Mercantile Law - Company's Act 1956 (Part - 2)

2. Membership in a Company
 Share Capital
 Shares
 Company Management
 Meetings and Proceedings
 Borrowings Powers, Debentures and Charges
 Accounts and Auditors
 Prevention of Oppression and Mismanagement
 Compromises, Arrangements and Reconstructions
 Winding Up


3. MEMBERS & SHAREHOLDERS The members of shareholders of a company are the
persons who collectively constitutes the company as a
corporate entity.
The terms „member‟ and „shareholder‟ and „holder of a
share‟ are used interchangeably.


4. Any person who is competent to contract (sec.11 of the Indian Contract
Act, 1872) may become a member of a company . This is subject to the provision
of the Memorandum and the Articles of the company.
The articles may provide that following person cannot become members
of the company1.
2.
3.
4.
5.
Minor
Insolvent
Partnership firm
Foreigner
Company

5. Membership
by Subscription
Membership
by Application and Registration.
›by application and allotment
›by transfer
›by succession
›agreement to be in writing
Membership
by Beneficial Ownership
Membership
by Qualification Shares.

6. The
amount of share capital a company reports on its balance sheet only accounts for the
initial amount for which the original shareholders purchased the shares from the issuing
company. Any price differences arising from price appreciation/depreciation as a result of
transactions in the secondary market are not included.
For
example, suppose ABC Inc. raised $2 billion from its initial public offering. Over the
next year, the total value of its shares increases to $5 billion. In this case, the value of the
share capital is still only $2 billion because ABC Inc. had received only $2 billion from the
sale of its securities to the investing public.

7. 
Authorized, registered, maximum or normal capital:The maximum amount of capital, which a company is authorized to raise from the public by the issue of
shares, is known as authorized capital. It is a capital with which a company is registered, therefore it is also
known as registered capital.

Issued Capital:Generally, a company does not issue its authorized capital to the public for subscription, but issues a part of
it. So, issued capital is a part of authorized capital, which is offered to the public for subscription, including
shares offered to the vendor for consideration other than cash. The part of authorized capital not offered for
subscription to the public is known as 'un-issued capital'. Such capital can be offered to the public at a later date.

Subscribed Capital:It can not be said that the entire issued capital will be taken up or subscribed by the public. It may be
subscribed in full or in part. The part of issued capital, which is subscribed by the public, is known as subscribed
capital

8. 
Called Up Capital :It is that part of subscribed capital, which is called by the company to pay on shares allotted. It is not necessary
for the company to call for the entire amount on shares subscribed for by shareholders. The amount, which is not
called on subscribed shares, is called uncalled capital.

Paid-up Capital:It is that part of called up capital, which actually paid by the shareholders. Therefore it is known as real capital of the
company. Whenever a particular amount is called and a shareholder fails to pay the amount fully or partially, it is
known an unpaid calls or calls in arrears.
Paid-up Capital = Called up capital - calls in arrears

Reserve Capital:It is that part of uncalled capital which has been reserved by the company by passing a special resolution to be called
only in the event of its liquidation. This capital can not be called up during the existence of the company.It would be
available only in the event of liquidation as an additional security to the creditors of the company.

9. 
A unit of ownership that represents an equal proportion of a company's capital. It
entitles its holder (the shareholder) to an equal claim on the company's profits and an
equal obligation for the company's debts and losses.

Two major types of shares are :
 Ordinary Shares (Common stock), which entitle the shareholder to share in the earnings of the
company as and when they occur, and to vote at the company's annual general meetings and other
official meetings, and
 Preference Shares (Preferred stock) which entitle the shareholder to a fixed periodic income
(interest) but generally do not give him or her voting rights.

10. Company Management
Hierarchy
Top Management
Middle Management
First – Line management
Chairman
General Manager
Supervisor
Vice President
Regional Manager
Office Manager
Board Of Directors
Chief Executive Officer
Team Leader

11. 
Management involves the manipulation of the human capital of an enterprise to
contribute to the success of the enterprise. This implies effective communication: an
enterprise environment (as opposed to a physical or mechanical mechanism),
implies human motivation and implies some sort of successful progress or system
outcome.

