Business Law

“ Ignorance of law is not an

excuse”
Unit -1 ( syllabys)

 Companies Act 1956/ 2013

Provisions of the act with regard to
 Classification
 Formation
 Memorandum of association
 Articles of association
 Capital of company
 Compay meetings, Agenda & minutes
Unit Objectives

 The objective of the unit is to provide basic knowledge

of the provisions of Indian companies act 1956 & recent
amendments of 2013. This will help students ti
understand the legal framework of Indian Business.
 A Very substantial part of the Act will be in the form of
rules which will be prescribed separately.
 470 Sections [658 Sections ]
 7 Schedules [15 Schedules]
 29 Chapters [13 Parts]
Introduction

 Industrial revolution has led to the emergence of large

scale business organizations. The 1956 act has been in
need of substantial change, to make it more
contemporary & relevant to corporate regulators &
other stakeholders in India. The 2013 act has introduced
several new concepts & has also tried to streamlined
new definitions.
 Act may be called as Companies act 2013
 Extends to whole India
 ORIGIN OF COMPANIES ACT IN INDIA
 The earliest piece of legislation in India relating to
companies was the Act of 1857.
 The next came companies Act ,1866. After this the
companies Act 1882 was enacted and it was replaced by
Indian Companies Act,1913 Following the
recommendations of Company law committee set up in
1950 , the Indian Companies act,1956 was enacted.
 The Companies Act, 1956, has been amended as many
as 24 times since 1956.
 Objectives of the Act
 To equip the Government with adequate powers to intervene
in the affairs of a company in the public interest and as per
the procedure prescribed by law so that the interest of all the
stake-holders may be protected from unscrupulous
management
 To help the development of Companies in India on healthy
lines, because corporate sector constitutes a very important
segment of the economy.
 To protect the interests of large number of share holders, as
there exists separation of ownership from management in a
company.
 To help the attainment of the ultimate ends of the social and
economic policy of the Government
Definition of Company

 “ A Voluntary Association”
 Companies formed & registered under the act.
 TATA Consultancy Services
Reliance Industries
Hindustan Unilever
Infosys
Features of Companies

 Created by law:- It is created by law. It is considered as a

person in the eyes of law.
 Separate legal entity:-A company formed and registered under
the Companies Act is a legal entity separate and distinct from
its members.
 Limited liability:-It means that the liability of the shareholders
is limited up to the value of the shares held by them.
 Perpetual succession:-As the life of the company is not
affected by changes in individual shareholders, it is said to
have perpetual succession (i.e., continuity of life). Even the
death or insolvency of a member (or even all members) does
not affect the corporate existence of the company. Members
may come, members may go, but the company continues its
operations unless it is wound up.
 Common seal:- A company, being an artificial person, cannot sign its
name on any document. So a company functions with the help of a
Common Seal which is the official signature of a company.
 Transferability of shares:- Shareholders have the right to transfer
their shares. The shares of a company are freely transferable and
can be sold or purchased in the stock exchange. However, in the
case of a private company, certain restrictions are placed on the
rights of a member to transfer his shares.
 Separate property:-The property of the company is not considered
as the joint property of the shareholders although the same has
been purchased from the capital contributed by the shareholders.
 Capacity to sue:- A company like any other person can sue a third
party and be sued.
 Artificial person:- It has no body and mind of its own. It can act
only through other persons elected for the purpose.
 Separation of ownership and management – A company is
managed through a board of directors elected by its members. A
member has no right to participate in the management of its day-
to-day affairs.
 Dissolution – The company can be dissolved only by which creates
it.
 Registration: A company comes into existence on registration
under the Companies Act. It is an incorporated association. A joint
stock company may be incorporated as a private or public
company or one person company.
• Board: The management of the company is delegated to a board,
called board of directors.
• Not a Citizen: A company is not a citizen and therefore cannot
enjoy the fundamental rights like right to vote which are available
to citizens only.
Kinds of companies

