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SEMESTER 5 B.COM
MAJOR 10
CORPORATE LAWS
UNIT 1

1. Meaning and characteristics of Companies

A company means an association of individual formed for some common purpose. But it
is a voluntary association of persons. It has capital divisible into parts, known as shares, an
artificial person created by a process of law and it has a perpetual succession and a common
seal.
A company is a voluntary association of individuals formed to carry on
business to earn profits or for non profit purposes. These persons contribute
towards the capital by buying its shares in which it is divided. A company
is an association of individuals incorporated as a company possessing a
common capital i.e. share capital contributed by the members comprising
it for the purpose of employing it in some business to earn profit.
A company as an entity has many distinct features which together make it a unique
organization. The essential characteristics of a company are following:
Separate Legal Entity:
Under Incorporation law, a company becomes a separate legal entity as compared to its
members. The company is distinct and different from its members in law. It has its own
seal and its own name, its assets and liabilities are separate and distinct from those of its
members. It is capable of owning property, incurring debt, and borrowing money,
employing people, having a bank account, entering into contracts and suing and being sued
separately.
Limited Liability:
The liability of the members of the company is limited to contribution to the assets of the
company up to the face value of shares held by him. A member is liable to pay only the
uncalled money due on shares held by him. If the assets of the firm are not sufficient to pay
the liabilities of the firm, the creditors can force the partners to make good the deficit from
their personal assets. This cannot be done in the case of a company once the members have
paid all their dues towards the shares held by them in the company.
Perpetual Succession:
A company does not cease to exist unless it is specifically wound up or the task for which
it was formed has been completed. Membership of a company may keep on changing from
time to time but that does not affect life of the company. Insolvency or Death of member
does not affect the existence of the company.
Separate Property:
A company is a distinct legal entity. The company's property is its own. A member cannot
claim to be owner of the company's property during the existence of the company.
Transferability of Shares:
A company’s capital is divided into shares, and the members of the company can freely
transfer those shares. The shareholders can easily free themselves from their membership

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by selling their shares. However, the shares of a private limited company are not easily
transferability.
Common Seal:
A joint stock company is an artificial person and its day to day functions are managed by
the Board of Directors. All the decisions taken by the Board have to be authorized with the
company’s common seal which has the name of the company and the signature of the
authorized personnel.
Huge Capital:
Due to a large number of members, a huge amount of capital can be collected by the
company in the form of shares, debentures, bonds, public deposits etc. It can also obtain
form banks and financial institutions.
Representative Management
The number of shareholders is so large and scattered that they cannot manage the affairs
of the company collectively. Therefore, they elect some persons among themselves to
manage and administer the company. These elected representatives of shareholders are
individually called the ‘directors’ of the company and collectively the Board of Directors.

2. Types of Companies
Joint Stock Companies can be classified on the basis of corporation, nature of liability,
extent of public interest, ownership, nationality etc. let us examine briefly the different
kinds of companies.

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I. On the Basis of Incorporation

Any company is to be incorporated under an Act. The provision of the particular Act under
which it is established governs it working.
Companies of this kind are of three types. They are;
a. Statutory Companies These are the companies which are created special act of the
Parliament or State Legislature, e.g., the Reserve Bank of India, the State bank of India,
the Life Insurance Corporation, etc. these are mostly concerned with public utilities, e.g.,
railways, tramways, electricity companies and enterprise of national importance.
b. Registered Companies: Companies which are registered under the Companies Act,
1956, or were registered under any of the earlier companies Acts are called registered
companies. A vast majority of companies we come across belong to this category. Tata
Motors Limited, Reliance Telecommunication Limited, EID Parry Limited, etc belong to
this category.
c. Chartered Companies Companies established as a result of a charter granted by the
King or Queen of a country is known as chartered companies. The charter issued, governs
their functioning. In other words, The Crown, in the exercise of the royal prorogated has
power to create a corporation by the grant of a charter to persons assenting to be
incorporated. Example – Bank of England, East India Company, etc.
II. On the Basis of Liability
On the basis of the extent of liabilities of the shareholders such companies are divided into
three categories.
a. Companies Limited by Share
Where the liability of the members of a company is limited to the amount unpaid on
the shares such a company is known as a company limited by shares. If the shares are
fully paid, the liability of the members holding such shares is nil.
b. Companies Limited by Guarantee
In a company limited by guarantee the liability of a shareholder is limited to the amount
he has voluntarily undertake to contribute to meet any deficiency at the time of its
winding up. Such a company may or may not have a share capital. If it has a share
capital a member’s liability is limited to the amount remaining unpaid on his share plus
the amount guaranteed by him. This type of company is started with the object of
promoting science, arts, sports, charity, etc. it is clear that its objective is not profit
earning. It gets subscription from its members and donations and endowments from
philanthropists.
c. Unlimited Liability
A company without limited liability is known as an unlimited liability. In case of such
a company, every member is liable for the debts of the company, as in an ordinary
partnership, is proportion to his interest in the company. In other words, their liability

