. Improvements in production or distribution of goods or provision of services
f. Promotion of technical, scientific and economic development

2. Inquiry whether an enterprise enjoys dominant position

The Commission shall, while inquiring whether an enterprise enjoys a dominant position or no
under Sec.4, have due regard to all or any of the following factors, namely:-
i. Market share of the enterprise
ii. Size and resource of the enterprise
iii. Economic power of the enterprise
iv. Dependence of consumers on the enterprise
v. Market structure and size of the market, etc.

3. Inquiry into combination by commission

For the purpose of determining whether a combination would have the effect of or is likely to
have an appreciable adverse effect on competition in the relevant market, the Commission shall
have due regard to all or any of the following factor, namely:-
a. Level of combination in the market
b. Effect of combination on price increase
c. Availability and effect of substitutes in the market
d. Possibility of failing business
e. Whether the benefits of the combination outweigh the adverse impact of the combination,
etc.

2 Marks
 23
Legal Aspects of Business –Company Law
1. Define-Company-(Feb2014)
Incorporated association, which is an artificial person. Having an independent legal entity, with
a perpetual succession, a common seal, a common capital comprised of transferable shares and
carrying limited liability in relation to its members

2. Define -Memorandum of association-

It is one of the core documents which has to be filed by the registrar of the companies at the time
Of incorporation of company

3. What is Doctrine of ultra-vires?

Any activity not expressed or impliedly authorized by the memorandum are Ultra-vire to the
company. It is void ab- initio. Eg: share certificate was forged by the secretary of the company
and issued under the seal of the company

4. Define-Articles of association.
The Articles of Association or just Articles are the rules, regulations and bye-laws for the
internal management of the affairs of a company. The Articles are next in importance to the
memorandum of association which contains the fundamental conditions upon which alone a
company is allowed to be incorporated.

5. Define prospectus. (feb2012) (Feb2014)

Document inviting the public to purchase the shares or debentures of the company. A document
by which an invitation is issued to the public to take shares or debentures of the company is
called prospectus.

6. Write various types of prospectus

Lieu of prospectus - Document without the allocation of shares.
Shelf prospectus. - Prospectus issued by any financial institution or bank for one or more
issues of the securities

7. What is abridged form of prospectus?

Contain similar information similar to a prospectus in a concise and compact matter. So that
cost of public issue of capital may be reduced.

8. Difference between Memorandum and Articles of Association of a company?

Memorandum of association- It is one of the core documents which has to be filed by the
registrar of the companies at the time of incorporation of company
Articles of association- Rules and regulation of the company framed for the purpose of the
internal management of is affairs

9. What do you mean by Lifting or Piercing the Corporate Veil?

From the juristic point of view, a company is a legal person distinct from its members.
This principle is referred as “the veil of Incorporation”.

10. Define - Statutory Companies

These are companies which are created by a special Act of the Legislature. Example is Reserve
Bank of India, the State Bank of India

11. Define Company Limited by Shares.

A Company limited by shares is a company in which the liability of its members is limited by its
memorandum to the amount unpaid on the share respectively held by them.
 24
Legal Aspects of Business –Company Law
The companies limited by shares may be either public companies or private companies. If a
member has paid the full amount of shares, then his liability shall be nil.

12. Define Company Limited by Guarantee

A Company limited by guarantee is a company in which the liability of its members is limited
by its memorandum to such an amount as the members may respectively undertake to contribute
to the assets of the company in the event of its being wound up.

13. Define- Unlimited Company

An unlimited company is a company in which the liability of its members is not limited by its
memorandum.

14. Define Foreign Company.

A foreign company means a company which is incorporated in a country outside India under the
law of that country

15. Define the term ultra vires

The term ultra vires a company means that the doing of the act is beyond the legal power and
authority of the company.

16. Define Doctrine of Indoor Management

 The doctrine of indoor management is a limitation to the doctrine of constructive
notice.
 “An outsider is presumed to know the constitution of a company but not what may or
may not have taken place within the doors that are closed to him”.

17. Corporate Governance

The process, mechanism, principles and structure by which the business and affairs of the
company are directed and managed and governed effectively. Its goal is to enhance long term
shareholder value through improving corporate performance and accountability while taking
into account the interest of other shareholders.

18. What is winding up?

Winding up of a company is process whereby its life is ended and its property administered
for the benefit of its creditors and members. Otherwise called Liquidation of a company or
dissolving the company.

19. Who is director?

A person has control over the direction, contact, and management of the affairs of the
company.

20. Doctrine of constructive notice (OR) constructive Notice of Memorandum and Articles
These documents, on registration with the Registrar, assume the character of public documents.

21.What is incorporation of the company?

The incorporation of a company refers to the legal process that is used to form a corporate entity or a
company. An incorporated company is a separate legal entity on its own, recognized by the law.

22. Corporate Veil.

A legal concept that separates the personality of a corporation from the personalities of its
shareholders, and protects them from being personally liable for the company's debts and other
 25
Legal Aspects of Business –Company Law
obligations.

13 marks

1. Describe the Nature and Characteristics of the Company?

2. What are the different kinds of company? Explain in detail.
3. Discuss the Clauses of Memorandum of association. Write the difference between Memorandum and
Article of association.
4. Difference between Private Company and public company.
5. Discuss the power, duties and Liability of a director.
6. What are the various modes in winding up a company?
7. Explain the meaning and importance of prospectus. Write the legal provisions relating to the issue
and registration of a prospectus
8. Write the content in Article of association in detail.
9. What are the procedures to be following for formation of the company?