FORMATION OF COMPANY : FORMATION OF COMPANY Promotion Incorporation or Registration Commencement of Business Memorandum of Association Articles of Association Prospectus PROMOTION

: PROMOTION Promotion stands for all those activities which give existence to a business unit. In this, first the idea to establish the business comes in the mind of promoters. Second the detail investigation is done on this idea to execute. Third different factors which need to run the business are assembled. PROMOTION : PROMOTION Fourth to get all these factors we need money, so the different sources of finance are considered to raise the finance. INCORPORATION OR REGISTRATION : INCORPORATION OR REGISTRATION The second stage of formation of company is to registered it under Indian Company Act 1956. Company registration is compulsory. Following activities has to done to registered the company: Mention about the registered office Mention about the Name of Company INCORPORATION OR REGISTRATION : INCORPORATION OR REGISTRATION Mention about underwriter, bankers, legal advisors etc. Prepared important documents like Memorandum of Association and Articles of Association. Mention about the list of directors and their consent. Sending application with prescribed fee to the Registrar. COMENCEMENT OF BUSINESS : COMENCEMENT OF BUSINESS In case company issuing the Prospectus: A company must receive the amount of minimum subscription within 4 months from the date of issue of prospectus. Every director must pay the due amount on his holding shares. Statuary declaration by any director that all the formalities have been compiled. COMENCEMENT OF BUSINESS : COMENCEMENT OF BUSINESS In case of company not issuing the prospectus: A statement in lieu of prospectus has been presented to registrar. Every director must pay the due amount on his holding shares. Statuary declaration by any director that all the formalities have been compiled. MEMORANDUM OF ASSOCIATION : MEMORANDUM OF ASSOCIATION Memorandum of Association is such a document in which those conditions are stated on the basis of which a company is incorporated. A company cannot be incorporated without it. The main aim of the memorandum of association is to tell the sphere of company s

The following are the defining characteristics of a company :Separate Legal Entity : On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, 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 when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets. On the other hand, partners of a partnership firm have unlimited liability i.e. if the assets of the firm are not adequate 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 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 die or 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. Death or insolvency of member does not affect the existence of the company. Separate Property: A company is a distinct legal entity. The companys 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 a artificial person and does not have a physical presence. Therefore, 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.

Capacity to sue and being sued: A company can sue or be sued in its own name as distinct from its members. Separate Management: A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company

Rights of Directors Directors have the right to: 1) inspect the companys accounting records, assisted by an accountant [284(3)] 2) claim reimbursement for expenses incurred 3) discharge their duties without interference from co-directors 4) participate in the strategic management of the company and attend and vote at board meetings 5) receive reasonable notice of meetings 6) take independent professional advice at the expense of the company A director assumes two roles, as an "agent" acting on behalf of the company, and as a trustee who controls company assets. These roles give rise to the following directors duties: 1) to act in good faith towards the company 2) to act only within their powers and use their powers only for purposes which benefit the organisation. Directors who act outside their powers bind the company to the transaction but may be held personally liable if a loss results 3) not to use for personal gain any information acquired in their capacity as a director 4) to act in the best interests of the company and to avoid a conflict between personal and company interests 5) to exercise independent judgment in decision-making. A director who is appointed to represent an interest group, for example employees, is nevertheless obliged to act in the best interests of the company as a whole Statutory Duties : A director's duties in terms of the Companies Act Directors have to comply with a number of obligations in terms of the Companies Act. These are dealt with in Annexure A. Duties in terms of the memorandum and articles of association The memorandum of association determines the scope of the companys objects and powers, while the articles of association is a contract between members themselves and between members and the company. The articles therefore contain the internal rules by which a company is governed. The Companies Act provides a standard set of articles that many companies use as a basis but may amend to meet their specific needs. The memorandum and articles are integral to the company and directors should familiarise themselves with their contents since they invariably impose duties on directors. Directors and shareholders Decision making authority Whilst shareholders retain ultimate responsibility for the company and have the power to remove or not to re-appoint directors, they in effect delegate the day-to-day running of the company to the directors who in turn appoint and supervise management. The board of directors must manage the company within the limits of legislation and the memorandum and articles. The board may delegate certain powers to managers and at the same time impose appropriate restrictions and conditions which can be varied or revoked at any time. The directors have a duty to monitor management's performance and ensure that management work within their delegated power. In the absence of specific cause for suspicion, directors are generally entitled to trust management to perform their duties honestly and to accept and rely on the judgment, information and advice of management when reaching their own decisions. Directors should not lose sight of the fact, however, that they remain ultimately liable, both jointly as a board and individually, for the well being of the company. Directors power to bind the company 'Normally the powers and duties of directors are left undefined and it is implied that directors possess all powers necessary to enable them to direct the affairs of the company. The articles may sometimes seek to limit these powers or to specify particular duties, in which event these limitations must be strictly complied with. A director may not enter into transactions on behalf of the company which are beyond the powersconferred upon him by the articles, the Act and common law. In some circumstances where directors have acted beyond their powers as directors, the shareholders may subsequently ratify their action by special resolution. Ratification is not possible, however, where the action falls outside the object of the company as defined in the companys memorandum of association. Directors will be liable to the company for any financial losses incurred by it as a result of them having acted outside the scope of their authority. Any member of the company may institute action against any

