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KLE LAW ACADEMY BELAGAVI(Constituent Colleges: KLE Society’s Law College, Bengaluru, Gurusiddappa Kotambri Law College, Hubballi, S. Manvi Law College, Gadag, KLE Society’s B. Bellad Law College, Belagavi, KLE Law College, Chikodi, and KLE College of Law, Kalamboli, Navi Mumbai)STUDY MATERIALforCOMP...

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KLE LAW ACADEMY BELAGAVI (Constituent Colleges: KLE Society’s Law College, Bengaluru, Gurusiddappa Kotambri Law College, Hubballi, S.A. Manvi Law College, Gadag, KLE Society’s B.V. Bellad Law College, Belagavi, KLE Law College, Chikodi, and KLE College of Law, Kalamboli, Navi Mumbai)

STUDY MATERIAL for

COMPANY LAW Prepared as per the syllabus prescribed by Karnataka State Law University (KSLU), Hubballi

Compiled by

Reviewed by

Tanmay Patil, Asst. Prof.

Dr. Anita M.J., Asst. Prof.

Vivek Narayan, Asst. Prof.

K.L.E. Society's Law College, Bengaluru

This study material is intended to be used as supplementary material to the online classes and recorded video lectures. It is prepared for the sole purpose of guiding the students in preparation for their examinations. Utmost care has been taken to ensure the accuracy of the content. However, it is stressed that this material is not meant to be used as a replacement for textbooks or commentaries on the subject. This is a compilation and the authors take no credit for the originality of the content. Acknowledgement, wherever due, has been provided.

CONTENT Sl. No. Unit - 1 1. 2. 3. 4. 5. 6. 7. 8. Unit - 2 1. 2. 3. 4. 5. 6. Unit - 3 1. 2. 3. 4. 5. 6. 7. Unit - 4 1. 2. 3. 4. 5. Unit - 5 1. 2. 3. 4. 5.

Particulars Syllabus Introduction and Concept Company - Concept Historical development Nature and characteristics of company Kinds of company Corporate personality Limited liability Lifting of corporate veil Promoters – duties and liability of promoters Incorporation Procedure of incorporation Certificate of incorporation Memorandum of Association (MOA) Articles of Association (AOA) Doctrine of indoor management Prospectus Management and Control of Companies Board of Directors Meetings Resolutions Distribution of powers between Board of Directors and general meeting Directors Corporate social responsibility Prevention of oppression and Mismanagement Financial structure of company Shares Dividends Buy back Debentures Acceptance of Deposit by Companies Reconstruction and amalgamation and winding up Reconstruction, rehabilitation, and amalgamation Winding up Modes of winding up Who can apply Procedure under different modes Bibliography

Page No. 3 5 5 7 15 23 38 39 44 51 61 61 71 72 88 95 97 104 105 110 117 118 119 125 127 134 135 146 151 161 167 176 176 180 201 202 203 205

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SYLLABUS Objectives: In view of the important developments that have taken place in the corporate sector, the course is designed to understand the formation, management and other activities of the companies. Important regulations pertaining to the issue of shares and the capital raising have come into force. This course aims to impart the students, the corporate management, control, possible abuses, the remedies, and government regulation of corporate business and winding up of companies. Course contents: UNIT – I Introduction and Concept Company – historical development – nature and characteristics of company – kinds of company – Corporate personality – limited liability – lifting of corporate veil – promoters – duties and liability of promoters UNIT – II Incorporation Procedure of incorporation – certificate of incorporation – MOA – AOA – Doctrine of indoor management – prospectus UNIT – III Management and Control of Companies Board of Directors – powers and functions: Distribution of powers between Board of Directors and general meeting Directors: appointment – qualification – position of directors – types of directors – powers and duties of directors – remuneration – removal Meetings: Meetings of Board and Committees – kinds of meetings – procedure relating to convening and proceedings at General and Other meetings – resolutions – Prevention of oppression and Mismanagement Corporate social responsibility UNIT – IV Financial structure of company Sources of capital: Shares – types – allotment – transfer of shares – rights and privileges of shareholders – dividends – declaration and payment of dividends, prohibition of buy back – private placement –

