MBA management

Law Relating To Companies Topics:

COMPANY


Company means a company formed and registered under the Companies Act .When the Law fails to provide clear definition, it seeks the opinion of the court.

CHARACTERISTICS OF A PUBLIC COMPANY


• Limited liability.
• Perpetual.
• Common seal.
• Transferability of Shares.
• Separate property.
• To sue and be used.

The company is an artificial and justice person .It can possess and transfer property in its name.

MEMORANDUM OF ASSOCIATION - Sec 13 to 18


An important step in the formation of a company is to prepare a document called the memorandum of Association. It contains five clauses.

a. Name Clause

The first clause of the memorandum is required to state the name of the proposed company. A company, being a legal person must have a name to establish its identity. The name of a corporation is the symbol of its personal existence .Any suitable name may be selected provided it should not resemble any other company name under section 20. Name should end with words “Limited”. For multi-national companies, it should end with “International” or Global.

b. Registered office Clause-Sec 17

The second clause of the memorandum must specify the state in which the registered office of the company is to be situated.

Within thirty days of incorporation or commencement of business, whichever is earlier , the exact place where the registered office is to be decided and notice of the situation given to the Registrar who is to record the same. All communications to the company must be addressed to its registered office.

To change the registered office, company should take the permission from the Registrar and it should be published under Sec 17 and 17A.

c. Object Clause—Sec 13

In the third clause ,the memorandum must state the objects for which the proposed company is to be established .The companies(Amendment)Act,1965 requires that in case of companies in existence before this amendment, the object clause has simply to state the objects of the company. But in the case of a company to be registered after the amendment, the object clause must be divided into three sub-clauses, viz.

1. Main objects: This sub-clause has to state the main objects to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects.

2. Other objects: This sub-clause must state other objects which are not included in the above clause.

Doctrine of Ultra Vires: When a company assumes the powers beyond the memorandum and proceeds with the contracts beyond the scope of object clause, then those contracts are called as ultravires which means beyond the scope of the objects. Then those acts were treated as violations. The remedies available are Injunctions and Personal liability of directors for contracts.

d. Liability Clause-Sec13 (2).

The fourth clause has to state the nature of liability that the members incur. If the company is to be incorporated with limited liability, the clause must state that “the liability of the members shall be limited by shares”. This means that no member can be called upon to pay more than the nominal value of the shares held by him, or so much thereof as remains unpaid; and if his shares be fully paid up his liability is nil.

If it is proposed to register the company limited by guarantee, this clause will staye the amount which every member undertakes to contribute to the assets of the company in the event of its winding up.

e. Capital Clause –Sec 13(3) and 13(4)(a).

The last clause states the amount of the nominal capital of the company and the number and value of shares into which it is divided. The Companies Amendment Act 2000 has, by amending Sec 3,prescribed the requirement that a public company must have a minimum paid up capital of five lakh rupees or such higher amount as may be prescribed .A private company is required to have a minimum paid up capital of 1 lakh rupees or such higher amount as may be prescribed by its articles.

ARTICLE OF ASSOCIATION-Sec 26 to 31.


Articles of association are the second document which has, in the case of some companies, to be registered along with the memorandum. Companies which must have articles of association are:

1. Unlimited companies.
2. Companies limited by guarantee.
3. Private companies limited by shares.

If articles are proposed to be registered they must be printed .They should be divided into paragraphs, each consisting generally of one regulation and numbered consecutively. Each subscriber of the memorandum has to sign the document in the presence of at least one witness, both of them adding their addresses and occupations.

CONTENTS OF ARTICLES

Articles of association may prescribe such regulations for the company ,as the subscriber to the memorandum deems expedient .The Act gives the subscribers a free hand .Any stipulation as to the relations between the company and its members and between members inter se may be inserted in the articles. But everything stated therein is subject to the Companies Act.

