Company Law Notes for Mcc

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Nilesh A Pradhan & Co.

INTRODUCTION The word Company is derived from the Latin word (Com - with or together, Panis - bread) and is originally referred to an Association of Persons who took their meals together. Nowa-days, business matters have become more complicated and cannot be discussed at one time. Therefore, word Company has assumed greater importance as it denotes a Joint Enterprise in which capital is contributed by large number of people. In popular parlance, a Company denotes an association of like minded people formed for the purpose of carrying on some business or undertaking. The Company may be brought into existence for multifarious purposes. In Smith V/s Anderson (1880) 15, CHD 247, it was observed that a Company in broad sense, means an association of person formed for some purpose. A Company may be incorporated Company or Corporation or Unincorporated Company. An incorporated company is single and legal (artificial) person whereas unincorporated company, such as partnership is mere collection or aggregation of Individuals. Incorporated Company owes its existence either to special Act of Parliament or to company legislation. Unincorporated Company, which is governed by Partnership Act. In legal sense, a Company is an association of both natural and artificial person incorporated under existing law of the country. In the context of Company Act, 1956, A Company means a company formed and registered under the Companies Act, 1956 or under previous laws relating to companies. In short, company is intricate, centralized economic and administrative structure run by professional managers who hire capital from investors. In general sense, the term Company can be summarized as collection of many individuals united into one body under a special denomination having perpetual succession under an artificial form and vested by the policy of law with the capacity of acting in several respects as an Individual, particularly of taking and granting property of contracting obligations and of suing and being sued of enjoying privileges and immunities in common and exercising of political rights, more or less extensive, according to the designs of the institution or the powers upon it, either at time or its creation or at any subsequent period of its existence. ADVANTAGES OF COMPANY FORM OF ORGANISATION.1) Corporate Personality: A Company is a distinct legal or juristic person independent of

its members. Even a one man company (Saloman & Co.Ltd. case) is different legal status apart from its shareholders. As given in Companies Act, from the date of incorporation, the subscriber to the Memorandum of Association and other members shall be body corporate, who are capable of exercising all the function of an incorporated company and having perpetual succession & common seal. The term Perpetual Succession indicates that the company will be same entity with the same privileges and immunities irrespective of death, insolvency of individual members. In short, the principle of perpetual succession connotes Members may come and members may go but the company can go on forever.

2) Perpetual Succession: The company form of organization enjoys perpetual succession.

3) Corporate Property: A Company as a legal entity is capable of owing its funds and

other assets. The property of the company is not the property of shareholders. (Gramophone & Typewriting Co. v/s. Stanley). The company is real person in which all the property is vested and by which it is controlled, managed and disposed of.

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4) Transferable Shares: The Shares or other interest of any member in the company shall

be movable property, transferable in the manner provided by Articles of Company. This facilitate investment of fund in shares of company. The shareholder may sell their shares at any time. Thus, it provides liquidity to the investor as shares could be sold in the open market and in Stock Exchange. However, this advantage is not available to private company.5) Capacity to sue: As a juristic legal person, a company can sue in its name and be sued

by others. The Managing Director and other Director are not liable for dues against the company except in the exceptional circumstances provided under Company Act, 1956. policies and implement them subject to the general principle of law, equity & good conscience and in accordance with provisions contained in the Company Act, Memorandum and Articles of Association. This advantage promotes professional management and enhance the efficiency. The Director & Manager of the company can carry on the activity the business activities with freedom, authority and accountability in accordance with the company law.

6) Flexibility & Autonomy: The Company has autonomy and independence to form its own

DISTINCTION BETWEEN COMPANY & PARTNERSHIP FIRM POINTS 1. Legal Status 2. Owner of Property 3. Contract 4. Liability COMPANY Separate legal status Property of company is owned by co. and shareholder have no right over such property A member of the company can contract company. Shareholders liability is limited either by guarantee or shares except it is made unlimited by making alteration in the MOA. The shares of company can be transferred except in case of private co. PARTNERSHIP FIRM No separate legal status distinct from person comprising it. Partnerships property is the property of the Individuals comprising it. Partners of the firm cant contract his firm. Partners liability in the firm is unlimited. In case of partnership, the Partner cant transfer his share except with the consent of all other partners.

5. Transferability

DISTINCTION BETWEEN COMPANY & SOLE PROPRIETORSHIP POINTS 1. Legal Status 2. Owner of Property 3. Extend of Operation 4. Share Capital COMPANY The company has separate legal status apart from its member. Property of company is owned by the company & shareholders has no right over it. The volume of operation of company is too large to be managed by one person. The company has its own capital. PARTNERSHIP FIRM The proprietor is not having any legal status. Proprietor is owner of his business. Generally, the volume of operation is too small as compared to company. However, the proprietor of business cant issue share

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5. Liability

6. Perpetual

Liability of member of company is limited to the extent of unpaid value of shares purchased by him, except it will be unlimited in certain cases mentioned under Act. The company enjoys the perpetual i.e. it continues even in not insolvency of its members succession

capital to public. The liability of Proprietor is unlimited. He is personally liable for the debt incurred by him during business. The sole proprietor is succession enjoying perpetual death,

COMPANY MEETINGS A Meeting may be generally defined as a gathering or assembly or getting together of number of persons for transacting any lawful business. There must be at least two persons to constitute a meeting. Therefore, one shareholder usually cannot constitute a company meeting even if he holds proxies for other shareholders. Meeting may be of various kinds like Board Meeting, Class Meeting, Annual General Meeting, Extra Ordinary General Meeting, Statutory Meeting etc. There must be at least two persons to constitute a meeting (Sharp v/s Dawes) (7876). In some exceptional circumstances, even one person may constitute a meeting. Therefore, one shareholder cant constitute a company meeting even if he holds proxies for other shareholders. It is to be noted that every gathering or assembly does not constitute a meeting. A company meeting must be convened and held in perfect compliance with the various provisions of the Company Act. BOARD MEETING The affairs of the company are managed by the Directors. It is therefore, necessary that the Directors should often meet to discuss various matters regarding the management and administration of affairs of company in best of interest. As per provisions contained in the Act, at least Four meetings of Board of Directors must be held in the period of 12 months and a gap between the two meetings should not exceed 3 months. The notice of Board Meeting must be given to all the Directors of Board who are time being in India and at his usual residential address. The Act does not provide for minimum days of which notice of Board Meeting must be given. The meeting of Board of Director may, therefore, be held at any place convenient to the Directors outside the business hours and even on public holiday unless the articles provide otherwise. The DCA has clarified that in connection with relevant section of Act, it would not raise any objection if adjourned board meeting held on Public Holiday for the convenience of the directors although it can state that an original meeting should also normally be held only on working day (Letter No.8111 (285) 63-PR dated 2.1.63)

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GENERAL MEETING There are three types of General Meeting. 1. Statutory General Meeting 2. Annual General Meeting 3. Extra Ordinary General Meeting. 1. STATUTORY MEETING: Every Public Company has to conduct the statutory meeting after one month but before six months of the date of incorporation of the co. Notice of statutory meeting must be set out that it is Statutory Meeting. Failure to conduct the meeting renders the company liable to be wound U/s. 433(b). The Company Act has not specific provision as to place of holding statutory meeting. Statutory meeting can adjourn from time to time and at any adjourned meeting any resolution of which notice has been given in accordance with the provisions be passed and adjourned meeting shall have the same powers as original meeting. 2. ANNUAL GENERAL MEETING : Annual General Meeting must be held at every company at its registered office or at any place within the jurisdiction of the registered office each year. First AGM must be held within a period of 18 months from incorporation of Company and a period of more than 15 months must not be elapsed between two succeeding meetings. As per the provisions of the Act, the subsequent AGM should be held on the earliest of following dates. a. 15 months from date of last AGM b. The last day of Calendar Year c. 6 months from the close of Financial Year. The fact that company did not function is no excuse for not holding AGM (Madan Gopal Dev V/s. State of West Bengal). In case of any difficulty in holding AGM (except first AGM) the R.O.C. may for time being extend the time if specific reasons are shown. However, the time will not exceed more than 3 months by R.O.C.. As per the provisions of Act, the AGM must be held at earliest date of the three months period specified by Act. 3. EXTRA ORDINARY GENERAL MEETING Extra Ordinary General Meeting is the meeting which is conducted by the company to transact any business of special nature, if the same cant be postponed till the next AGM. Extra Ordinary General Meeting is to be conducted either by board of directors of the company or on the requisition in writing by the shareholders holding specified percentage of share capital of company. EGM, if held at the requisition of members of the company. It should be held within a period of 45 days from day of giving requisition. The Act does not restrict holding of EGM as it has put certain restrictions on place of holding AGM. Notice of EGM given by secretary without express sanction of Director is invalid in case the EGM is requested by the Board of Director. (State of Wyoming Syndicate (190S) 2 CH 43) In case of company having Share Capital such number of them as hold at the date of deposit of the requisition, not less than 1/10th of paid up capital of company. In case of company not having share capital, the number of them as hold at the date of the deposit of the requisition not less than 1/10 th of total number of member. HOW TO CONDUCT BOARD MEETING / GENERAL MEETING:

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BOARD MEETING Board Meeting must be conducted after giving notice of Board Meeting to all the director of the company present in India. If there is a willful omission to give notice to one of the director, Meeting of directors is invalid and resolutions passed are inoperative (Darmeshwari Prasad Gupta V/s. UOI (1947). If there is accidental omission to give notice to one director and meeting is conducted then it is irregular. The Board Meeting of the company can be conducted at any place other than Registered Office of the company. The Board Meeting can be held on any day. The Secretary of the company has to take certain necessary steps for the purpose of effective conduct of meeting before, at the time & after the meeting. AGM & EGM As far as the conduct of meeting is concerned, all the necessary provisions of act relating to notice, agenda, proxies, quorum, minutes must be complied with. Also the chairman of the meeting has to comply with the necessary provisions, before conducting any meeting. Also one should keep in mind the provision as to Motion, Amendment, and Adjournment & Postponement of the meeting while conducting the meeting. The chairman of the meeting should ascertain sense of meeting so as to decide the method for passing proposed resolution. Also the provisions of Table A (in case of Pvt. Co.) which are relevant in connection to the conduct of meeting must be adhered to. Also the copy of the notice of meeting and all copies of other important matter must be given to all the important department like R.O.C., SEBI, Stock Exchange, CLB as per the requirement of the Act. HOW TO FORMALISE RESOLUTION Resolution can be defined as passing of motion in the meeting. Resolutions under present Act are of three kinds in case of general meetings a) b) c) Ordinary Resolution Special Resolution Resolution requiring special notice.

Every resolution must start with the word Resolved that. If particular provision of any Act, rules, regulation has to be referred, then it must be written as pursuant to section no. of Act, provision in AOA/ rules, regulation. Resolution must also state whether it is special/ordinary resolution at its top. If there is an extension to the Resolution then, it must be by word Resolved further that. The resolution must be written in logical sequence. In case of resolution of forming committee, then it must also state the composition of committee, extent of powers to be administered by the committee, the purpose of forming the committee. In case of Board Meetings resolution, in some cases such as power to borrow money from financial institution etc., power to make loan etc. The resolution shall also state the extent of borrowing limit. The resolution must be written with clarity & brevity and also referring to all the relevant aspect pertaining to the matter in connection with resolution is proposed to be passed. In case of resolution passed in General Meeting, then in such case, it must also be accompanied with the explanatory statement as required under the Act. The explanatory statements state the reason & explain the circumstance which has forced the company to pass proposed resolution. Every resolution passed in general meeting should explain the

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interest of director in proposed resolution. Every resolution must be at it top has to be with Preamble stating in brief the purpose & matter to be passed by the resolution. MINUTES OF BOARD MEETING The Company Act requires every company to maintain separate book for minutes of Board Meeting. In preparation of board meetings minute one must comply with certain statutory requirements as mentioned below. 1. 3. 5. 6. 7. 8. To mention day date time and place of the meeting as given in the notice to the meeting. 2. To give name of directors present in meeting. To give name of directors absent & requested for grant of leave of absence by Board. 4. To give name of directors voting against & in favour against various resolutions. To specifically mention the fact of unanimity of director as contemplated U/S.316 , 372A, 386 of Act. To incorporate the resolution for appointments of officers made at the board meeting. To read notice given by director, if any, with regard to directorship in other companies. In case of Board Meeting, minutes of meeting must be signed by chairman of next meeting. MINUTES OF ANNUAL GENERAL MEETING The minutes of AGM are required to be maintained at the registered office of the company. The minutes are record of business transacted at a meeting. In order to maintain the authenticity of minutes of meetings, the company has to maintain fair & correct summary of the meeting i.e. business transacted therein. The minute book must have their pages consequently numbered and the minute must be recorded within a period of 30 days. In case of general meeting, the chairman of same meeting must sign the minutes of the meeting within a period of 30 days. In case of death of chairman, by director authorized to sign by board. MINUTES OF EXTRA ORDINARY GENERAL MEETING The minutes of EGM must be maintained in the separate book and all the provision as applicable to minutes of AGM is also applicable to the minutes of EGM. As per the provisions of Act, in regard to minutes of the proceeding of any meeting have to be kept in accordance with provisions of section 193, they are unless the contrary is proved, presumed to be correct and show presumptive evidence that the meeting was duly called and held in particular, all appointments of director or liquidators made at meeting shall be deemed to be valid. In general, minutes of all meetings of board, general meeting & meetings of committees of BOD & EGM must be maintained at registered office of company. Every member of the company has right to inspect all these records except the minutes of the Board meeting, free of cost during business hours at Registered office of company. Further, every member has right to take copy of minutes of any meeting. If inspection of any copy requested for is refused, then it will be punishable with a fine which may extend to Rs.500/-. AGENDA/ NOTICE OF BOARD MEETING

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As per the provisions of the Act, every notice of the Board Meeting shall specify the place and hours of the meeting and shall contain statement of business to be transacted therein. As per the provisions contained in the Act, Notice of Board Meeting must be given to each of the director present in India and having address in India. Any business to be transacted at the board meeting shall be informed in advance to the members of Board present in India. In case of certain resolutions like, a resolution to be passed U/s.316/386, it must be stipulated that notice of the resolution to be passed therein is required to be given to director in India. In such cases, it would be incumberent on the company to circulate agenda along with copy of proposed resolution in regard to every item of business to be transacted therein. The good practice is that the agenda containing business to be transacted is circulated preferably along with the notice at least a week before the date of meeting. The agenda should contain notes on items to be discussed and should be circulated in advance so that the director will come fully prepared. Agenda in relation to certain items like approval of capital project, matters calling major policy decision etc. requires good drafting skill. Agenda of Board Meeting should be conveniently grouped and divided so that minimum time and energy of directors are consumed on less important items. Routine items to be placed at the beginning. As far as the notice of AGM is concerned, it must be given to every shareholder of the company at least 21 clear days before the date of meeting. The days of notice should exclude all the holiday, the date of serving the notice & date of meeting. In case of notice given by giving it in newspaper having appropriate circulation in area of Registered Office of the company and it is deemed to be served on the date of giving notice in newspaper. However, the company cant take this excuse i.e. it has given notice of meeting in newspaper in case of members whose address is with the company. The notice of the annual general meeting must be circulated along with copy of the Balance Sheet, Profit & Loss A/c., and Auditor Report & Statement of brief report of companys progress to each member of the company. The notice of AGM must contained date, place, time, of meeting and also requirement as to proxies, quorum of the meeting. Agenda of the AGM must be divided into two types i.e. the requiring ordinary & special resolution. The notice must be circulated along with proposed resolutions & explanatory statement which is required to be annexed to the resolution passed therein. AGENDA OF EXTRA ORDINARY GENERAL MEETING The agenda of EGM contains all the items which requires special resolution i.e. all the items must be of special nature. The notice of EGM must be given at least 21 clear days before the meeting if not; the consent of 95 % of shareholders must be taken in Form No.22A. If EGM is called at the requisition of members then notice must state that it has been called at requisition of members. The matter decided at the EGM called by requisition of members cant be questioned at next meeting. Further, all the provisions as to quorum, minutes are equally applicable to EGM. EXPLANATORY STATEMENT Every meeting i.e. AGM or EGM must be with the explanatory statement. The explanatory statement is to be annexed to the notice of meeting along with draft of proposed