 On the basis of incorporation

 Statutory companies - created by a special act of
legislature- RBI, LIC,SBI
 Registered companies- formed & registered under the
companies act
 On the Basis of Liability
 Companies with limited liability
 Limited by shares
 Limited by guarantee
 Unlimited company ( sec. 12 provides that in case of a
private company with unlimited liability, every member is
liable for the debts of the company)
 Kinds of companies

 On the basis of number of members

 PRIVATE COMPANY - According to sec 13 (1) two or more
person can form a private company which has a
minimum paid up capital of rs. 100000 or higher paid up
capital as may be prescribed & which by articles
 Restrict the right to transfer its shares
 Limits the number of its members to 200
 Prohibits any invitation to the public to subscribe for
any shares of the company
 Prohibits any invitation or acceptance of deposits from
person other than its members or directors.
Kinds of companies

 PUBLIC COMPANY
 A public company means a company which
 Has minimum paid up capital of rs. 5 lakh
 Is a private company which is subsidiary of a company
which is not a private company.
 Kinds of companies

 On the basis of control

 Holding Company:
 Defined u/s 2(46) of the CA, 2013 –“holding company”, in relation to one
or more other companies, means a company of which such companies are
subsidiary companies.
 Subsidiary Company:
 Defined u/s 2(87) of the CA, 2013 – “subsidiary company” or
“subsidiary”, in relation to any other company (that is to say the holding
company), means a company in which the holding company—
 1. controls the composition of the Board of Directors; or
 2. exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary companies:
 Provided that such class or classes of holding companies as may be
prescribed shall not have layers of subsidiaries beyond such numbers as
may be prescribed.
Kinds of companies
 Government Companies
 Section 2(45) defines a “Government Company” as any company in
which not less than fifty one per cent. Of the paid-up share capital is
he

Foreign Companies
 As per section 2(42), “foreign company” means any company or body
corporate incorporated outside India which—
 has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and conducts any business
activity in India in any other manner
Kinds of companies

 Small Company:
 Defined u/s 2(85) of the CA, 2013 – “small company” means a company,
other than a public company,—
 1. paid-up share capital of which does not exceed 50 lakh rupees or such
higher amount as may be prescribed which shall not be more than 10 crore
rupees; and
 2. turnover of which as per profit and loss account for the immediately
preceding financial year does not exceed 2 crore rupees or such higher
amount as may be prescribed which shall not be more than 100 crore rupees
 Provided that nothing in this clause shall apply to—
 a holding company or a subsidiary company;
 a company registered under section 8; or
 a company or body corporate governed by any special Act;
 Special privileges: Small Company enjoys several privileges and exemptions
under the Companies Act.
Kinds of companies

 Dormant Company:
 In case of company is formed and registered under this Act for a future project or
to hold an asset or intellectual property and has no significant accounting
transaction, such a company or an inactive company may make an application to
the Registrar for obtaining the status of a dormant company.
 Thereafter Registrar on consideration of the application shall allow the status of
a dormant company to the applicant and issue a certificate.
 “Inactive company” means a company which has not been carrying on any
business or operation, or has not made any significant accounting transaction
during the last two financial years, or has not filed financial statements and
annual returns during the last two financial years.
 In case of a company which has not filed financial statements or annual returns
for two financial years consecutively, the Registrar shall issue a notice to that
company and enter the name of such company in the register maintained for
dormant companies.
 Registrar have power to strike off the name of a dormant company from the
register of dormant companies, which has failed to comply with the
requirements of this section.
Kinds of companies

 Association not for profit

 Sec. 8 of companies act 2013 permits the registration,
under a license granted by the central govt. of an
association not for profit with limited liability.
 Conditions for granting license
 For promoting commerce, research, social welfare, arts,
science, sports, education, religion, charity, protection
of environment or any other useful object.
 It tends to apply its profit in promoting its object.
 It will prohibit the payment of any dividend to its
members.
Kinds of companies

 ONE PERSON COMPSNY

 With the implementation of the Companies Act, 2013, a single person could constitute a
Company, under the One Person Company (OPC) concept.
 The concept of One person company is quite revolutionary. It gives the individual
entrepreneurs all the benefits of a company, which means they will get credit, bank
loans, access to the market, limited liability, and legal protection available to
companies.

