Unit 3 Company law

Question 1

Company

Answer 1

• Artificial person created by law
• Voluntary association
• To generate profit mostly

Question 2

Company’s act years

Answer 2

1956
2013
2015

Question 3

Company’s Act definition

Answer 3

Acc to Company’s act 1956. Sec 3 (1) (i), “A company formed and registered under this act or an existing company”

Question 4

Kinds of company

Answer 4

1. Incorporation
2. Liability
3. Control
4. Ownership
5. National Interest

Question 5

Classify the companies on the basis of liability?

Answer 5

On the basis of liability, the companies may be classified into three categories, i.e.
(1) Companies limited by shares, (2) Companies limited by guarantee, and
(3) Unlimited companies.

Question 6

State any four differences between a public company and a private company

Answer 6

Points of Differences between Public Company and Private company Public Company Private Company
1. Definition A public company can sell its registered shares to the general public. A private company can sell its own, privately held shares to a few willing investors.
2. Traded on The stocks of a public company are traded on stock exchanges. The stocks of a private company are owned and traded by only a few private investors.
3. Regulations A public company must adhere to many regulations and reporting standards per the SEC. Until the private companies reach $10 million and more than 500 shareholders, it does not have to follow any regulations issued by the SEC.
4. Advantage The primary advantage of a publicly-traded company is that it can tap into the market by selling more shares. The primary advantage of a privately traded company is that it does not need to answer to any stockholders, and there is no need for disclosures.
5. Size Publicly traded companies are big companies. Privately traded companies can also be big companies. So, the idea that a privately held company is smaller is utterly false.
6. Source of funds For the publicly traded company, the source of funds is selling its shares and bonds. For the privately traded company, the source of funds is a few private investors or venture capitalists.

Question 7

List out the formation of a company

Answer 7

The major steps in formation of a company are as follows:

Promotion stage
Registration stage
Incorporation stage
Commencement of Business stage

Question 8

Promotion Stage

Answer 8

Promotion is the first step in the formation of a company. In this phase, the idea of starting a business is converted into reality with the help of promoters of the business idea.

In this stage the ideas are executed. The promotion stage consists of the following steps:

1. Identify the business opportunity and decide on the type of business that needs to be done.
2. Perform a feasibility study and determine the economic, technical and legal aspect of executing the business.
3. Interest shown by promoters towards the business idea and supply of capital and other necessary procedures to start the business.

Question 8

Promotion Stage

Answer 8

Promotion is the first step in the formation of a company. In this phase, the idea of starting a business is converted into reality with the help of promoters of the business idea.

In this stage the ideas are executed. The promotion stage consists of the following steps:

1. Identify the business opportunity and decide on the type of business that needs to be done.
2. Perform a feasibility study and determine the economic, technical and legal aspect of executing the business.
3. Interest shown by promoters towards the business idea and supply of capital and other necessary procedures to start the business.

Question 9

Registration stage

Answer 9

Registration stage is the second part of the formation process. In this stage, the company gets registered, which brings the company into existence.

A company is said to be in existence, if it is registered as per the Companies Act, 2013. In order to get a company registered, some documents need to be provided to the Registrar of Companies.

There are several steps involved in the registration phase, and are as follows:

1. Memorandum of Association: A memorandum of association (MoA) must be signed by the founders of the company. A minimum of 7 members are required in case of a public company and 2 in case of a private company. The MoA must be properly registered and stamped.
2. Article of Association: Article of Association (AoA) is also required to be signed and submitted. All members who previously signed MoA, should also be signing the AoA.
3. The next step is preparing a list of directors which should be filed with the Registrar of Companies.
4. Directors of the company should provide a written consent agreeing to be directors, should be filed with the Registrar of Companies (RoC).
5. The notice of address of the office needs to be filed.
6. A statutory declaration should be made by any advocate of either the High Court or Supreme Court, or a person of the capacity of Director, Secretary or Managing Director. This declaration shall be filed with the RoC.

Question 10

Describe the meaning of memorandum of Association:

Answer 10

A Memorandum of Association (MOA) is a legal document prepared in the formation and registration process of a limited liability company to define its relationship with shareholders. The MOA is accessible to the public and describes the company’s name, physical address of registered office, names of shareholders and the distribution of shares.

Question 11

What are articles of Association?

Answer 11

Articles of association form a document that specifies the regulations for a company’s operations and defines the company’s purpose. The document lays out how tasks are to be accomplished within the organization, including the process for appointing directors and the handling of financial records.

Question 12

Give any two differences between memorandum and Articles

Answer 12

Meaning
Memorandum of Association is a document that contains all the fundamental information which are required for the incorporation of the company. Articles of Association is a document containing all the rules and regulations that governs the company.

Type of Information contained Powers and objects of the company. Rules of the company.

