LAW - B.M.S. Sem - I

The Companies Act, 1956

I. Conversion of a private company into a public company and vice versa

(1) Conversion of a private company into a public company: There are two modes namely:
(i) By default: When a private company fails to comply with the essential requirements of a private company. However, the default must be intentional.
(ii) By special resolution: When the private company, by a special resolution may become a public company.
(iii) Becoming a subsidiary of a public company: A private company, which is a subsidiary of a public company, shall be deemed to be a public company.
(iv) By provisions of law: A private becomes a public company when:

(a) Not less than 25% of the paid-up capital is held by, one or more bodies corporate.
(b) Not less than 25% of the paid-up capital is held by a public company.
(c) Where the annual turn over is rupees 10 crores or more, during the relevant period (relevant period is the period of three consecutive financial years.).
(d) Where a private company accepts after an invitation is made by an advertisement or renews deposits, from the public other than its members.

(2) Conversion of a public company into a private company: A public company may convert itself to a private company by passing a special resolution to that effect and obtaining the approval of the Central Government.


II. Memorandum of Association

Meaning and Definition:

Just like a country is known by its constitution, a company is known by its Memorandum of Association. It is the framework within which a company performs. S. 2(28) of the Act defines Memorandum as,

“Memorandum means memorandum of association of a company originally formed or as altered from time to time in pursuance of any previous companies law or of this Act.”

Contents of Memorandum of Association:

(1) Name Clause: Every company must have a name of its own. The name gives the company a personal existence. The promoters, who select the name of the company, are required to take care that the name is not an undesirable one.
Further, in case of public company with limited liability must add the word ‘Limited’ at the end of its name, and the private company the word ‘Private Limited’ must be added at the end.
The department of Company Affairs, has held that if the company uses any of the following key words in the name, it must have minimum authorized capital as stated below:


Key words
Required authorized capital (Rupees)
i
Corporation
5 Crores
ii
International, Globe, Universal, Continental, Inter-Continental.
Asia, Asiatic (Being the first name)
1 Crore
iii
If any of the words mentioned in (ii) is used within the name (with or without brackets)
50 lakhs
iv
Hindustan, India, Bharat being the first word of the name
50 lakhs
v
If any of the words mentioned in (iv) is used within the name (with or without brackets)
5 lakhs
vi
Industries / Udyog
1 Crore
vii
Enterprises, Products, Business, Manufacturing
10 lakhs

(3) Registered Office Clause: Every company must have a registered office. At the time of registration, the memorandum must contain the name of the state, in which the registered office of the company shall be situated. The registrar shall be intimated within 30 days o incorporation. It is at the registered office where all registers and documents are kept. Also, the Annual General Meetings of the company are held.

(4) Objects Clause: This clause defines the objects of the company and indicates what a company can do. S. 13(1)(d) along with Table B, C, D and E requires the objets clause to be divided into (1) Main objects of the company to be pursued by the company on its incorporation (2) Objects incidental or ancilliary to the attainment of the main objects, and (3) Other objects of the company not included in (1) and (2). A company cannot go beyond the object clause without the approval of the shareholders and/or approval of the Central Government. It must however be noted objects cannot be illegal, immoral, opposed to public policy or the Act.

(5) Liability Clause: This clause states, the nature of liability o the members. In case of a company with limited liability, it must state that the liability of the members is limited whether it is y shares or by guarantee. In the absence of this clause in the memorandum means, that the liability of its members is unlimited.

(6) Capital Clause: This clause states, the share capital with which a company is registered and the number and value of the shares into which it is divided.

(7) Association Clause: This clause is also known as ‘subscription clause’. It is a declaration made by the subscribers who have signed the memorandum of their intention to form a company.


II. Object Clause and the Doctrine of Ultra Vires


Anything that a company does which is beyond the scope of the object clause is called ultra vires the object clause and is null and void. This doctrine was laid down in Ashbury Railway Carriages and Wagons Company v. Riche (1875) LR & HL 653. The company was incorporated with a number of objects. Two important objects being the company shall (a) make, sell, hire railway carriages and wagons, and (b) to act as mechanical engineers and general contractors. The directors of the company, contracted with Riche to finance the construction of railway line at Belgium.

Subsequently, the directors repudiated the contract, on the ground that it was ultra vires the company. Riche brought an action for damages for breach of contract.

The House of Lords held that the contract was ultra vires and therefore, null and void.


