MB2106 LEGAL ASPECTS OF BUSINESS

UNIT II COMPANY LAW

 Major principles
 Nature and types of companies
 Formation
 Memorandum of Association
 Articles of Association
 Prospectus
 Power, duties and liabilities of Directors
 winding up of companies
 Corporate Governance
 Amendments of Companies Act, 2013
1. Voluntary association.
A company is a voluntary association formed by an individual or group of
individuals. Most companies are formed with the motive of profit-making except
the Section 8 companies (NGO). Profit earned is divided among the shareholders
or saved for the future expansion of the company.

2. Company is an artificial person created by law.

A company is an artificial person created by law. It is regarded as a legal person
capable of entering into contracts, owning property in its name, suing, and being
sued by others.

3. Separate legal entity.

A company incorporated under the Companies Act, 2013 is treated as a separate
person distinct from its members under law. Therefore, the company will be liable
for all the acts of the company except any illegal act done by the directors of the
company.
 Definition of company : Section 2(20) of the Companies Act, 2013 defines a company to
mean a company incorporated under this Act or under any previous company law.

Company has limited liability.

The liability of a company may be limited either by Shares or Guarantee.
Company limited by Guarantee: Liability of shareholders is limited to a certain
amount of guarantee mentioned in the memorandum payable only at the time of
wind up and losses occurred by the company.
Company limited by Shares: Liability of the members shall be limited to the extent
of unpaid money or shares held by them.

What means incorporated company?

Incorporation is the legal process used to form a corporate entity or company.
A corporation is the resulting legal entity that separates the firm's assets and
income from its owners and investors.
  Major principles of Company Law

A company’s property belongs to it and not to its directors, management or

shareholders. Even if you are a sole director and a 100 per cent shareholder,
you can still be found guilty of stealing from your own company.

Liquidators and future owners will have an interest in pursuing claims for
theft or misuse of assets where a company has been plundered by those in
day-to-day control.

Many a corporate swindler has been pursued through the courts for forgetting
this basic principle.

A company is responsible for its own debts and liabilities. The shareholders
and, as a general rule, directors cannot be forced to pay them.
  Major principles of Company Law

why ‘limited’ companies give their shareholders ‘limited liability’.

A limited company may be sued until all its assets have been
exhausted, but no creditor can turn to the shareholders and ask
them to meet any deficit. Once a company has received at least the
nominal value of its issued shares (£1 for a £1 share, etc), the shares
are ‘fully paid’ and the shareholder has no further liability. Shares may
be issued ‘partly paid’: a £1 share may be issued with 25p payable on
issue and 75p at some future date or on an earlier liquidation. But
once those amounts are paid in full, the shareholder has no
further liability for the company’s debts.
 a) Companies Limited by Shares

Sometimes, shareholders of some companies might not pay the entire value of
their shares in one go. In these companies, the liabilities of members is limited to
the extent of the amount not paid by them on their shares.
This means that in case of winding up, members will be liable only until they pay
the remaining amount of their shares.

b) Companies Limited by Guarantee

In some companies, the memorandum of association mentions amounts of

money that some members guarantee to pay.
In case of winding up, they will be liable only to pay only the amount so
guaranteed. The company or its creditors cannot compel them to pay any
more money.
 c) Unlimited Companies
Unlimited companies have no limits on their members’ liabilities. Hence, the
company can use all personal assets of shareholders to meet its debts while
winding up. Their liabilities will extend to the company’s entire debt.

On the basis of Members

a) One Person Companies (OPC)
These kinds of companies have only one member as their sole shareholder.
They are separate from sole proprietorships because OPCs are legal entities
distinct from their sole members. Unlike other companies, OPCs don’t need to
have any minimum share capital.
b) Private Companies
Private companies are those whose articles of association restrict
free transferability of shares. In terms of members, private companies need to
have a minimum of 2 and a maximum of 200. These members include present
 c) Public Companies
In contrast to private companies, public companies allow their members to freely
transfer their shares to others. Secondly, they need to have a minimum of 7
members, but the maximum number of members they can have is unlimited.

