COMPANY LAW –I

ANUPAM KISHORE SINHA

LEGAL ASPECTS OF BUSINESS

 DEFINITION OF A COMPANY

• As per Section 2(20) of the

Companies Act, 2013 (the “Act”),
“company” means a company
incorporated under this Act or under
any previous company law
[Companies Act, 1956]
 DEFINITION OF A COMPANY

“A company is an association of many

persons who contribute money or
money’s worth to a common stock and
employ it for some common purpose.
The common stock so contributed is
denoted in money and is the capital of
the company. The persons who
contribute it or to whom it belongs are
members. The proportion of capital to
 CLASSIFICATION OF COMPANIES

I. LIABILITY – Limited Liability &

Unlimited liability
II. BY NUMBER – One Person,
Private and Public
III. LISTING – Listed & Unlisted
 SEPARATE LEGAL PERSONALITY /
CONCEPT OF LIMITED LIABILITY
SALOMON V. SALOMON
1. Salmon was a leather merchant.
2. He sold his business for a sum of £30,000 to a company formed by
him along with his wife, a daughter and four sons.
3. The purchase consideration was satisfied by allotment of 20,000
shares of £1 each and issue of debentures worth £10,000,
secured by a floating charge on the company’s assets in favour of
Mr. Salmon.
4. All the share holders subscribed for one share of £1 each.
The company almost immediately ran into difficulties and
eventually become insolvent and winding up commenced.
 SEPARATE LEGAL PERSONALITY /
CONCEPT OF LIMITED LIABILITY
1. At the time of winding up, the total assets of the company amounted
to £6,050; its liabilities were £10,000 secured by the debentures
issued to Mr. Salmon and £8,000 owing to unsecured trade creditors.
2. The unsecured sundry creditors claimed the whole of the company’s
assets, viz. £6,050 on the ground that company was a mere alias or
agent for Salmon.
3. The contention of the trade creditors could not be maintained because
the company, being by law a person quite distinct from its members,
could not be regarded as an ‘alias’ or agent or trustee for Salmon.
4. As the company was duly incorporated, it is an independent person
with its rights and liabilities appropriate to itself.
 SEPARATE LEGAL PERSONALITY /
CONCEPT OF LIMITED LIABILITY
• BACHA GUZDAR V. CIT

• The plaintiff (Mrs Guzdar) received certain amounts as dividend in respect of

shares held by her in a tea company.
• Under the Indian Income-tax Act, agricultural income is exempted from
payment of income-tax. As income of a tea company is partly agricultural,
only 40 per cent of the company’s income is treated as income from
manufacture and sale, and therefore, liable to tax.
• The plaintiff claimed that the dividend income in her hands should be treated
as agricultural income up to 60 per cent, as in the case tea company, on the
ground that dividends received by shareholders represented the income of
the company.
 SEPARATE LEGAL PERSONALITY /
CONCEPT OF LIMITED LIABILITY
• Held: Though the income in the hands of the company was partly agricultural
yet the same income when received by Mrs. Guzdar as dividend could not be
regarded as agricultural income.
• A share is a right to a specified amount of the share capital of a company
carrying with it certain rights and liabilities while the company is a going
concern and in its winding up. The shares or other interest of any member in a
company are personal estate transferable in the manner provided by its
articles, and are not of the, nature of real estate
• It can be referred from Mrs. Guzdar’s case that a shareholder of a company is
not a part-owner or co-owner of the company or its property. He is only given
certain rights by law, for example, to attend and vote at the meetings of the
shareholders, to receive dividend. Thus the property of the company belongs
to the company and not to its shareholders.
 CLASSIFICATION OF COMPANIES

• As per Section 3(2) of the Companies Act, 2013 (the

“Act”), a company may be a company limited (i) by
share or (ii) by guarantee or (iii) an unlimited
company.
• As per Section 2(22) of the Act, in a company limited
by shares, members have their liability limited to
the unpaid amount of shares respectively held by
them.
• As per Section 2(21) of the Act, in a company limited
by guarantee, members have their liability limited to
such amounts as the members may respectively
 CLASSIFICATION OF COMPANIES

• In a company limited by guarantee, the profits earned

are re-invested into the Company itself. Company
limited by guarantee is a structure that is legally
preferred for most non-profit / charitable organization.