Effects of Ultra Vires Transactions: -

(1) Contract void: Ultra vires transactions render the contract void, giving no legal rights to the company or the outsiders. Such contracts can never be ratified.
(2) Property acquired under ultra vires transaction: If a company acquires property under an ultra vires transaction, the right of the company over the property shall be protected because assets so acquired represents corporate capital.
(3) Directors personally liable: Directors who part with the company’s money or property for ultra vires objects, will be personally liable to restore to the company the funds used for such purpose.
(4) Liability for torts: A company can be made liable for any tort, if the following two conditions are satisfied, viz.:
First, the activity, in the course of which the tort has been committed, falls within the scope of the Memorandum of Association.
Second, the servant of the company must have committed the tort within the course of his employment.


III. Articles of Association

Articles of Association are a document containing rules and regulations for the administration of the company.

Form and Signature of Articles: Table A in schedule I of the Companies Act, contains the ‘Regulation for management of a company’. A company may either accept Table A or make changes in the content of Table A for its articles.

Contents of Table A: The articles of a company usually deal with the following matters:

1) The business of the company.
2) The amount of the capital issued and the classes of shares into which the capital is divided; the increase and reduction of share capital;
3) The rights of each class of shareholders and the procedure for variation of their rights;
4) The execution or adoption of a preliminary agreement, if any;
5) The allotment of shares; calls and forfeiture of shares for non-payment of calls;
6) Transfer and transmission of shares;
7) Company’s lien on shares;
8) Extent of borrowing powers including issue of debentures;
9) General meetings, notices, quorum, proxy, poll, voting, resolution, minutes;
10) Number, appointment and powers of directors;
11) Dividends – interim and final – and general reserves;
12) Accounts and audit.
13) Keeping of books – both statutory and others.
14) Regulation as to seal.
15) Regulation as to winding up.



Distinction between Memorandum of Association and Articles of Association

The following are the fundamental points of distinction between Memorandum of Association and Articles of Association:

Criteria
Memorandum
Articles
Fundamental conditions or Internal regulations
The Memorandum contains the fundamental conditions upon which the company is incorporated. The conditions are introduced for the benefit of the creditors, the shareholders and the outside public.
The Articles of Association are the internal regulations of the company. They provide the manner, in which the company is to be carried and its proceedings disposed of.
Dominant or Subordinate
The Memorandum is a dominant instrument, as it states the purposes for which the company has come into existence.
The Articles are always held to be subordinate to Memorandum because they are mere internal regulations of the company.
Methods of alteration
Section 13 provides that some of the conditions of incorporation, contained in the memorandum, such as the objects clause, and the registered office clause, cannot be altered except by the special resolution of the company and with the sanction of the central government.
Section 31, on the other hand, provides that the Articles of Association can be altered simply by a special resolution. It does not requiore the sanction of the central government or of any other authority.
Effect of the acts done in contravention of MOA and AOA
If a company does something outside the scope of the objects stated in the Memorandum, it is absolutely null and void and incapable of ratification.
If a company does something in contravention of the provisions of its Articles, it is only an irregularity and can always be confirmed by the shareholders. And thus rectified.


IV. Doctrine of Constructive Notice

The memorandum and articles of association of a company are public documents. Any person who is dealing with a company, presumed to have read and understood the proper meaning of the documents. In other words, no party can take the plea that he was ignorant of what have been stated in the memorandum and articles of association.
The doctrine of constructive notice comes to the aid of a company vis-à-vis the outsiders.

V. Doctrine of Indoor Management

As one is aware that the doctrine of constructive notice protects the company in its dealings with outsiders, the doctrine of indoor management comes to the aid of the outsiders, while dealing with the company.
The doctrine of indoor management implies, anyone dealing with the company who has no means of knowing about the internal functioning of the company has every right to presume that, things are happening the way it ought to happen. And any irregularity will not affect the rights of the outsiders. The company will not be allowed to escape liability.

In Royal British Bank v. Turquand (1856) 6E and B 327, the articles authorised the directors to borrow on bonds, by a resolution passed at the general meeting of the company. A bond was issued against the borrowings made by the company without passing the required resolution. Held, the company was liable on the bond as the borrower could presume that the resolution had been passed before making the borrowing through the issue of bond. This came to be known as ‘Turquand Rule’.