The document must not conflict with the provisions of the Act .Any clause which is contrary to the provisions of the act or of any other law for the time being in force is simply inoperative and void.

PROSPECTUS

Prospectus is defined by Sec2 (36).A prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from for the subscription or purchase of any shares in or debentures of a body corporate, In nutshell it means that a prospectus is an invitation issued to the public to take share or debentures of the company or to deposit money with the company.

BUSINESS COMMENCEMENT CERTIFICATE –Sec 149.

A private company can commence business right from the date of its incorporation. But in the case of a public company, a further certificate for the commencement of business right from the date of its incorporation. But in the case of a public company, a further certificate for the commencement of business has to be obtained .This becomes necessary where a company has issued a prospectus inviting public to subscribe for its shares.

CAPITAL STRUCTURE


A number of types of financials instruments are used and issued by the corporate undertaking to obtain the required capital from the general public. The financial Instruments are of two kinds, namely, ownership securities and creditorship securities. The amounts of capital mobilized by the issue of two kinds of shares are ordinary shares or equity shares and preference shares. The amount of capital raised by the issue of ordinary and preference share are called ordinary or equity share capital and performance share capital respectively.

However, share is defined under Sec 2 (46) of the Companies of Act of 1956 as ”a share is a share in the share capital of the company and includes stock except where a distinction between stock and share is Expressed or implied”, which means each share is a share in the total capital of the company.

share capital

Authorized Share Capital: Represents the maximum share capital which the company, as stated in its memorandum of association, is authorized to raise.

Issued Share Capital: It denotes the nominal value of that part of authorized share capital which is issued or offered to the general public for subscription.

1. Subscribed Share Capital: It is that part of the issued share capital, which the general public has subscribed.

2. Called up Capital: It denotes that part of allotted (Subscribed) share capital, which has been called up by the company to the subscribers to pay.

3. Paid up Capital: It refers to the difference between the called up capital and calls in arrears that is the amount which the shareholder has not paid through called up.

4. Reserve Share Capital: A limited company, by a special resolution, may declare that a portion or whole of its uncalled share capital shall not be called except in the event of its (company’s)winding up and this portion of uncalled share capital share capital is called reserve capital.

KINDS OF SHARE CAPITAL


One can find a number of kinds of shares, issued by the corporate undertakings, with varying rights of the shareholders as to the dividends, voting etc., which are presented below.

kinds of shares

Preference share capital is that part of share capital, which carries a preferential right to get a fixed amount of dividend to be paid annually.

Cumulative preference share carry the right to cumulative dividend in case an organization fails to pay the dividend in any accounting year and this is paid by the company before paying dividend to any other category of shares. On the other hand, the non-cumulative preference shares do not enjoy the benefit of carrying the right to receive the arrears of dividend.

Participating preference shareholders enjoy a right to participate in the surplus profit if left after paying all the categories of shareholders. They also participate in the surplus assets while winding up of the company. The non-participating preference shareholders do not enjoy the rights to participate in the surplus profit or assets of the company while winding up.

The convertible preference shareholders will have the right to convert their convertible preference shares into the same company’s equity shares at a later date as per the terms of the issue. This right to convert is not available to the non-convertible preference shareholders. In the case of redeemable preference shares, the company pays back the capital received on such shares. However the redemption Price may differ from the issue price during the life of the company. This facility is not available to the irredeemable preference shareholders. The repayment, in this case, takes place only on the winding up of the company.

The companies Act of 1956 dos not define the term ”ordinary or equity share capital”. According to Sec 85(2) of the Companies Act Equity share capital means all share capital which are not preference share capital. Equity shares are major corporate financial instruments issued to general public to mobilize a portion of the required capital ranging from major portion to almost whole capital. They carry voting rights. Voting rights are based on the principle on-share one vote. Along with voting rights they also carry.