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extends to their private properties also in the event of winding up. Unlimited companies
are almost non- existent.

III. On the Basis of Nationality

They are of two types’ viz., domestic companies and foreign companies.
a. Domestic Company
Companies registered under the Companies Act, 2013, or under earlier Acts are
considered domestic companies.
b. Foreign Company
Foreign company means a company incorporated outside India but having a place
of business of India. It has to furnish to the authorities the full address of the
registered or principal office of the company or a list of its directors or names and
addresses of the residents in India authorized to receive notices, documents, etc.

IV. On the Basis of Number of Members

a. Private Company
A private company means a company which by its articles
i. Restricts the rights to transfer its shares
ii. Limits the number of its members minimum 2 and maximum number of
members fifty (excluding the employees)
iii. Prohibits any invitation to the public to subscribe for any shares or debentures
of the company. The name of the company must end with the words ‘private
limited’.

b. Public Company The public is invited to subscribe to the shares of the company
usually by issuing a prospectus. Shares are easily transferable. A public company
must have at least 7 persons to form and no maximum limit as to its number of
shareholders or members. The name must end with the word ‘limited’.

V. On the Basis of Control / Ownership

a. Holding Company and Subsidiary Company
A company is known as the holding company of another company if it has control over
that other company. A company becomes a holding company of another
i. if it can appoint or remove all or majority of the directors of the latter company
or
ii. if it holds more than 50% of the equity share capital of the latter or
iii. if it can exercise more than 50% of the total voting power of the latter.
A company is known as a Subsidiary of another company when control is exercised by
the latter (called holding company). Over the former called a subsidiary company.

c. Government Companies

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A Government company is one in which not less than 51% of the paid up capital is held
by the Central Government or by any one or more State Governments or partly by the
Central Governments and partly by one or more State Governments. Examples:
Bharath Heavy Electricals Limited, Steel Authority of India Limited, etc. A subsidiary
of a Government company is also treated as a Government company. A Government
company also enjoys a separate corporate existence. It should not be identified with the
Government and its employees are not Government employees.

d. One Person Company

Only one person as a member. No Minimum limit prescribed for Minimum Paid Up
Capital. The MOA shall indicate the name of the other person(nominee), who shall, in
the event of the subscriber’s death or his capacity to contact, become the member of
the company. The member of the OPC may at any time change the name of the nominee
by giving a notice to the company and the company shall intimate the same to the
Registrar. No person shall be eligible to incorporate more than one One Person
Company.

Steps in the formation of company

Modern-day business requires a large amount of funds. The competition and change in the
technological environment are also increasing day by day. As a result, the company form
of organization is being preferred by more and more business firms. The formation of a
company involves several steps, that are required from the time a business idea originates
to the time a firm is legally ready to commence business, also referred to as stages in the
formation of a company. Those who are taking these steps and the associated risks are
promoting a company and are called its promoters.
Promoter:
A promoter conceives an idea for setting-up a particular business at a given place and
performs various formalities required for starting a company. A promoter may be a
individual, firm, association of persons or a company. The persons who assist the promoter
in completing various legal formalities are professional people like Counsels, Solicitors,
Accountants etc. and not promoters.

