RICHTERLICH ACADEMY (JUNIOR CIVIL JUDGE, APP, TSAPP. CLAT, TSPGLCET, ‘LAW OPTIONAL) COMPANY LAW ‘S$ LAWCET, UPSC WRITTEN BY ROMANA ( BA.LLB, LLM, PGD) t CORPORATE PERSONALITY Corporate personality means the company is having a se} entity, distinct from its members and creators. A corporation i; Me juristic person having rights and liabilities such as: Right to possess the property in its own nares ~ Right to sue and be sued in its own na is) Like a natural person, the compan Apt to pay taxes and other statutory duties. © Right to contract in its own) Liability to repay loansignd cReditors. Corporate personal ‘creation of law. And as per the law, a corporation is an artificial pétsby cheated by the personification of a group of individuals. The theot porate personality mainly states that a company has a legal oN nt from its member. Both English and Indian laws follow the ‘corporate personality. Qin of the company can recover their money only from the company and they cannot sue individual members. In the same way, the company is‘ not in any way liable for the individual debts of its shareholders/members and the property of the company is only used for the benefit of the company.It enjoys certain rights and duties such as the right to hold property, right to enter into contracts, to sue and be sued in the name of the company. The rights and liabilities of the members are different from the company. In short, corporate/legal personality, which the company acquires on incorporation, confers legal personality and independent statusnth the company, For the first time, this concept was recognized in the yes 18¥7%in the case of Oakes v, Turquand and Harding, - a But it was approved and firmly established inks § Ming case of Salomon vs. Salomon in which it was held that,a cbpifiny has its own personality which is different from the personaliti e individuals. Salomon y A n_ & Co Ltd [1897] AC 22 1. Mr. Aron “e a businessman who specialized in manufacturing Teather boGid ARE a few years, he incorporated a limited company kno} ‘Safomon and Co. Ltd. 2. CG to meet the requirement to incorporate a company, he needed at Qa seven members/ shareholders so he decided to make his family members his business partners by giving one share to each of them. 3. He sold his business to the limited company for $39000 out of which $10000 was a debt to him. He was then the company’s principal shareholder and principal creditor.4, After one year, the company went into liquidation. The assets realized were $6000 while the liability was debentures held by Salomon $10000 and unsecured creditor $7000. 5. An unsecured creditor challenged the right of Salomon to have preference IssU a Was the formation of Salomon’s company a fraud intends SS, the creditors? 9 HELD: The court said that on incorporation, the ecame an independent legal person and not an agent of ne mon, as a debenture holder of the company was ought to eegrgh creditor, > as debenture holder over unsecured creditors. in payment over the unsecured The ee: of corporate personality given to the companies must be used for AS ‘te purposes only. When the said privilege is used to hide mdulent conduct, the court shall remove the veil or pierce the veil Sie This concept is called piercing of the corporate veil. If it is found that the members are misusing the statutory privilege then the individuals concemed will not be allowed to take shelter behind the corporatepersonality, The Court will break through the corporate shell and apply the principle/doctrine of what is called as “lifting of or piercing the corporate veil”. Cases where the court has ordered lifting up of veil- In case the Company commits a Fraud. Where the company do not have a physical presence, it is just on instrumepts. If the company has an enemy character because of its associationsawith the enemy counuy. ~S If the criminal activities are being hidden behind the companygS pant Further, the lifting of the corporate veil can be Statut f& or Judicial Lifting. ea, Statutory Lifting: If the company violates the Cofmpa fs Act, 2013 and the act provides for the lifting of the veil for the san is termed to be Statutory Lifting. Judicial Lifting: If the company vjotat&&the Companies Act, 2013 and the act does not provide for the lifting o then the judges can order the lifting of the veil which is known as, ee Name of aeparinee Company v. Continental Tyre and Rubber case RG) Ga (1916) 2 A.C. 307 Year of the ‘Company 1916 case Appellant | Daimler CompanyRespondent | Continental Tyre and Rubber Company Earl of Halsbury, viscount Mersey, lord Kinnear, lord Bench/ Atkinson, lord shaw of Dunfermline, lord parker of Judges Waddington, lord Sumner, and lord paramour. Acts Companies Act, 1905, Trading with the Enemy{ Act Involved 1914, \ Important ~~ Article 102, Article 15 of the Compay 905 Provisions be . Keywords \¢ Control, enemy, character, lifting the veil r Facts of the case es Most shareholders and all o; thors of Continental Tyre & Rubber Co Ltd. were German cit s an English secretary. Daimler purchased tires from Contingy and Rubber Co Ltd, but Daimler was hesitant to pay because dejfi%sg 1 fay violate both a proclamation and the common law with the enemy. Due to the First World War, Daimler launel suit to see if payment could be made, : a company is formed for a specific purpose, it is anticipated that it will be impartial and independent from its owners; nevertheless, during times of war, this is not always the case, and the shareholders may exert influence over the firm’s decisions. This particular case deals with a similar subject, and the ruling clarified several contentious issues. It also serves as a model for similar situations.SU 1. Whether trade with the enemy would constitute paying the debt because the corporation was an outsider? 