Companies on the basis of Control or Holding

a) Holding and Subsidiary Companies
In some cases, a company’s shares might be held fully or partly by another company.
Here, the company owning these shares becomes the holding or parent company.
Likewise, the company whose shares the parent company owns becomes its
subsidiary company.
Holding companies exercise control over their subsidiaries by dictating
the composition of their board of directors. Furthermore, parent companies also
exercise control by owning more than 50% of their subsidiary companies’ shares.
 b) Associate Companies
Associate companies are those in which other companies have significant influence.
This “significant influence” amounts to ownership of at least 20% shares of the
associate company.
The other company’s control can exist in terms of the associate company’s
business decisions under an agreement. Associate companies can also exist under
joint venture agreements.
Other Types of Companies
a) Government Companies
Government companies are those in which more than 50% of share capital is held
by either the central government, or by one or more state government, or jointly by
the central government and one or more state government.

b) Foreign Companies
Foreign companies are incorporated outside India. They also conduct business in
India using a place of business either by themselves or with some other company.
 Steps in Formation of a Company

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

 Promotion stage
 Registration stage
 Incorporation stage
 Commencement of Business stage

Promotion stage
• Identify the business opportunity and decide on the type of business that needs
to be done.
• Perform a feasibility study and determine the economic, technical and legal
aspect of executing the business.
• Interest shown by promoters towards the business idea and supply of capital and
other necessary procedures to start the business.
 Registration stage
• Memorandum of Association: A memorandum of association (MoA) must be
signed by the founders of the company. A minimum of 7 members are required
in case of a public company and 2 in case of a private company. The MoA must
be properly registered and stamped.
• Article of Association: Article of Association (AoA) is also required to be signed
and submitted. All members who previously signed MoA, should also be signing
the AoA.
• The next step is preparing a list of directors which should be filed with the
Registrar of Companies.
• Directors of the company should provide a written consent agreeing to be
directors, should be filed with the Registrar of Companies (RoC).
• The notice of address of the office needs to be filed.
• A statutory declaration should be made by any advocate of either the High Court or Supreme Court,
or a person of the capacity of Director, Secretary or Managing Director. This declaration shall be filed
Certificate of Incorporation: Certificate of incorporation is issued when the
registrar is satisfied with the documents provided. This certificate validates the
establishment of the company in the records.
Certificate of commencement of business: Certificate of commencement of
business is required for a public company to start doing business, while a private
company can start business once it has received the certificate of incorporation.
Public companies receiving the certificate of incorporation can issue prospectus
in order to make the public subscribe to the share for raising capital. Once all
the minimum number of required shares have been subscribed, a letter should
be sent to the registrar along with a bank document stating the receiving of the
money.
The registrar will issue a certificate upon finding the provided documents
satisfactory. This certificate is known as certificate of commencement of business.
The company can start business activities from the date of issue of the certificate and the business shall be
done as per rules laid down in the MoA (Memorandum of Association).
  Memorandum of Association

A Memorandum of Association (MoA) represents the charter of the company. It is

a legal document prepared during the formation and registration process of a
company to define its relationship with shareholders and it specifies the objectives
for which the company has been formed.
 Meaning and Definition of AOA
Articles of Association is abbreviated to AOA, is a primary/secondary document
which states all the rules and regulations that designed by the company for
conducting its policy of day-to-day administration to run their organization
smoothly. Articles of Association define the rights, responsibilities, duties and
the purpose of the members and directors of the company.
The articles of association is generally contains the provisions for the company
name, Board of Directors, Equity and preference shares, Bonus shares,
remuneration, ESOPS, the organization of the company, provisions regarding to
shareholders meetings , Board meeting and committee Meeting, etc..
The articles includes with some activities in a company are
 Share Capital
 Rights of Shareholders
 General Meetings
 Board of Directors and their responsibilities
 Accounts and Auditing
 Borrowing Powers and etc.
 What does your prospectus mean?
Definition of prospectus

1 : a preliminary printed statement that describes an enterprise (such as a

business or publication) and that is distributed to prospective buyers,
investors, or participants. 2 : something (such as a statement or situation) that
forecasts the course or nature of something.

Director's Rights, Duties, And Liabilities

Directors must have a vision in order to frame policies that will result in high results.
They must set the company's targets in order to reach high levels of success. They
must have the authority to carry out the company's goals. Then there are the director's
roles and duties. Directors also have some protections that they can use to defend
themselves and the company's interests.
 Who can be a Director?
Managing a Business is not an easy task. Therefore there are eligibility criteria for
a person to become a Director.

Only an Individual person can become a Director of the Company. A person other

than individual is not eligible to become a director.
Furthermore, a minor individual cannot become director of Company as he is not
eligible to obtain DIN as well as cannot file a valid consent to act as director.
At least one director of Company should be Resident of India.

