CORPORATE LAW

Unit 6 – Company Meetings and Secretary

5.1 Company Meeting
• A company meeting is an official gathering of concerned persons who come
together in required number, to discuss and arrive at decisions essential for
the functioning of the company.
Prerequisites:
1. Proper authority
2. Notice of Meeting (21 days)
3. Quorum of Meeting
4. Chairman of Meeting
5. Minutes of Meeting

Essentials for a meeting:

1. Notice
2. Agenda
3. Quorum (Public – 5, Private - 2)
4. Proxy
5. Chairman
6. Voting and demand for poll
7. Amendment
8. Adjournment

5.2 Minutes
• Summarized written record of what occurs and what is said at a meeting
• Made by a typist or court recorder
Contents:
1. Date of the meeting
2. List of attendees
3. Purpose of meeting
4. Administrative issues discussed
5. Concerns raised by attendees
 6. Closure

5.3 Quorum
A. Public company
• 5 members (members > 1000)
• 15 members (1000 > members < 5000)
• 30 members (5000 > members)
B. Private company
• 2 members

5.4 Types of meetings

A. Shareholders’ meeting
i) Statutory meeting
• First meeting of the shareholders
• Held once in the life of public company
• Public limited companies should hold the meeting not less than one
month and not more than 6 months of commencement of business
• Private, unlimited, and government companies are exempted
Objectives
• To discuss success of formation of company
• Approve/ modify contracts specified in prospectus
• Providing information regarding shares, preliminary expenses,
underwriting agreement, and contracts
Contents of notice of a statutory meeting
• Notice – 21 days before meeting
Contents
i. Total shares allotted
ii. Cash received while allotting shares
iii. Abstracts of receipts and payments
iv. Information about directors, auditors, managers, secretary
v. Contracts
vi. Underwriting agreement
 vii. Arrears of calls
viii. Commission and brokerage

B. Annual General Meeting

• Gathering of directors and shareholders of every incorporated firm, required
by law to be held each calendar year
• Only one-person companies are exempted
• Should be organized within every 15 months
• Should not be held later than 6 months from date of balance sheet
• First AGM should be held no later than 9 months after closing of financial year
• Extension can be approved (extension not more than 3 months) by Registrar’s
approval
• Notice should be issued 21 days before AGM

Main Purpose of AGM

• To comply with legal requirements, such as:
i. Approval of audited documents
ii. Appointment of new auditors
iii. Compensation of officers
iv. Election of Directors
v. Confirmation of proposed dividend
vi. Deal with issues raised by shareholders

C. Extraordinary General Meeting

• All general meetings other than the AGM are called EGM
• Meeting of directors, shareholders, and maybe even employees of the
organization which occurs at an irregular time
• It is called for by the Board of Directors for urgent business

Purpose of EGM
• Purpose of EGM is as follows:
i. Consideration of accounts
 ii. Declaration of dividends
iii. Appointment of directors in the place of retired ones
iv. Appointment and fixing remuneration of auditors

D. Class Meetings
• Held by holders of a particular type of shares
• Resolutions passed will apply only to holders of that particular type of shares

E. Meeting of Board of Directors

• Formal meeting of board held at definite intervals to discuss policy issues

F. Meetings of Committee of Directors

• Meetings of directors of various committees (nomination, remuneration, audit),
as per CSR at least 2 times annually, or more frequently

5.5 Resolutions
• Decisions of a meeting take form of resolutions carried by majority of votes
• A question on which a vote is to be taken is called a motion
• Once a motion is put forward and favored by the members, it becomes a
resolution
• It is the formal decision of a meeting on a particular proposal before it

Types of resolutions
1. Ordinary resolutions
• Passed at a general meeting by simple majority (for and against will be
considered, with neutral being ignored)
• Sufficient to affect any transaction within powers of the company
• Examples:
i. Rectification of name
ii. Approve remuneration of directors
iii. Alteration of share capital
iv. Declaration of dividend
 2. Special Resolutions
A resolution is considered to be special if:
• Intention to propose it has been duly specified in the notice
• Notice required has been duly given
• Votes in favor are three times of the votes against
• Examples:
i. Alter memorandum
ii. Alter articles of association
iii. Pay interest to members out of capital

