Commerce ePathshala NOTES
(IGNOU)
Important Questions & Answers
IGNOU
: BCOM
BCOC
135 – COMPANY LAW
Q - Define a private company.
Distinguish between a private company and a public company.
Ans.
DISTINCTION BETWEEN A PRIVATE COMPANY AND A PUBLIC COMPANY
Following are the main points of distinction between a
private company and a public company:
1.
Minimum Number of Members [Section 3]: In the case of a private
company minimum number of persons to form a company is two while it is seven in
the case of a public company.
2.
Maximum Number of Members: In case of private company the
maximum number must not exceed two hundred whereas there is no such restriction
on the maximum number of members in the case of a public company.
3.
Transferability of Shares [Sections 44]: As per Section 44, the
shares of any member in a company shall be movable property transferable in the
manner provided by the articles of the company. In a private company, by its
very definition, articles of a private company have to contain restrictions on
transferability of shares.
4.
Prospectus [Section 2 (68)]: A private company cannot
issue a prospectus, while a public company may, through prospectus; invite the
general public to subscribe for its securities.
5.
Minimum number of Directors [Section 149]: A private company
must have at least two directors, whereas a public company must have at least
three directors.
6.
Retirement of Directors [Section 152]: Directors of a private
company are not required to retire by rotation, but in case of a public company
at least 2/3rds of the directors must be such whose period of office is subject
to retirement by rotation.
7.
Quorum for General Meetings [Section 103]: Unless the
articles of the company provide for a larger number, in case of a public
company, the quorum shall be —
· five
members personally present if the number of members as on the date of meeting
is not more than one thousand;
· fifteen
members personally present if the number of members as on the date of meeting
is more than one thousand but up to five thousand;
· thirty
members personally present if the number of members as on the date of the
meeting exceeds five thousand; In the case of a private company, unless
Articles provide for a higher number, two members personally present, shall be
the quorum for a meeting of the company.
8.
Managerial Remuneration [Section 197]: In a private company,
there are no restrictions on managerial remuneration, but in the case of a
public company total managerial remuneration cannot exceed 11 per cent of the
net profits. The remuneration payable to each managing/whole time director or
manager cannot exceed 5 per cent of the net profits unless approval of the
Central Government has been taken. Likewise, there are restrictions on the
remuneration payable to ordinary directors also.
9.
Public Deposits: A public company is free to accept
deposits from the public (subject, however, to the provisions of sections 76).
A private company cannot accept deposits from the public.
Q - Describe the main
characteristics of a company.
Ans.
On
analysing the various legal and juristic definitions of the term company, you
will observe that a company formed and registered under the Companies Act has
certain special features which distinguish it from the other forms of
organisations. The main characteristic features of a company are as follows:
1)
Creation of Law: A company is an association of persons
(except in case of ‘One Person Company’) registered under the Companies Act. It
comes into existence only when it is so registered. Minimum number required for
the purpose is 2, in case of a private company and 7, in case of a public
company. Only one person can form a ‘one person company’ (Section 3).
2)
Artificial Person: A company is created with the sanction of
law and is not itself a human being. It is, therefore, called artificial; and
since it is clothed with certain rights and obligations, it is called a person.
A company is accordingly an artificial person.
3)
Separate Legal Entity: Unlike partnership, company is
distinct from the persons who constitute it. Section 9 says that on
registration, the association of persons becomes a body corporate by the name
contained in the memorandum.
4)
Limited Liability: A major advantage enjoyed by a company is
that the liability of its members is limited. The company being a separate
person, its members are not as such liable for its debts. You will later study
that on the basis of liability, companies may be classified as (i) Companies
limited by shares, (ii) Companies limited by guarantee, (iii) Companies limited
by guarantee but having share capital, and (iv) Unlimited liability companies.
5)
Separate Property: Shareholders are not, in the eyes of the
law, part owners of the undertaking. In India, this principle of separate
property was best laid down by the Supreme Court in Bacha F. Guzdar v.
Commissioner of Income Tax, Bombay (supra). The Supreme Court held that a
shareholder is not the part owner of the company or its property, he is given
only certain rights by law, e.g., to vote or attend meetings, to receive
dividends.
6)
Perpetual Succession: The term perpetual succession means the
continued existence. The existence of the company is not affected by reasons
such as the insolvency, death, unsoundness of mind of its members. The company
has a perpetual succession. Members may come and members may go but the company
goes on. It continues even if all its human members are dead. Even where during
the war, all the members of a private company, while in general meeting were
killed by a bomb, the company survived. Not even a hydrogen bomb could have
destroyed it. In the aforesaid eventuality, the legal successors of the
deceased shareholders will become the members. But this does not mean that a
company can never come to an end. You learnt that a company is creation of law,
it can also be brought to an end by the process of law.