Status
It is subordinate to the Companies Act. It is subordinate to the memorandum.

Retrospective Effect The memorandum of association of the company cannot be amended retrospectively. The articles of association can be amended retrospectively.

Major contents A memorandum must contain six clauses. The articles can be drafted as per the choice of the company.

Question 13

What is the „Prospectus‟?

Answer 13

A prospectus is a formal document required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public. A prospectus is filed for offerings of stocks, bonds, and mutual funds.

Question 14

What is meant by director?

Answer 14

A company is a legal entity and does not have any physical existence. It can act only through natural persons to run its affairs. The person, acting on its behalf, is called Director. A Director is any person, occupying the position of Director, by whatever name called. They are professional men, hired by the company to direct its affairs.

Question 15

State the provisions of the companies Act regarding the mode of appointment of directors of
a company?

Answer 15

Modes of Appointment of Directors are listed below.

1. Appointment by Signatures to the Memorandum
2. Appointment of Director by Central Government
3. Appointment oy Company in the General Meeting
4. Appointment of Directors by third party
5. Appointment of Director by Proportional Representation
6. Appointment by Board of Directors

Question 16

State the modes of Removal of Directors

Answer 16

Mode I

Removal of director in case he resigns himself

Mode II

Suo-moto removal of a director by shareholder

Model III

Removal of director in case director doesn’t attend three board meeting in a row

Mode IV

Removal of director by Tribunal

Mode V

Removal of Director by Government

Question 17

What are the provisions regarding powers of director?

Question 17

What are the provisions regarding powers of director?

Question 17

What are the provisions regarding powers of director?

Answer 17

Section 179: Power of Board of Directors
Section 180 of the Companies Act, 2013: Restrictions on the powers of Board of Directors

Question 18

List out the provisions regarding liabilities of directors?

Answer 18

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Question 19

Define „Winding up of a company‟

Answer 19

Winding up refers to closing the operations of a business, selling off assets, paying off creditors, and distributing any remaining assets to the owners. Once the winding-up process is complete, the dissolution step comes into play.

Question 20

What are the modes of winding up?

Answer 20

The two main types of winding up are compulsory winding up and voluntary winding up.

Compulsory Winding Up
A company can be legally forced to wind up by a court order. In such cases, the company is ordered to appoint a liquidator to manage the sale of assets and distribution of the proceeds to creditors.

Voluntary Winding Up
A company’s shareholders or partners may trigger a voluntary winding up, usually by the passage of a resolution. If the company is insolvent, the shareholders may trigger a winding-up to avoid bankruptcy and, in some cases, personal liability for the company’s debts.

Question 21

Who can present petition for winding up?

Answer 21

Section 439 provides that an application to the Court for the winding up of a company can be made:
(a) by the company;

(b) by any creditor or creditors, including any contingent or prospective Creditor or creditors;
(c) by any contributory or contributories;

(d) by all or any of the parties at (a), (b) and (c), whether together Or separately;
(e) by the Registrar of Companies;

(f) by any person authorised by the Central Government as a result of investigation carried out on the affairs of a company pursuant to section 237;

(g) by the Central Government or a State Government, in a case falling under clause (h) of section 433

By a creditor or creditors
Any creditor or creditors of the company may present a petition to the Court for winding up, alleging that the company is unable to pay the debts of the creditor in the manner specified in section 433 or 434. The Court will ascertain the wishes of a majority of the creditors and where the majority oppose the petition, the Court will not make the order.

The Court can direct winding up of a Company even if the petition is filed at the instance of a single creditor. A petition for winding up can be presented by a contingent or prospective creditor and it is for the Court to satisfy itself about the eligibility of such person to present a petition.

A debenture holder is a creditor of a company and entitled to present a petition for winding up of the company subject to the terms of covenants contained in the terms of the debenture. [Narotamdas Trikamdas Toprani v Bombay Dyeing & Manufacturing Co. Ltd (1990) 68 Comp Cas 300 (Bom): (1986) 3 Comp LJ 179 (Bom)]

The person guaranteeing loans granted to the company is entitled to move a petition seeking winding up. [Kermeen Foods (P) Ltd, In re (1984) 56 Comp Cas 445 (Guj)]

Question 22

What is voluntary winding up?

Answer 22

A voluntary liquidation is a self-imposed windup and dissolution of a company that has been approved by its shareholders. Such a decision will happen once an organization’s leadership decides that the company has no reason to continue operating. It is not a compulsory order by a court. The purpose is to terminate a company’s operations, wrap up its financial affairs, and dismantle its corporate structure in an orderly fashion while paying back creditors according to their assigned priority.

Question 23

State the types of voluntary winding up?