2. Is removing the corporate veil appropriate in urgent situations? Judgment > ‘The House of Lords accepted the appeal and scone in though the firm is a separate artificial entity from its shareho! will take on an enemy character if its shareholders or consrhee ge nts are citizens of an enemy nation. r When there is peace or no war, so believed that the character of individual shareholders cannot net character of the company. However, during a war, it is imp git go” consider any agents or people who are following orders eee who are from an enemy nation to assess the charagtéqof Wé company. Because ry only owns one of the company’s 25000 shares, which Cas, and the rest are from Germany, the court strongly held that are fi 1 Kees of the company to demonstrate that the secretary was not acting on instructions from other areholders from an enemy nation. Conclusions The historic decision questioned the conventional wisdom that a company is a distinct legal entity. Business operations may be affected by shareholderloyalties in times of conflict when the bulk of shareholders are from an adversary nation. The corporation was able to act in the best interests of shareholders because the court correctly understood that measures taken against a company owned by an enemy could have serious repercussions. The ruling of the House of Lords demonstrates the dynamic interaction between businesses and shareholders, as seen in a situation when all byt one share was owned by a foe (Germany). S OFFICIAL LIQUIDATOR > In the process of winding up a company, a key jerges to oversee the entire liquidation process: the official ligftid > The official liquidator is responsible fing the company’s assets and distributing them among ws holders, such as debenture holders, creditors, and shareby > The National Company woah is a quasi-judicial body established under the Companies, Att of 3013. ded by the V Balakrishna Eradi Committee, > Its creation was xe and it offici Tnto existence on June 1, 2016, under Article 245 of the India tution. specifically established to handle cases related to Indian afegtetvent OF THE OFFICIAL LIQUIDATOR > The appointment of the official liquidator occurs in two types of winding up: > compulsory winding up and voluntary winding up. > In compulsory winding up, the official liquidator is appointed as the high court officer.> The appointment takes effect from the date of the winding-up order. > On the other hand, in voluntary winding up, the official liquidator is not automatically appointed; > Instead, the shareholders have the option to appoint a liquidator of theit choice. DUTIES OF THE OFFICIAL LIQUIDATOR \ form Under the Companies Act, the official liquidator has several du regarding the winding up of a company. These duties include: 1. Asset Realisation: One of the primary responsi of the official valuing and selling the assets to generate "for distribution among liquidator is to identify and realise the BS sets. This involves stakeholders. 2. Creditor Claims he official beh B responsible for examining and verifying the claims my ditors. They must determine the sims at Is legitimacy of these claims sure fair distribution of available funds. 3. Shareholder Cor ieaein: In the course of winding up, the official saijain effective communication with shareholders, liquidator we keeping ws fed about the progress of the liquidation process and e any ead jelopments. 4. DigSoluti¥n Process: Once the assets are realized and distributed, the Dida proceeds with the dissolution of the company. This Sr folves filing necessary documents with the Registrar of Companies and complying with legal requirements. POWERS OF THE OFFICIAL LIQUIDATOR The official liquidator is granted certain powers to cary out their duties effectively. These powers include:1. Investigation: The official liquidator has the authority to investigate the affairs of the company, including its past transactions, to identify any fraudulent activities or misconduct that may have contributed to the company’s liquidation. 2. Legal Proceedings: The official liquidator can initiate legal proceedings on behalf of the company if it is deemed necessary to protect the inferests of the stakeholders or recover any outstanding debts. — 3. Asset Preservation: To prevent any further loss or de of the company’s assets, the official liquidator has the power(o galt necessary steps to preserve and safeguard these assets qin WE liquidation process. 