As such, management is not the manipulation of a mechanism (machine or
automated program), not the herding of animals, and can occur in both a legal as
well as illegal enterprise or environment At first, one views management
functionally, such as measuring quantity, adjusting plans, meeting goals. This
applies even in situations where planning does not take place.

12. 
From this perspective, Henri Fayol (1841–1925) considers
management to consist of six functions:
› Forecasting
› Planning
› Organizing
› Commanding
› Coordinating
› Controlling

13. 
STATUTORY MEETINGS:
A public company limited by shares or a guarantee company having share capitals
required to hold a statutory meeting. Such a statutory meeting is held only once in the
lifetime of the company. Such a meeting must be held within a period of not less than
one month or within a period not more than six months from the date on which it
is entitled to commence business.

STATUTORY REPORT :
The report forwarded to every member of the company by the board of members
atleast 21Days before the actual date of the meeting.
›
›
›
›
Procedure of the meeting
List of the members
Discussion of matters relating to formational aspect
Adjournment

14. 
ANNUAL GENERAL MEETINGS:
Must be held by every type of company, public or private, limited by shares or by
guarantee, with or without share capital or unlimited company, once a year. Every
company must in each year hold an annual general meeting. Not more than 15 months
must elapse between two annual general meetings.
› Time and place of meeting
› 21 days notice.

EXTRAORDINARY MEETINGS:
A meeting for transacting some urgent or special business which cannot be
postponed till the next AGM.

15. Notice of meeting – should contain the details of place, date, hour & purpose.
 Quorum for the meeting – minimum no. of members that must be present to
constitute a valid meeting. Minimum 5for public company and 2 for any
other company.
 Chairman or the presiding officer present in the meeting.
 Minutes of the meeting.


PROXIES :
› An authority who can represent and :-vote for another person at a meeting is called a
proxy.
› Proxy to be in writing.
› It should be deposited 48 hours before the meeting.

16. RESOLUTION:-
The questions which generally come for consideration at the general meeting of a company are
presented in the form of proposals called „motions‟ and when this motion is carried, it becomes a
„resolution‟.

17. 
Every trading company has an implied power to borrow, as borrowing is implied in
the object for which it is incorporated. A trading company can exercise this power
even if it is not included in the Memorandum. However non-trading company has no
implied power to borrow and such power can be taken by it implied power to borrow
and such power can be taken by it by including a clause to that effect in the
Memorandum.

Restrictions on borrowing power : A public company can borrow only after
the receipt of Commencement Certificate. [Section 149(1)]. But a private company
can borrow immediately after the incorporation

18. 
The Board of Directors may borrow moneys by passing a resolution passed at the
meetings of the Board. The board may delegate its borrowing powers to a Committee
of Directors. Such a resolution should specifically mention the aggregate amount upto
which the moneys can be borrowed by the Committee, the Managing Director,
Manager or any other principal officer of the company on such conditions as it
may prescribe [Section292 (1) (c)]

The moneys borrowed together with the moneys already borrowed by the company
(excluding loans obtained from banks i.e. working capital) shall not exceed
the aggregate of the paid up capital and the free reserves.[Section 293(1)(d)]

It may be noted that a company may borrow in excess of its paid up capital and free
reserves if it is so consented and authorized by the shareholders at a general meeting.

19. Debenture includes debentures stock, bonds, and any other securities of a
company, whether constituting a charge on the assets of the company or not.

FEATURES OF A DEBENTURE SEC 2(12)] :
(i) In the form of a certificate (like a share certificate) issued under the common seal
of the company. The certificate is an acknowledgement by the company of
indebtedness to a holder.
(ii) Provides for the payment of a specified principal sum at a specified date with
contracted rate of interest.

20. Issued in series
(v) Secured by a charge on the undertaking of the company, or on some class of its
assets or on some part of its profits. [Unsecured debenture is a deposit with the
meaning of the Companies (Acceptance of Deposits)Rules 1975].
(iv)
DEBENTURE STOCK :
Debenture stock is of the same nature as debentures but instead of each lender
having separate debenture bond he gets a certificate entitling him to a specified portion
one large loan. It is borrowed capital consolidated into one mass for the sake of
convenience.