3. Resolutions requiring special notice

• Ordinary resolution where mover of the resolution should give a notice
14 days before to the company, which will then be transferred by the
company to the required members in the same manner
• Examples:
i. Appointment of auditors other than retiring one
ii. Removing a director
iii. Appointment of director other than retired one

5.6 Principle of Majority Rule

• Majority rule is a decision rule that selects alternatives which have a majority,
that is, more than half the votes
• It is the binary decision rule used most often in influential decision-making
bodies, including all the legislatures of democratic nations

5.7 Protection of Minority Interest

Rights enjoyed by minority shareholders
i. Fiduciary Duty
• majority shareholders must deal with minority shareholders with
candour, honesty, good faith, loyalty, and fairness
ii. Access to Company’s financial records
iii. Minority Discount
 • discount on minority shares reflects the fact that minority shares are
not as valuable because they do not provide as much company
ownership as other shares

5.8 Company secretary

Any individual possessing the required qualifications and appointed to perform the
duties of the secretary, or any other ministerial or administrative duties

1. Appointment
• Appointment of company secretary is a statutory obligation in the case
of public limited companies
• Appointment is done through written agreement
• Contents of written agreement – term, conditions, salary, rules for
termination
2. Required qualifications
i. Membership of ICSI
ii. Pass in intermediate examination of ICSI
iii. Degree in law
iv. Membership of ICAI
v. Membership of ICWAI

3. Duties
a. Statutory duties
i. Maintenance of books and registers
ii. Filing of returns with Registrar of companies
iii. Timely payment of sales tax
iv. Safe custody and use of company seal
b. General duties
i. Preparation of minutes
ii. Execute orders passed by Board
iii. Convene Board meetings
iv. Confidential advisory to the Board
c. Shareholder Relation duties
i. Calls of shares
ii. Application of shares
iii. Allotment of shares
iv. Forfeiture of shares
d. Organization duties
i. Ensure efficiency
ii. Supervising activities
iii. Coordination activities
e. Public relation duties
i. Communication between directors and general public
ii. Liaison officer between shareholders and directors
iii. Provide information
Unit 4 – Membership of a company
4.1 Members & Shareholders
• The term members and shareholders are used interchangeably and are
considered synonymous as there can be no membership except through the
provision of shareholding
• A member can be defined as a subscriber to the memorandum of the company
who have agreed to become members of the company, and on its registration
will be entered as member in the company’s register
• Every other person who agrees in writing to become a member of the company
and whose name is entered
• Every person holding shares and whose name is entered as a beneficiary in
the records of the company is a member of that respective company
• Any person who desires to become a member of a company should have the
legal capacity to do so under the Indian Contract Act of 1972. The conditions
are as follows;
i. Is of age of majority
ii. Is of sound mind
iii. Is not disqualified from signing a contract by any law that he is subject
to
4.2 Modes of acquiring membership
A person may acquire membership of a company
a. By subscribing to the Memorandum of Association
b. By agreeing in writing to become a member
i. By making an application for allotment of shares
ii. By executing transfer of shares
iii. By consenting to transfer of someone else’s share in his/her
name
c. By holding shares of the company and whose name is entered as
beneficial owner in the records of depository (Depository Act, 1996)
1. Subscribers to the Memorandum
• In the case of a subscriber, no allotment is necessary for him to become a
member
• By virtue of subscribing to the Memorandum, he becomes ipso facto member
of the company and is liable for the shares he has subscribed to
• Money payable by any member to the company under the Memorandum or
Articles shall become debt due from him to the company
• A subscriber to the Memorandum has to pay for his shares in cash, even if
promotors have promised him the shares in return for services rendered in
promotion of the company
• When a person signs the Memorandum, he becomes absolutely bound to take
those shares and his liability remains right up to the time the company goes
into liquidation

