Business law and ethics

Chapter-1 Companies act 2013

Meaning of company:
A company is meant an association of many persons who contribute
money or money’s worth to a common stock and employ it in some trade
or business, and who share the profit and loss (as the case may be)
arising there from.

Characteristics of a Company:
Separate Legal Entity:
Under Incorporation law, a company becomes a separate legal entity as
compared to its members. The company is distinct and different from its
members in law. It has its own seal and its own name, its assets and
liabilities are separate and distinct from those of its members. It is
capable of owning property, incurring debt, and borrowing money,
employing people, having a bank account, entering into contracts and
suing and being sued separately.

Limited Liability:
The liability of the members of the company is limited to contribution to
the assets of the company upto the face value of shares held by him. A
member is liable to pay only the uncalled money due on shares held by
him. If the assets of the firm are not sufficient to pay the liabilities of the
firm, the creditors can force the partners to make good the deficit from
their personal assets. This cannot be done in the case of a company
once the members have paid all their dues towards the shares held by
them in the company.

Perpetual Succession:
A company does not cease to exist unless it is specifically wound up or
the task for which it was formed has been completed. Membership of a
company may keep on changing from time to time but that does not
affect life of the company. Insolvency or Death of member does not
affect the existence of the company.

Separate Property:
A company is a distinct legal entity. The company's property is its own.
A member cannot claim to be owner of the company's property during
the existence of the company.

Transferability of Shares:
Shares in a company are freely transferable, subject to certain
conditions, such that no share-holder is permanently or necessarily
wedded to a company. When a member transfers his shares to another
person, the transferee steps into the shoes of the transferor and
acquires all the rights of the transferor in respect of those shares.

Common Seal:
A company is an artificial person and does not have a physical
presence. Thus, it acts through its Board of Directors for carrying out its
activities and entering into various agreements. Such contracts must be
under the seal of the company. The common seal is the official signature
of the company. The name of the company must be engraved on the
common seal. Any document not bearing the seal of the company may
not be accepted as authentic and may not have any legal force.

DIFFRENCE BETWEEN PUBLIC AND PRIVATE COMPANY

 BASIS FOR PRIVATE
PUBLIC COMPANY
COMPARISON COMPANY

Meaning A public company is a A private company is a

company which is owned company which is
and traded publicly owned and traded
privately.

Minimum members 7 2

Maximum members Unlimited 200

Minimum Directors 3 2

Suffix Limited Private Limited

Start of business After receiving certificate After receiving

of incorporation and certificate of
certificate of incorporation.
commencement of
business.

Statutory Meeting Compulsory Optional

Issue of prospectus / Obligatory Not required

Statement in lieu of
prospectus

Public subscription Allowed Not allowed

Quorum at AGM 5 members must present in 2 members must

person. present in person.
 BASIS FOR PRIVATE
PUBLIC COMPANY
COMPARISON COMPANY

Transfer of shares Free Restricted

Steps In The Formation Of A Company

1. Promotion of a Company
2. Registration of a Company
3. Certificate of Incorporation; and
4. Commencement of the Business

1. Promotion of a Company:
A business enterprise does not come into existence on its own. It comes
into existence as a result of the efforts of an individual or group of
people or an institution. That is, it has to be promoted by some person
or persons. The process of business promotion begins with the
conceiving of an idea and ends when that idea is translated into action
i.e., the establishment of the business enterprise and commencement
of its business.

Who is a Promoter in a Company?

A successful promoter is a creator of wealth and an economic prophet.
The person who is concerned with the promotion of business enterprise
is known as the Promoter.

2. Registration of a Company
It is registration that brings a company into existence. A company is
properly formed only when it is duly registered under the Companies
Act.

Procedure of Registration
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.

Contents of Memorandum of Association

1. Name Clause of Memorandum of Association
The name of the company should be stated in this clause. A company is free
to select any name it likes. But the name should not be identical or similar to
that of a company already registered.

2. Situation Clause of Memorandum of Association

In this clause, the name of the State where the Company’s registered office is
located should be mentioned. Registered office means a place where the
common seal, statutory books etc., of the company are kept.