Definitions:
Following definitions of a promoter clarify his status and role:

“A promoter is the one, who undertakes to form a company with reference to a given object
and sets it going and takes the necessary steps to accomplish that purpose.” —Justice C.J.
Cokburn

“A promoter is the person conscious of the possibility of transforming an idea into a

business capable of yielding a profit; who brings together various persons concerned and

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who finally, superintendents the various steps necessary to bring the new business into
existence.” —Arthur Dewing

Characteristics of a Promoter:
The above given definitions bring out the following characteristics or features of a
promoter:

1. A promoter conceives an idea for the setting-up a business.

2. He makes preliminary investigations and ensures about the future prospects of the
business.

3. He brings together various persons who agree to associate with him and share the
business responsibilities.

4. He prepares various documents and gets the company incorporated.

5. He raises the required finances and gets the company going.

Functions of a Promoter:
1. Identification of Business Opportunity
The first important function of a promoter is to identify the business opportunity. The
opportunity could be to create a new product or service, to make product available through
a different channel. The opportunity is then evaluated for technical and economic
feasibility.

2. Feasible Studies:
It is sometimes not possible to convert the business opportunities into actual projects which
may not be feasible or profitable. The feasibility of the business project is evaluated by the
experts to determine whether the perceived business opportunity can be profitable or not
Technical Feasibility
Sometimes it is technically impossible to practically carry out a business project. This is
due to required technology or raw material is difficult to obtain.
Financial Feasibility
The promoters must estimate the amount of money needed to fund the identified business
opportunity. If a project outlay required is so huge that it is impossible to arrange the
finances within the available resources, the project must be abandoned.
Economic Feasibility
Sometimes the project identified may be technically and financially feasible, but its
chances of being profitable is very low. In such cases, the idea may have to be abandoned.
3. Name Approval

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It is necessary to get the name of the company approved from the Registrar of Companies. This is
done in order to avoid duplication of the name. Generally, a company submits a list of names in
order of preference. The Registrar matches the names with the names of existing companies and
then one name is approved.

4. Fixing up Signatories to the Memorandum of Association

The promoters decide the names of persons to be the signatories to the memorandum of
association. Usually, the first signatories to the memorandum become the first directors of the
company. The written consent of the persons to act as directors is taken and they are asked to take
qualifying shares of the company.

5. Appointment of Professionals
The next stage is of raising funds and deciding about various contracts. So, promoters
appoint the brokers and underwriters to ensure the availability of capital by sale of
company’s securities. They also appoint solicitors to deal with legal matters of the
company.

6. Preparation of Necessary Documents

The promoters take steps to prepare various legal documents of the company which have
to be submitted to the Registrar of Companies at the time of incorporation. The documents
which are required to be prepared include Memorandum of Association, Articles of
Association, Prospectus, etc.

Documents Required to be Submitted:

1. Memorandum of Association:

MOA is the most important document as it defines the objective of the company. No
companies can legally undertake activities that are not contained in the MOA. The MOA
contains different clauses which are given as follows-

The Name Clause

Registered Office Clause
Objects Clause
Liability Clause
Capital Clause
Association Clause

2. Articles of Association:
AOA contains the rules regarding the internal management of the company. A Public Ltd.
Co. may adopt Table A which is a model set of articles given in the companies act. Table
A is a document containing rules and regulations for the internal management of a
company. If a company adopts Table A, there is no need to prepare separate Articles of
Association.

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3. Consent of Proposed Directors:

Apart from the MOA and AOA, written consent of each person named as a director is required
confirming that they agree to act in that capacity and undertake to buy and pay for qualification
shares.

4. Agreement:
The agreement, if any, which the company proposes to enter with any individual.

5. Statutory Declaration:
A declaration stating that all the legal requirements about registration have been complied
with is to be submitted to the Registrar.