2. Agreement in writing
i. By an application for allotment
• A person who applies for shares becomes a member when the
shares are allotted and notice of allotment is issued to him, along
with his name being added to the register of members
• General law of contract applies to this transaction, where there
is an offer to take shares and shares are allotted on acceptance
of the offer
• Application for shares may be absolute or conditional:
a) Absolute application - allotment and its notice will be
sufficient acceptance
b) Conditional application – allotment must be made
according to the condition
c) Conditional application but unconditional allotment – no
contract
ii. By transfer of shares
 • Shares are moveable property and are transferable according to
the procedure in the Articles of Association and the Indian
Companies Act, 2013
• A person can become a member by acquiring shares from an
existing member, having the transfer of shares registered in the
book of the company, and getting his name registered in the
company’s register of members

iii. By transmission of shares

• A person may become a member if he is the legal successor to
a member who passed away
• Membership by this method is a legal consequence
• On the death of a member, the person who is legally entitled to
succeed his estate gets the right to have the shares transmitted
and have his name entered in the company’s register of
members
• The new member can either choose to be registered as a
member in place of the deceased, or may request the company
to transmit the shares in the name of another person

iv. By acquiescence or estoppels

• A person is deemed to be a member if his name, without
sufficient cause, is on the register of members and holds himself
out
• In such a case, he is estopped from denying his liability
• He can only escape his liability by taking prompt action for having
his name removed on permissible grounds

v. By holding shares as a beneficiary

• Any person holding shares and whose name is entered as a
beneficiary in the company’s register of members is said to be a
member of that company
4.3 Who can become a member?
a. Company as a member of another company
• A company is a legal person and is competent to contract, if
authorized by its Memorandum of Association
• In most cases, a subsidiary company cannot become a member
of its holding company, except when:
1) the subsidiary company holds shares as the legal
representative of a deceased member of the holding
company
2) subsidiary company is a trustee of the holding company
3) subsidiary company is a shareholder before it become a
subsidiary to the holding company
b. Partnership firm
• Partnership firm is not a legal person and cannot become a
member of another company, except of companies registered
under Section 8 of the Indian Companies Act, 2013
c. Limited Liability Partnership
• LLP, being an incorporate body under the statute, can become
a member
d. Section 8 Company
• A non-profit making company registered under Section 8 of the
Indian Companies Act can become a member of another
company, if authorized by its Memorandum of Association
e. Foreigner
• A foreigner may become a member subject to the Foreign
Exchange Management Act, 1999
• In the event of war with the foreigner’s country, he becomes an
enemy, and his voting power and rights to receive notices are
suspended
f. Minor
• A minor cannot become a member, and an agreement by him to
take shares is void ab-initio
 g. Insolvent
• An insolvent may be a member
• Entitled to vote
• Loses beneficial interest in the shares

h. Pawnee
• Has no right of foreclosure since he never had the absolute
ownership
i. Receiver
• If his name is not entered in register of members, he cannot
exercise any of the rights attached to a share
j. Fraudster
• A person who takes shares in the name of a fictitious person, is
deemed a member besides incurring criminal liability under
Section 38
k. Trade Union
• Trade Unions are allowed to register as members under their own
corporate name

4.4 Termination of membership

A person ceases to be a member of the company when his name is removed from
the company’s register of members, which can occur if:
i. He transfers his share to another person; the company records this
transfer and removes the original member’s name from the register
ii. His shares are forfeited
iii. He dies
iv. He is judged insolvent; the official assignee removes his name from the
register of members
v. His redeemable shares are redeemed
vi. He goes against the terms of the contract of membership on grounds
of fraud, misrepresentation, or a genuine mistake
 vii. His shares are purchased by another member or by the company on
orders of the Tribunal
viii. The member is a company being wound up, and disclaims its shares
ix. Company is wound up

4.5 Rights of shareholders

i. Right to elect directors
ii. Right to transfer shares
iii. Right to know facts
iv. Right to make a proposal / inquiry
v. Right to draw dividend
vi. Right to vote
vii. Right to convene and preside shareholder meetings