FEATURES

 In order to meet the statutory requirement of minimum number of members, some

dummy members are , mostly in his relations, hold just one or two shares
 OPC can be incorporated as private limited company
 “one person company” must be mentioned below the name of company.
 Exempted from holding general meeting.
 A single person in entitled to incorporate maximum of 5 OPC.
Kinds of companies

 Small Company
 As recommended by the Dr JJ Irani Committee, the concept of small
companies has been introduced in the Companies, Act, 2013A small
company is a new form of a private company under the Act.
As per section 2(85) ‘‘small company’’ means a company, other than a
public company,—

 paid-up share capital of which does not exceed fifty lakh rupees or such
higher amount as may be prescribed which shall not be more than five crore
rupees; or turnover of which as per its last profit and loss account does not
exceed two core rupee
 turnover of which as per its last profit and loss account does not exceed
two core rupees or such higher amount as may be prescribed which shall
not be more than twenty core rupees:
How to form a company?
 The whole process of formation of a
company may be divided into four
stages, namely:
(i) Promotion
(ii) Registration
(iii) Floatation/Raising of Capital
(iv) Commencement of Business.
Promotion

 Promotion is the first stage in the formation of a

company. The term ‘Promotion’ refers to the aggregate
of activities designed to bring into being an enterprise
to operate a business. It presupposes the technical
processing of a commercial proposition with reference
to its potential profitability. A person who does the
necessary preliminary work for incorporation is called as
promoter.
 For example, Dhirubhai Ambani is the promoter of
Reliance Industries.
 According to C.W. Grestembeg, “Promotion may be
defined as the discovery of business opportunities and
the subsequent organisation of funds, property and
managerial ability into a business concern for the
purpose of making profits therefrom.”
 According to H.E. Heagland, “Promotion is the process of
creating a specific business enterprise. Its scope is very
broad, and numerous individuals are frequently asked to
make their contributions to the programme. Promotion
begins when someone gives serious consideration to the
formulation of the ideas upon which the business in
question is to be based. When the corporation is
organised and ready for operation, the major function of
promotion comes to an end.”
Promoter’s position

 The company law has not given any legal status to promoters. He
stands in a fiduciary position(relation requiring confidence & trust).
 From the fiduciary position of promoters, the two important results
follow:
 (1) A promoter cannot be allowed to make any secret profits. If it is
found that in any particular transaction of the company, he has
obtained a secret profit for himself, he will be bound to refund the
same to the company.
 (2) The promoter is not allowed to derive a profit from the sale of his
own property to the company unless all material facts are disclosed. If
he contracts to sell his own property to the company without making a
full disclosure, the company may either repudiate/rescind the sale or
affirm the contract and recover the profit made out of it by the
promoter.
 A promoter who wishes to sell his own property to the company must
make a full disclosure of his interest.
Rights of Promoter:

 Right of indemnity:
 Where more than one person act as the promoters of the company, one promoter
can claim against another promoter for the compensation and damages paid by
him.
 2. Right to receive the legitimate preliminary expenses:
 A promoter is entitled to receive the legitimate preliminary expenses which he
has incurred in the process of formation of the company such as cost of
advertisement, fee of solicitor and surveyors. The right to receive the preliminary
expenses is not a contractual right. It depends upon the discretion of the directors
of the company. The claim for expenses should be supported by vouchers.
 3. Right to receive the remuneration:
 A promoter has no right against the company for his remuneration unless there is
a contract to that effect. In some cases, articles of the company provide for the
directors paying a specified amount to promoters for their services but this does
not give the promoters any contractual right to sue the company. This is simply an
authority vested in the directors of the company.
 However, the promoters are usually the directors, so that in practice the
promoters will receive their remuneration.
Duties of Promoter

