AN INTRODUCTION TO COMPANY LAW
Importance of Choice of Business Organisation
- The ability of the entity to raise capital
- The Manner in which risk is shared between owners and creditors
- The Extent of control exercisable by the owners
- The Nature of the regularity framework applicable to the entity
- The Tax burden for the entity and the owners
CHARACTERISTICS
SEPARATE LEGAL ENTITY: An Entity separate from its members
LIMITED LIABILITY: Either limited by shares or limited by guarantee.
PERPETUAL SUCCESSION: A Company outlasts its members. Since Law has created it, only Law can end it…
COMMON SEAL: It is the official signature of the company. The purpose of the seal is to furnish evidence regarding the authenticity of a document.
TRANSFERABILITY OF SHARES: Transfer of the ownership of shares either in the form of a transfer or by transmission
SEPARATE PROPERTY: Since it is a legal person distinct from its members, it is capable of owning, enjoying & disposing of property in its own name.
CAPACITY TO SUE: A company can sue and can be sued
MANAGEMENT Management of a company is vested in the hands of directors who are elected by shareholders
Salomon v Salomon Ltd (1895-9)
Case of a profitable leather & shoe manufacturing business being converted into a company – Salomon, his wife & five children subscribe to one share each – authorized capital £ 40000 – business valued at £39,000 & sold to a company which pays £9,000 in cash & allots shares worth £ 20,000, Salomon loaned the remaining £ 10,000 through secured debentures – Company took an unsecured loan of £ 10,000 from Mr Broderip – thereafter company falls on hard times – had to be liquidated to meet demands of the creditors – total assets were not sufficient – Should Salomon, a secured creditor be paid first?
Though a company is a legal person, it is not a citizen either under the Constitution of India or the Citizenship Act 1955. But a company has a nationality & a residence.
NUMBER OF MEMBERS
PRIVATE COMPANY:
MINIMUM 2* MAXIMUM 200
PUBLIC COMPANY:
MINIMUM 7 MAXIMUM - Not specified
ONE PERSON COMPANY
What is One Person Company (OPC)?
The concept of One Person Company [OPC] is a new vehicle/form of business, introduced by The Companies Act, 2013 [No.18 of 2013], thereby enabling Entrepreneur(s) carrying on the business in the Sole-Proprietor form of business to enter a Corporate Framework.
One Person Company is a hybrid of Sole-Proprietor and Company form of business and has been provided with concessional/relaxed requirements under the Act.
Features of One Person Company (OPC)
Only One Shareholder:
Only a natural person, who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company. Explanation: The term "Resident in India" means a person who has stayed in India for a period of not less than 182 days during the immediately preceding one calendar year.
Nominee for the Shareholder:
The Shareholder shall nominate another person who shall become the shareholders in case of death/incapacity of the original shareholder. Such nominee shall give his/her consent and such consent for being appointed as the Nominee for the sole Shareholder. Only a natural person, who is an Indian citizen and resident in India shall be a nominee for the sole member of a One Person Company.
Director:
Must have a minimum of One Director, the Sole Shareholder can himself be the Sole Director. The Company may have a maximum number of 15 directors.
Terms and Restrictions of OPC
A person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company.
Minor cannot become a member or nominee of the One Person Company or can hold share with beneficial interest.
An OPC cannot be incorporated or converted into a company under Section 8 of the Act. [Company not for Profit].
An OPC cannot carry out Non-Banking Financial Investment activities including investment in securities of any body corporate.
An OPC cannot convert voluntarily into any kind of company unless two years have expired from the date of incorporation of One Person Company, except threshold limit (paid-up share capital) is increased beyond Rs.50 Lakhs or its average annual turnover during the relevant period exceeds Rs.2 Crores i.e., if the Paid-up capital of the Company crosses Rs.50 Lakhs or the average annual turnover during the relevant period exceeds Rs.2 Crores, then the OPC has to invariably file forms with the ROC for conversion into a Private or Public Company, within a period of Six Months on breaching the above threshold limits.
PIERCING THE CORPORATE VEIL
WHEN THE COMPANY IS A SHAM/CLOAK FOR FRAUD OR FOR IMPROPER CONDUCT, COURTS PIERCE THE CORPORATE VEIL & LOOK AT THE PERSONS WHO ARE THE REAL BENEFICIARIES OF THE CORPORATE FICTION.