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resolution. The explanatory statement state the reason behind passing such resolution or taking such decision. Every explanatory statement must contain the restrictions subject to which powers in respect of matter to be passed by resolution. For e.g. In case of extra ordinary general meeting conduct for giving specific power to board of director. It must state extend to which this power is to be exercised by them. Explanatory statement must contain the statement as to whether any member of board of company has interested or any other person related with company has interested in the matter to be approved by the passing resolution. QULIFICATION SHARES As per the Companies Act, 1956 there is no requirement which compels the director of any company to hold qualification shares, hence, a person may be a director in a company without being its members unless the Articles provides otherwise. In case Article of Association of company provides for holding of qualification shares then as per provisions in the Act 1. Each director must hold the qualification shares within a period of two months from the date of his appointment. 2. The nominal value of share shall not exceed Rs.5000 or nominal value of one share where it exceed Rs.5000. A director who accepts his qualification shares as a secret gift from promoters of company is guilty of gross breach of trust & liable to give up the shares (Boston Deep Fishing Co. V/s. Ansell, 1888). If director fails to obtain qualification shares within a period of 2 months then, he is liable to vacate his office as laid down under the Act and such director is punishable with a fine which may extend Rs.5000/- every day, if he acts as a director after the expiry of said period of 2 months without holding qualification shares. However, act done by the director during his period i.e. before he fails to hold qualification shares within stipulated time from date of his appointment will be valid. (International Cable Co. ex. p. official liquidator (1892). SIGNING OF MINUTES OF BOARD MEETING & ANNUAL GENERAL MEETING As far as signing of minutes of board meeting is concerned, it must be signed by the chairman of next meeting. In case of AGM, it must be signed by the chairman of the same meeting. In case of board meeting, the minutes of board meeting may be signed by chairman of same or succeeding meeting. In case of annual general meeting, by chairman of same meeting within the aforesaid period of 30 days and in case of his inability or death during said period, then by any director duly authorized by board of director for the said purpose. The minutes of annual general meeting must be signed by director within a period of 30 days. However, there is no such period prescribed for Board Meeting. SHAREHOLDER Shareholder is the holder of shares of the company. He is a person who has subscribed to the share capital of the company. Shareholder may not be the member of the company until his name is duly entered in the Register of members maintained by the company.

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Shareholder has been protected under Companies Act, 1956 by empowering him by giving various rights under the Act. The SEBI has also protected shareholders from fraud or mismanagement by inserting various guidelines. Shareholder may or may not be member of the company but member is always the shareholder of the company. DIRECTOR Supreme Authority in the control of company and its affairs resides in person known as Board of Director. As per the provisions in Act, only individual can be appointed as a Director of the company. (Oriental Metal Pressing Ltd. V/s. Bhaskar Kashinath Thakoor) Sec.2 (13) defines a director as including any person occupying position of director by whatever name called. The definition given under the Act is purely based on function. The collective body in whom the authority is vested and through whom company acts is known as Board of Director or Board. Supreme Court in Ram Avtar Jalan V/s. Coal Product (P)Ltd. (1970) 40 comp.cas.714 held that a question arises as to whether a person is in law a director of company, minute books and return sent to Registrar of Company are important director of company. The director of the company can be of various types like Non-executive Director, Executive Director, Independent Director, Deemed Director, Inside/Outside Director, Professional Director, Nominee Director, Special Director etc. Minimum & Maximum Directors Section 252 of the Act says that every private limited company should have at least two directors and every public limited company should have at least three directors. The maximum number of directors can be twelve. If the company wants to increase its number of directors beyond twelve it has to get the permission of the Central Government. APPOINTMENT OF DIRECTOR Director of the company can be appointed by a) b) c) d) e) f) by Board by Government by Shareholders of Company by Subscriber to Memorandum of Association by Third parties if Article provide by Small Shareholder if Articles of Association provides.

First director of the company assumes the office from incorporation of the company. In absence of any provisions in Articles of Association of Company, subscriber of the company is deemed to be first Director of company. 1. Additional Director 2. Director in Casual Vacancy 3. Alternate Director By Government: The Central Government can appoint any person as a director in the company for a period of 3 yrs. (at a time). The director appointed by central government is not liable to retire by rotation and they do not require to hold any qualification shares. They have same rights & liabilities as that of ordinary Director of Company. Central

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Government may appoint such director in case of oppression/ mismanagement of affairs of company. By Financial Institution as Nominee Director: The financial institutions give loan to the companies. To see whether the funds given by the Company are properly utilized the Financial institute appoints a director which is refereed as Nominee Director. Eform Form 32 is required to be filed by the Company for appointment, resignation and change in designation of the directors. Qualification of Directors Share Qualification [section 270] The articles of a company may provide that a certain number of shares (called qualification shares) will have to be held by each director. Within two months of appointment of a director, he must obtain the required number of shares. The value of qualification shares cannot exceed Rs.5000/-. Besides the holding of qualification shares, shareholders may, however, insist on some other qualification, at their discretion and judgment. Disqualification of Directors Section 274 lays down the minimum eligibility requirements. A person is not capable of being appointed a director in the following cases: (a) Where he is of unsound mind, provided that the fact has been certified by a court of Competent jurisdiction and the finding is in force. (b) Where he is an undischarged insolvent. (C) Where he has applied to be adjudicated as an insolvent. (d) Where he has not paid for six months any call on his shares. (e) Where he has been disqualified under section 203 of the Act for the purpose of preventing fraudulent persons from managing companies. REMOVAL OF DIRECTOR Company Act, 1956 has provided for retirement of Director. The director of company can be removed by following party. 1. Company Law Board 2. By Members of Company in General Meeting 3. By Central Government. 1. Company Law Board : Where an appointment has been made by the members of the Company U/s.397,398 of the Act for oppression/ mismanagement of company and CLB finds that relief ought to be granted, it may order to terminate or set aside any agreement of the company as it fills just & equitable. 2. Central Government: Chapter IV A of the Company Act contains provisions regarding power of Central Government to remove managerial personnel on recommendation of CLB. 3. Circumstances under which company may remove director.1. 2.

That any person concerned in the conduct and management of company has been guilty of fraud. The business of the company is not or has not been conducted and management by such person in accordance with sound business.

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RESGINATION OF DIRECTOR There is no provision in the companies Act as to whether, and by what procedure, a director can resign. The company has to inform the Registrar in Form No. 32 of the resignation of the director and attach his resignation letter to the form. In view of this it is necessary to get a written resignation letter from him. POWERS OF DIRECTOR General powers are declares that subject to the provisions of the Act, the Board of directors of a company shall be entitled to exercise all such powers and to do all such acts and things as the company is authorized to exercise and do. There are however two important restrictions upon the powers of the Board of Directors:1. The Board is not allowed to approve of matters which are required to be done by the shareholders in General Meeting as per the Act, and Memorandum and the Articles. 2. In the exercise of their powers, the directors cannot exceed the provisions of the Act, Memorandum and Articles and any other rules or regulations decided by the company in general meeting. The shareholders may exercise the powers if they feel that the Board of Directors has to acted in the best interests of the company or the Board is not competent to act or if there is a deadlock among the directors. AUDITOR Audit means examination of accounting records undertaken with a view to establishing the correctness or otherwise of the transactions reflected therein. The main object of the audit is to ensure that the statement of accounts of the relevant financial year truly and fairly reflect the state of affairs of the company. Auditor of the company can be of two types 1. Internal Auditor 2. Statutory Auditor. Statutory Auditor required to be appointed compulsorily for conducting statutory audit as prescribed by the Act. The person to be appointed as Auditor of the company must be Chartered Accountant as prescribed by the Act. Before appointing any person or firm as Chartered Accountant, the certificate stating that he has complied with requirement of Sec.224 (1B) of Act shall be obtained. APPOINTMENT OF AUDITOR According to the Act, every company must maintain a record of the financial transactions carried out by it during the year. These records are known as Accounts. The shareholders, who are the owners of the company, do not take part in its day to day working. It is the job of the Auditor, who is well-versed in Accounts to go through the Accounts and report to them as to whether the accounting records kept by the management truly and fairly reflect the state of affairs of the company. The Auditors who are appointed by the shareholders at the Annual General Meeting are known as Statutory Auditors. They are independent of the management. The statutory Auditors must be Chartered Accountants as prescribed by the Act. They must be individual/ Firm of individuals. Before appointing any person or firm as Chartered Accountant, the certificate stating that he has complied with requirement of Sec. 224 (1B) of Act shall be obtained. He cannot be an auditor in more than twenty companies of which not more than 10 companies each of which has a paid up capital of 25 lacs or more. He should not be a