22. Debenture may be of different kinds as follows:
›
›
›
›
Perpetual or Irredeemable Debentures
Redeemable Debentures
Registered and Bearer Debentures
Secured and Unsecured or Naked Debentures
CONVERTIBLE DEBENTURES:
› A convertible debenture mean, which by the terms of its issue gives the
holder the right of exchange debenture wholly or in part with fully, paid
shares.
› Section 81(3)(b) provides that the terms of issue of debentures may provide
for an option to convert debentures or loans in the company.

23. 
Borrowing has become an equally important method along with share capital of financing
projects. Corporate borrowing has its own peculiarities. No single individual may in normal
circumstances be in a position to meet the loan requirements of a company.

Loan money has, therefore, to be raised from a large number of individuals very much in the
same way as share capital. Loans may have to be obtained in a sequence one after the other.

The problem was solved by the evolution, on the one hand, of debentures and, on the other, of
the concept of floating charge, both being reserved only for the corporate sector. The same
assets are charged to several lenders and also to several lenders in a series. That raises a
question as to who shall have priority. This gave rise to the concept of pari passu ranking.
Since other trade creditors have also to seek payment only out of the company's assets, the
problem had to be tackled as to how they should know, before supplying more credit, what
assets would be available as security for their payments?

24. The Act prescribes for registration of charges with the Registrar of Companies, and also
gives a list of assets a charge on which must be registered.


Registration of charges : Identifies the assets, which are subject to the charge. It becomes a
source of knowledge, and, therefore,
Operates as constructive notice : A protection, to "all classes of persons interested in knowing
the assets position of the company. It makes the charge effective against all quarters including
the liquidator.
Types of Charges:

FIXED CHARGE:
Charge is fixed when it is made specifically to cover definite an ascertained assets of
permanent nature such as land, building, o heavy machinery. A fixed charge passes legal title
to certain specific assets and the company loses the right to dispose of the property
unencumbered, though the company retains possession of the property.

25. FLOATING CHARGE:
› It is a charge on the current assets of the company, present or future which
changes from time to time in the ordinary course of business e.g. stock in
trade, bills receivable, cash in-hand, work in progress, goods in transit,
inventory etc.
When floating charge becomes crystallized :
When the company goes into liquidation
When the company ceases to carry on the business
When the creditors or the debenture holders take steps to enforce this security
e.g. by appointing receiver to take possession of the property charged.
On the happening of the even specified in the deed.

26. REGISTRATION OF CHARGES [SECTION 125] :

The security created and charged for the following purposes must be registered with the ROC within 30 days(or
further period of 30 days with additional fees) after the date of their creation.

Securing any issue of debentures;
Uncalled share capital of the company;
Any immovable property;
Book debts, stock in trade or other current assets of the company;
Any movable property (not being a pledge);
Calls made but not paid;
IPRs of the company.







The ROC shall with respect to each company maintain a Register of charges containing all the specified
particulars. Upon registration of charge by the company, ROC shall issue a Certificate of charges, which shall be
conclusive evidence.

27. 
Proper and accurate compilation of financial information of a corporate and its disclosure, in a
manner that is standardized and understood by stakeholders, is central to the credibility of the
corporates and soundness of investment decisions by the investors. The preparation of financial
information and its audit, therefore, needs to be regulated through law with stringent penalties for
non-observance.

The present statute provides for a mechanism for development of Accounting Standards. We
understand that Accounting Standards for the use of Indian corporate sector, taking into account
International Accounting Standards, are being developed through the instrumentality of the
National Advisory.

The Committee took note of the contribution made by the ICAI and the NACAS in development of
proposals for Accounting Standards and took the view that the existing institutional mechanism
for formulating and notifying Accounting Standards under the Companies Act, 1956 may be
retained. Committee on Accounting Standards (NACAS). Holding-Subsidiary Accounts and
Consolidation .

The Committee took the view that consolidation of financial statements of subsidiaries with those
of holding companies should be mandatory. The Committee discussed the question of the manner
of maintenance of accounts of entities other than companies but controlled by companies
registered under the Act.