Some other rights like:

rights of equity shares

DEBENTURE CAPITAL


Another kind of capital which the corporate undertakings have been extensively using is the debt finance which refers to the loan capital or debt capital. The loan raised may be for short term or for long term period. The long term loan capital is normally mobilized from both the individuals and the institutions (banks) and by issuing the creditorship securities such as debentures.

The word debenture has been derived from the Latin word debere, which simply means,”to owe” or “Debt” Debenture has been defined as “a document given by a company as evidence of a debt to the holder, usually arising out of a loan and most commonly secured by charge.”

Under Sec 12 of the Companies Act of 1956 debenture is defined as “debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the asset of the company or not.”

The claim of the debenture holder is to be settled fully before any amount can be paid to the shareholders. The company has to pay the interest at the agreed fixed rate to the debenture holder periodically irrespective of the profit. Debentures are issued for a fixed period and therefore ,immediately after the expiry of the stipulated period they are to be redeemed as per the terms of the issue. Normally, a debenture gives but not necessarily a charge in the form of the security for the amount lent. However, debenture holder do not enjoy the voting rights.

CLASSES OR KINDS OF DEBENTURES



kinds of debentures

Redeemable debentures can be received back by the company by paying the amount before maturity but not in case of irredeemable debentures. Secured debentures are secured by the charge created on the assets of the assets of the company, where a unsecured debentures are not secure d by charge. Bearer debentures are not registered in any person’s name and it can be transferred easily. Convertible debentures can be converted into shares whereas non-convertible debenture cannot be converted into shares.

DIVIDEND


Dividend means the share of profit that falls to the share of each individual member of a company. It is that portion of the corporate profits, which has been set aside and ”declared by the company as liable to be distributed among the shareholders .”The profits of the company when distributed among its member are called ”dividends.”

The payment of dividend is bound by two fundamental principles. The first one is that dividend must never be paid out capital. It is supplemented by the second that dividends shall be paid only out of profits. The Act allows dividends to be paid out of the following three sources.

Profits of the company for the year for which dividends are to be paid.

Undistributed profits of the previous financial years.

Money provided by the central or a state government for the payment of dividends in pursuance of a guarantee by the concerned.

The principle behind payment of dividend is that it should be paid only after the deduction of income tax, all payables, payment of all debts, creation of statutory and special reserve funds, contingency reserves etc. after deducting these amounts from the total profits the remaining amount is distributed as dividend on the basis of number of shares.

MEETINGS OF COMPANY


A meeting is a get together or assembly or getting of two or more persons for the transaction of some lawful business of common concern .Like any other association, the Company should go for meeting of shareholders to collectively discuss and decide the affairs of the company.

KINDS OF MEETING


The Company meetings are as follows:

*Statutory meeting will be held only once in the life of a company. It is the first meeting of shareholders .Private companies, company limited by guaranty having no share capital, unlimited liability company, and Government companies need not hold statutory meetings.

*Annual general meeting AGM where all Shareholders meet once in a year. It is in this meeting the shareholders exercise their real powers.

*Extra-ordinary general meeting –in between AGM’s special meeting of all Shareholders will be held, if it is very urgent and important to be decided only in the AGM’s.

*Board meeting the board of directors do meet here, periodically.

*Class meetings like the creditors meeting so as protect their interests.
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Review Questions
  • 1. Brief the laws relating to companies?.
  • 2. Describe the laws relating to the Dividends.
  • 3. State the regulations regarding the winding up of companies.
  • 4. State the procedures for the incorporation of the company.
  • 5. How to prevent the mis-management in the company?
  • 6. Write a note on the capital structure of the company?
  • 7. What are the meetings duly conducted in the company?
  • 8. Give me a note on management of the company.
  • 9. Who is the director? How he is appointed and removed?
  • 10. Write a note on incorporation preocedures.
  • 11. Briefly explain the types of capital.
  • 12. What is borrowing?
  • 13. What is Memorandum of Association?
  • 14. What is Articles of Association?
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