3. Objects Clause of Memorandum of Association

his clause mentions all possible types of business in which a company may
engage in future.

4. Liability Clause of Memorandum of Association

This clause states the liability of the members of the company. The liability
may be limited by shares or by guarantee. This clause may be omitted in case
of unlimited liability.

5. Capital Clause of Memorandum of Association

This clause mentions the maximum amount of capital that can be raised by
the company. The division of capital into shares is also mentioned in this
clause

6. Subscription Clause of Memorandum of Association

It contains the names and addresses of the first subscribers. The subscribers
to the Memorandum must take at least one share. The minimum number of
members is two in case of a private company and seven in case of a public
company.
 2. Articles of Association: This document is signed by all those
persons who have signed the Memorandum of Association.

Contents of Articles of Association

The articles generally deal with the following

1. Classes of shares, their values and the rights attached to each of them.

2. Calls on shares, transfer of shares, forfeiture, conversion of shares and

alteration of capital.

3. Directors, their appointment, powers, duties etc.

4. Meetings and minutes, notices etc.

5. Accounts and Audit

6. Appointment of and remuneration to Auditors.

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
a. any advocate of the Supreme Court or
b. of a High Court, or
c. an attorney or pleader entitled to appear before a High Court or
d. a practicing chartered accountant in India, who engages in the
Company formation or
 e. 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.

3. 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
.
4. Certificate of Commencement of Business
As soon as a private company gets the certification of incorporation, it
can can commence its business. A public company can commence its
business only after getting the ‘certificate of commencement of business‘.
After the company gets the certificate of incorporation, a public
company issues a prospectus for inviting the public to subscribe to its
share capital. It fixes the minimum subscription. Then it is required to
sell the minimum number of shares mentioned in the prospectus.
After completing the sale of the required number of shares, a certificate
is sent to the Registrar along with a letter from the bank stating that all
the money is received.

procedure of forming a company

private company
he procedure of forming a private limited company in India.

The procedure:
1. The most important step in forming a private limited company is
applying for DIN. Only directors that do not have this need to apply.
They need to submit the form to the central government with a fee of
rupees1500 per director

2. Obtaining digital signatures is the next step. The director has to apply
for the digital signature certificate. This is necessary to file company
registration documents.
3. Submit 5-6 preferred names for your company in order of the most
preferred. Check for name availability.

4. Apply for name availability to the concerned ROC.

5. Once the name has been approved, you need to apply for
incorporation of the company. For this, you will have to prepare a
Memorandum of Association that details company operation and list
of directors.

6. Once it is approved, make at least 10 copies of Certificate of

Incorporation and Memorandum of Association and have it in a
booklet form.

7. You will then have to fill various forms in the ROC.

8. You will have to submit proof of registered address (pan card, voters
id)
9. Filling fees for final documents

10. Other government expenses

Appointment of Directors
1. Appointment of Directors by Signatures to the
Memorandum:
The Articles of a company usually name the first directors by their
respective name or prescribe the method of appointing them.

(ii) If the directors are not named in the Articles of the Company, the
number of directors and the name of the directors shall be
determined in writing by the subscribers of the Memorandum or a
majority of them

2. Appointment of Directors by Company in the General

Meeting:
Section 255 provides that subsequent directors shall be appointed by the
company in general meeting. In the case of a public company or a private
company which is a subsidiary of a public company, unless the Articles
provide for the retirement of all directors at an annual general meeting, at
last two-thirds of the total number of directors shall be liable to retire by
rotation and shall be appointed by the company in general meeting.

This means one-third of the total number of directors can be permanent

directors. The remaining directors in the case of any such company and all
the directors in the case of private company not being a subsidiary of the
public company may be appointed as provided in the Articles. In the
absence of any regulation in the Articles of the company, these directors
shall be appointed by the company in general meeting.