CIRCUMSTANCES
(A few examples Under Judicial Interpretations)
PROTECTION OF REVENUE: Company has been formed for tax evasion or to circumvent tax obligation
PREVENTION OF FRAUD OR IMPROPER CONDUCT: Company has been formed to default creditors or circumvent any law.
WHERE THE COMPANY IS USED FOR SOME ILLEGAL OR IMPROPER PURPOSE: Courts have shown themselves willing to lift the veil where the device of incorporation is used for some illegal or improper purpose.
DETERMINATION OF THE CHARACTER OF A COMPANY: When persons in actual control are residents of an enemy country, the court may lift the veil and declare the company to be an enemy.
FORMATION OF SUBSIDIARIES TO ACT AS AN AGENT: When the parent & the subsidiary company are one commercial unit, & the subsidiary is formed to circumvent some obligation.
WHERE COMPANY IS USED TO AVOID WELFARE LEGISLATION: Where it was found that the sole purpose for the formation of the new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen.
TO PUNISH FOR CONTEMPT OF COURT
FOR DETERMINATION OF TECHNICAL COMPETENCE OF THE COMPANY
WHERE THE COMPANY IS A MERE SHAM OR CLOAK
(Under Statutory Provisions)
- Reduction of membership
- Misrepresentation in Prospectus
- Failure to return application money
- Misdescription of name
- For investigation of the company by investigators appointed by Central Govt.
- Fraudulent conduct (at time of winding up)
- Liability for Ultra Vires Act
FORMATION OF A COMPANY
- PROMOTERS
- MEMORANDUM OF ASSOCIATION
- ARTICLES OF ASSOCIATION
- LIST OF FIRST DIRECTORS
- DECLARATION OF COMPLETION OF FORMALITIES
- FILING FEES
- APPLICATION TO THE REGISTRAR OF COMPANIES.
- PROMOTERS
Who is a Promoter? The term promoter is “a term not of law but of business”, usefully summing up, in a single word— promotion, “a number of business operations familiar to the commercial world by which a company is brought into existence”.
However, the persons assisting the promoters by acting in a professional capacity do not thereby become promoters themselves.
PROMOTERS
Legal Position of a Promoter: The promoter stands in a fiduciary position towards the company. The following are some of the fiduciary duties that the Courts will insist that a Company promoter has to observe:
- Top of the list is not to make a secret profit at the expense of the company
- A duty to account to the company for the benefit for any property he might purchase with the intent of selling the property to the Company for a profit later.
- A duty not to defraud the Company by active concealment of any affairs relating to the company
- A duty not to disclose confidential information to outsiders.
- A duty not to hide his personal interests through a nominee.
Pre-incorporation contracts are Void-ab-initio:
- However, pre-incorporation contracts shall be valid if:
- The contract is made for the purpose of the company and the contract is warranted by the terms of incorporation.
- The company adopts the transactions after incorporation.
MEMORANDUM OF ASSOCIATION (MA)
Fundamental conditions upon which alone the company is allowed to be incorporated.
Regulates external affairs of the Company with outsiders.
Enable those who deal with it to know the permitted range of its enterprise.
CONTENTS OF THE MA:
NAME CLAUSE
REGISTERED OFFICE CLAUSE
OBJECTS CLAUSE: a) Main objects and objects ancillary to main objects b) Other objects
CAPITAL CLAUSE: the amount of share capital the company is permitted to raise.
LIABILITY CLAUSE: limited by shares or by guarantee
ASSOCIATION CLAUSE: declaration by the subscribers that they are desirous of forming a company.
ARTICLES OF ASSOCIATION (AA)
The articles of association are the rules, regulations and bylaws for the internal management of the affairs of the company. They are formed with the object of carrying out the aims and objects as set out in the memorandum of association.
CONTENTS OF AA:
The articles of association usually contain provisions relating to:
- Share capital & rights of shareholders,
- Lien on shares
- Calls on shares
- Transfer of shares
- Transmission of shares
- Forfeiture of shares
- Conversion of shares into stock
- Share warrants
- General meetings and procedures there at
- Voting rights of members, voting & poll proxies
- Directors, their appointments, remuneration, qualifications, powers and proceedings of the board of directors
- Manager & secretary
- Dividends and reserves
- Accounts, audit and borrowing powers
- Capitalisation of profits
- Winding up procedures
IMPORTANT NOTE ON AA
The AA should not go beyond the powers of the company itself as contemplated in the MA. Also, they should not violate the provisions of the Companies Act.