4. Access to Records: The official eh to access all company records, documents, and required for the winding-up ms CONFLICT BETWEEN SEC enfohin AND 4573) One of the notable asp, sane ie official liquidator’s role is the potential conflict between SA. 7(2) and 457(3) of the Companies Act. Section 4570) grants dw liquidator the power to carry on the business of the 1e ii up process if it is in the best interest of the to gather information stakeholdérs. [Bwever, section 457(3) states that the official liquidator cannot jusiness for more than a specified period without the approval of the\@ouit. This conflict raises questions about the extent of the official liquidator’s powers and the need for judicial oversight. THE ROLE OF THE OFFICIAL LIQUIDATOR: A COURT PERSPECTIVETo gain further insights into the role of the official liquidator, we turn to a notable decision by the Madras High Court. The court emphasized the official liquidator’s duty to act in all stakeholders’ best interests and ensure fair asset distribution. It highlighted the importance of transparency and accountability in The court also stressed the need for the official DEEMED PROSPECTUS S >A Deemed Prospectus refers to any =v that fulfils the a characteristics of a prospectus and invifes the liquidation proce: liquidator to exercise their powers judiciously and with due diligence. ription or offer for securities of a company. & > It includes documents like oes s, pamphlets, circulars, or any other communication that C) urities to the public for subscription or purchase. “X > Such documents ary ‘to be prospectuses and are subject to the same regulatory, efffénts as a regular prospectus. > The releva isjdns for Deemed Prospectus under the Companies Act 2013 incl x © Se 9 and Section 2(71): These sections define the term Cx and “deemed prospectus” respectively, and outline the broad Qa of documents that may be considered as a deemed prospectus. ‘© Section 26 and Section 32: These sections, as mentioned earlier, also apply to deemed prospectuses, requiring them to comply with the same requirements for contents and filing as regular prospectuses.INSOLVENCY AND BANKRUPTCY > The insolvency and bankruptcy code (IBC), 2016 was introduced to improve the relationship between the creditors and the debtors. > IBC, 2016 was passed by the Lok Sabha on May 05, 2016 and by the Rajya Sabha on May 11, 2016. > It got the assent of the President of India in 2016 and after 6 aah in December 2016 IBC got active, On Ist June 2016, National ympany Law Tribunal (NCLT) and its appellate body wa; ww the government under Companies Act, 2013, to adjugi utes in the matters of companies and limited liability ~ en ising under the fi ‘Act. In case of individuals and partnership, cating authority will Recovery of debts due to Banks andFindfcial Institution Act, 1993. faitons can apply for insolvency. The be Debt Recovery Tribunal wales was established under > Both individuals as well as only difference is, for me it is known as bankruptey and for corporate it is called coxgorai¥vinsolvency. 'vidual or company is not able to pay the debt > Itisa situation wi in the preseny &y@ay'Yuture and the value of assets held by them are less than liab 0 > The Ji ey and Bankruptcy Code (IBC), 2016 had been enacted to ie then existing laws related to insolvency and bankruptcy. Ivency is a state in which financial difficulties of a company are such that it is unable to run its business. > In order to cut down the burden of increasing non-performing assets, different kinds.of reforms were necessary. > However, an immediate change in the Insolvency and Bankruptcy Laws ‘was important.> Therefore, Bankruptcy Law Reforms Committee (BLRC) in 2014 under the chairmanship of Mr. TK. Viswanathan, former Union Law Secretary, was set up, in view of recommending an Indian Bankruptey Code to replace the existing laws and applicable both to non-financial corporations and individuals. The draft of Insolvency and Bankruptcy Insolvency and Bankruptcy Board of India ~\ > Insolvency and Bankruptcy Board of India (IBBI) ¢; ixistence on Code was submitted in 2015. Bankruptcy cases reported by financial ang-ope especially involved banks in India, home, buersyand ete, > The IBBI falls under the Insolvene ree Code, 2016. > IBBI plays the role of govet dy for all such as insolvency Ist of Oct 2016 to regulate and counter ,yaritys/Insolvency and eo creditors, which resolution process, insolyefley frofessional agencies and information utilities. > Approving the list, fon professionals is done by IBBL > It also enacts n#lesas well as enforce them to resolve corporate te liquidation, individual insolvency and individual per the insolvency and bankruptey code, 2016. > ey fakes part in making new amendments to the code. ye fhushan steel, Lancolnfratech, ESSAR steels, Bhushan Power and Cae Alok Industry, AmtekAuto, Electro Steel limited, Era Infra, Jaypee Infra Tech, ABGShipyard, Jyoti Structures and Monnet Ispat & Energy, constitute 25% of bad loans. © Many cases are settled outside the courts by using the Alternative resolution process.