4.6 Duties of shareholders

i. Attend the annual meeting and other important shareholder meetings
ii. Vote competent representatives to the Board
iii. Serve the Board, if elected
iv. Determine the organization’s mission and purpose
v. Enhance the organization’s public image
vi. Manage resources effectively
 Unit 8 – Limited Liability Partnerships
8.1 Limited Liability Partnerships – definition
• Alternative form of business organization
• Combines features of partnership and company
8.2 Nature
a) LLP is a
1. Corporate body formed under the LLP act
2. Legal entity separate from its partners
3. Has perpetual succession
4. Partners in an LLP is not responsible for another partner’s misconduct or
negligence
5. Partners have right to manage the business

8.3 Number of partners

a) 2 or more partners are required to form an LLP
b) Any individual or corporate body can be a partner in LLP

8.4 Features of LLP

• Hybrid form of organization having both features of:
a. Partnership, under the Partnership Act, 1932
b. Company, under the Companies Act, 2013
• Administered by Registrar
• Liability is limited except when an Act is carried out to defraud creditors or
any person for fraudulent purposes
• LLP is capable of acquiring, owning, holding, disposing of property,
whether it is movable, immovable, tangible, or intangible
• It can sue and be sued
• Capable of doing and suffering other acts
• No limit on number of partners
• Partners are agents of LLP but not agents of other partners
• At least one of the designated partners must be a resident of India
 • Must maintain proper books of account
• Accounts of LLP are required to be audited
1. LLP with turnover <= 40L or capital <=25L are exempt from provision
of audit
2. Any LLP with turnover > 40L and capital > 25 have to be compulsorily
audited

8.5 Advantages of LLP

1. Convenient
• easy to start and manage a business, like entrepreneurs
• LLP agreements are customized to meet the need of partners
concerned
• Fewer formalities in areas of legal compilation, annual meeting, and
resolution as compared to other Private Limited Companies
2. No minimum capital requirement
• No mandatory capital requirement specified under LLP
3. No limit on owner of business
• Minimum – 2
• Maximum – Unlimited
4. Lower registration cost
• Low compared to other companies (Public or Private)
5. Taxation Aspect on LLP
• Not liable to pay income tax of its partner
• No dividend distribution tax
• Provision of ‘Deemed Dividend’ is not applicable to LLP

8.6 Who can be a partner in LLP?

1. Persons who subscribe to the Incorporation Document are the first partners
of the LLP. Any other person may become partner according to LLP agreement
2. Only individual bodies and corporate bodies
3. Right of a partner to share profits and losses is transferable
8.7 Who can’t be a partner in LLP?
1. Person of unsound mind
2. Undischarged insolvent
3. Minor
4. Partnership firm
5. Artificial judiciary

8.8 Designated Partners

• Every LLP should have at least two designated partners; one must be a
resident of India
• LLP may appoint a designated partner within 30 days of vacancy of the post
• If there is no designated partner, or if there is only one, each partner is deemed
to be a designated partner
• Designated partners are responsible for doing all acts, matters, and things
that are required to be done for complying with the provisions of the LLP Act
• Liable to all penalties subject to LLP

8.8.1 Who can’t be a designated partner?

• Undischarged insolvent
• Person who has withheld payments to creditors at any point of time
• Person who has been imprisoned for immoral acts, where the period of
sentence <= 6 months
• Minors

8.9 Duties of designated partners

• File documents, returns, statements etc.
• Authorized to affix his signature on the Statement of Account & Solvency
 • Extend his cooperation to inspector on inquiry of inspection, by
supporting the authority with necessary documents, information, signing
notes for examination
• Liable to reimburse expenses on an investigation conducted by the Inspector
• Must file annual returns within 60 days from date of closure of financial
year

8.9 Liabilities of designated partners

• Responsible for all acts, matters, things that are required to be done by LLP
to comply with the provisions of the LLP Act

• Liable to all penalties imposed on the LLP for any violations of those
provisions