incumbent or previous director where the company has suffered damages due to a breach of trust or a wrongful act by that director. [266] Loans to directors Loans made either directly or indirectly to directors are prohibited unless: all members give their consent , a special resolution approves a specific loan , the loan is to enable a director to perform his or her duties , the business of the company is to make loans , the loan is to provide assistance to enable the director to participate in a companys share incentive scheme, the loan is for directors' housing , the loan is made to a director of a subsidiary who is not also a director of the lending company [226]

Director meaning; Individuals elected by a corporation's shareholders to oversee the management of the corporation. The members of a Board of Directors are paid in cash and/or stock, meetseveral times each year, and assume legal responsibility forcorporate activities. also calleddirectorate. Appointment and removal of company directors Appointing new directors Every limited company must have at least one director. If a limited company only has one director, that director must be an actual person - as opposed to another company. A public limited company or plc must have at least two directors. In general, it's up to shareholders to appoint whom they want as director, however, there are restrictions: You must not have been disqualified by a court from being a director - if you have, you need; the court s permission; You must not be an undercharged bankrupt - if you are, you need the court's permission; You must not be under the age of 16. The appointment of a new director must comply with the company's Articles of Association which may specify: How many directors there should be; How long they can serve; What happens at the end of their term? You must tell Companies House within 14 days when: You appoint a new director - using form AP01 or AP02; Someone stops being a director - using form TM01; There s a change in a director's details - name or address, for instance - using form CH01 or CH02. These forms are available from Net Lawman along with completed examples and drafting notes to help you with the easy filing of the forms. Removal of company directors from office A director of a company can be removed from office by the following methods Retirement by rotation At each subsequent annual general meeting of the company, one-third of the total number of directors must retire from office and be subject to re-election. It is thus open to the members of the company to remove a director from the board when they are subject to re-election. Executive directors (which include the managing director) however, are exempt from the requirement to retire by rotation. Removal by ordinary resolution Members of a company always have the right to remove a director from office at any time. This right cannot be taken from them by anything contained in the director's service contract or in the Articles of Association. Any member wanting to propose a resolution to remove a director must give the company 'special notice', i.e. a formal notice setting out their request at the registered office of the company at least 28 days before a general meeting. The directors may try to frustrate the members' intention by not calling a general meeting at all. Faced with this situation, a member could either request an annual general meeting providing they