7)
Transferability of Shares: One particular reason for the
popularity of joint stock companies has been that their shares are capable of
being easily transferred. The shares of a public company are freely
transferable. A shareholder can transfer his shares to any person without the
consent of other members. Articles of association, even of a public company can
put certain restrictions on the transfer of shares but it cannot altogether
stop it. A shareholder of a public company possessing fully paid up shares is
at liberty to transfer his shares to anyone he likes in accordance with the 11
manner provided for in the articles of association of the company.
8)
Common Seal: A company being an artificial person is not bestowed with body of
natural being. Therefore, it has to work through its
directors, officers and other employees. But, it can be held bound by only
those documents which bear its signatures. Common seal is the official
signature of a company. A metallic seal should be used. A company may have a
common seal with its name engraved on the same.
9)
Company may sue and be sued in its own name: As juristic
person, company can sue and be sued in its own name. This is so because a
company has a separate legal existence. A company may enter into contracts and
can enforce the contractual rights against others and it can be sued by others
if it commits a breach of contract.
Q – Distinguish between a
company and a partnership.
Ans.
DISTINCTION BETWEEN COMPANY AND PARTNERSHIP
You learnt that a company is an artificial person
created by law, with limited liability and perpetual succession as its main
features. Let us now study the difference between a company and another popular
association of persons formed to run business in India, namely, Partnership.
The
main points of difference between a company and a partnership are as follows :
1.
Mode of creation - A company comes into existence only when
it is registered under the Companies Act. A partnership, on the other hand, is
created by mutual agreement between partners. Registration of partnership firm
is not compulsory under the Partnership Act, 1932. An unregistered partnership,
therefore, is not an illegal association.
2.
Membership
· Minimum
- The minimum number of members in a partnership is two whereas the minimum
number of members in a private company is two and in case of public company,
seven.
· Maximum
- In partnership, the maximum number of partners is 50. The maximum number of members
in private company is 200 (excluding employee and ex-employee members and joint
shareholders counted as a single member) but in a public company there is no
limit on the maximum number of members.
3. Legal status - A company has a separate legal personality
of its own whereas a partnership is not a distinct person. A partnership,
commonly called a firm, has no legal existence apart from its members. Firm is
only a convenient way of addressing the partners collectively. A company being
a juristic person is quite distinct from its members.
4. Liability of members - The liability of every
shareholder of a limited liability company is limited up to the nominal value
of shares held by him or up to the amount of guarantee given by him. The
creditors of a company can proceed only against the company and not against any
member or members. Even in case of unlimited liability company, the company
being an entity distinct from the members, the creditors are not allowed to
proceed against members individually or even jointly; they can only proceed
against the company. But in partnership the liability of partners is unlimited
and partners are severally and jointly liable for the debts of the firm.
Creditors of the firm are the creditors of all the partners and they can
proceed against the partners individually as well as collectively. 5. Transfer
of shares - Shares in a public company are freely transferable. A private
company does place restrictions on free transferability of shares without
denying transferability. In partnership, no partner can transfer or sell his
share in the firm without the consent of all the other partners.
6. Perpetual succession - A company enjoys perpetual
succession. The existence of the company is not affected by the death,
insolvency, insanity or separation of a member. But, it is not so in case of
partnership. Unless otherwise agreed, death, insolvency, etc. of a partner
dissolves the firm.
7. Management - The affairs of a company are managed by
a Board of directors. Directors on the Board are elected, appointed or
reappointed by shareholders in a general meeting. Members of a company have no
role in managing the affairs of the company. Every partner, on the other hand,
unless otherwise provided in the partnership deed/agreement, can participate in
management of the firm.
8. Agency relationship - A shareholder is not an agent
of the company and thus has no power to bind the company by his acts. In
partnership, every partner is an agent of the firm and that of other partners.
A partner is bound by all the acts of other partners done within the scope of
his apparent or ostensible authority.
9. Property - In the case of a company, the property of
the company is in the name of the company and is owned by it. It does not
belong to the individual shareholders of the company. During the lifetime of
the company, no shareholder has any legal or equitable interest in any property
of the company. But, in the case of partnership, the partners are the joint
owners of the property of the firm.
10. Statutory requirements - A company is required to
comply with various statutory formalities, such as maintaining statutory books,
getting the accounts audited by chartered accountants, whereas a partnership
firm is not required to perform any such statutory obligations.
11. Powers - The powers of the company are contained in
the object clause of the memorandum of association. A change can be effected by
following the rigid procedure as laid down in the Act. In partnership, the
partners can do anything which they agree to do. Changes in partnership deed
can be effected by mutual consent.