DOCTRINE OF ULTRA VIRES
ULTRA VIRES = BEYOND THE POWERS
The company has the power to do all acts & things that are:
- Authorised by the Act
- Essential to attain the objects specified in the MA
- Fairly incidental to the objects
EVERYTHING ELSE IS ULTRA VIRES
The Ashbury Railway Carriage & Iron Company v Riche (1875)
Case of ARC&IC contracts to provide finance to Riche for the construction of a railway in Belgium -objects of a company (a) To make and sell or lend on hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery and rolling stock (b) to carry on the business of mechanical engineers and general contractors (c) to purchase, lease, work and sell mines, minerals, land and buildings (d) to purchase and sell as merchants, timber, coal, metals, or other materials, and to buy any such materials on commission or as agents – evident that financing was not an object of the company.
PURPOSE OF THE DOCTRINE
The purpose of this doctrine is:
- To protect the investors in the company so that they may know the objects in which their money is to be employed.
- To protect creditors by ensuring that the company’s funds to which they must look for payment, are not wasted in unauthorised activities.
DOCTRINE OF CONSTRUCTIVE NOTICE
Every outsider dealing with a company is deemed to have notice of the contents of the memorandum & articles of association; which on registration with the registrar of companies assume the character of public documents. This is known as constructive notice of the MA & AA.
EFFECT OF THE DOCTRINE
The doctrine is not a positive one but a negative one. It is like the doctrine of estoppel. I.e. a person dealing with the company is stopped from taking the plea that he had not read the memorandum & articles of association.
DOCTRINE OF INDOOR MANAGEMENT
The doctrine of indoor management is a limitation to the doctrine of constructive notice. The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned, everything has been regularly done. They are not bound to do more than read the MA & AA. They need not inquire into the regularity of the internal proceedings.
Royal British Bank v Turquant (1843-60)
The directors of a coal mining and railway company borrowed money from the Royal British Bank, on a bond of £ 2,000. The bond was given under the seal of the company and was signed by two directors and a secretary. The company, however, claimed that under its clauses of incorporation, the directors had the power to borrow only such sums as had been authorised by a general resolution of the company. Further, in this case, no sufficiently specific resolution had been passed.
EXCEPTIONS - DOCTRINE OF INDOOR MANAGEMENT
- Where the outsider had knowledge of irregularity
- Where the outsider had no knowledge of Articles
- Forgery
- The doctrine, in no way, rewards those who behave negligently
CERTIFICATE OF INCORPORATION
Effect of Certificate of Incorporation
On incorporation, the association of persons becomes a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound-up as is mentioned in the Act.
Conclusiveness of Certificate of Incorporation
Conclusive to the effect that all requirements of law relating to registration and matters precedent and incidental thereto have been duly complied with.
A private limited company can commence business on receipt of a certificate of incorporation.
A public company has, however, to wait to commence business till a certificate of commencement of business is received from the registrar of the joint-stock companies.
CERTIFICATE OF COMMENCEMENT OF BUSINESS
The certificate of commencement of business is granted on fulfilling some requirements:
Where prospectus has been issued inviting the public to subscribe for shares:
- Shares payable in cash have been allotted to the amount of minimum subscription.
- Every director of the company has paid the full amount of the shares payable in cash.
- There is no money liable to be paid to applicants for shares that have been offered for subscription.
- A statutory declaration by the chief executive or one of the directors and the secretary that the aforesaid conditions have been complied with.
The registrar on being fully satisfied that:
- The verified declaration has been filed,
- All other requirements of the ordinance have been complied with,
will issue a certificate called ‘certificate to commence business'. On receipt of this certificate, a company is entitled to commence business.
A company that has not issued a prospectus shall have to file a statement in lieu of a prospectus in order to get a certificate of commencement of business to be issued.
Provisional Contracts
Contracts entered into by a company after incorporation but before getting the certificate to commence business are called ‘provisional contracts’.
Provisional contracts are, therefore, relevant to public companies only.
Such contracts become void if a company fails to obtain a certificate to commence business and automatically become valid, and binding if the company obtains the certificate.
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