© Companies pay up in anticipation of not being referred to NCLT after introduction of section 29(a). © Bank receiving money from potential debtors who pay in anticipation of default. © Defaulters know that if they get into IBC they will be out of management of their ‘company because of section wee companies are clearing their NPAs. © No political and governmental interference. ~S Need of Insolvency and Bankruptcy Code (amendmen > Due to the novel coronavirus disease, it has SPaSincton around the globe. Till date many people are a whe world and the number is increasing rapidly. > To combat the spread of cag and to break the chain, various countries including India rings ied lockdowns. > Lockdown has ane nomy, financial market and businesses ip ed which is affecting the cash flow in the have been snopes market mics Ge the non-performing assets and causing defaults in payments a it > The ae ent of India, in order to safeguard the interest of the Gy lebtors and to rescue those corporate persons who may commit é towards their debt obligations, the Central Government brought itors/banks/financial institution. two amendments for insolvency and bankruptcy code, 2016 1. Including the raising of threshold for initiating the corporate insolvency resolution process (“CIRP”) under Section 4 of the Code, from one lakh rupees to one crore rupees, vide a notification issued by the Ministry of Corporate Affairs (MCA) dated 24 March, 2020.2. Section 10A of IBC, 2016: suspension of initiation of corporate insolvency resolution process Notwithstanding anything contained in section 7, section 9, and section 10 of the IBC, 2016- No application for initiation of corporate insolvency resolution process of a corporate debtor shall be filled, for any default arising on or after 25th march 2020 for a period of 6 months not exceeding 1 year from such date as may be notified i.e. 05.06.20. It is hereby clarified that verge of this 25th March 2020. & MERGER section shall not apply to any default under the said sgetid}ix,before > A merger is a business deal where two ong dependent companies combine to form a new, singular legal oe > Mergers are voluntary. imilar size and scope and both stand > Typically, both companies oe to gain from the sransagtion SS > Mergers happen f ‘of reasons. > They could aliéw, = company to enter a new market, sell a new product, was fw service. > They gai -duce operational costs, improve management, change aey 1g models, or lower tax liabilities. Daa fly, however, companies merge to increase size, scale, and ere. In other words, mergers help companies make more money. How Mergers Work > Mergers are often spearheaded and facilitated by an investment banker.vi > They source deals, value companies, forecast outcomes, and make sure both companies have their houses in order (a process known as due diligence). > Corporate lawyers also oversee M&A deals, ensuring, among other things, that the transaction complies with federal and state regulations. Learn both sides of M&A with the following Forage courses: > Mergers are generally funded by cash, equity (stocks), or both. ~\ ued > When two companies merge, shareholders in each comp: stock (equal to the value of their old stock) in the new int ‘Types of Mergers . O ‘There are a variety of ways for companies to ner) ‘The most common types include: re Horizontal O ‘A merger is considered yétRontaf if the two companies already offer the same products or servicesfHprizontal mergers help companies reduce competition and dominate ee For example, gas giant Exxon combined with gas giant Mobil 1998 to form ExxonMobil. At the time, that horizontal deal Mat sion A matket extension merger is a horizontal merger that allows two companies that sell the same product to operate in a new market. For example, if a U.S. regional bank in the east merged with a U.S. regional bank in the west to form the U.S. Bank of the East and West, that would be a market extension merger. These types of consolidations help companies drive more revenue by expanding where they do business.Vertical A merger is considered vertical if the two companies operate within each other's supply chain. Think of a home construction company purchasing a window pane manufacturer or a winery buying a glass bottle manufacturer. Vertical mergers help companies reduce costs because they effectively the middleman. Conglomerate SX ‘A merger is considered a conglomerate acquisitis AP Epmies operate in separate industries and, at face value, have iy "Wee in common from a business perspective. Think of a clothing eempifiy go fombining with a snack food market extensions, and increase rational efficiencies. manufacturer. Conglomerate A statutory meeting is held once during the life of a company. > Generally, it is held just after a company is incorporated,> Every public company, limited either by shares or by guarantee, must positively hold a statutory meeting as soon as the company is incorporated, > A statutory meeting should be held between a minimum period of one month and a maximum period of six months after the commencement of statutory meeting of the company. AY >The notice for a statutory meeting should resin business of the company. >A meeting before a period of one month cannot be con: asa Statutory meeting is going to be held on a specific date. 2) > Private companies and government companies we found to hold any statutory meetings. > Only public limited companies are within the specified period of AON Procedure of the Statutory Megtil > The board of otyinn a statutory report to every member > This rene nt at least 21 days before the meeting. > Membety, attending the meeting may discuss topics regarding the fe of the company or topics related to the statutory report. hold statutory meetings Nee futions can be taken in the statutory meeting of the company. ee ‘main objective of the statutory meeting is to make the members familiar with the matters regarding the promotion and formation of the company. > The shareholders receive particulars related to shares taken up, moneys received, contracts entered into, preliminary expenses incurred, etc. > The shareholders also get a chance to discuss business ideas and methods and the future prospects of the company.