own at least 5% of the shares in the company or, if they own at least 10% of the shares in the company, request an extraordinary general meeting and thus fix the agenda for that meeting. Whenever the company receives 'special notice' of a resolution to remove a director, the board must ensure that the director concerned is informed immediately. That director has the right to make written representations to the members and can circulate a statement in writing to them. They can also speak at the meeting.
REMOVAL OF DIRECTOR; A (Special notice) of the intension to move a resolution for the removal of director be furnished by any member to the company not less than 14 days before the meeting at which it is to be moved, exclusive of the day on which the notice is served and the day of the meeting. (Section 284) The company shall, immediately after the notice of the intention to move any such resolution has been received by it, give its members notice of the resolution in the same manner as it gives notice of the meeting. If is not possible for the company to give notice to all the members, publish by advertisement in the newspaper having an appropriate circulation not less than 7 days before the meeting. The company must give intimation to the concerned director of the intended resolution by sending a copy of the special notice received by it, forthwith on receipt thereof. The director shall have the right to be heard on the resolution at the meeting. The director, who is sought to be removed, can make a representation in writing against his removal and request the company to notify it to the company's members [section 225(4)]. If the director requests the company to notify the members of the company his representation against his removal and the representation is of reasonable length and it has been received not too late, the company must (a) (b) mention in the notice of the resolution to be moved at the annual general meeting, the fact of the representation having been received; and send a copy of the representation to every member along with the notice of the meeting if the representation has been received before sending the notice of the meeting or separately if the representation has been received after sending the notice of the meeting.

If the representation could not be sent to the members because it was received too late or because the company made a default in sending it, the company must read out the representation at the annual general meeting, if the director requires it to do so. In addition, director can make oral representation at the annual general meeting.

Managing Directors statutory provisions Managing Director means a person who, by virtue of an agreement with the company or of a resolution passed by the company in a general meeting or by its Board of directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which could not otherwise be exercisable by him and includes a director occupying the position of a managing director, by whatever name called. The power merely to do administrative acts of a routine nature, when so authorised by the Board such as the power to affix the common seal of the company on any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any share certificate or to direct registration of share transfers will not be deemed to be included within substantial powers of management. The managing director must exercise his powers subject to the superintendence, control and direction of the Board. Appointment of directors and proportion of those who are to be retire by rotation Unless that articles provide for the retirement of all directors at every annual general meeting, at least two-thirds of the total number of directors of a public company, or of a private company which is subsidiary of a public company, must :(a) retire by rotation (b) be appointed by the company in general meeting, except where otherwise provided by the Companies Act. The remaining directors in the case of any such company, and the directors generally in the case of a private company which is not a subsidiary of a public company, must also be appointed by the company in general meeting, unless otherwise provided in any regulations in the articles of the company. Right of persons other than retiring directors to stand for directorship A person who is not a retiring director shall, subject to the provisions of this Act, be eligible for appointment to the office of director at any general meeting, if he or some member intending to propose him has, given notice in writing to the company at its registered office of at least 14 days before the meeting, signifying his candidature for the office of director or the intention of such member to propose him as a candidate for that office along with a deposit of rupees five hundred ( refundable on successful election ). The company must inform its members of such candidature by giving at least 7 days prior notice. Such notice may not be required if the company advertises such candidature at least 7 days before the meeting in at least 2 newspapers circulating in the place where the registered office of the company is situated, one of which must be in English and the other in the regional language. This provision shall not apply to a private company, unless it is a subsidiary of a public company. Additional directors The Board of directors may appoint additional directors if such power is conferred on it by the articles of the company. Such additional directors shall hold office only up to the date of the next annual general meeting of the company. Provided further that the number of the directors and additional directors together shall not exceed the maximum strength fixed for the Board by the articles. Filling of casual vacancies among directors In the case of a public company or a private company which is a subsidiary of a public company, if the office of any director appointed by the company in general meeting is vacated before his term of office will expire in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of directors at a meeting of the Board. Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated as aforesaid. Appointment of directors to be voted on individually At a general meeting of public company or of a private company which is a subsidiary of a public company, each director has to be appointed separately by a separate resolution. However, appointment of more than one director through the same resolution will be valid if it has been passed unanimously. A resolution moved in contravention of the aforesaid provision shall be void, whether or not objection was taken at the time to its being so moved: Consent of candidate for directorship to be filled with Registrar A person shall not act as director of a company unless he has, by himself or by his agent authorised in writing, signed and filed with the Registrar, a consent in writing to act as such director within 30 days of