Exceptions to the Rule of Indoor Management:

The doctrine of indoor management is subject to five exceptions:

(1) Knowledge of internal irregularities of the company: A person already aware of the irregularity cannot claim protection under this rule.
(2) Suspicion of the internal irregularity: Where a person dealing with the company is placed in such circumstances, which are suspicious in nature and which invite inquiry, he is not protected by the doctrine.
(3) Acts void abinitio: This doctrine does not apply to acts that are void abinitio. Example: Where the document is a forged one.
(4) Acts, outside the apparent authority of the company: Where the acts of an officer, do not fall within the apparent authority of such an officer, protection under the doctrine cannot be claimed.
(5) No knowledge of articles: A person who at the time of entering into a contract with a company, has no knowledge of the company’s articles of association, cannot be saved or protected by the doctrine.



VI. Prospectus

Definition and meaning:

S. 2(36) defines a prospectus as –

“Any document desired or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares in or debentures of a body corporate.”


Contents of a Prospectus:
Section 56 lays down that the matters and reports stated in Schedule II to the Act must be included in a prospectus. The format of a prospectus is divided into three parts.
Part I:
(1) General information: Under this head information is given about
(i) Name and address of registered office of the company.
(ii) Name/s of stock exchange/s where application for listing is made.
(iii) Declaration about refund of the issue if minimum subscription of 90 per cent is not received within 90 days from closure of the issue.
(iv) Declaration about the issue of allotment letters / refunds within a period of 10 weeks and interest in case of any delay in refund, at the prescribed rate, under s. 73.
(v) Date of opening of the issue.
(vi) Date of closing of the issue.
(vii) Name and address of auditors and lead managers.
(viii) Whether rating from CRISIL or any rating agency has been obtained for the proposed debentures / preference shares issue. If no rating has been obtained, this should be answered as ‘NO’.
(ix) Name and address of the underwriters and the amount underwritten by them.

(2) Capital structure of the company:
(i) Authorised, issued, subscribed and paid-up capital.
(ii) Size of the present issue, giving separately reservation for preferential allotment to promoters and others.

(3) Terms of the present issue:
(i) Terms of payment.
(ii) How to apply.
(iii) Any special tax benefits.


(4) Particulars of the issue:
(i) Objects.
(ii) Project cost.
(iii) Means of financing (including contribution of promoters).

(5) Company management and project:
(i) History and main objects and present business of the company.
(ii) Promoters and their background.
(iii) Location of the project.
(iv) Collaborations, if any.
(v) Nature of the product(s). export possibilities.
(vi) Future prospectus.
(vii) Stock market data for share / debentures of the company including high and low price in each of the last three years and monthly high and low during the last six months, if applicable.

(6) Certain prescribed particulars: in regard to the company and other listed companies under the same management, which made any capital issue during the last three years.
(7) Outstanding litigations: relating to financial matters or criminal proceedings against the company or directors under Schedule XIII.
(8) Management perception of risk factors: (e.g., sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw materials or in marketing of products, cost / time over-run, etc.)


VII. Meetings

The following are the kinds of meetings of shareholders, Board of Directors and Class.

Kinds of Meetings:

(1) Statutory Meeting: This meeting is to be held by every public company limited by shares or limited by guarantee and having a share capital. It is convened after one month and not later than six months of commencement of business. The Directors are required to give minimum twenty-one days notice to the members. Along with the notice, a statutory report must be sent to all the members.
The statutory report contains the following matters:
(a) Total shares allotted.
(b) Cash received.
(c) Summary of receipts and payments made up to 7 days prior to the report.
(d) Names, addresses and occupations of the directors, manager and secretary of the company and of its auditors.
(e) Particulars of contracts if any.
(f) Extent of non-carrying of each underwriting contract, together with the reason.
(g) Details of commission and brokerage paid or to be paid to the director or manager, in connection with the issue of sale of shares or debentures.
(h) Details of arrears due from every director and manager.

If any default is made in filling the statutory report or in holding the statutory meeting, those in default are liable to fine, which may extend to five thousand rupees.

Another consequences being the Tribunal can order for compulsory winding up of the company.


(2) Annual General Meeting (AGM): Every company is required to hold the annual general meeting, in addition to any other meeting held by the company. The first general meeting is required to be held within a period of not more than 18 months from the date of its incorporation.