8.10 Whistleblowing
• Court or tribunal may reduce or waive off penalty leviable against any
partner or employee of an LLP, if:
a. Such a person has provided useful information during
investigation of an LLP
b. When any information given by any partner or employee (during
investigation or any other time) leads to the LLP or any partner
or employee of the LLP being convicted under the LLP Act or
any other Act
• No partner or employee of any limited liability partnership can be demoted,
harassed, suspended, threatened or in any manner discriminated against
the terms of his LLP merely because of providing information or causing
information to be pursuant to sub-section

8.11 Process of registering an LLP

Step 1: Obtain Digital Signature Certificate (DSC)
• All documents for LLP are filed online and require a digital signature
Step 2: Apply for Director Identification Number (DIN)
• All the designated partners or those intending to be one should apply for a
DIN
• Application for DIN has to be made in Form – 3
• Form should be signed by Company Secretary/MD/CEO/CFO
Step 3: Name approval
• Registrar will approve only
a. if the name chosen is not undesirable in the name of the Central
Government
b. if the name chosen does not resemble any existing LLP or
partnership firm
Step 4: Incorporation of LLP
• Form used is FiLLiP (Form for incorporation of Limited Liability
Partnership), to be filed with the Registrar
• Fees has to be paid according to Annexure A
• Application for reservation may be made through FiLLiP

Step 5: File LLP Agreement

• Must be filed in Form 3 online on MCA portal
• Form 3 has to be filed within 30 days of date of incorporation
• LLP Agreement has to printed on stamp paper

8.12 Conversion of partnership to LLP

• Get DSC
• Get DPIN
• Name approval
• File LLP Form 17, Form 2, Form 3 for conversion
Documents necessary will be
§ Address proof of registered office
§ Details of partnership
§ Consent of all members
 § No objection certificate from Tax Authorities
§ List of creditors
§ List of assets and liabilities

8.13 Winding up of LLP

• Can be voluntary or called for by a Tribunal

• If voluntary

§ LLP must pass a resolution to wind up

§ Approval of 75% of total members is required

§ Approval of both secured and unsecured lenders

• If called for by a Tribunal, it is because

§ Less than 2 partners for a period of more than 6 months

§ LLP is not in a position pay its debts

§ LLP has acted against sovereignty and integrity of India
§ Tribunal thinks it is just for the LLP to be wound up
§ LLP has not filed Statement of Account and Solvency for 5
consecutive financial years

1. Pass and file a resolution with the Registrar

2. Make a declaration verified by an Affidavit to the effect that LLP has no
debt or can pay its debts in full within a period (not more than one year
from date of commencement of winding up)
3. File the following documents
§ Statement of assets and liabilities
§ Report of valuation of assets of LLP, if any

8.14 Appointment of LLP Liquidator

• Must be appointed within 30 days of passing of resolution
• In case LLP has creditors, LLP Liquidator has to be chosen if it is approved
by two thirds of the creditors
 • He performs functions and duties for winding up
§ Settle creditors
§ Adjust rights of partners
§ Maintain proper books of accounts pertaining to winding up of LLP
§ File a report (Winding Up report) stating how winding up has been
carried out and how property was disposed
o If two thirds of partners and creditors are satisfied with the
report, resolution of winding up of accounts and explanation
for dissolution must be passed

• Finally, LLP Liquidator must

a. Send LLP Winding up report and resolution of winding up of
accounts and explanation for dissolution to the Registrar
b. File an application with the Tribunal

8.15 Dissolution of LLP

• If Tribunal is satisfied with the way winding up has been carried out, they will
pass an order that LLP stands dissolved
• LLP Liquidator is required to file the copy of the Tribunal’s order with the
Registrar for winding up of LLP
• The Registrar will then publish a notice in the gazette that LLP stands
dissolved
Unit 5: Company Management
8.1 Key Managerial Personnel
According to the Indian Companies Act of 2013, key managerial personnel, in relation
to a company, means
i. The Chief Executive Officer (CEO) / MD / Manager
ii. Company secretary
iii. Whole-time director
iv. Chief Financial Officer (CFO)
v. Any such other officer, as prescribed