6. Payment of Fees:
Along with the above-mentioned documents, necessary fees have to be paid for the
registration of the company.

Position of Promotor:
Promotors are neither the agents nor the trustee of the company as the company is yet to
be incorporated. Therefore, they are personally liable for all the contracts which are entered
by them, for the company before its incorporation, in case the same is ratified by the
company later on.

Steps in the process of incorporation

After going through the above formality the promotors of the company make an application
for the Incorporation of the company. The application is to be filed with the Registrar of
the Companies of the state within which they plan to establish the registered office of the
company. The application for registration must be accompanied by the same certain
documents about which we have already discussed above. These may be briefly mentioned
again-

1. Memorandum of Association duly stamped, signed, and witnessed.

2. Article of Association duly stamped, signed, and witnessed.

3. Written Consent of the Proposed Directors

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4. Agreement, if any, with the proposed Managing Director, Manager, etc.

5. A copy of the Registrar’s Letter approving the Name of the Company.

6. A Statutory Declaration affirming that all legal requirements of registration have been
submitted.

7. Notice the exact Address of the Registered Office.

8. Documentary evidence of Payment of Fees.

Effect of the Certificate of Incorporation:

A company is legally born on the date printed on the Certificate of Incorporation. It
becomes a legal entity with perpetual succession on such a date. It becomes entitled to enter
into valid contracts. On the date of issue of Certificate of Incorporation, a private company
can immediately commence its business, it can raise necessary funds through a private
arrangement, and proceed to start a business. A Public Company, however, has to undergo
two more stages in its formation.

3. Subscription of the Capital

A Public Company can raise the required funds from the public using an issue of shares
and debentures. For this purpose, it has to issue a prospectus which is a kind of invitation
to the public to subscribe to the capital of the company and undergo various other
formalities. The following steps are required for raising funds from the public-

1. SEBI Approval: Securities and Exchange Board of India which is the regulatory
authority in our country has issued guidelines for the discloser of information and investor
protection. A company inviting funds from the general public must follow SEBI guidelines
of discloser of all the adequate information.

2. Filing of Prospectus: Prospectus is a document that includes any notice, circular,

advertisement, or other documents inviting offers from the public for the subscription. It
has to be filed with the Registrar of Companies.

3. Appointment of Bankers, Brokers, and Underwriters

4. Minimum Subscription: If Applications received for the shares are for an amount less
than 90 percent of the issue size, the allotment cannot be made.

5. Application to Stock Exchange: Application is to be made to at least one stock exchange

for permission to deal its shares or debenture.

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6. Allotment of Shares

4. Commencement of Business
If the amount of minimum subscription is raised through the new issue of shares, a public
company applies to the Registrar of Companies for the issue of Certificate of
Commencement of Business. The following documents are required:

1. A declaration that shares payable in cash have been subscribed for and allotted.

2. A declaration that every director has paid in cash, the application, and allotment money
on his shares.

3. A declaration that no money is payable or liable to become payable to the applicants.

4. A statutory declaration that the above requirements have been complied with.

Function of promoters and their legal position

Promoter
As per Section 2(69) of the Companies Act, 2013, promoter means any of the following
persons:
A person named as a promoter in the prospectus or identified by the company in its annual
return in Section 92.
A person who controls the company affairs, indirectly or directly, whether as a director,
shareholder or otherwise.
A person in accordance with whose directions, advice or instructions the Board of Directors
of a company are accustomed to act.
In simple words, promoters perform the preliminary steps, like floating the securities in the
market, making the prospectus of the company, etc., for establishing the company’s
business. However, if a person is doing these things professionally, they will not be
considered a promoter.

Types of Promoters of a Company

A promoter is a person/entity who conceives the idea of company formation. An individual,
firm, association of person or company can be a promoter. A promoter of a company can
be any of the following types:

Professional promoter: A professional promoter is an expert in promoting the business

during its formation or inception. They transfer the ownership of the business to
shareholders when it is established in the market.