The provisions relating to this meeting may be summarized as follows:

(a) AGM must be held once a year. The gap between two consecutive AGMs cannot be more than 15 months. However, the Registrar of companies may extend the time for holding the AGM by not more than 3 months.
(b) At least 21 days notice of the meeting must be given to every member of the company. The notice must specify the date, place and time of the meeting.
(c) Shorter days of notice may be given with the consent of all members entitled to vote at the meeting. The meeting must be held on a day, which is not a public holiday and during the business hours.
(d) The meeting must be held at the registered office or the company or at some place within the city, town or village in which the registered office is situated.
(e) The business to be transacted at such a meeting may comprise of:

i. Consideration of accounts, balance sheet and the reports of the Board of directors and auditors.
ii. Declaration of dividend
iii. Appointment of directors.
iv. Appointment of directors.
v. Any other business.

(f) Where the meeting is not held in accordance with the law, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 50,000 and in case of continuing default with further fine which may extend to Rs. 2,500 per day during the continuance of default. Further the Central Government has the power to call for the AGM.

(3) Extraordinary or special General meeting: Any meeting held between two annual general meetings is called extraordinary general meeting. It is called to transact some urgent or special business, which cannot be postponed till the next annual general meeting.
(4) Board meeting: The meeting of the Board of Directors is referred to as Board Meeting. The Act requires board meeting to be held at least once in 3 months. The meeting may be held at any convenient place and time with a proper notice. Failure to give proper notice can hold the guilty person liable to a fine of Rs. 1000. Quorum for the board meeting is 1/3rd the strength of the Directors or 2 Directors whichever4 is higher. Quorum is necessary at every stage of the meeting.
(5) Class meeting: It is a meeting of a particular class of shareholders. It is generally held to pass resolution, which will bind only the members of the class concerned. These class meetings must be convened, whenever it is necessary to alter or change the rights or privileges of that class as provided by the articles.
Example: Debenture holder, Creditors & Preference Share holders.

VIII. Directors


A] Definition : S. 2(13) defines –

“Director includes any person occupying the position of director, by whatever name it called.”


B] Legal position of director:

i) Director as agent: Director is primarily recognized as an agent of the company. Director’s role is akin to the agent in the following aspects:

a) Acts of the director acts of the company: The director is the agent, while the company is the principal. The company is liable for the director’s act.

b) Notice to a director is notice to the company: Just as notice given to the agent is notice to the principal, any notice given to the director will be taken to be given to the company.

c) Ratification: Like a principal who may ratify the act of an agent, company can also ratify acts of a director provided it is not ultravires.

ii) Director as trustee: Though a director is not trustee in the strict sense of the term yet he has been held to be so since he stands in a fiduciary relation towards the shareholder.

iii) Director a managing partner: Directors while holding the interest of the company, are authorised by the shareholders to manage and control the affairs of the company in which shareholders are considered as inactive partners.

iv) Director as an employee: Although a director may be compared to an employee as he gets paid for the work done, he is not an employee.

v) Director as an organ of the body: A director is many a time compared to the brain, because the company operates through the director.

C] Duties and Liabilities of Directors:

i) Duty to act in good faith: Directors are in a fiduciary relation to the company. Therefore, they must discharge their duties with greatest good faith.
ii) Duty to act with reasonable care and diligence.
iii) Duty to attend board meetings and committee meetings.
iv) Duty not to delegate functions.
v) Duty to invest company’s money in a proper state of investements.
vi) Duty to deposit money of the company in a scheduled bank.
vii) Duty to forward statutory report to every member.
viii) Duty to call for extra-ordinary meeting, when validly demanded.
ix) Duty to prepare and place the balance sheet at the AGM
x) Duty to refrain from acting on behalf of the company, in the case of liquidation.

Liabilities:

i) Liability of directors as shareholders: Directors are also shareholders of the company. Hence like the shareholder their liabilities may be limited, unlimited or limited by guarantee based on the nature of the company.
ii) Person liabilities of directors: Personal liabilities of directors occurs in the following circumstances:
a) For breach of trust.
b) For untrue statement in the prospectus, failure to allot shares within
Stipulated time.
c) For ultravires acts of the company.
d) For misapplication of company’s money.
e) For fraud and torts of the company directed by the directors.
f) For loss on account of failure to exercise skill and diligence.

iii) Criminal liability: The companies Act imposes criminal liability upon directors, for certain breath of their duties like making untrue statement in the prospectus, falsification of accounts etc.