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full-time employee in any organization. If firm is appointed as an auditor, the limit of twenty companies is applicable to each partner. Depending on the nature of the industry and volume of transactions, the management has to appoint an Internal Auditor. He may be an employees or an outsider (a firm of Chartered Accountants). APPOINTMENT OF FIRST AUDITOR OF COMPANY First Auditor of the company has to be appointed by the Board of Directors within one month from date of registration of Company and his appointment is valid until first annual general meeting. SUBSEQUENT APPOINTMENT OF AUDITOR Every company must appoint an auditor or auditors at each annual general meeting to hold office from conclusion of this AGM to next AGM and must give intimation to such auditor within 7 days. Every auditor appointed as such shall inform the Registrar in writing in Form No.23B that he has accepted the appointment or refused. As specified by Act, the person can be appointed as an auditor of 20 companies out of which not more than 10 companies each of which has a paid up capital of 25 lacks or more. If firm is appointed as an auditor, the limit of 20 is per partner. Eform 23B is required to be filed by the auditor for appointment of director. REMOVAL / CEASING OF AUDITOR 1. Death 2. By way of Resignation in between two AGMs or if he expresses his wish not to be reappointed at the AGM. 3. Removal Permission of the Central Government is needed for removing an Auditor. A Special Notice has to be given 14 days before the AGM at which the resolution for his removal is to be placed. He can make a representation and the same can be read out at the AGM. PROCEDURE FOR FORMATION OF PRIVATE COMPANY A) Application for availability of name of company : The person forming the company (promoters) should decide at least 3 suitable names in the order of preference to afford flexibility to Registrar of Company to ascertain the availability. The name of the company should end with word Public Ltd. in case of public limited and with word Private Limited in case of private company. In case of Sec.25 of the Company Act, 1956, by obtaining license from the Regional Director, the requirement as to addition of the word Limited or Private Limited to the name can be disposed with. A company cant register which is undesirable or which is identical with or nearly resembled the name of existing company. A company is not allowed to use a name which is prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950. Application for obtaining name shall be made in Form No.1A to the Registrar of Companies of the state in which Registered Office of company is to be situated. The name given by the ROC is available for company for 60 days. Before making application in Form1A the proposed directors should obtain the Director Identification Number and Digital signature.

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B) Preparation of Memorandum of Association & Articles of Association Memorandum of Association defines area of the company within which company can act and it state the object for which company has been formed, the business that it would undertake, the liability, the capital which it shall be allowed to raise, the nature of liability of its members, the name of state where the registered office of the company shall be located etc. Articles of Association contain the rules & regulations relating to the internal management of company. C) Vetting of MOA & AOA, printing, stamping, signing of same. The draft of Memorandum of Association & Articles of Association shall be prepared and typed before printing the MOA & AOA. The promoters of the company can approach ROC for the purpose of some changes for vetting of MOA & AOA. No fee is required to be paid to ROC. After vetting the MOA & AOA must be printed. The MOA & AOA is required to be stamped as required under the Stamp Act of respective state. Every MOA & AOA should be signed by subscriber of MOA who should give his address, description and occupation. AOA shall be separately signed by each subscriber mentioning the number of shares subscribed by each of them. An agent may sign the Memorandum of Association on behalf of subscribers, if he is authorized by a power of authority in this behalf (Dept. Circular 8/15/58-PR dated 13.09.58) D) Power of Attorney In order to fulfill the various formalities that are required for incorporation of a company, the promoter may appoint an attorney empowering him to carry out the instruction/ requirements stipulated by ROC. The execution must be done on Non-Judicial Stamp Paper of prescribed value. (The prescribed value is Rs.100/-) E) Additional Documents required Form 32: Where the company by its AOA appoints any person(s) who have to act as Director, Manager or Secretary, it may filed particular in Duplicate. Form No.32 can also be filed within a period of 30 days of Registration of company or appointment of First Director. 2. Form No.18: The Company can file Form 18 along with MOA & AOA. Where location of company is not finalized, it can be filled within a period of 30 days of Registration of company. 3. Form No.1:Form 1 is the declaration given by the promoter that all the formalities are dully completed as per provisions of the Companies Act.1.

F) Uploading of eforms 1, 18 & 32 and Payment of Registration fees After approval of the MOA, AOA and other incorporation documents, the promoters have to upload the eform 1, 18 & 32 electronically. After uploading of the same the challan is generated and is required to be paid at the specified branches authorised by the Ministry of Corporate Affairs. G) Certificate of Incorporation If all the documents of the company are filled & ROC is satisfied that all the requirements of Act & Rules are complied by the company, then the ROC will certify under his hand that company is incorporated and can commence its business.

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PROCEDURE OF FORMATION OF PUBLIC COMPANY Procedure for formation of Public company is same in all respect as that of the private company only the additional document required to be filled in case of formation of public company. A public company on the other hand must obtain a certificate to commence business a trading certificate from the Registrar before it can commence business or exercise its borrowing powers. In order to obtain certificate company has to comply with provisions of Sec.149 of the Act. If company has to issue prospectus, provisions of Sec.149 (1) applies & if not, Sec.149 (2) applies. As per provisions of company if company issues prospectus then it shall not commence the business, unless following points are complied with: a) Shares up to amount of minimum subscription have been allotted. b) every director has paid to the company on each of share he has taken or contracted to be taken for which, he is liable to pay in cash, the same proportion payable or applicable and allotment on the shares offered to public subscription. c) No money is or may become, repayable to the applicant for shares in or debentures of company for failure to apply for or to obtain permission to deal the shares or debentures of any recognized Exchange. It has filed with the Registrar, a Statutory Declaration of compliance of clause (a) (b) and (c) in Form 19 signed by one of director or the secretary or where the company has not appointed a Secretary a company in whole time practice. Sec.149 (2) of the Act, if company having share capital does not issue prospectus, it cannot commence its business unless: a. It has filed with Registrar of Company a Statement in Lieu of Prospectus. b. Every director of the company has to pay in cash for each of shares taken by him. c. It has filed with R.O.C. a Form No.20 signed by one of the directors or the secretary. The company has to comply with this condition, then R.O.C. will issue a certificate to commence the business. If the company borrows money or commence business before obtaining certificate to commence business, then it has to pay a fine which may extend to Rs.50,000/-. If company does not commence business within a period of one year of incorporation, then it will wound up U/s.433(c) of company. DIVIDEND under The Companies Act, 1956. Concept The definition of the term Dividend as given under section 2(14) Companies Act, 1956 is an inclusive defination as the same connotes that dividend includes any interim dividend. In the general sense, Dividend can be defined to mean the share received by a shareholder from the companys profits (distributable Profits), which are legally available for distribution amongst the members. It can be termed as return on the amount invested by the stakeholders in their company. Dividend is one of the factor which induces any investor to make his/ her investment decision.

15


Every company has implied power to apply its profits in order to distribute the same amongst its members in the form of Dividend. Dividend can be interim or final. Dividend declared by the shareholders at an Annual General meeting of the company is called final dividend. Dividend declared at any time during the year by Board of directors is called interim dividend. Both interim and final dividend when declared are payable within 30 days of its declaration. Dividend is a down the line payment i.e. it has to be paid after making provision for other statutory expenses such as provision for taxation, provision for depreciation, proposed Preference dividend, interest on debentures, etc. WHO CAN DECLARE As per section 173(1)(ii) of the Companies Act, 1956, declaration of dividend by the directors of the company is one of the ordinary business to be transacted at an Annual General Meeting of the Company. Section 217(1)(c) of the Companies Act, 1956 makes it mandatory on the Board of directors of the Company to state in their report to the shareholders, the amount, if any, they recommend by way of dividend. Thus, it can be inferred from the abovementioned provisions that dividend has to be approved by the shareholders in an Annual General Meeting of the Company. Regulation 85 of Table A of Schedule 1 to the Companies Act, 1956 vests power in a General Meeting to declare dividend. However, shareholders cant recommend the dividend at a percentage exceeding the percentage recommended by Board of Directors of the Company. TO WHOM PAID Section 206(1) of the Companies Act, 1956 state that a company shall pay no dividend in respect of any share therein except to the registered holder of such share or to his order or to his bankers; or (b) in case of a share warrant issued in pursuance of Section 114 of the Companies Act, 1956 to the bearer of such warrant or to his bankers. The company usually closes the register of members under Section 154 of the Companies Act, 1956 or fixes a record date, of which notice should be given by publication of advertisement in two newspapers- one in English and one in the language of the region in which the Registered Office of the company is situated. The purpose of fixing a record date or closing the Register of members is to enable the members to lodge the transfer forms duly completed before such a date. Dividend is paid to the person whose name appears on the record date or the last or the first day of closure of register of members. So, dividend is payable to a person even though he has transferred his shares to any other person prior to date of closure of Register of Members and registration of transfer has not been effected. Thus to remove such inconveniences the Companies (Amendment) Act, 1988 has introduced Section 206A which states that: Where any instrument of transfer of shares has been delivered to any company for registration and the company has not registered the transfer of such shares, it shall: (a)

(a)

transfer the dividend in relation to shares as mentioned above to the Unpaid Dividend Account as specified in Section 205A(1) unless the company is authorized by registered holder of such share in writing to pay such dividend to the transferee. Keep in abeyance in relation to such shares any offer of rights shares under and any issue of fully paid bonus shares in pursuance of Section 205(3) of the Companies Act, 1956.