8.2 Meaning of BOD

• Collective body of directors of that company that
§ Controls, manages, superintends affairs of the company
§ Formulates general policy of the company
§ Can exercise control and act collectively
§ No individual director can act on behalf of the company unless
authorized by:
o Indian Companies Act, 2013
o Articles of Association
o Resolution of the Board of Directors
o Resolution of the shareholders

8.3 Types of directors

1. Ordinary directors – neither whole time, nor managing
2. Managing directors – appointed by virtue of
a) AOA
b) Agreement with the company
c) Resolution passed in general meeting
3. Whole time directors – whole time employees of the company
4. Additional directors – appointed between 2 AGM according to Section 161
 5. Alternate directors – appointed when original director is absent for a period
not more than 3 months
6. Professional directors – directors with professional qualification with no
pecuniary interest in the company
7. Nominee directors – directors appointed while borrowing money from banks
and financial institutions
8. Independent directors – Independent judgement in management
deliberations
9. Small shareholder directors – According to Section 152, small shareholder
director is one who holds nominal value of Rs. 20000 or less in a public
company

8.4 Executive (inside) vs Non-Executive (outside)

Executive (Inside) Non-Executive (Outside)

Whole time employee of the company Not in employment
Associated with day to day working Serve boards of more than one
company
Receive remuneration No remuneration
Example: Example:
1. Managing Director 1. Nominee Director
2. Whole Time Director 2. Professional Director
3. Executive Director

8.5 Appointment of Directors

• By promoters
• By Act
• By Articles of Association
• By company at Annual General Meeting
• By third parties
 • By Tribunal

8.6 Qualifications of Director

• No educational qualifications
• No prescribed age limits
• Only individuals can become directors
• Qualification shares’ nominal value < 5000

8.7 Position of Directors

• Directors as Agent
• Directors as Trustees
• Directors as Officers in the Company
• Directors as Employees
• Directors as Managing Partners

8.8 Power of Director

• Subject to:
a) Provisions of Indian Companies Act of 2013
b) Memorandum of Association
c) Articles of Association

• Powers exercised:
a) Make calls, issue debentures, forfeit shares, invest funds
b) Appoint a secretary, manager, etc.
c) Appoint alternate directors
d) Appoint auditors
e) Make a contribution to the NDF (non-deliverable forward) without
any limit
8.9 Duties of Directors
• Determine the amount of minimum subscription
• Confirm that application money is received and deposited until returned to
the applicants
• To call an EGM
• To manage affairs of company efficiently
• To approve balance sheet & P/L account before it is sent to the auditors

8.10 Directors’ Liability to

1. Company
• Negligence
• Commit an act that ultra vires their powers
• Illegal activities
• Breach of trust

2. Shareholders
• Directors negligence

3. Statutory penalties
• Due to non-compliance with Companies Act

4. Criminal Liability
• False statement in the prospectus
• Fraudulent credit taken from company

8.11 Disqualification of a director

• unsound mind
• uncharged insolvent
• person applied to be judged insolvent
• convict
• disqualified by court on order of the court
 • failed to pay calls for 6 months from date of calls

8.12 Removal of directors

1. Removal by shareholders
• Special notice of 14 days is to be given to the company to move a
resolution to remove the director and appoint another
• Once company gets the notice, it should circulate it among all the
members and the concerned director
• If director wishes to make a representation, he may send it to the company
and the company will circulate it among all the members
• If there is no representation from his side, other directors can speak
against his removal
• At the meeting:
i. One resolution is for removing the director
ii. Another is for filling up the vacancy

2. Removal by Central Government

• In case of adverse findings by Company Law Board (CLB)
• Fraud, persistent negligence, default, damage to business, defraud
creditors
• Company may fill the vacancy after approval of the Government

3. Removal by Company Law Board

• Prevention of oppression of management, frauds, mismanagement
enables a Company Law Board to remove the director

8.13 Managing Directors

• Attend everyday
• Person appointed among directors
• Carries out policy decision taken at Board Meeting
• Has special powers given by AOA
 • Also called whole time director or manager

Appointed by
1. Agreement with the company
2. Resolution passed in the AGM
3. Resolution passed by BOD