12. Dissolution - A company’s existence will come to an
end only according to the provisions laid down in the Companies Act, 2013. A
partnership firm can be dissolved at any time by an agreement between the
partners or in case of partnership at will, by the withdrawal of even one
partner.
13. Governing legislation - A company is governed by
the Companies Act, 2013, SEBI Regulations, Listing Requirements of Stock
Exchanges. A partnership, on the other hand is governed by the Partnership Act,
1932.
Q – Distinction between a
Company and a Limited Liability partnership.
Ans.
Limited
Liability Partnership (LLP) Act, 2008, is a new piece of legislation. This Act
enables formation of partnerships with liability of partners being kept limited
like that of share holders as in case of companies. Thus, the public has been
given a choice to form a partnership either under the partnership law, i.e,
Partnership Act, 1932 or under Limited Liability Partnership Act, 2008.
Although, in case of a Limited Liability Partnership, the liability of partners
is limited but it differs from a company in many respects. The main points of
distinction between a ‘limited liability partnership’ and ‘limited liability
company’ are as follows:
1.
Regulating Act: A Limited Liability Partnership is
regulated by the Limited Liability Partnership Act, 2008, whereas a company is
governed by the Companies Act, 2013. The name of a company must end with words
‘Limited or Private Limited’ whereas of Limited Liability Partnership with
words ‘LLP’ or ’Limited liability partnership’.
2.
Minimum and Maximum Number of Members: In case of Limited
Liability Partnership, minimum numbers of partners required are 2 whereas in
case of public company minimum number of members required are 7. There is no
limit to maximum number of partners in case of Limited Liability Partnership
but in case of a private company number of members cannot exceed 200.
3.
Governance Structure: A basic difference between a Limited
Liability Partnership and a joint stock company lies in that the governance
structure of a company is regulated by statute (i.e., Companies Act, 2013)
through memorandum ad articles of association whereas for a Limited Liability
Partnership it would be by contractual agreement between partners.
4.
Management: In the case of a Limited Liability
Partnership, management rests with those partners (including designated
partners) who are authorized by Limited Liability Partnership agreement. But in
the case of a company the right to control and manage the business is vested in
the Board of Directors elected by the shareholders. Thus, the management
ownership divide inherent in a company is not there in a limited liability
partnership.
5.
Transfer of Interest: In the case of a limited liability
partnership, a partner’s economic rights (i.e. right to a share of the profits
and losses and to receive contribution at the time of winding up) shall be
transferable (Section 42). However, such transfer shall not by itself cause the
disassociation of the partner and a dissolution and winding-up of the Limited
Liability Partnership.
Further, such transfer would not make the transferee a
‘partner’ of the Limited Liability Partnership entitled to participate in its
management (Section 42). For becoming a partner of Limited Liability
Partnership, unless otherwise provided in the Limited Liability Partnership
agreement, consent of all the existing partners is required (Schedule I
appended to Limited Liability Partnership Act). But in the case of a public
company a shareholder can transfer his shares freely without restriction and
the transferee succeeds to all the rights of membership.
6.
Audit: The audit of the accounts of a company is a legal necessity
but it is not so in the case of a Limited Liability Partnership. If the capital
contribution does not exceed Rs.25 lakhs or if the annual turnover does not
exceed Rs. 40 lakhs [Rule 24(8) of the Limited Liability Partnership Rules,
2009] audit is not compulsory.
7.
Meeting: Annual General meeting of shareholders of a company is
compulsory by law but in Limited Liability Partnership, the annual meeting of
partners is not mandatory
Q - Discuss the documents
that are required to filed with the Registrar of Companies for the purposes of
registration.
Ans.
After
the promoters have got the necessary documents prepared, these are required to
be filed with the Registrar of Companies. The documents that are necessary for
the purpose of registration are as follows:
1. Memorandum of Association:
The Memorandum of Association is the charter of the company. It needs to be
originally prepared for every company. It defines the objectives for which the
company is being formed. The memorandum by its clauses, describes the whole
character of the company. This includes its objectives, its name, the nature of
liability of its members, the State in which its registered office shall be
located, the capital which the company is authorised to have. Besides,
Memorandum must also state the names, addresses and other prescribed
particulars of persons who subscribe their names to the memorandum of
association.
The memorandum defines the
powers of a company and its relations with third parties. The memorandum of a
company has to be in respective forms specified in Tables A, B, C, D and E in
Schedule I as may be applicable to such company.
For purposes of
registration, the promoters have to file with the Registrar of Companies, a
duly signed and properly stamped printed Memorandum of Association.
You should note that in
case of a private company the memorandum of association should be signed by at
least two persons in contrast to seven in case of a public company.