his appointment. This provision shall not apply to a private company unless it is a subsidiary of a public company. Option to company to adopt proportional representation for the appointment of directors If the articles of a company provide for the appointment of not less than two-thirds of the total number of the directors of a public company or of a private company which is a subsidiary of a public company, according to the principle of proportional, representation, whether by the single transferable vote or by a system of cumulative voting or otherwise. Such appointments may be made once in every three years and interim casual vacancies being filled by the Board of Directors as Casual Vacancies. This may enable minority shareholders to have a proportional representation on the Board of Directors of the company. Qualification shares are the minimum number of shares a person must own, as provided in the articles of the company, in order to qualify to become a director of the company. Qualification shares must be acquired by a director within 2 months of his appointment. The articles cannot require a director to acquire qualification shares within a shorter period. The face value of the qualification shares cannot exceed five thousand rupees, or if the face value of one share is more than five thousand rupees, then the qualification share will be one qualification share. Every director, not being a technical director of a director appointed, by the Central or a State Government, shall within two months after his appointment file with the company a declaration specifying the qualification shares held by him. If, after the expiry of the said period of two months, any person acts as a director of the company when he does not hold the qualification shares, he shall be punishable with the fine which may extend to fifty rupees for every day between such expiry and the last day on which he acted as a director. The above provisions do not apply toa company not having a share capital; a private company; a company which was a private company before becoming a public company; or a prospectus issued by or on behalf of a company after the expiry of one year from the date on which the company was entitled to commence business.

WINDING UP- PROCEDURE UNDER COMPANIES ACT, 1956 Winding up is the process by which the normal activities of the corporation or association of person is stopped and the assets and liabilities of the association is assessed and distributed among the shareholders as per the existing agreement. On winding up, the organization ceases to be a going concern. The owners are eligible to get the share of residual property and may require to compensate in the event the assets are insufficient and the existing agreement so specifies. As section 425 of the Act, a company may be wound up in any one of the following ways: (a) by the court making a winding-up order (compulsory winding up) and (b) by passing of an appropriate resolution for voluntary winding up at a general meeting of members (voluntary winding up) COMPULSORY WINDING UP As per section 433, company may be wound up by the High Court/Tribunal on: Passing a special resolution ; a court can wind up the co. if the co itself has passed a special resolution to the effect. If the court opines to the resolution is against public interest. It should also be noted that if majority of the share holders are for winding up, then the company can choose the path of voluntary winding up . Failure to hold statutory meeting; in case of default by the co either in holding the staturory meeting to the registrar, the court may order for winding up. The court may give a chance to rectify the faults, instead of making a winding up order. Failure to commence business the power of the court is discretionary and it may refuse an order if the suspension of the business for a whole year is sufficiently accounted for and the company had intention to start buss with in a reasonable time Reduction in number of members below minimum 7 in case of a public co and 2 in case of pvt co then the co may be wound up by an order of the court. Inability to pay its debts 1) demand for payment neglected 2) decreed debt unsatisfied 3) commercial insolvency MEMBERS VOLUNTARY WINDING UP Board meeting shall be convened by issuing notice to all the directors of the company. Within 5 weeks, immediately preceding the date of resolution for winding up, make sure that the company can pay its debts in full within a period of 3 years, if the company is put to liquidation. A declaration has to be made therein to this effect in Form 149 prescribed under rule 313 of the Companies (Court) Rules, 1959. The declaration should also be verified by an affidavit. Finally the winding up has to be completed by realizing all assets and paying of all liabilities and returning the share capital and surplus, if any 1)by ordinary resolution and 2) by special resolution CREDITORS VOLUNTARILY WINDING UP Where the resolution for winding up has been passed, but the Board of Directors are not in a position to give a declaration on the liability of company, they may call a meeting of creditors, for the purpose of winding up. (Sec.500) It is the duty of Board of Directors, to present a full statement of companys affairs, and list of creditors along with their dues, before the meeting of creditors(Sec.50(3)) Whatever resolution, the company passes in creditor's meeting, shall be given to the Registrar within ten days of its passing. (Sec.501) Company in the general meeting [in which resolution for winding up is passed], and the creditors in their meeting, appoint liquidator. They may either agree on one liquidator, or if two names are suggested, then liquidator appointed by creditor shall act.(Sec.502) Any director, member or creditor may approach the tribunal, for direction that: Liquidator appointed in general meeting shall act, or He shall act jointly with liquidator appointed by creditor, or appointing official liquidator, or Some other person to be appointed as liquidator.