Moreover the person acting as Director should be :-

of sound mind
capable to enter into a contract
not an insolvent person.
 Powers of Directors
According to Companies Act 2013, the Board of Directors of a Company has the
following powers in the Company.
 Power to make calls in respect of money unpaid on shares
 Call meetings on suo moto basis.
 Issue shares, debentures, or any other instruments in respect of the Company.
 Borrow and invest funds for the Company
 Approve Financial Statements and Board Report
 Approve bonus to employees
 Declare dividend in the Company
 Power to grant loans or give guarantee in respect of loans
 Authorize buy back of securities
 Approve Amalgamation/Merger/ Takeover
 Diversify the business of the Company
 Duties of Directors
Board of Directors acts as agent of the Company. However while acting for
Company, Director needs to take care of his duties which are as follows:-
To act in good faith
Act in accordance with the Articles of Association of the Company
To act so as to promote the objects of the Company
Act in best interest of the Company and its stakeholders
Exercise duties with due and reasonable care
To exercise independent judgment
Not to get involved in a situation where his interest conflicts with the interest of
the Company
He cannot assign his office to any other person.
Not to achieve undue gain or advantage
 What Is Winding Up of companies?
Winding up is the process of liquidating a company. While winding up, a company
ceases to do business as usual. Its sole purpose is to sell off stock, pay off creditors,
and distribute any remaining assets to partners or shareholders.
 Corporate governance
is the system by which companies are directed and controlled. Boards of
directors are responsible for the governance of their companies. The
shareholders' role in governance is to appoint the directors and the auditors
and to satisfy themselves that an appropriate governance structure is in place.
 What are the Key Proposals?
It is expected to raise the bar on corporate governance, especially in hiring for
board positions and handling resignations of auditors and top executives.
The key proposals seek to ensure that independent directors are truly
independent, and companies are more open about instances of statutory
auditors making adverse remarks or qualifications on the financial statements or
even quitting their audit assignment.
It seeks to protect the independence of the statutory auditors by making several
changes to the law, including mandatory joint audits for certain types of companies.
The idea of the proposed changes to the Companies Act is to strengthen the
gatekeepers of good governance(Corporate governance)—independent directors
and auditors—infuse more transparency into company affairs and allow
companies to issue fractional shares and discounted shares as part of efforts to
improve ease of doing business.
 •The issue of fractional shares, a practice currently prohibited under the
Companies Act, will help retail investors access high-value shares, while
discounted shares will allow a company in distress to convert debt to equity.
• Some of the past bankruptcies in the corporate sector, particularly
those involving large non-bank financial companies facing serious financial
difficulties, have prompted the government to consider some of these changes.

What is the Indian Companies Act?

Indian Companies Act is an Act of the Parliament which was enacted in 1956. It
enables the companies to be formed by registration, sets out the
responsibilities of companies, their executive director and secretaries.
In 2013, the Government amended the Indian Companies Act 1956 and added a
new Act called as Indian Companies Act 2013.
The Companies Act, 1956 was replaced partially by the Indian Companies Act
2013. It became an act and finally it came into force in September 2013.
An overview of amendments in the Companies Act from 1956-2013
Companies Act, 1956
Companies have a huge role in any developing economy. The Companies Act
1956, was not enacted only from a legalistic, calculative, and scientific point of
view, rather it was based more on the social and economic needs of the young
nation, to provide economic growth. It was primarily brought to regulate the
formation, functioning, financing, and dissolving of companies. The Act came
into effect on April 1, 1956. The original Act contained around 658 Sections. The
Act prescribed various regulatory mechanisms regarding all the aspects of a
company such as organizational, financial, and managerial. The Act vested the
winding-up jurisdiction in the High Courts. In the working of the corporate
sector, freedom to the companies is as important as protecting the rights of
shareholders and investors. The Companies Act tried to play a balancing role
between these two competing forces, i.e., the autonomy of the management
and investor protection. 
 The main objectives of the Act were as follows:

To safeguard the dividends of the shareholders, from the management. As there is

a separation between the management and the ownership of a company. 

To protect the interest of the creditors at the same time. 

To help develop companies in a healthy and competitive environment in India.

Because the corporate sector always has a huge role in the development of a
nation. 

To equip the government with ample power to protect the public interest by
intervening in the company affairs; as per the procedure prescribed by law.