(b)

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Thus, as per this provision where a transfer of shares, which has not been registered, but the transfer documents have been lodged with the company, then the dividend relating to such shares is to be transferred to a special account called as Unpaid Dividend Account Any offer of right shares made under Section 81(1)(a) of the Companies Act, 1956 (deals with issue of rights shares) or issue of fully paid bonus shares in relation to those shares has to be kept pending. WHEN PAYABLE As per Section 207(1) of the Act, dividend has to be paid within 30 days from the date of declaration. Posting of warrants within 30 days shall be deemed to be payment of dividend. If there is failure to comply with above provision then, every director, shall be punishable with a simple imprisonment for a term which may extend to three years and shall also be liable to a fine of one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen percent per annum during the period of the default. The provision as to the payment of dividend within a period of 30 days from the date of declaration as specified above shall not apply in the following circumstances where dividend could not be paid due to operation of law

Where shareholder has given directions as to payment and those directions could not be complied with. Where there is a dispute regarding the right to receive the dividend.

Where dividend has been lawfully adjusted against any sum due to the company from the shareholder. Where default was not due to fault of the company. PREFERENCE DIVIDEND Preference shares are entitled to dividend at a fixed rate. Thy have priority in case of payment of dividend before equity shares. Where preference shares are non-cumulative they are entitled to priority only in respect of the amount of dividend due to them in the current year. Where they are cumulative, they are entitled to priority for the total accumulation in the year in which the company is proposing to pay dividend. Preference shareholders may obtain an injunction to restrain the payment of a proposed interim dividend in excess of that authorized by the articles or of any ordinary dividends, which would prejudice their rights. SOURCES FOR PAYMENT Dividend can be paid only out of profits. Under Section 205(1) of the dividend can be paid by a company: (a) Out of the profits of the company for that year after providing depreciation under Section 205(2) and/ or (b) Out of profits of the company for the previous financial year or years arrived at after providing depreciation under Section 205(2) and remaining undistributed. (c) Out of moneys provided by the Central or State Government for the payment of dividend pursuant to a guarantee given by that Government.

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Section 205(2) of the Companies Act, 1956 gives detailed directions for calculating the depreciation chargeable for finding out the amount of profits available for distribution of dividend. INTERIM DIVIDEND The Board of Directors can declare interim dividend. According to the newly inserted Section 205(1A), the Board of Directors may declare interim dividend and the amount of interim dividend shall be deposited in a separate bank account within five days from the date of declaration of such dividend. As per Section 205(1B), the amount of dividend including interim dividend so deposited under sub-section (1A) shall be used for payment of interim dividend. Section 205(1C) states that provisions contained in Section 205,205A, 206,206A and 207 also apply to interim dividend. So, the directors should satisfy themselves that the company has enough profits available for distribution before declaring any interim dividend. In case of wrong declaration they would be held personally responsible. So, it would be advisable to prepare Proforma Accounts of the company up to latest date possible. Provision for all working expenses should be made including depreciation on all assets should be made and should be placed in the meeting of Board of Directors at which the question of declaration of interim dividend is to be transacted. TRANSFER TO RESERVES Under Sub-section (2A) of Section 205 no dividend can be declared by a company for any financial year except after transfer to reserve of the company of such percentage of its profits for that year, not exceeding 10% as may be prescribed. The Central Government has promulgated Companies (Transfer of Profits to Reserves) Rules, 1975 prescribing the percentages of profits to be transferred to reserves before declaring dividend. Rule 2 of the above said rules lays down the following percentages, PROPOSED DIVIDEND 1. Exceeds 10% but does not exceed 12.5% of the paid-up capital. 2. Exeeds 12.5% but does not exceed 15% of the paid-up capital. 3. Exceeds 15 % but does not exceed 20% of the paid-up capital. 4.Exceeds 20% of the paid-up capital % TO BE TRANSFERRED Not less than 2.5% of current Profits. Not less than 5 % of current Profits Not less than 7.5 % of rent Profits Not less than 10% of current Profits

A current profit means profit after tax and statutory transfer to Development Rebate Reserve. According to Rule 3 of the rules, The Company can transfer at a percentage higher than 10 % of its profits to its reserves for any financial year so that, where dividend is declared

(i)

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(a) (b)

a minimum distribution sufficient for maintaining dividends at a rate equal to the average of the rates at which dividends declared by it over 3 yrs immediately preceding the financial year is ensured or, where bonus shares have been issued in the financial year in which dividend is declared or in 3 years immediately preceding the financial year, a minimum distribution sufficient for maintaining dividends at an amount equal to average amount of dividend declared over the 3 yrs immediately preceding the financial year is ensured. Provided, where net profits after tax is lower by 20% or more than average net profits after tax of the two financial years immediately preceding the above sub-rule doesnt apply.

(ii)

where dividend is declared: The amount proposed to be transferred to its reserves from the current profits shall be lower than the average amount of dividends to the shareholders declared by it over the 3 yrs immediately preceding the financial year. According to Rule 4, if company fails to comply with a any provision of the rules, the company and every officer of the company in default, shall be punishable with a fine which may extend to five hundred rupees and if contravention is continuing, a further fine up to fifty rupees for every day during which the contravention continues. DIVIDENDS IN CASE OF ABSENCE OR INADEQUACY OF PROFITS. In case profits of the company are insufficient or inadequate the company can declare out of accumulated profits of the company earned by it in the previous years and transferred by it to the reserves. As per Section 205A(3), where, due to inadequacy or absence of profits in any year, any company proposes to declare dividend out of accumulated profits earned by the company and transferred by it to reserves, such declaration of dividend shall not be made except in accordance with the rules as may be made in this behalf and where such declaration is not according to the rules, such declaration can not be made except with the previous approval of Central Government. The Central Government has promulgated the Companies (Declaration of Dividend out of Reserves) Rules, 1975 for the purpose. According to Rule 2 of the said rules, Dividend can be declared out of the accumulated profits earned by it in previous year and transferred by it to reserves, subject to the following conditions; i) Rate of dividend shall not exceed average of return of dividends declared by it in the 5 years immediately preceding that year or 10% of its paid-up capital whichever is less. ii) Amount drawn from accumulated profits earned in previous years and transferred to the reserves shall not exceed amount equal to one-tenth of the sum of paid-up capital and reserves and amount drawn shall be first utilised for settingoff losses incurred in that financial year. iii) Balance of reserves after such drawl shall not fall below 15 % of its paid-up capital. UNPAID DIVIDEND ACCOUNT As per Section 205A(1), if a dividend declared by the company, has not been paid or claimed within thirty days of declaration, the same shall, within seven days thereafter have