Answer 23

According to Section 425 of the Companies Act, 2013, there are 2 kinds of Winding Up. They are:

Compulsory Winding Up under the order of the Court
Voluntary Winding Up, which itself is of two kinds:
Members’ Voluntary Winding Up
Creditor’s Voluntary Winding Up

Question 24

What are the consequences of winding up?

Answer 24

Winding up doesn’t take away the existence of the company completely. The company continues to exist as a corporate entity till its dissolution. All the ongoing business of the company is administered by the liquidator during the phase of liquidatio

Question 25

Define corporate governance?

Answer 25

Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.

Question 26

What are the powers, duties and liabilities of a director?

Answer 26

Powers of Directors
General Powers of the Board (Sec. 291):
The Board of directors of company is entitled to exercise all such powers and to do all such acts and things as the company is authorized to exercise and do.
Powers To Be Exercised At Board Meetings (Sec. 292): The following powers, on behalf of the company,
 To make calls on shareholders in respect of money unpaid on their shares
 The power to authorize the buy-back ofshares
 To issue debentures
 To borrow moneys otherwise than on debentures
 To invest the funds of the company; and make loans.
Other powers: These powers are:
 To fill vacancies in the Board (Sec. 262)
 To sanction or give consent for certain contracts in which particular directors, their relatives and firms are interested (Sec. 297)
 To receive notice of disclosure of directors‟ interest in any contract or arrangement with the company (Sec. 299)
 To receive notice of disclosure of shareholdings of directors (Sec.
 308)
 To appoint as managing director or manager a person who has already been the managing director or manager of another company (Sacs. 316 and 386)
 To make investments in companies in the same group (Sec. 372).
Exceptions:
Directors actingmalaise.
Directors themselveswrong-doers.
Incompetency of Board.
Deadlock in management.
Residuary powers. I.e., powers not expressly conferred on the directors or shareholders, in a general meeting.
Powers to be exercised with the approval of company in general meeting
(Sec. 293):
Tosell, lease or otherwise dispose of.
To remit or give time for repayment of any debt.
To invest (excluding trust securities) the amount of compensation received.
To borrow moneys where the moneys to be borrowed (together with the moneys already borrowed by the company) are more than the paid-up capital.
To contribute to charitable and other funds not directly relating to the business.
Audit Committee [Sec. 292-A as introduced by the Companies (Amendment) Act, 2000]:
The Audit Committee shall act in accordance with terms of reference to be specified in writing by the Board.

Duties of Directors
1. Fiduciary duties and
2. Duties of care, skill and diligence.
3. Fiduciary Duties: As fiduciaries
Other Duties of Directors:
 To attend board meetings,
 Not to delegate his functions except to the extent authorized by the Act or the constitution of the company, and
 To disclose his interest.

Liabilities of Directors
Liability to third parties: (1) Material misrepresentations. (2) Independently of the Act: Directors, as agents of a company, are not personally liable on contracts entered into agents on behalf of the company. (3) Liability for acts ultra virus the company:
Where a director enters into a contract, which is ultra virus the company, the director is personally liable for breach of implied warranty of authority. (4)Liability for frauds and torts.
1. Liability to the company
The liability of directors towards the company may arise from
 Ultra virusacts,
 Negligence,
 Breach of trust, and Misfeasance.

Question 27

What are the characteristics of a company?

Answer 27

Corporate Body: A company needs to be registered under the Companies Act, 2013. Any other organisation incorporated with the Registrar of Companies, and subsequently not registered cannot be considered as a company.

Separate Legal Entity: A company exists as a separate legal entity which is different from its shareholders and members. Due to this feature, shareholders can enter into a contract with the company and can also sue the company and be sued by the company.

Limited Liability: As the company exists as a separate entity, members of the company are not liable for the debts of the company. Liability of members of a company is limited to the extent of the shares that are held by them or by the extent of the guarantee amount

Transferability of Shares: Shareholders of a public limited company can transfer their shares as per the rules laid down in the articles of association. However, in case of a private limited company, there might be some restrictions on the transfer of shares.

Common Seal: The firm is an artificial entity or a person, and therefore cannot sign its name by itself. It creates the necessity of a common seal that can be used for representing the decisions made on behalf of the company.

Perpetual Succession: The company being an artificial person established by law perpetuates to exist regardless of the differences in its membership. In simple words, a company is an artificial person. Therefore, it does not have any restrictions on age. The factors like death, insolvency, retirement or the insanity of one or all of the members do not impact the company status.

Number of Members: As per the Companies Act, 2013, the minimum number of members required to start a public limited company is seven while for a private limited company, it is two. The maximum number of members for a public limited company can be unlimited while it is restricted to 200 for a private limited company.

Question 28

Define a company. Explain the classification of companies under the companies act,1956

Answer 28

Acc to Company’s act 1956. Sec 3 (1) (i), “A company formed and registered under this act or an existing company”

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