3. Appointment of Directors by Board of Directors (Secs.

260, 262 and 313):
In the following cases, the Board of Directors may appoint
the directors:
(i) Additional Directors:
Section 260 of the Companies Act empowers the Board to appoint
additional directors and Articles of every company also confer this power to
the Board. But the additional director shall hold his office upto the next
annual general meeting. The number of directors including the additional
director should in no case exceed the maximum number of directors as
determined by the articles of the company.

(ii) Casual Director:

The Companies Act empowers the Board to appoint the casual director
subject to any regulation in the Articles. The casual vacancy in the office of
the director may exist due to retirement, resignation, insolvency or any
other reason. The casual director may hold his office only upto the period to
which the original director would have his office if he had not vacated. [Sec.
262]

(iii) Alternate Director:

This Board may appoint the alternate director if the article authorises. The
Board is empowered to appoint the alternate director if the original director
remains absent for more than three months from the date on which the
meeting is ordinarily held. Such alternate director shall hold office only for
the period till the original director returns. [Sec. 313]

Way # 4. Appointment of Directors by Third Parties (Sec.

255):
The articles may permit the third parties for the appointment of
director as their nominee, but the number of directors so appointed
should not exceed one- third of the total number of directors and they
are not liable to retire by rotation. The third party means the Vendor,
Banking Company, Finance Corporation and Debenture holders.

The idea behind the appointment is that they may have the watch that
money advanced to the company has been utilised for same purpose
for which it was lent.

Way # 5. Appointment of Directors by Proportional

Representation (Sec. 265):
Directors are appointed individually either by show of hands or by ballot
unless the Articles otherwise provide.

The appointment may be made by the single transferable vote or by a

system of cumulative voting. In this system, the minority shareholders may
become in a position to have their representation in the Board of Directors.
Such appointment is made once in three years and the usual vacancies are
filled up according to the provisions of Sees. 262 and 265.

Way # 6. Appointment of Directors by the Central

Government (Sec. 408):
According to Sec. 408, the Central Government may appoint the directors
but not more than two in number and for the period not exceeding 3 years.

Power of director:
 General powers of the board (Sec 291) – MOA & AOA
 Powers to be exercised at board meetings (Sec 292) –

1 make calls on shareholders in respect of money unpaid

on their shares
2 issue debentures
3 borrow moneys
4 invest the funds of the company
5 make loans
 Powers to be exercised with the approval of a company in
general meeting (Sec 293)

1. To sell, lease or otherwise dispose of the whole

2. To remit or give time for repayment of any debt
due to the company by a director
3. To approve the financial statement and board’s
report
4. To diversify the business of the company
5. To approve amalgamation, merger or
reconstruction
6. to take over a company or acquire a company or
substantial stake in another company

Duties of Directors:
 1. the A director of a company shall act in accordance
with Articles of Association (AOA) of the company.
2. A director of the company shall act in good faith, in
order to promote the objects of the company, for the
benefits of the company as a whole, and in the best
interests of the stakeholders of the company.
3. A director of a company shall exercise his duties with
due and reasonable care, skill and diligence and shall
exercise independent judgment.
4. A director of a company shall not involve in a
situation in which he may have a direct or indirect
interest that conflicts, or possibly may conflict, with
the interest of the company.
5. A director of a company shall not achieve or attempt
to achieve any undue gain or advantage either to
himself or to his relatives, partners, or associates
and if such director is found guilty of making any
undue gain, he shall be liable to pay an amount equal
to that gain to the company.
6. A director of a company shall not assign his office and
any assignment so made shall be void.
7. If a director of the company contravenes the
provisions of this section such director shall be
punishable with fine which shall not be less than one
Lakh Rupees but which may extend to five Lac
Rupees

Liabilities of Directors:

1.Liability to the Company

 Breach of fiduciary duty: As the directors hold the office of trust along with power they
are expected to exercise this power in the best interest of the company. Whenever there
 comes dishonesty in fulfilling this duty, there is a breach of fiduciary duty. There is always
a possibility of a conflict of interests but should such a conflict arise the concerned director
should make complete disclosure and try to obtain the confidence of stakeholders in the
general meeting.
 Ultra vires act: Directors have powers subject to Companies Act, Memorandum and
Articles of association. Whenever they exceed these limits they are personally liable for
the act being ultra vires. But if acts are intra-vires the company such acts can be
subsequently ratified by the shareholders in the general meeting, otherwise, if a company
suffers a loss on ultra-vires acts of its directors, the company can claim such loss from the
directors.[18]
 Negligence: As long as the Directors exercise reasonable care and due diligence, they are
fulfilling their duties to the company. But as soon as there is the failure to exercise such
care and precaution they are deemed to be negligent in their conduct and are personally
liable for the consequent damages. However, the error of judgement will not be deemed
as negligence.[19] “Business runs on a going concern, which will not be possible if people
doubt every step of the trust holders or office holders.”[20]
 Mala fide acts: Directors are the trustees for the money and property of the company.
They hold an office of trust and if they misuse their powers they will be liable for breach
of trust and may be required indemnify the losses incurred due to.they need to make
regular disclosures on their profits, if any, earned in course of the performance of duties.
Director can also be held liable for misconduct, provided it is not willful.

2.Liability to third parties

The directors as agents of the company are not most of the times personally liable to third parties for
any transaction entered on behalf of the company. Their acts bind the company to third parties.
Generally, the rule is that wherever an agent, in a principal- agency concept liable, directors would be
liable. They can be held personally liable only in exceptional circumstance

3.Liabilities for breach of statutory duties

4. Liabilities for acts of his co-directors

Meetings:

In common parlance, the word meeting means an act of coming face to

face, coming in company or coming together.

Types of meeting:

1.shareholders meeting:

A) Statutory Meeting: Statutory meeting is the first meeting which company

conducts after its commencement. Conduction of statutory meeting is compulsory.
Public limited company is required to hold such meeting within a period not less than
one month and not more than six months from the date of commencement. The
directors of company also need to make statutory report. Every members also must
be given a copy of report at least 21 days before the date of the meeting and a copy
is also to be sent to the Registrar for registration.

Section 165(3) provides that the Statutory Report must contain the following
particulars:
(i) The total number of fully paid-up and partly paid-up shares allotted;
(ii) The total amount of cash received ;
(iii) The receipts, classifying them and also the expenses incurred for commission, also
brokerage etc.
(iv) The names, addresses and also occupations of directors, auditors, managers and
secretaries and also changes of the names, address etc.
(v) The arrears of calls;

B. Annual General Meeting (AGM)

Under Section 96 of the companies act, every company shall hold a general meeting as
annual general meeting every year.
Notice of AGM can be either in writing or also in electronic form. The member should get
the notice at least fore 21 clear days. . The notice should consist of place, day, date and the
proper hour of the meeting. It should also contain agenda of meeting. Everyone should
attend this meeting
C. Extra ordinary meeting (EGM)
Every meeting which is not a AGM or statutory meeting meeting is EGM. An EGM is held
for some special business which can not be transacted at AGM. It is also held to transact
some urgent business. This meeting may be called by the Directors or by the member’s
according to Sec.169 of the Companies Act, 1956.

2. Meeting of Creditors:
Meeting is when directors of company has any scheme for creditors. The Court may order a
meeting of the creditors on the application of the company or of liquidator in case of a
company being wound-up.

3. Meeting of Debenture Holders: Such meetings is held in the interest of

debenture holder. The rules for appointment of Chairman, notice of the meeting, quorum
etc. are there in the Trust Deed.

4. Meeting of the Board of Directors:

The Board of Directors controls the management of the company. Therefore, the Directors
are to meet frequently to decide both policy and also other related matters. It is conducted
four times in a year.

Resolutions:

A resolution is a legally binding decision made by

limited company directors or shareholders. If a majority vote is achieved in
favor of the decision, is 'passed'.

 Three kinds of resolutions under the act

1. Ordinary resolution (Sec 189(1)) - an ordinary resolution is

passed by the shareholders of a company by a simple or bare majority
 (for example more than 50% of the vote) either at a convened meeting
of shareholders or by circulating for signature.