 1. To disclose the secret profit: The promoter should not make any secret profit.
If he has made any secret profit, it is his duty to disclose all the money secretly
obtained by way of profit.
 2. To disclose all the material facts: The promoter should disclose all the material
facts. If a promoter contracts to sell the company a property without making a full
disclosure, and the property was acquired by him at a time when he stood in a
fiduciary position towards the company, the company may either repudiate the sale
or affirm the contract and recover the profit made out of it by the promoters.
 3. The promoter must make good to the company what he has obtained as a
trustee:A promoters stands in fiduciary position towards the company. It is the duty
of the promoter to make good to the company what he has obtained as trustee and
not what he may get at any time.
 4. Duty to disclose private arrangements: It is the duty of the promoter to
disclose all the private arrangement resulting him profit by the promotion of the
company.
 5. Duty of promoter against the future allottees: When it is said the promoters
stand in a fiduciary position towards the company then it does not mean that they
stand in such relation only to the company or to the signatories of memorandums of
company and they will also stand in this relation to the future allottees of the
shares.
Stage 2. Incorporation or
Registration Stage:
 In order to get the company registered, the important
documents required to be filed with the Registrar of
Companies are as follows.
 1. Memorandum of Association: It is to be signed by a
minimum of 7 persons for a public company and by 2 in
case of a pvt company. It must be properly stamped.
 2. Articles of Association: This document is signed by
all those persons who have signed the Memorandum of
Association.
 3. List of Directors: A list of directors with their names,
address and occupation is to be prepared and filed with the
Registrar of Companies.
 4. Written consent of the Directors: A written consent of the
directors that they have agreed to act as directors has to be
filed with the Registrar along with a written undertaking to the
effect that they will take qualification shares and will pay for
them.
 5. Notice of the Address of the Registered Office: It is also
customary to file the notice of the address of the company’s
registered office at the time of incorporation. It is to be given
within 30 days after the date of incorporation.
 6. Statutory Declaration: A statutory declaration by
 any advocate of the Supreme Court or
 of a High Court, or
 an attorney or pleader entitled to appear before a High Court or
 a practicing chartered accountant in India, who engages in the
Company formation or
 by a person indicated in the articles as director, managing
director, Secretary or manager of the company, mentioning that
the requisites of the Act and the rules there under have been
complied with. It is to be filed with the Registrar of
Companies.
 When the required documents have been filed with the
Registrar along with the prescribed fee, the Registrar
scrutinizes the documents. If the Registrar is satisfied,
the name of the company is entered in the register.
Then the Registrar issues a certificate known as
Certificate of Incorporation.
Certificate of Incorporation

 On the registration of Memorandum of Association,

Articles of Association and other documents, the
Registrar will issue a certificate known as the
‘Certificate of Incorporation‘. The issue of certificate
is the evidence of the fact that the company is
incorporated and the requirements of the Companies
Act have been complied with.
The specimen of certificate
of incorporation
Effects of Incorporation:

 The certificate of incorporation is conclusive

evidence of the fact that:
 The company is properly incorporated and duly
registered;
 The terms of the Memorandum and Articles are within
the law;
 All requirements of the Act in respect of registration
have been complied with;
 A private company can start its business after getting
the certificate of incorporation; and
 With the issue of certificate, the company takes birth
with a separate legal entity.
Stage 3. Capital Subscription Stage:

 A private company or a public company not having share

capital can commence business immediately on its
incorporation. As such ‘capital subscription stage’ and
‘commencement of business stage’ are relevant only in
the case of a public company having a share capital.
Such a company has to pass through these additional
two stages before it can commence business.
 For this purpose, soon after the incorporation, a
meeting of the Board of Directors is convened to deal
with the following business:
 1. Appointment of the Secretary. In most cases the
appointment of pre-tem secretary (who is appointed at
the promotion stage) is confirmed.
 2. Appointment of bankers, auditors, solicitors and
brokers etc.
 3. Adoption of draft ‘prospectus’ or ‘statement in lieu
of prospectus’.
 4. Adoption of underwriting contract, if any.