19


to be transferred to a special account to be opened by the company in that behalf in any scheduled bank to be called Unpaid Dividend Account of Co. Ltd? Co. (Pvt.) Ltd. Under Section 205A(4), If default is made in complying with the above sub-section the company shall pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of twelve percent per annum and interest accruing on such amount shall be for the benefit of members of the company in proportion to the amount remaining unpaid to them. As per Section 205A(5), any money transferred to the unpaid dividend account remains unpaid or unclaimed for a period of seven years from the date it first became due for payment, the amount so remaining unpaid/ unclaimed should be transferred to the Fund established u/s 205C(1). Under Section 205A(8), if the company fails to comply with any of the requirements of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand Rupees for every day during which the failure continues. INVESTOR EDUCATION AND PROTECTION FUND Section 205C(1) provides for the establishment of the Investor Education and protection Fund by the Central Government. Sub-section (2) of Section 205C states the amounts that are to be credited to the Fund. They are: (a) amounts in the unpaid dividend accounts of companies; (b) the application moneys received by companies for allotment of any securities and due for refund. (c) Matured deposits with companies (d) Matured debentures with companies. (e) The interest accrued on the amounts referred to in (a) to (d). (f) Grants and donations given to the Fund by Central and State Governments, companies or any other institutions. (g) The interest or other income received out of investments made from the Fund. Provided that no such amounts shall form a part of the Fund unless such amounts remain unpaid or unclaimed for a period of seven years. This Fund shall be utilised for promotion of investors awareness and protection of interests of investors in accordance with such rules as may be prescribed. The Central Government shall specify the authority or Committee to administer the Fund, and maintain separate accounts in relation to the Fund. PAYMENT OF INTEREST OUT OF CAPITAL IN CERTAIN CASES It has been made clear by the foregoing provisions that companies can pay dividend only out of profits for the current year. But in certain cases, a company has been allowed to pay interest out of capital. Section 208 talks about the same. According to Sub-section (1): Where any shares in a company are issued for the purpose of raising money to defray the expenses of the construction of any work or building or the provision of any plant, which cannot be made profitable for a lengthy period, the company may-

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(a)(b)

pay interest on so much of that share capital as is for the time being paid up, for the period and subject to the conditions

Charge the sum so paid by way of interest, to capital as a part of the cost of construction of the work or building, or the provision of plant. No such payment shall be made unless it is authorized by the articles or by special resolution. No such payment shall be made without the previous sanction of the Central Government. The rate of interest shall in no case exceed 4 % or such other rate as may be prescribed by Central Government. The payment of interest shall not operate as reduction in amount paid up on the shares in respect of which it is paid. LATEST CHANGES BROGHT ABOUT IN THE COMPANIES ACT, 19561)

2) 3)

4)

The Companies (Amendment) Act, 2000 introduced sub-sections 1A, 1B, 1C to Section 205. The discussion as to the relevant provisions as mentioned above has already been made in this notes. As per the earlier provision of the companies Act, 1956 in regards with the declaration of interim dividend was not creating any liability and could be rescinded at any time before actual payment. This was so even if cash was deposited in a separate account. Now, the position has changed. Both interim and final dividends are treated on the same footing and both become a debt on declaration thereof and cannot be rescinded. The Companies (Amendment) Act, 2000 made changes to Section 205A(1) by which dividends once declared are payable within 30 days. Earlier they ere payable within 42 days. The Companies (Amendment) Act, 1999 substituted the old S.205A (7) by a new S.205A(7) which says that the company shall be entitled to a receipt from the authority or Committee referred to in 205C (4) for any money transferred by it to the Fund and such receipt shall be an effectual discharge in respect thereof. S 205A(8) levies a penalty of five thousand rupees for every day of non-compliance of S 205A.Prior to the coming into force of the Companies (Amendment) Act, 2000 it was five hundred rupees.

BRIEF ILLUSTRATION OF VARIOUS SECTIONS RELATING TO DIVIDENDS SECTION NO. 205(1) 205(1A), (1B), (1C) 205(2) 205(2A) 205(2B) 205A(1) 205A(3) 205A(5) 205B 205C 206 206A ILLUSTRATION Dividend to be paid out of profits only, except in certain cases mentioned in Section 208 where it can be paid out of capital. Interim Dividend; to be deposited in separate bank account, etc Calculation of depreciation for calculating profits for the purpose of Section 205(1). Transfer to Reserves on declaration of dividend No dividend declaration in case of non- compliance of provisions of Section 80A Unpaid dividend to be transferred to special dividend account Declaration of dividend out of reserves Amount in unpaid dividend account to be transferred to Investor education and Protection Fund after 7 years Payment of unpaid or unclaimed dividend Establishment of Investor Education and Protection Fund. Dividend not to be made except to the registered shareholders Right to dividend, right shares and bonus shares to be held in abeyance

21


207 208

pending registration of transfer Penalty for failure to pay dividends within 30 days Payment of interest out of capital

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MANAGERIAL REMUNERATION Under the Companies Act, 1956. Remuneration is that benefit or incentive given to a person for providing some services. Thus, any remuneration paid to managerial personnel in an organization is called managerial remuneration. It is the consideration or the cost that an organization pays to its management for the specialized service it provides to the organization. As per explanation to Section 198 of the Companies Act, 1956, remuneration shall include: (a) any expenditure incurred by the company in providing any rent-free accommodation or any other benefit or amenity in respect of accommodation free of charge (b) any expenditure incurred by the company in providing any other benefit or amenity free of charge or at concessional rate to any of the persons aforesaid. (c) Any expenditure incurred by the company in respect of any obligation or service which but for such expenditure by the company, would have been incurred by the managerial personnel. (d) Any expenditure incurred by the company to effect any insurance on the life of, or to any pension, annuity or gratuity for, any of the managerial personnel or their spouse or child. A company form of organization appoints various managerial personnel such as managing director, manager, whole-time director, secretary, other directors, etc. Corporate reality is different from theories and practices of Company Law. We know that the provisions of Company Law make it clear that the shareholders of a company are the real owners of the organization. But in reality, the management and directors are able to use the funds of the company for their own personal benefits in the form of high managerial remuneration costs at the cost of the shareholders. The shareholders cannot do much to prevent the management to enrich itself through higher remuneration. Hence, over the period of time the Company Law has created safeguards to protect the interests of its stakeholders. The Act prescribes an overall limit on the total amount of remuneration which the management can pay itself. The Companies Act also has laid down limits for remuneration for various other managerial personnel. These limits are prescribed as a percentage of net profits that the company earns. Thus, such a provision acts as a control as well as an incentive to the management. These provisions and other related matters have been explained in brief in these notes. OVERALL MAXIMUM REMUNERATION According to Section 198(1) of the Companies Act, 1956, the total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its manager in respect of any financial year shall not exceed eleven per cent of the net profits of that company for that financial year. The net profits of the company for the matter of computing overall managerial remuneration shall be calculated in the manner laid down in Sections 349 and 350 of the Companies Act, 1956. (Explained in detail later) Remuneration of directors shall not be deducted from gross profits for the purpose of managerial remuneration. As per sub-section (2), the percentage prescribed in the subsection (1), shall be exclusive of the amount payable to a director under section 309(2) of the Companies Act, 1956. i.e. fees payable to directors for attending meetings of the Board or Committee thereof. As per Section 198(3) of the Companies Act, 1956, a company may pay a monthly remuneration to its managing or whole-time director in accordance with provisions of

23


Section 309 or to its manager in accordance with the provisions of Section 387. The payment by way of remuneration on monthly, quarterly or yearly basis to any other director would require approval of Central Government and payment by way of commission would require a special resolution. (Section 309 deals with remuneration to directors and section 387 deals with remuneration to managers, both these Sections have been dealt with in detail in the later part of these notes) MANAGERIAL REMUNERATION IN CASE OF ABSENCE OR INADEQUCY OF PROFITS As per Section 198(4) of the Companies Act, 1956, notwithstanding anything contained in sub-sections (1) to (3), but subject to the provisions of section 269, read with Schedule XIII, if, in any, financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole-time director or manager, by way of remuneration any sum, except with the previous approval of the Central Government. (Section 269 relates to appointment of managing, whole-time directors and Schedule XIII is explained later.) The section requires previous approval of the Central Government for payment of remuneration in case of company has not earned any profits or its profits are inadequate. The profits of the company can be known only at the end of the financial year only after accounts are audited. The company may seek previous approval of the Central Government without waiting for the financial year to end; otherwise payment made to the managerial personnel will not be in accordance with the law. Approval will not be required where payment is within limits specified in Schedule XIII. REMUNERATION OF DIRECTORS 1) Determination of remuneration: As per Section 309(1) of the Companies Act, the remuneration payable to the directors of the company, including any managing or whole-time director, shall be determined in accordance with and subject to the provisions of Section 198 of the Companies, Act, 1956, and this section, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by a company in general meeting. Such remuneration payable to any such director determined as aforesaid shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity: Provided that any remuneration for services rendered by any such director in any other capacity shall not be so included if(a) the services rendered are of a professional nature, and (b) In the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession. The purpose of this section is to control the cost of management and therefore only managerial remuneration and not remuneration paid for any other purpose can be considered. So remuneration received by the director in any other capacity is included if services are of professional nature and the director possesses such qualifications as are necessary. It may be noted that the remuneration of directors can only be determined only by the articles of the company or a resolution of a general body or a special resolution if the articles so require. In any case the determination of remuneration should be in accordance with Section 198 of the Companies Act, 1956, i.e. overall remuneration should fall within the limit of 11% of net profits of the company. As per Section 309(2) of the Companies Act, 1956, a director may receive a fee for each meeting of the Board, o Committee thereof, attended by him. Thus, sitting fees, travelling