> An adjourned meeting is called if the statutory meeting does not mect a conclusion, > According to section 433 of the Companies Act, 1956, a company may be subjected to winding up if it fails to submit a statutory report or fails to conduct a statutory meeting within the aforementioned period. > However, the court may order the company to submit the statutory report and to conduct the statutory meeting and impose a fine on thespérsons responsible for the default instead of directly winding up she’ Adjournment of Statutory Meeting © According to section 165(8) of the Compani ‘Statutory meeting inay be adjourned from time to time. © Any resolution on which notice bas be: fFaccording to the provision of the Companies Act may be pa: yh her the resolution was taken up before or after the last meeti “< @ The adjourning meeting same power as the original statutory meeting. ee © The power to adj Sere on the decision of the meeting. The ica adjourned by the chairman without the consent of the memBbgs oBthe meeting. Th SN is expected to adjourn the meeting if the members wish to ~~ Jithout invoking any discriminatory powers given to the chairman a ¢ articles of association of the company. sually, the chairman is not bound to adjourn a meeting even if the majority of the members wish for the adjournment. The statutory meeting provides an exception in the rule that only unfinished business at the original meeting must be carried out at the adjourned meeting.Members have the right to initiate new topics of discussion in the adjourned meeting. The advantage of adjourned meetings over statutory meetings is that a resolution can be passed in an adjourned meeting, which is not possible in the case of the latter. If any resolution is needed to be passed based on the topics discussed in the statutory meeting, it must be passed at an adjourning mee 0 in accordance with the law. wy Default & In case of any default made in filing the statutory r ‘in conduct of the statutory meeting, the members responsible willf6e ligble to fine according to section 165(9) of the Companies Act. The Lope to INR 5000. The court can also order compulsory stigdinits up of the company in accordance with section 433(b) of the conttc Cl if the statutory meeting is not held within the prescribed time, ~~ Statutory Report y The board < fust forward a statutory report to every member of the company. Thi afoh be sent at least 21 days before the meeting. qT 2: rticulars to be mentioned in the report are as follows — The total number of allotted shares with the account of fully paid and partly paid shares and the reasons for considerations and extension of the partly paid shares ‘The net amount of cash collected after the allotment of sharesA brief insight, i.e., an abstract of receipts and payments made within 7 days of the date of the report, balance remaining in the hands of the company and an estimation of the preliminary expenses of the company The names, addresses, and designations of the directors, managers, secretaries, and auditors along with the change log in case of any replacements made from the date of incorporation of the company The details of any modifications or contracts to be submigede te meeting for approval The limit of non-carrying out of any underwriting og with justified reasons for the non-carrying out of the aft fed contracts ventures. any manager for the issue of sale of cote ‘TRANSMISSION OF SHARE: > The word Gas means transfer of title by operation of law. >It Seed Succession Transmission of shares is a process by a of law where under the Shares are registered in a ‘© pany in the name of deceased person or an insolvent person we ‘are registered in the name of his legal heirs by the Company on & proof of death or insolvency as the case may be. > Transmission of shares takes place when a registered member dies or is adjudicated insolvent or lunatic by a competent court. > Section 56 of the Companies Act, 2013 the power of the company to register, on receipt of an intimation of transmission of any rightto sccurities by operation of law from any person to whom such right has been transmitted. > Documents required for Transmission of Shares: In case of transmission of shares by operation of law, it is not necessary to execute and submit transfer deeds. > A simple application to the company by a legal representative along with the following necessary evidence is sufficient; . a. Certified copy of death certificate; & b. Succession