The remuneration of liquidator shall be fixed by the creditors, or by the tribunal.(Sec.504) On appointment of liquidator, all the power of Board of Directors shall cease. (Sec.505) As per section 509, the liquidator shall take the following steps, when affair of the company are fully wound up: Call a general meeting, and meeting of creditors, and lay before it, complete picture of accounts, winding up procedure and how the properties of company are disposed of. The meeting shall be called by advertisement, specifying the time, place and object of the meeting. The liquidator shall send to the Registrar and official liquidator copy of account, within one week after the meeting. If from the report, official liquidator comes to the conclusion, that affairs of the company are not being carried in manner prejudicial to the interest of its members or public, then the company shall be deemed to be dissolved, from the date of report to the tribunal. However, if official liquidator comes to a finding, that affairs have been carried in a manner prejudicial to intent of members or public, and then tribunal may direct the liquidator to investigate further. Restrictions on the appointment of body corporate as Liquidator in case of a voluntary winding up.(Sec.513) The Central Govt. shall keep a cognizance over the functioning of official liquidator, and may require him to answer any inquiry. (Sec. 463).

Dividends: are payments made by a company to its shareholders. Typically, when a company is making
a profit, it distributes those profits to its owners (the shareholders) by way of a dividend. When a company makes a profit, some of this money is typically reinvested in the business and called retained earnings, and some of it can be paid to its shareholders - as a dividend. Paying dividends reduces the amount of cash available to the business. Companies that pay dividends are usually least volatile and are typically large and established companies. Smaller, high growth companies usually do not pay dividends, as they need to reinvest that money into business to support the growth. Dividends are taxable as a regular income and at much higher rate than that applied to long term capital gain. As of 2003, cash dividends are taxed at a maximum rate of 15% as long as the stock has been held for at least 60 out of the 120 days beginning 60 days prior to the ex-dividend date. If you have held the stock for a period of less than this the dividend will be taxed at your regular income level. Distributions of a companys profit, paid out to common and preferred shareholders. Usually dividends are paid out on a quarterly basis in the form of a cash dividend, as determined by a companys board of directors. Statutory provisions regarding dividends Payment of dividend can be made only from profits; it should be noted that no dividend can be paid out of capital. No dividend can be paid if there is non compliance with sec.80 , the dividends cannot be declared by a company on its equity shares, if it fails to redeem the preference shares as required by sec.80a. Dividend payable only in cash only Dividend payable to the registered holder only of such shares or to his holder or to his banker Dividend to be paid within the prescribed time within 42 days of declaration Dividends to be declared only at AGM in respect of the particular FY for which the AGM has been convened No dividend on advance payment of cell Declared dividend is a statutory debt from the date on which it is declared and become payable. The SH entitled to it can seek the intervention of court for payment. Adjustment of dep and lossed for previous year; the co cannot pay dividends, if dep are not provided for the current year out of the profits at the rates specified in schedule of the co has incurred any loss in any previous FY, such losses should also be deducted for profits.