24


allowances, etc. are payable to a director who was present at the meeting of the Board with a view to participate in the proceedings. 2) Mode and amount of payment: As per Section 309(3) of the Companies Act, 1956, a director who is either in whole-time employment of the company or a managing director may be paid remuneration either by way of monthly payment or at a specified percentage of the net profits of the company or partly by one and partly by the other: Provided that except with the approval of the Central Government such remuneration shall not exceed i) Five percent of the net profits for one such director, and ii) Ten percent of the net profits for all of them together, if there are more than one such director. As per Schedule XIII, there is no restriction on the quantum of remuneration as long as the remuneration paid during any financial year is within 5% or 10% of net profits, as the case may be. Even if the remuneration exceeds these limits, no Central Government approval is required if the remuneration is satisfying the conditions laid down in Schedule XIII. Section 309(5) of the Companies Act, 1956 states that the net profits referred to in subsections (3) shall be computed in the manner referred to in Section 198 of the Companies, 1956. 3) Case of excess payment of remuneration: Section 309(5A) of the Companies Act, 1956, states that if any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limits prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall, refund such sums to the company and until such sum is refunded, hold it in trust for the company. Section 309(5B) of the Companies Act, 1956, states that the company shall not waive the recovery of any sum refundable to it under sub-section (5A) unless permitted by the Central Government. Any payment by way of remuneration in excess of the limit prescribed by the section or without approval of the Government where approval is required to be held by the recipient in trust for the company and he shall refund it to the company. The recovery of such sum cannot be waived unless permitted by the Central Government. The provisions of this Act are not applicable to a private company which is not a subsidiary of a public Company. [Section 309(9)]. As per Section 388 of the Companies Act, 1956 Section 309 also applies to a manager. INCREASE IN REMUNERATION As per Section 310, in case of a public company, or a private company which is a subsidiary of a public company, any provision relating to the remuneration of any director including a managing or whole-time director, which has the effect of increasing, whether directly or indirectly, the amount thereof, whether that provision be contained in Companys articles or Memorandum, or in an agreement entered into by it, or in any resolution passed by the company in a general meeting or by its Board meeting, shall not have effect (a) In cases where Schedule XIII is applicable, unless such increase is in accordance with the conditions specified in that Schedule

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(c)

In any other case, unless it is approved by the Central Government and the amendment shall become void if, and in so far as, it is disapproved by that Government. Provided that approval shall not be required where any provision or any amendment thereof that increases the amount of such remuneration only by way of a fee for each meeting of the Board or Committee and the amount of such fee after such increase does not increase does not exceed the sum as may be prescribed. The prescribed sitting fees are Rs.20000/- per board meeting.

The increase in remuneration of directors does not require Central Governments approval, in cases where it is in accordance with statutory guidelines specified in Schedule XIII. This section does not apply to banking companies and Government companies. As per Section 388 this section also applies to a manager. As per Section 311 of the Companies Act, 1956, in case of a public company or a private company which is a subsidiary of a public company, if the terms of re-appointment or appointment of a managing or a whole-time director, made after the commencement of this Act, have the effect of increasing, whether directly or indirectly, the remuneration which the managing or whole-time director or the previous managing or whole-time director, as the case may be, was receiving immediately before such reappointment or appointment shall not have affect : (a) in case where Schedule XIII is applicable, unless such increase is in accordance with the conditions specified in that Schedule, and (b) in any other case, unless it is approved by the Central Government. It may be noted that this section only deals with cases of appointment or re-appointment of managing and whole-time directors only. This section is also applicable to a manager. The approval is not necessary in cases where the increase is in accordance with Schedule XIII. But in any other case, if the original remuneration had been fixed at a particular percentage or figure, an increase of it even within the limits allowed by section 309 is not permitted without the sanction of Central Government. REMUNERATION OF MANAGER As per Section 387 of the Companies Act, 1956, the manager of a company may, subject to the provisions of Section 198, receive remuneration rather be way of a monthly payment, or by way of specified percentage of the net profits of the company calculated in the manner laid down in Sections 349 and 350, or partly by the other; Provided that except with the approval of the Central Government such remuneration shall not exceed in the aggregate five per cent of the net profits. This section does not affect a private company which is a subsidiary of a public company, banking company and a Government Company. The appointment or reappointment of manager, and the fixation and increase of his remuneration is done mutatis mutandis in the same manner as for the managing or whole-time director of a company.

PROHIBITION OF TAX-FREE PAYMENTS As per Section 200 of the Companies Act, 1956, no company shall pay to any officer of the company, whether in his capacity as such or otherwise, remuneration free of any tax, or calculated with reference to, or varying with any tax payable by him.

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DETERMINATION OF NET PROFITS FOR CALCULATING MANAGERIAL REMUNERATION Section 349 of the Companies Act, 1956, states the method for computing net profits. According to sub-section (1), in computing the net profits of a company in any financial year(a) credit shall be given for the sums specified in sub-section (2), and credit shall not be given for those specified in sub-section (3); and (b) the sums specified in sub-section (4) shall be deducted, and those specified in sub-section (5) shall not be deducted. Sub-section (2) contains the following items: bounties and subsidies received from any Government, or any public authority constituted or authorized in this behalf, unless and except in so far as the Central Government otherwise directs. Sub-section (3) contains the following items: (a) profits, by way of premium, on shares or debentures of the company, which are issued or sold by the company. (b) Profits on sales by the company or forfeited shares. (c) Capital profits including those on sale of undertaking(s) of the company or any part thereof. (d) Profits from sale of immoveable property or fixed assets comprised in the undertaking(s), unless the business of the company consists, whether wholly or partly of buying and selling any such property or assets: Provided that where the amount for which any fixed assets is sold exceeds the written-down value thereof referred to in Section 350, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written down-value. Sub-section (4) contains the following items: (a) All the usual working charges. (b) Directors remuneration. (c) Bonus or commission paid or payable to the staff, or to any engineer, technician or person employed or engaged, whether on a whole-time or on a part-time basis. (d) Any tax in the nature of tax on excess or abnormal profits. (e) Any tax on business profits imposed for special reasons or in special circumstances (f) Interest on debentures issued by the company. (g) Interest on mortgages executed and on loans and advances secured by charge on its fixed or floating assets. (h) Interest on unsecured loans and advances. (i) Expenses on repairs, whether immovable or movable property, provided the repairs are not of capital nature. (j) Outgoings, inclusive of donations made u/s 293(1)(e). (k) Depreciation as per Section 350 of the Companies Act, 1956. (l) Excess of expenditure over income (M) Any compensation or damages to be paid in virtue of any legal liability, including a liability arising from a breach of contract. (n) Any sum by way of insurance against the risk of meeting any liability such as is referred to in clause (o) Debts considered bad and written off or adjusted during the year of account. (p) Amount paid as cess under Section 441A. [Brought about by Companies (Amendment) Act, 2002] Sub-section (5) of the Act contains the following items:

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(a) (b) (c)

Income-tax and super-tax payable by the company under the Income tax Act, 1922, Any compensation, damages or payments made voluntarily capital loss including loss on sale of the undertaking(s) of the company or part thereof not including any excess referred to in the proviso to Section 350 of the written- down value of any asset which is sold, discarded, demolished or destroyed, over its sale proceeds or scrap value.