certificate; (Succession cer ‘a document the successor of a deceased person) eS ) c. Probate (sample given belqw’ 4. Specimen “0 \cCessor.. Note 1: If a member of a seen Q and he/she leaves after him a will or letter of administration = furvivors shall get a copy of ‘will’ certified Ip under the seal of “x C mpetent jurisdiction. i. The certified’ AS the will is called a ‘probate’. Succession certificate is not requirgd+Wifen probate or letter of administration is issued. om er of a company dies without leaving a will, then a succession See issued by a Court of competent jurisdiction shall be submitted to the company. Once succession certificate is granted, it provides full indemnity to the company regarding transmission of shares by operation of law. iii, The survivors in case of joint holding can get the shares transmitted in their names by production of the death certificate of the deceased holder of sharesNote Such a legal Representative is however, not the member of the Company but the legal owner of the Shares instead of registered as a member, he may transfer the shares as the deceased or insolvent member could have made. Note 3: Where title to the shares comes to vest int another person by operation of law, it is not necessary to submit a transfer form. Note 4: Since the Transmission is by the operation by law, ne duty nor consideration is required on the instrument of transmig6 less he is registered Note 5: The legal Representative of a deceased mem| Sait ot be entitled to exercise voting rights or other rights in a general Cj as a member in respect of the Shares. Note ‘ransmission in case of Joint Shatgholdins Regulation 23 of Table F of the Cémpapits Act, 2013 provides that on death of a member where the Ns Tat shareholder, the survivors or survivor shall be the only pers Oe fiized by the Company. The legal heirs of deceased member er titled to get registered as joint holder along with surviving nolaey G de® of Transmission of Shares:- ee The Survivors in case of joint shareholding can get the share transmitted on production of the death certificate of deceased shareholder. 2. If the member of the Company dies and leaves after him a will or letter of administration then survivor shall get the copy of will cettified under the s al of the Court. The certified copy of will is called a probate and it shall be forwarded to the Company.3. If a Member of the Company dies without leaving a Will, then a succession certificate issued by the Court shall be issued to the Company. ‘Transmission in case of small shareholding:- ‘Transfer may be considered and affected by the Company without obtaining succession certificate. The Board of Directors shall cra that sufficient evidence has been produced by the legal ~ > The doctrine of indoor management is an except Q earlier doctrine of constructive notice. > It is important to note that the doctri structive notice does not allow outsiders to have notice of theyintergal affairs of the company. a > Hence, if an act is autho Age Memorandum or Articles of ke ip Association, then the outsi assume that all detailed formalities are observed in doing the Sor Management or the Turquand Rule. > This is based, \dmark case between The Royal British Bank and °s indoor affairs are the company’s problem. Gv this rule of indoor management is important to people dealing ‘ith a company through its directors or other persons. > They can assume that the members of the company are performing their acts within the scope of their apparent authority, > Hence, if an act which is valid under the Articles, is done in a particular manner, then the outsider dealing with the company can assume that the director/other officers have worked within their authority.Exceptions to the Doctrine of Indoor Management The Turquand rule or the law of indoor management is not applicable to the following cases: The outsider has actual or constructive knowledge of an irregularity In such cases, the rule of indoor management does not offer protectiongto the outsider dealing with the said company. = The outsider behaves negligently fealing with a company if he does not initiate an inquiry wes reting an irregularity. The rule of Indoor management does not protect a Further, this rule does not offer protection if the Gjrcufhttances surrounding the contract are suspicious. For example, the Ape a get suspicious if an officer pupors to actin a manner ousigejhy.scbpe of his authority = _ OG The doctrine of indoor egies is applicable to irregularities that affect a transaction except f JEBEN eo ‘debenture’ itself is a derivation of the Latin word ‘debere’ hi \ich means to borrow or loan. In case of a forgery, the transaction is deemed null and vot > Debentures are written instruments of debt that companies issue under their common seal. > They are similar to a loan certificate. > Debentures are issued to the public as a contract of repayment of money borrowed from them.