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
PUBLIC COMPANY PRIVATE COMPANY
COMPARISON

Meaning A public company is a company A private company is a

which is owned and traded company which is owned
publicly 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 of After receiving certificate of

incorporation and 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

 BASIS FOR
PUBLIC COMPANY PRIVATE COMPANY
COMPARISON

Quorum at AGM 5 members must present in 2 members must present in

person. person.

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.

Petition for Winding Up (Sec 439):

  A petition for the winding up of a company may be presented to the

court by any of the following parties:

1. By a shareholders or contributory can present a petition on the

following grounds:

a)When No. of members of the company falls below prescribed limit.

b)When the contributory has paid the calls in arrears.

2. By the company itself by passing a special; resolution.

3. By the Registrar of the Companies.

4. By any creditor or creditors, including any contingent or

prospective creditor or creditors.

5. By the person authorised by the Central Government.

6. By the voluntary liquidator.

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.
Contributions and proceeding of committee of inspection (Sec 465)

. The committee shall not consist of more than 12 members

representing the creditors & contributors.
2. The committee shall have power to inspect the accounts of the
liquidator at any reasonable time.
3. The committee shall meet at such time as it may itself decide.
4. The quorum of the committee meetings shall be one third or two
whichever is higher.
5. Any member of the committee may resign by giving written notice
to the liquidator.

B. Voluntary Winding-Up:
Solvency:

Majority of the directors make a declaration of solvency must be made:

1. Within five weeks preceding the date of passing the resolution for winding up and
delivered to Registrar for registration before the date, along with:
2The balance sheet made out on the last mentioned date
3.A statement of the assets & liabilities as on that date

Procedure – Member’s Voluntary Winding Up:

1. Declaration of solvency must be made as per the provision of Section 488 of
Companies Act.

2. The next step is to hold a general meeting of the members for passing the special
resolution for the winding up.

3. The notice of the same must be given within 14 days by an advertisement in the official
gazette and local newspaper.
 4. The company can appoint a liquidator and fix his remuneration.

5. On appointment of liquidator, all powers of the Board of directors, managing directors

ceases.

6. The liquidator shall exercise all powers of the board & do all such acts necessary for
winding up of the company.

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)

When no declaration of solvency is made it is considered as a case of creditors’ voluntary

winding up. Procedure for the same is as follows:

1. The company shall hold a meeting of creditors immediately after the general meeting

of the members to pass a resolution for voluntary winding up.

 2. The directors must prepare statement of affairs, list of creditors and statement of their

claim and present them to the creditors meeting.

3. A liquidator must be nominated by members & creditors at their respective meetings.

4. The creditor’s meeting may appoint a committee of inspection constituting not more than 5

members.

Provisions applicable to Voluntary Winding Up (Sec 486, 487 , 511 to 520)

1. The voluntary winding up of the company considered to commence when resolution is

passed for the same.

2. The business of the company ceases on the commencement of the winding up.

3. Even the company’s business is ceased the corporate status and power of the company

remains continue until it is dissolved.

4. The liquidator has power to prepare contributor’s list, to make calls, call general

meeting of the company.

5. Any question arising in the winding up of the company the court may approved by the

liquidator or any contributor or creditor.

6. All costs, charges and expenses of winding up including remuneration of liquidator

shall be payable by company’s assets.

(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