28. 
With consolidation of financial statements by holding companies on mandatory basis, the provisions
requiring attaching the accounts of subsidiary companies with those of holding companies, for
circulation to shareholders in accordance with the provisions of the present Companies Act should
be done away with.

Further, the Committee took the view that the holding companies should be required to maintain
records relating to consolidation of financial statements for specified periods. Presentation of
consolidated financial statements by the holding company should be in addition to the mandatory
presentation of individual financial statements of that holding company.

At present, Section 209 (4A) of the Act requires companies to preserve the books of accounts,
together with the vouchers relevant to any entry in such books of account, in good order, relating to
a period of not less than 8 years immediately preceding the current year. The Committee felt that the
rules may provide for preservation of books of account and records of the company for a period of 7
years to bring it in harmony with Income Tax Act.

In order to bring about more transparency and uniformity in the maintenance of accounts, the
Committee felt that the companies should continue to be mandated to maintain their books of
accounts on accrual basis and double entry method of book keeping.

29. 
Maintenance of Records Outside the Country :
The companies should have an option to keep records outside the country provided financial
information in compliance with the Companies Act is available within the country and written notice is
given to the Registrar of the place where the records are kept. However, such a Company should be
obligated to produce the records that are kept outside the country, if and when required to do so as
specified in the Rules.

Cash Flow Statement To Be Made Mandatory :
World over, the importance of Cash Flow Statement is being specifically recognized. At present, the
listed companies are mandated to include a Cash Flow Statement in the Annual Report and the
Standards of Accounting prescribed by ICAI also requires in specified cases a Cash Flow Statement to be
submitted along with the Balance Sheet and Profit & Loss Account with a view to make Cash Flow
Statement mandatory. The Committee felt that there was a need to include the definition of the term
Financial Statement in the Act, to include Profit & Loss Account, Balance Sheet, Cash Flow Statement
and Notes on Accounts. Financial Year

The Companies Act at present does not contain any provision relating to the minimum period of a
Financial Year. The Concept Paper has defined the Financial Year with the minimum period of six
months. The Committee dwelt on the subject and came to the conclusion that the first financial year
should begin from the date of incorporation and end on the immediately succeeding 31st March and the
subsequent Financial Years should also end on 31st March every year.

30. 
A company in a broad sense is a group of persons who have come together or
who have contributed money for some common purpose and have
incorporated themselves into distinct legal entity. Company is the
amalgamation of two distinct words- “com” and “pain”, the former meaning
with/together and the later meaning “bread”. The whole scheme of the
Companies Act, 1956 is to ensure proper conduct of the affairs of the company
in public interest and preservation of image of country in public interest.

31. 
Majority rule is hallmark of democracy. It equally applies to corporate democracy
and is not free from pitfalls and abuse. Corporate democracy is more vulnerable
to it because it is reckoned with the number of shares and not with number of
individuals involved.

The rule of majority has been made applicable to the management of the affairs
of the company. The members pass resolution on various subjects either by
simple or three-fourth majority. Once resolution is passed by majority it is
binding on all members. As a resultant corollary, court will not ordinarily
intervene to protect the minority interest affected by resolution. However there
are exceptions to this rule- Prevention of Oppression and mismanagement being
one such ground. The requisite number of members to make an application
before the Tribunal is :
› In case of Company having share capital: 100 members or 1/10th of total number of its
members, whichever is less or member/s holding not less that 1/10th issued capital. The
applicants should have paid all calls and other sum due on their shares.
› In case of Company not having a share capital: not less than 1/5th of total number of the
members. In case of joint shareholding they will be counted as only one member.

32. Winding up or liquidation of a company represents the last
stage in its life. It means a proceeding by which a company is
dissolved. The assets of the company are disposed of, the debts
are paid off out of the realised assets and the surplus if any ,is then
distributed among the members in proportion to their holdings in
the company.
The two terms winding up and liquidation are used
interchangeably.

33. There are three modes of winding up of a company are
a. Winding up by the court i.e. compulsory winding up (Sections.
433 to 483)
b.
Voluntary winding up (Sections. 484 to 521)Members voluntary winding up
2. Creditors voluntary winding up
1.
C.
Winding up subject to Supervision of Court.

34. THANK YOU