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Debentures – floating charge – appointment of debenture trustees and their duties – kinds – remedies of debenture holders – redemption Acceptance of Deposit by Companies, charge on assets UNIT – V Reconstruction and amalgamation and winding up Reconstruction, rehabilitation and amalgamation: concept – jurisdiction and powers of courts and NCLT – vesting of rights and transfer of obligations – takeover and acquisition of minority interest Winding up: concept – modes of winding up – who can apply – procedure under different modes. Prescribed Books: 1. Taxman, Companies Act 2013. 2. Singh, Avtar, Company Law, (Lucknow: Eastern Book Company,2007) Reference Books: 1. Ramaiah,A, Guide to Companies Act, (Nagpur: Wadhwa, 1998) 2. Shah, S.M., Lectures on Company Law, (Bombay: Tripathi, 1988) 3. Kuchal, S.C, Corporation Finance: Principles and problems, 10th Edition, (Chaitanya Publishing House, 1973) 4. Y. D. Kulshreshta, Government regulation of financial management of private corporate sector in India, Indian Law Institute, (1986) 5. S. K. Roy, Corporate Image in India A Study of Elite Attitudes towards Public and Private Industry, (Shri Ram Centre for Industrial Relations and Human Resources ,1974) 6. Gower, L.C.B, Principles of Modern Company Law, (London: Sweet & Maxwell, 1997) 7. D. L. Majumdar, Towards a philosophy of Modern Corporation. (Asia Publishing House, 1967) 8. Pennington, Robert R., Pennington’s Company Law, (U.K: Oxford University Press, 2001) 9. Rajiv Jain, Guide on foreign collaboration – Policies & Procedures (Vidhi Publication, 2007). 10. C. Singhania, Foreign collaborations and Investments in India – Law and procedures, (Fred B. Rothman & Co, 1999) 11. Joyant M Thakur, Comparative Analysis of FEMA – FEMA Act, 1999 with FERA. 12. Sanjiv Agarwal, Bharat’s guide to Indian capital, 2nd Edition, (New Delhi: Bharat Law House Pvt Ltd, 2001) Note: The course teachers have to keep track of the notification regarding enforcement of the Companies Act, 2013 and teach the provisions enforced. For the provisions not enforced, the parallel provisions from the Act of 1956 are to be taught.

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UNIT – 1 INTRODUCTION AND CONCEPT Synopsis •

Introduction

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Meaning of a Company

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Definition of Company

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Historical Development

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Nature and Characteristics of a Company

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Kinds of Company

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Corporate Personality

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Limited Liability

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Lifting of corporate veil

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Promoters

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Duties of Promoter

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Liabilities on Promoter

Introduction The concept of ‘Company’ or ‘Corporation’ in business is not new but was dealt with, in 4th century BC itself during ‘Arthashastra’ days. Its’ shape got revamped over a period according to the needs of business dynamics. Company form of business has certain distinct advantages over other forms of businesses like Sole Proprietorship/Partnership etc. It includes features such as Limited Liability, Perpetual Succession etc. After reading this lesson, you would be able to understand the historical development in the evolution of corporate law in India and England, emerging regulatory aspects including Companies Act, 2013, besides dealing with basic characteristics of the company and how it differs from other forms of businesses.

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Meaning of a Company The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread), and it originally referred to an association of persons who took their meals together. In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters. Nowadays, business matters have become more complicated and cannot be discussed at festive gatherings. Therefore, the company form of organization has assumed greater importance. It denotes a joint-stock enterprise in which the capital is contributed by several people. Thus, in popular parlance, a company denotes an association of likeminded persons formed for the purpose of carrying on some business or undertaking. A company is a corporate body and a legal person having status and personality distinct and separate from the members constituting it. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality. The word ‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly, ‘corporation’ is a legal person created by a process other than natural birth. It is, for this reason, sometimes called an artificial legal person. As a legal person, a corporation can enjoy many of the rights and incurring many of the liabilities of a natural person. An incorporated company owes its existence either to a special Act of Parliament or to company law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought into existence by special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance Industries Limited have been formed under the Company law i.e. Companies Act, 1956 which is being replaced by the Companies Act, 2013. Definition of Company In the legal sense, a company is an association of both natural and artificial persons (and is incorporated under the existing law of a country). In terms of the Companies Act, 2013 (Act No. 18 of 2013) a “company” means a company incorporated under this Act or under any previous company law [Section 2(20)].