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Financial promoter: A financial promoter is a promoter who invests capital or money and
has a sizable company share. They promote banks or financial institutions. They aim to
assess the market's financial situation and start a company at the right moment.
Managing promoter: A managing promoter helps in company formation. They also get the
managing rights in the company after it is formed.
Occasional promoter: An occasional promoter is a promoter whose main job is to float the
company. They do not promote the business routinely since they are in charge of two to
three enterprises, and they get involved only in the crucial matters of the business.

Functions of a Promoter
A promoter plays many functions in the formation of a company, from conceiving the
business idea to taking all the required steps to make the idea a reality. Below are some of
the functions of a promoter:
1. A promoter needs to comprehend/conceive the idea of company formation.
2. A promoter looks into the feasibility and viability of the business idea. He/she
assesses whether the company formation will be practicable or profitable.
3. Once the idea is conceived, the promoter organises and collects the available
resources to convert the business idea into a reality.
4. The promoter decides the company name and settles the contents of the company’s
Memorandum of Association and Articles of Association.
5. The promoter decides the location of the company’s head office.
6. The promoter nominates associations or people for vital company posts, such as
appointing the auditors, bankers and the company’s first directors.
7. The promoter prepares all the necessary documents required to incorporate a
company.
8. The promoter decides the company’s funding sources and capital requirements.
9. A promoter cannot be considered a trustee, employee or agent of a company. The
role of the promoter ceases when the company is established and is handled by the
board of directors and the company management.

Duties of a Promoter
The promoters have certain duties towards the company, which are as follows:
Disclose hidden profits
The first duty of the promoters is to be loyal to the business and not involve in malpractice.
They should not earn secret or hidden profits while carrying out promoting activities such
as buying a property and selling it for a profit without disclosing it. They are not barred
from making such profits, but the only condition is that they must disclose it. They must
share all the information regarding their profitability and earnings with all the relevant
company stakeholders.

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Disclose all material facts

A promoter has a relationship of trust and confidence with the company, i.e., a fiduciary
relationship. Under this fiduciary relationship, the promoter has the duty to disclose all
material facts relating to the company’s business and formation with the relevant
stakeholders.

Act in the best interest of company

In all situations, promoters should prioritise the company’s interest over their personal
interests. They must provide utmost consideration to the company’s best interest in its
formation and all business dealings.

Disclose all private arrangements

While forming and establishing a company, many private transactions take place.
However, such transactions must be disclosed by the promoters to the stakeholders. It is
the duty of the promoters to disclose all private transactions and the profit earned from
them to the stakeholders.

Rights of a Promoter
The rights of promoters include the following:
Right of indemnity
Promoters are jointly and severally accountable for any hidden profits made by any of them
and false statements made in the prospectus. All the promoters are individually and equally
responsible for the company’s affairs. Thus, one promoter can claim the compensation or
damages paid by him/her from the other promoters.

Right of preliminary expenses

A promoter is entitled to reimbursement for preliminary expenditures incurred for the
company’s establishment, such as solicitors’ fees, advertising costs and surveyors’ fees.

Right of remuneration
A promoter has the right to receive remuneration from the company unless a contract to
the contrary. The company’s Articles of Association can also provide that the directors can
pay an amount to the promoters for their services. However, the promoters cannot sue the
company for remuneration unless there is a contract.

Liability of a Promoter
The liabilities of a promoter include the following:

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1. To conceive an idea of forming a company and explore its possibilities.

2. To conduct the necessary negotiation for the development of the business.
3. To collect the requisite number of persons who can sign the MOA and AOA of the
company and also to act as the first directors of the company.
4. The decide about the—Name and location of its registered office, the amount and
form of its share capital, the brokers or underwriters for capital issue, if necessary,
the bankers, auditors and legal advisers.
5. To get the MOA and AOA drafted and printed.
6. To enter into preliminary contracts with the vendors, underwriters, etc.
7. To make arrangement for the preparation of prospectus, its filing, advertisement
and issue of capital.
8. To arrange for the registration of company and obtain the certificate of
incorporation. To defray preliminary expenses.
9. To arrange for the minimum subscription.

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