2. Special Resolution (Sec 189(2)) - A special resolution of the

members (or of a class of members) of a company means
a resolution passed by a majority of not less than 75%. A written
resolution is passed by a majority of not less than 75% if it is passed
by members representing not less than 75% of the total voting rights
of eligible members
.

Winding –up of company:

 Meaning: The winding up of a company is a process which involves

ending the life of the company and administering its property for the
benefit of its creditors and members.

Modes of winding of a company:

A. Grounds for Compulsory Winding-Up:

A company may be wound-up by the Court under the following
cases:
1. (i) Special Resolution of the Company:
If the company has, by special resolution, resolved that the Company
be wound-up by the Court;

(ii) Default:
If a default is made in delivering the statutory report of the Registrar
of Companies or in holding the statutory meeting of the company, the
court may make a winding-up order;

(iii) Not commencing or suspending the Company:

If the company does not commence its business within a year from its
incorporation, or suspends its business for a whole year;
(iv) Reduction of Members:
If the number of members falls below seven in case of a public
company or below two in case of a private company;

(v) Inability to pay Debts:

If the company is unable to pay its debts;

(vi) The Just and Equitable Clause:

If the Court is of opinion that it is just and equitable that the company
should be wound-up.

Powers of the court to dispose of Petition of Winding Up:

1. It may dismiss the application with or without costs.

2. It may adjourn the hearing conditionally/
unconditionally.
3. It may dispose of the application in any way it thinks fit.

4.It may make an interim order.

Procedure of Winding-Up Order by the Court [Official

Liquidator

Appointment:
The Companies Act, 1956, provides that in each High Court there must
be attached an officer known as the Official Liquidator appointed by
the Central Government

duties of official liquidator

(i) Proceeding in Winding-up
(ii) Report
(iii) Additional Reports:
(iv) Custody of Company’s Property
 (v) Control of Powers.

B. Voluntary Winding-Up:
according to Sec. 484 of the Companies Act, a company can be wound-
up voluntarily under the following circumstances:
(1) By an Ordinary Resolution (passed in a general meeting in the
following cases):
(a) Where the duration of the company was fixed by the articles and
the period has expired; and

(b) Where the articles provided for winding-up on the occurrence of

any event and the specified event has occurred.

(2) By a Special Resolution (passed by the members in all

other cases):
When a resolution is passed for voluntary winding-up it must be
notified to the public by an advertisement in the Official Gazette and
in a local newspaper (Sec. 485).

Types of Voluntary Winding-Up:

Voluntary winding-up is of two types:
(a) Members’ Voluntary Winding-up; and

(b) Creditors’ Voluntary Winding-up.

(a) Members’ Voluntary Winding-up:

If the company is, at the time of winding-up, a solvent company, i.e.,
able to pay its debts and the directors make a declaration to that effect;
it is called a Members’ Voluntary Winding-up. The declaration must
be verified by an affidavit.

The declaration must be:

(a) Made within the five weeks immediately preceding the date of
passing of the resolution of winding-up by the company;

The Members’ Voluntary Winding up is done by the

following successive steps:
(i) Declaration of solvency;

(ii) Statutory Declaration to the Registrar;

(iii) A resolution in general meeting of the company within 5 weeks of

declaration of solvency;

(iv) Appointment of Liquidator;

(v) Collecting the company’s assets, pay the liabilities of the company
and pay the balance of the proceeds to the contributories.

(b) Creditors’ Voluntary Winding Up:

If the declaration of solvency is not made and filed with the Registrar,
it may be presumed that the company is insolvent. In that case, the
company must call a meeting of its creditors (for the day or the day
next following the day fixed for the company’s general meeting) for
passi (c) Voluntary Winding-up under the Supervision of
Court:
At any time after a company has passed a resolution for voluntary winding-
up, the Court may make an order that the voluntary winding-up shall
continue but subject to the supervision of the court (Sec. 522). A
supervision order is usually made for the protection of the creditors and
contributories of the company. A petition for the continuance of a voluntary
winding-up subject to the supervision of the Court is deemed to be a
petition for winding-up by the Court (Sec. 523