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In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving beyond the lives of its members. However, an association formed not for profit also acquires a corporate character and falls within the meaning of a company by reason of a license issued under Section 8(1) of the Act. A company is not merely a legal institution. It is rather a legal device for the attainment of the social and economic end. It is, therefore, a combined political, social, economic and legal institution. Thus, the term company has been described in many ways. “It is a means of cooperation and organization in the conduct of an enterprise”. It is “an intricate, centralized, economic and administrative structure run by professional managers who hire capital from the investor(s)”. Lord Justice Lindley has defined a company as “an association of many persons who contribute money or money’s worth to common stock and employ it in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contributed in it or form it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his “share”. The shares are always transferable although the right to transfer them may be restricted.” From the foregoing discussion, a company has its own corporate and legal personality distinct which is separate from its members. A brief description of the various attributes is given here to explain the nature and characteristics of the company as a corporate body. Historical Development As we all know that India has drawn a lot of legislation from England. Similarly, in the case of Companies law, India enacted company law based upon the company law enacted in England. The three phases which influenced the Company legislations may be divided as i) Colonization era; ii) Period after World War II & iii) the Opening up of Indian markets in the year 1990.

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Legislation Enacted In the year 1850, the first Company enactment for the registration of the joint-stock company was introduced in India. This enactment as mentioned before was based upon the English Companies Act, 1844. Later in the year 1857, the concept of limited liability was recognized in the companies legislation but the said limited liability was not extended to the banking company. The concept of limited liability into the Companies Act was introduced earlier in the English Companies Act of 1856. But by the year of 1858, the concept of limited liability was extended to banking company even in India. In the year 1866 Companies Act was yet again passed for consolidating and amending the laws relating to incorporation, regulation and winding up of trading companies and other associations. This Act was based upon the Companies Act 1862 of England. This Act was recast in the year 1882 and was in use until 1913. In the year 1913 another Indian Companies Act was enacted based upon English Companies Consolidation Act, 1908. Companies Act of 1913 was amended in the year 1914, 1915, 1920, 1926, 1930 and 1932. But the major amendment to the Companies Act of 1913 who was made in the year 1936 this amendment was based upon the English Companies Act. 1929. The act of 1913 regulated the Indian business company until 1956. By the end of 1950, Bhabha committee was set up under the chairmanship of H. C. Bhabha. For the difference of Indian Companies Act with reference to the development of Indian trade and industry. The committee submitted its report on 1952, this report of Bhabha committee was accepted Companies (Amendment) Act, 1956. This legislation was made keeping in mind the English legislation of Companies Act in 1948. Act of 1956 The period of the Second World War and the post-war years witnessed an upsurge of Industrial and commercial activity on an unprecedented scale in India and large profits were made by businessmen through incorporated companies. The Government of India took up the revision of 8

Company Law immediately after the termination of the last war. Two company lawyers— one from Bombay and the other from Madras— were successively appointed to advise Government on the broad lines on which, the Indian Companies Act, 1913, should be revised and recast in the light of the experience gained during the war years. Their reports were considered by Government and a memorandum embodying its tentative views was circulated towards the end of 1949 for eliciting an opinion. On 28th October 1950, the Government of India appointed a Committee of twelve members representing various interests under the chairmanship of Shri H. C. Bhabha, to go into the entire question of the revision of the Companies Act, with particular significance to the development of trade and industry of India. This Committee, popularly known as the Bhabha Committee, submitted its report in March, 1952, recommending comprehensive changes in the Companies Act of 1913. The report of the Bhabha Committee was again the subject of discussion and comment by Chambers of Commerce, Trade associations, professional bodies, leading industrialists, shareholders and representatives of labour. The Bill, which eventually emerged as the Companies Act, 1956, was introduced in Parliament on 2nd September 1953. IT was a comprehensive and consolidating as well as amending piece of legislation. The Bill was referred to a Joint Committee of both Houses of Parliament in May 1954. The Joint Committee submitted its report in May 1955, making some material amendments to the Bill. The Bill, as amended by the Joint Committee, underwent some further amendments In Parliament and was passed in November 1955. The new Companies Act (I of 1956) came into force from 1st April 1956. Major Changes brought forth by the Companies Act 1956 •