Director Managing Director (MD)

Frames policy Implements policy
Do not take part in day to day Takes part in day to day activities
Appointed by shareholders Appointed by BOD
Person can act as a director for A company can have only 2 MDs
maximum of 15 companies
Appointment of directors is compulsory Appointment of MD is not compulsory

8.14 Independent directors

• Director other than MD or WTD
• Person of integrity who possesses relevant expertise and experience
• Is not / was not a promoter of the company
• Is not related to promoters or directors in the company
• No pecuniary relationship with the company

8.14.1 Functions of independent directors

• Helps bringing independent judgement in Board’s deliberations
• Evaluates performance of Board & Management
• Scrutinize performance of management in meeting predetermined goals
• Determines remuneration of executive directors, key managerial
personnel
• Balance interest of shareholders
• Make sure that company has an adequate vigil mechanism
8.15 Directors’ Identification Number (DIN)
• Created to keep a database of directors
• Displays his participation in other companies (past & present)

8.16 Woman Director

• Every listed company
• Every other company having a paid share capital of 100 crores or more or
turnover of 300 crore, or more

8.17 Managerial remuneration

• Monthly salary, specified percent of net profits, fee received for going and
sitting at meeting of the Board (called sitting fee)
• Any expenditure incurred by the company in providing rent free
accommodation, or any other benefit free of charge to any of its directors
or managers
• Should not exceed 11% of net profit of company in that year

1. Remuneration to MD / WTD / Manager

• Cannot exceed 5% of net profits

2. Remuneration to other directors

• Cannot exceed 1% of net profits if there is an MD / WTD/ Manager
• 3% in other cases

8.14 Effective capital

• Aggregate paid up share capital

8.15 Disclosure of remuneration

• Ratio of remuneration of each director to median remuneration of employees
• Percentage increase in remuneration of each director
• Percentage increase in median remuneration of employees
 • Number of permanent employees
• Relationship between remuneration and performance

8.16 Audit Committee

Audit is required for companies having
1. Paid up capital of 10 crore or more
2. Turnover of more than 100 crore or more
3. Aggregate, outstanding loans, borrowings, or debentures exceeding 50 crore

• Committee comprises of minimum 3 directors

• Majority of them will be independent directors
• Chairperson shall have ability to read and understand financial statements
8.16.1 Meetings and Quorum
• Shall meet at least 4 times a year
• Either 2 members / 1/3 of members of AC
• Minimum of 2 IDs

8.16.2 Powers of committee

• Investigate any activity
• Seek information from any employee
• Obtain outside legal advice / professional advice
• Secure attendance of outsiders with relevant expertise
• Oversee financial reporting procedures

8.17 Nomination & Remuneration Committee

 Unit 2 – Formation of a company
2.1 Formation of a company
There are 4 steps to formation of a company
1. Promotion
2. Incorporation
3. Floatation / rising of capital
4. Commencement of business

• Public company can start business after Stages 1, 2, 3, and 4

• Private company can start business after Stage 1 and 2

2.1.1 Promotion
• Process of organizing and planning finances
• Identification of business idea
• Discovery of business opportunities
• Assess feasibility
• Take steps to launch the business

Promoter means a person:

• Who has been named in the prospectus or is identified by the company in
the Annual return
• Who has direct and indirect control over company affairs,
shareholder/director or otherwise

Twycross v Grant – Promoter means one who undertakes forming a company, and
getting it going, taking necessary steps to accomplish that purpose.

2.1.2 Functions of Promoter

• Discovery of idea
• Detailed Investigation
• Assembling resources
 • Preparing preliminary documents
• Naming of company

2.1.3 Types of promoters

• Professional promoters
• Financial promoters
• Entrepreneurial promoters
• Specialized institutions
• Government

2.1.4 Legal position of a promoter

• Neither an agent, nor a trustee for the company
• Occupies fiduciary position in company
• No secret profits
• Must fully disclose all facts
• Prohibited from unfairly/unreasonably using his position

2.1.5 Promoters’ Liabilities

• Completion of contracts
• No secret profits
• Fraud in Prospectus
• Misstatement of names of directors
• Misrepresentation of facts