> These debentures are for a fixed period and a fixed interest rate that can be payable yearly or half-yearly. > Debentures are also offered to the public at large, like equity shares. Debentures are actually the most common way for large companies to borrow money. Let us look at some important features of debentures that make them. wai san © Debentures are instruments of debt, which meapt’ holders become creditors of the company © They are a certificate of debt, with the date company seal and is known as a Di Debentures have a fixed rate offipt payable yearly or half-y Debenture holders do any voting rights. This is because they are not inst pep, so debenture holders are not owners of st, and such interest amount is the compap¢ niggereditors © The intéfgst Pofable to these debenture holders is a charge against the prefi je company. So these payments have to be made even in case Of a loss » tages of Debentures © One of the biggest advantages of debentures is that the company can get its required funds without diluting equity. Since debentures are a form of debt, the equity of the company remains unchanged.@ Interest to be paid on debentures is a charge against profit for the company. But thi also means it is a tax-deductible expense and is useful while tax planning © Debentures encourage long-term planning and funding. And compared to other forms of lending debentures tend to be cheaper. @ Debenture holders bear very little risk since the loan is securgd and the interest is payable even in the case of a loss to the comy a, e At times of inflation, debentures are the preferred in; raise O Disadvantages of Debentures © The interest payable to debenture notoheish ‘financial burden for the company. It is payable even in the eWght Bf a loss funds since they have a fixed rate of interest © While issuing debentures ompany trade on equity, it also makes it dependent AN skewed Debt-Equity Ratio is not good for the financial health of company fures is a significant cash outflow for the imbalance its liquidity © During depression, when profits are declining, debentures can to'be very expensive due to their fixed interest rate ppventares There are various types of debentures that a company can issue, based on security, tenure, convertibility etc. Let us take a look at some of these types of debentures.© Secured Debentures: These are debentures that are secured against an asset/assets of the company. This means a charge is created on such an asset in case of default in repayment of such debentures. So in case, the company does not have enough funds to repay such debentures, the said asset will be sold to pay such a loan. The charge may be fixed, ic. against a specific asset/assets or floating, i.e. against all assets of the firm. = ‘© Unsecured Debentures: These are not secured by ‘against the assets of the company, neither fixed nor floatiy ally such kinds of debentures are not issued by companic ‘© Redeemable Debentures: These debe: fe Bayable at the expiry of their term. Which means at the, specified period they are payable, either in the lump sum or iNinstalments over a time period. Such debentures can be re, sgh par, premium or at a discount. © Irredeemable Deben Gs debentures are perpetual in nature. There is no fixed%gate Wt which they become payable. They are redeemable Segoe goes into the liquidation process. Or they Repo after an unspecified long time interval. or llyyConyertible Debentures: These shares can be converted to shares at the option of the debenture holder. So if he wishes Go after a specified time interval all his shares will be converted to Qe ‘equity shares and he will become a shareholder. Partly Convertible Debentures: Here the holders of such debentures are given the option to partially convert their debentures to shares. If he opts for the conversion, he will be both a creditor and a shareholder of the company.Non-Convertible Debentures: As the name suggests such debentures do not have an option to be converted to shares or any kind of equity. These debentures will remain so till their maturity, no conversion will take place. These are the most common type of debentures. RT) IF ASSOCIATION ~| Definition of Articles of Association under the Companies. 2043 > The Companies Act, 2013 provides a detailed defigi related to the Articles of Association er (5) and Section 5 “ind provisions respectively. > According to Section 2(5) of the cong ‘Act, 2013, the Articles of Association refers to the docu taining the rules and regulations that govern the manascen ng mpany’s affairs, > Section 5 of the Cor an et 2013 specifies that the Articles of Association must QName with the provisions of the Act and must be sigt subscriber to the memorandum of association in the presi at feast one witness who attests the signature. The articles musi ne printed and divided into paragraphs and numbered .ermore, the Act specifies that the articles may contain provisions for .¢ management of the company’s business, the regulation of its affairs, the conduct of its shareholders and directors, and other matters incidental to the company’s operations.