Promotion and growth of Companies.

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Capital structure of the Companies.

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Company meetings and procedures.

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Company accounts and its presentation & powers and duties of the auditors of the company.

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Inspection and investigations of the affairs of the Company.

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The constitution of the Board of Directors, Powers and functions of directors, Managing Directors and Managers; and

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Administration of the Company Law. 9

The Amendments in the Companies Act, 1956 As any other legislation various amendments were made to the Companies Act 1956 as mentioned below: Timeline of Amendments 1960

1962

1963

1964

1965

1966

1967

1969

1974

1977

1985

1988

1991

Opening of the market gates to the Globe-1990 The Era of liberalisation, privatization and globalisation saw the anachronistic Companies legislation made in time of closed market and hence inadequate to handle the global entry. This non-conducive legislation would have obstructed the Indian Corporate Sector. In pursuance to this necessity the Companies Bill, 1993 was formed but was later withdrawn. The Depositories Act, 1996 was introduced in India and later a working Group was constituted to rewrite the Companies Act, 1956. In pursuance to above made effort the Companies Bill, 1997 was introduced in Rajya Sabha on August 14, 1997 in order to replace the prior legislation. The President of India promulgated the Companies (Amendment) Ordinance, 1998 on October 31, 1998. But this promulgated the Companies (Amendment) Ordinance, 1998 was soon replaced by the Companies (Amendment) Act, 1999. The objectives of the Companies (Amendment) Act, 1999: •

To surge the capital market by boosting the morale of the National business houses.

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Fostering the FITs and Foreign Direct Investments in the country.

The changes brought by the Companies (Amendment) Act, 1999 are: •

A facility was introduced to allow the Corporate Sector to buy-back company’s own share.

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Provisions relating to investments and loans were liberalised and rationalised.

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Requirement of prior approval of the Central Government on investment decisions was done away with and companies were allowed to issue “sweat equity” in lieu of the intellectual property.

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The compliance of the Indian Accounting Standard was made mandatory and the National Committee on Accounting Standard was also incorporated. 10

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The benefit of the investors was looked into by setting up “Investor Education and Protection Fund”.

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Introduction of the nomination to shareholders, debenture holders, etc.

Later, the Companies (Amendment) Act, 2000 was enacted, which was followed by the Companies (Amendment) Act, 2001 wherein the Section 77A was introduced in relation to buy-back of the shares. This amendment allowed the Board of Directors to buy-back the shares upto 10% of the paid-up capital and free reserves provided not more than one such buy-back is made during the period of 365 days. Then, the Companies (Amendment) Act, 2002 was enacted which was followed by the Companies (Second Amendment) Act, 2002. The first amendment introduced the setting-up and regulation of the Cooperatives as a body corporate under the Companies Act, 1956 to be called ‘Producer companies. The Second Amendment was to expedite the winding-up process of the companies to facilitate rehabilitation of the sick companies and protection of workers interest. The Companies (Amendment) Act, 2006, was brought into force on 1.11.2006 wherein it introduced the Director Identification Number (DIN) and also introduced electronic filing of various returns and forms. The New Enactment of the New Society The Companies Act, 2013 replaced the Companies Act, 1956. The legislators introduced ideas of the likes of: •

Corporate Social Responsibility (CSR)

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Class action suits

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Fixed term for the Independent Directors

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The provision of raising money from the public was made little stringent

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Prohibition on insider trading by company d...