2.1.6 Rights of Promoters

• Right to receive preliminary expenses
• Right to receive proportionate amount from co-promoters
• Right to remuneration
2.2 Incorporation
• Translation of ideas into reality
• Three types of incorporated companies
a. Limited by shares
b. Limited by guarantee
c. Unlimited company

2.3 Steps in incorporation

1. Approval of name
• ‘Name availability form’
• Limited or Private Limited

2. Filing of documents
• MOA
• AOA
• Directors’ list
• Written consent of proposed directors
• Copy of name approval
3. Payment of filing and registration fee
Certificate of Incorporation
• Private companies – Certificate of Incorporation
• Public companies – Certificate of Trading / Business

2.4 Duties of secretary before incorporation

• Help promoter
• Secure expert opinion
• Draw financial plan
• Ensure compliance with SEBI guidelines
• Collection of Certificate of Incorporation
2.4.1 Duties of secretary after incorporation
• Call for 1st board meeting
• Arrangement for opening bank accounts
• Arrangement of necessary forms
• Preparation of common seal
• File declaration with registrar

2.5 Legal Effect of Incorporation

• Company becomes a corporate body
• Perpetual succession
• Common seal
• Company can sue and be sued in its own name
• Right to hold and sell its own property

2.6 Lifting corporate veil

• Fundamental principle – separate legal entity
• Can sue and be sued in its own name
• Rule was laid down by House of Lords in the case of Salomon v. Salomon
• Separate legal entity – curtain, veil, shield between company and its members
• Corporate entity – to encourage and promote trade and commerce
• Court lifts the veil in case of any frauds or dishonesty of members

2.6 Memorandum of Association

• Sets out the constitution of the company
• It is the foundation
• Scope of company’s activities & relationship
• Purpose: useful to investors, while being contractual to others

2.7 Printing and signing of MOA

• At least members <= 7 for public
• At least Members <=2 for private
 Members <= 1 at least for OPC

2.8 Contents of MOA

1. Name of the company
2. Name of the state
3. Objectives of the company
4. Liability of its members
5. Amount of share capital

2.9 Clauses of MOA

• Name clause
• Situation Clause
1. State of registered office
2. Registered office should be declared within 15 days of incorporation
3. Information to Registrar:
o 30 days of incorporation
o 15 days of change
• Object Clause
o Object of the company
§ Main, ancillary, other objectives

• Liability Clause
• Capital Clause
o Amount of capital registered
• Subscription Clause

Change in Name Clause

1. Pass special resolution
2. Get Central Govt.’s approval

Change in Situation Clause

• Change within Local Limits
 1. Pass board resolution and special resolution
2. Notice Registrar of change within 15 days
• Change of state
1. Get approval of Central Govt
2. Approval should be registered with Registrar for change in
Certificate of Incorporation
• Change in jurisdiction of Registrar
1. Get confirmation by Regional Director
2. Communicate confirmation to the company within 30 days
• Change in Object
1. Pass special resolution
2. Get certification for the same from the Registrar within 30 days

• Change in Liability
1. Needs special resolution
2. File the same with registrar
• Change in Capital
1. Alteration of capital to be authorized by AOA
2. If voting % is affected, then Tribunal’s confirmation is mandatory
3. Notify alternations made along with the respective resolutions, and file
it with the registrar within 30 days

2.10 Doctrine of Ultra Vires

• Ultra – beyond
• Vires – powers
• Any act of the company beyond its object clause, legal powers and authority
• Such an act is void and cannot bind the company
• Cannot be ratified by shareholders

2.11 Articles of Association

 • Rules or regulations that govern the management of its internal affairs and
business
• Establishes a contract between company and its members

2.12 Contents of Articles

1. Adoption of preliminary contracts
2. Number and value of shares
3. Issue of preference shares
4. Allotment of shares
5. Transfer and transmission of shares
6. Forfeiture of shares
7. Alteration of capital
8. Conversion of shares into stock
9. Seal
10. Remuneration of directors