> The articles may also provide for the transfer and transmission of shares, the appointment and removal of directors, the payment of dividends, and the winding up of the company. Purpose of the AoA. Law, some of which are: The Articles of Association serve several purposes under the Indian oer Governing document: The:Articles of Association is a goves that defines the rules and regulations for the management arf company. It sets out the tights, duties, and obliga directors, shareholders, and officers. Legal requirements: The Companies Act, 2015\mafidates every company to have its Articles of Association, which mm e filed with the Registrar of Companies at the time of incorporati Clarity: The Articles of oe Ip to provide clarity to the company’s tt shareholders, directors, and-gfficeé¥s on the procedures and rules they must follow when conductin; Gna Protection: mee Association help to protect the interests of the shareholders ing their rights and providing procedures to address 4 ick’. The Articles of Association can be amended from time to time to sl ging needs and circumstances of the company, provided that such amendments comply with the provisions of the Companies Act, 2013. Overall, the Articles of Association play a critical role in the governance of a company and help to ensure that the company’s affairs are conducted in a lawful and transparent manner while protecting the interests of its stakeholders.Scope of AoA > The Articles of Association and Memorandum of Association (MoA) are two important documents that a company must have as per the provisions of the Companies Act, 2013. > The MoA defines the fundamental objectives and scope of the company, while the AoA contains the rules and regulations for the company's management and operation. ~ > The scope of the AoA is limited by the MoA, as the rul lations contained in the AoA must be consistent with the weS outlined in ‘the MoA. > The AoA must not exceed the scope of on and should not contain any provision that is ultra vires (beyor rs) of the company as specified in the MoA. >In the landmark rin Chand v. Calcutta Stock Exchange, the Supreme India held that the AoA of a company must not contain any,pfbyision that is beyond the scope of the MoA. > In this case, theCA\Gufl Stock Exchange had inserted a provision in its AoA that aw to expel a member for conduct detrimental to the interest 6 the 2 sreme Court held that the provision in the AoA was ultra vires the change, even though this provision was not included in ‘A and was therefore void. > The court emphasised that the scope of the AoA must be consistent with the MoA and that any provision in the AoA that goes beyond the MoA is, invalid. > This judgement highlights the importance of ensuring that the AoA is in line with the MoA, and that any provision in the AoA must not exceedthe scope of the MoA. Companies must take care to ensure that their AoA is not ultra vires the MoA to avoid any legal disputes or challenges to the validity of their AoA. PROSPECTU: > A prospectus is a legal document that contains important igfSFnation about a company and its securities, which are being oO mublic for subscription or purchase. > It serves as a key source of infortiation for potefitigl ifivestors to make informed investment decisions. >A prospectus provides detailed ing hid ‘about the company’s financials, business operations, Se risks, and other relevant information that investors know before investing in the company’s securities. © >In the context of company law, a prospectus is regulated by the Companies Act, ts out the requirements and guidelines for preparing an ing prospectuses. > The Cor s Act lays down the mandatory disclosures that must be ma réspectus to ensure transparency and investor protection. ctus must be registered with the regulatory authority before it g ¢ used for offering securities to the public. > Prospectuses are commonly used by companies when they intend to raise funds through public offerings, such as initial public offerings (IPOs), follow-on public offerings (FPOs), and rights issues. > It is a crucial document that helps potential investors assess the risks and rewards associated with investing in a company’s securities.‘Types of Prospectus in Company Law Prospectuses can come in various forms, such as a full prospectus, red herring prospectus, shelf prospectus, abridged prospectus, or deemed prospectus, depending on the type of offering and regulatory requirements. Each type of prospectus has its own specific features, usage, and regulatory pro saa companies must adhere to while preparing and filing them. eS Red Herring Prospectus (RHP) O > The Red Herring Prospectus (RHP) is a prpli SRP ross or offer document used by companies to make an ititial Public offering (IPO) or a follow-on public offer (FPO) of seq ae > The RHP contains all the reftydfiinformation about the company’s shares or debentures, nek ti inal offer price. > It is filed with the Rec circulated to potential investors for their consideration. Q > The relevant, Signs for RHP under the Companies Act 2013 include: © Section s section outlines the requirements for the contents of a Pros icluding the information to be included in the RHP. This section specifies the procedure for filing the prospectus BY the ROC, including the requirement to file the RHP before the ‘opening of the subscription list. @ Section 31: This section mandates the inclusion of a statement in the RHP that the offer is being made through @ prospectus and that investors should read the prospectus before making an investment decision.