As per Section 350 of the Companies Act, 1956, of the amount of depreciation to be deducted in pursuance of clause (k) of sub-section (4) of Section 349 shall be the amount of depreciation on assets as shown in the books of the company at the end of the financial year, Provided that if any asset is sold, discarded, demolished or destroyed before depreciation of such asset has been provided for in full, the excess, if any, of the written-down value of such asset over its sale-proceeds or as the case may be, its scrap value, shall be written off in the financial year in which the asset is sold, discarded, demolished or destroyed. SCHEDULE XIII It is open to a public company, or a private company which is a subsidiary of a public company, to appoint its managerial personnel and fix their remuneration without Central Governments approval, so long as the same is in accordance with the conditions laid down in Schedule XIII. Part II of Schedule XIII gives a detailed account about the amount of remuneration that a company can pay its managing or Wholetime Directors under various situations. Section I of the Part II of Schedule XIII talks the maximum remuneration payable by a company having profits. Section II of Part II of Schedule XIII talks about remuneration payable by companies having no profits or inadequate profits. This Section has clauses (A), (B), (C) a which fixes the maximum managerial remuneration payable under various ceiling limits. The maximum remuneration increases with the increase in effective capital of the company. For the purpose of Section II of this part, effective capital means the aggregate of the paid-up share capital (excluding any share application money or advances against shares, amount in share premium account, reserves and surpluses (Excluding revaluation reserves); long-term loans, and deposits repayable after one year (excluding working capital loans, overdrafts, bank guarantee, etc and other short-term arrangements) as reduced by aggregate of any investments, accumulated losses and preliminary expenses not written off. Clause (D) lays maximum remuneration for companies in Special Economic zones as notified by the Department of Commerce from time to time. AMALGAMATION, MERGER, TAKEOVER 1. AMALGAMATION Amalgamation is the blending of two or more companies into single company or undertaking, the shareholders of each such company becoming substantially the shareholders in the new company which is to carry on the blended undertaking. To achieve this objective, either a new company may be formed or take over the business of the existing companies or the business of one or more existing companies be taken over by one of the existing company/ companies.

2. MERGER Merger means two or more companies merges together and form a new company. The shareholders of both the company are shareholders of new company i.e. Resulting company.

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3. TAKEOVER Takeover means taking over direct or indirect control over the assets of the another company. The control is taken over through the number of shares of the company to be acquired. As per the Companies Act, 1956 the scheme or contract involving the transfer of shares or any class of shares in the company (i.e. transferor company) to another company (transferee company) has, within 4 months after maturity of the shares that company approved by shareholders holding 9/10 of value of shares whose transfer is involved. It is provided ceiling as prescribed by Sec.224 (13) is not to private company by Company (Amendment) Act, 2000. While calculating specified limit branch audits of Indian companies and audit of Indian business account of Foreign companies to be excluded. WINDING UP Winding up of the company is the process whereby its life is ended and its property administered for the benefit of its shareholders, creditors & members. An administrator called as Liquidator is approved and he takes control of company collects the asset, pays its debt & finally distributes and he takes control of company in accordance with the rights. In other words, winding up is applying the assets of company in discharge of its liability and returning surplus to those entitled to it, subject to cost of doing so. The statutory process by which this is achieved is called Liquidation. Winding up can be by court, compulsory winding up or creditor/ Members voluntary wind up. STRIKING OFF Striking of means the process by which the name of the company is removed from the records of the Registrar of company if some circumstances exist. If paid up capital of Public/ Private Company is less than Rs.5 lacks/ 1 lacks as the case may be. The Registrar of company has to follow prescribed procedure as laid under the Act before striking of the name of any company. ILLEGAL ASSOCIATION Sec.11 of the Companies Act, 1956 provides that not more than 10 persons can combine together for carrying on a banking business or more than 20 persons for carrying on any other kind of business or more than 20 persons for carrying on any other kind of business, the object of which is acquisition of gain, unless, the association is registered under the Companies Act or any other Indian Law. An association formed in contravention of Sec. 11 of Companies Act,1956. The sole test to determine an illegal association under this section is whether it carries on business for the purpose of gain. If that is so, association carries with number of members exceeding statutory limit convert itself into illegal association unless is registered under the Act. This provision does not apply to Joint Hindu Family business but where two or more such joint families form partnership, they will come within the mischief to this section but in computing number of persons, the minor members of such family will be excluded. In Pannagi V/s. Senagi (1934), four firms entered into a partnership and aggregate of members exceeded 20, it will be illegal Association and could not maintain a suit. The association does not registered merely, because the persons forming it choose to affix the word Company after firms name. In case of Babulal V/s. Laxmi Bharat Trading Company AIR 1960 Raj 14 (D.B), an unregistered association consisting of 115 members was alleged to be formed at the instance of Government to help it in distribution of gain among public. It will established from evidence that an element of acquisition of gain was present in its formation, it was therefore, held that it was an illegal association and hit by Sec.11 of Act.

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LETTER OF AUTHORITY We, Mr. _______________ , Mr. ________________ AND Mr. ____________ Promoters of the Company __________________ having Registered Office at ----------------------------------------------------------------------------- hereby authorise, Mr. ___________, Mr. __________ and Mr. __________of ____________, firm of Practicing Company Secretaries having their office at _______________________________________________ who have signed below, to appear on behalf of us before the Registrar Of Companies, Maharashtra, Mumbai, to carry out the necessary amendments to Memorandum and Articles of Association and any other documents in connection with the incorporation of proposed Company and to submit, any paper, document so required by the Registrar in this connection and to collect the Certificate of Incorporation. All their acts and omissions are acceptable to us Mr. _____________________ Mr. _____________________ Mr. _____________________ Date: Place: - Mumbai For, Company Secretaries, Mr. _____________ Mr. _____________ Mr. _____________ Signature_______________________ Signature_______________________ Signature_______________________ Signature Signature Signature

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DRAFT RESOLUTIONS: APPOINTMENT OF DIRECTOR: The Chairman informed the Board that Mr./ (Mrs.) _____________ has expressed her/ (his) willingness to act as Director in the Company and she/ (he) has given her/ (his) consent letter to the company. The Board discussed the matter and passed the following resolution, RESOLVED THAT, Mr./ (Mrs.) _____________, be and is hereby appointed as an Additional Director of the Company. RESOLVED FURTHER THAT, Mr. _______________, Director of the Company be and is hereby authorized to complete all the necessary formalities in this respect and to file Form No. 32 with the Registrar of Companies. RESIGNATION OF DIRECTOR: The Chairman informed the Board that ------------------ has shown unwillingness to be continued as the Director of the company due to certain unavoidable reasons. The matter was then discussed in detail. The Board then passed the following resolution unanimously RESOLVED THAT the resignation tendered by ------------------ be and is hereby accepted with immediate effect DRAFT OF FIRST BOARD MEETING A meeting of Board of Directors of ------------------ was held on ------------------------ at --------------- when the following Directors were present. 1. -------------------2. -------------------3. -------------------took the chair and there being requisite quorum the proceedings of the meeting commenced. The original Certificate of Incorporation issued by Registrar of Companies, Maharashtra under reference ------------- dated ------------------- was placed before the Board and the Board passed the following resolution unanimously. "RESOLVED THAT Certificate of Incorporation of ----------------- dated --------------- be kept at the Registered Office of the Company." III. The Chairman stated that following persons have subscribed to the Memorandum of Association of the Company for ------------- shares of Rs.------------- each. Name of the Subscriber Number of Share(s) ------------------------------------------------------------------------------------------------------TOTAL ------The Board took the note of the same and then authorised the issue of share certificates to the subscribers of Memorandum of Association of the Company. Sr. No. 1 2 3 4

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IV.

The Chairman placed before the Board Form No.18 regarding situation of the Registered Office of the Company filed with the Registrar of Companies, Maharashtra. The Board after a brief discussion passed the following resolution unanimously. "RESOLVED THAT the notice of situation of Registered Office at -------------------------filed by the Promoters with the Registrar of Companies, Maharashtra be and is hereby confirmed and recorded." The Board was informed that ------------------, -----------------and Ms. Nayna Bhayani are the first Directors of the Company under clause 14 of Articles of Association. They will be acting as Directors from the date of incorporation of the Company and are not liable to retire and will hold the office till they resign. The Board considered their appointment and passed the following resolution unanimously. "RESOLVED THAT ---------------, --------- and ------------ whose names appear as the first Directors of the Company as mentioned in under Article ------------- of the Articles of Association be appointed as first Directors of the Company from the date of incorporation and shall constitute the first Board of Directors of the Company who shall hold office of Director at their description and shall be not liable to retire by rotation. " The Board considered details of preliminary expenses incurred by the Promoters of the Company in regard to incorporation of the Company which requires to be ratified and adopted by the Board. After a brief discussion the following resolution was passed unanimously. "RESOLVED THAT the preliminary expenses as per the details placed before the Board be and i

Company Law Notes for Mcc

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