• In a company limited by shares, the liability of the

shareholder is limited to the unpaid amount on the
shares held by him. If there is no unpaid amount then,
he is not liable at all.
 CLASSIFICATION OF COMPANIES

• Private company – (i) restricts right to transfer its

shares. (ii) 2< shareholders < 200. (iii) prohibits any
invitation to the public to subscribe for any
securities of the company.
• Public company – A company which is not a private
company. 7 < shareholders < Unlimited.
• Listed company – A company whose shares are listed
on stock exchange.
• Unlisted company – A company whose shares are not
listed.
 MEMORANDUM OF ASSOCIATION (MoA) &
ARTICLES OF ASSOCIATION (AoA)

• MEMORANDUM contains:-
1. Name of the Company with either “Private Limited” or “Limited”

2. State in which the registered office of the Company is situated

3. Objects for which the company is proposed to be incorporated

4. Liability of members of the Company

• ARTICLES contain:- Regulations for management of the company.

 STAGES IN CONSTITUTION OF A
COMPANY

• FORMATION

• INCORPORATION

• COMMENCEMENT

• PROMOTION
 STAGES IN CONSTITUTION OF A
COMPANY
• Formation comprises drawing up of charter documents
of the Company namely, MoA and AoA.
• Incorporation – Once the MoA and AoA have been signed,
they are presented before the Registrar of Companies
(RoC), who incorporates / registers the new company
• Commencement – the RoC after due process gives
certificate of commencement of business
• Promotion - this consists of putting into practice the
business plans which the managers of the company have
drawn up.
 PROMOTER

• Promoter:- is a person
• Who is named as such in the documents of the
company like annual return / prospectus;
• Who has control over the affairs of the company,
directly or indirectly whether as a director,
shareholder or otherwise
• In accordance with whose advice, directions or
instructions, the Board of Directors of the Company
is accustomed to act. [Section 2(69) of the Act]
 LEGAL POSITION OF PROMOTER

• Not an agent – as the Company does not exist in the eye of

law, when they are promoting the company
• Fiduciary – A relationship in which one person (promoter) is
under a duty to act for the benefit of another (the company)
on matters within the scope of the relationship.
• Duty not to make secret profit – An association of person
bought ‘Olympia’ (an amphitheatre) and sold this to a
company promoted by them and made a secret profit of
20,000 pounds, not disclosed in the prospectus. It was held
that they were bound to pay it to the company.
• Duty to disclose interest in a transaction
 RAISING MONEY FOR THE COMPANY /
PROSPECTUS

• As per Section 2(70) of the Act, prospectus means

any notice, circular, advertisement of other
document inviting offers from the public for
subscription or purchase of any securities of a body
corporate
• Securities include – shares, bonds, debenture or any
other marketable security of a company. [Financial
Assets]
• Company raises money through [Section 23 of the
Act]:-
• Prospectus (Public only)
• Private placement (Public and Private)
 PROSPECTUS

• Section 26 of the Act, includes the matters to be stated in the prospectus.

• Section 35 of the Act provides for civil liability for mis-statements in
prospectus, meaning thereby if a person who has purchased the securities
of the company acting on any statement included in the prospectus, the
company and every person who is director, promoter etc. of the Company
will be liable to pay compensation to every such person who has sustained
such loss or damage.
• Section 36 of the Act prescribes criminal liability / punishment for anyone
who knowingly makes any false statement to induce another to purchase
securities, etc., will be liable for punishment not less than 6 months but
which may extend to ten years and fine upto three times of amount
involved in the fraud.
 RAISING MONEY FOR THE COMPANY

• As per Section 42 of the Act, private placement means any offer of

securities or invitation to a select group of persons by a company
(other than by way of public offer) through issue of private
placement offer letter. The maximum number of people to whom
such offer may be made is 200 during the financial year.
• Rights issue means offering shares to existing shares in proportion
to their existing shareholding. As per Section 62 of the Act, if the
Company decides to issue fresh shares they should be offered to
existing shareholders in proportion to their paid share capital.
• Bonus issue means additional shares given to existing
shareholders without any additional cost. [Section 63 of the Act]
 RAISING MONEY FOR THE COMPANY

• SHARES & DEBENTURES

• Share represents the interest of the shareholder in
the Company.
Share capital of a company limited by share:-
• Equity share capital with voting rights or with
differential voting / dividend rights
• Preference share capital carries a preferential right
to payment of dividend, repayment in case of winding
up [Section 43 of the Act]
 RAISING MONEY FOR THE COMPANY

• As per Section 2(30) of the Act, debenture is any

instrument of a company evidencing a debt, whether
constituting a charge on the assets of the company
or not.
• Shares or debentures shall be movable property
transferrable in the manner provided under the AoA
[Section 44 of the Act]
QUESTIONS / DISCUSSION

QUESTIONS / DISCUSSION

QUESTIONS / DISCUSSION