2. Articles of Association:
The Articles of Association contain the rules and regulations for managing the
internal affairs of the company and, therefore, govern the relationship between
the company and its members. All companies are required to have articles of
association. However, any company may adopt all or any of the regulations
contained in the model articles applicable to the company. Model articles in
relation to different kinds of companies are contained in Tables F, G, H, I and
J in Schedule I to the Companies Act 2013.
3. Declaration by subscribers to the memorandum
and first directors: There shall be filed a declaration from
each of the subscribers to the memorandum and from persons named as the first
directors, if any, in the articles that he is not convicted of any offence in
connection with the promotion, formation or management of any company, or that
he has not been found guilty of any fraud or misfeasance or of any breach of
duty to any company under this Act or any previous company law during the
preceding five years and that all the documents filed with the Registrar for
registration of the company contain information that is correct and complete
and true to the best of his knowledge and belief. (Section 7(1)(c).
4. A list of persons who have agreed to become
the first directors of the company should also be filed:
There shall be filed the particulars of the persons mentioned in the articles
as the first directors of the company, their names, including surnames or
family names, the Director Identification Number, residential address,
nationality and such other particulars including proof of identity as may be
prescribed. Besides, the particulars of the interests of the persons mentioned
in the articles as the first directors of the company in other firms or bodies
corporate along with their consent to act as directors of the company in such
form and manner as may be prescribed must also be filed with the Registrar of
Companies.
5. Address for communication:
Address for communication till the company acquires its registered office shall
also be supplied. However, company must, as per Section 12, acquire its
registered office within thirty days of its incorporation for the purpose of
receiving and acknowledging all communications and notices as may be addressed
to it. Section 12 and the rules made in this regard also require the company to
furnish to the Registrar verification of its registered office within a period
of 30 days of its incorporation in the prescribed Form No.2.25.
6. Statutory declaration:
Lastly, the promoters must file a statutory declaration to the effect that all
the requirements of this Act and the rules made thereunder in respect of
registration and matters precedent or incidental thereto have been complied
with. The aforesaid declaration is to be signed by:
i)
an advocate, or
ii)
a chartered accountant, or
iii)
cost accountant, or
iv)
company secretary, in practice and engaged
in the formation of the company;
And by a person named in the articles as a director,
manager or secretary of the company.
Q - Enumerate privileges
enjoyed by a private company
Ans. PRIVILEGES
AND EXEMPTIONS AVAILABLE TO PRIVATE LIMITED COMPANIES
A private company enjoys certain privileges and
exemptions from certain provisions of the Companies Act. The basic reason for
granting these privileges and exemptions is that the private companies by
restricting their membership to not more than 200 and because of prohibition on
public subscription to shares or debentures or deposits do not involve the
public money. Hence less public accountability and as such it need not be
subject to such rigorous surveillance as a public company is required to be.
However, a private company shall lose these privileges and exemptions, where it
fails to abide by the restrictive clauses of Section 2 (68), whether directly
or indirectly. The privileges and exemptions available to a private company
include:
1.
Minimum number of members - A minimum of two persons
(as against seven persons in the case of public company) may form a private
company [Section 3].
2.
Minimum number of Directors - A private company need
not have more than two directors as against minimum three in the case of a
public company [Section 149].
3.
Quorum for general meetings - Unless Articles provide
for a higher number, quorum required for the general meeting of the
shareholders in the case of a private company is 2 members personally present
as against 5, 15 or 30 members personally present depending upon the number of
members as on the date of meeting being up to 1000, 5000 or more than 5000; in
case of a public company (Section 103).
4.
Managerial Remuneration - A private company is exempted from
the provisions of section 197 which fixes the overall limit to the managerial remuneration
at 11 per cent of net profits. Thus, a private company may remunerate its
managerial personnel by such higher percentage of profits, or in any manner, as
it may deem fit [Section 197].
5.
Rotational Retirement of Directors - All directors of a
private company can be non-rotational directors [Section 152].
6.
Filling casual vacancies - The provisions relating to manner of
filling of casual vacancies among directors and the duration of the period of
office of those so appointed do not apply to a private company [Section 161].
7.
Special disqualifications for appointment as directors - A
private company may, by its articles of association, provide special
disqualifications for appointment of directors in addition to those contained
in section 164 (1 & 2) [Section 164 (3)].
8.
Restrictions on number of directorships - No person can be a
director in more than 10 public companies whereas he can become a director in
maximum 20 private companies provided none of those companies is a public
company or a holding or subsidiary of a public company [Section 165].
9.
Independent directors - A private company is exempted from
the requirement of appointment of independent director(s) [Section 149]. 10.
Audit Committee - A private company is not required to constitute audit
committee of the Board [Section 177].
11.
Kinds of shares - Under section 43, a private company may
issue shares other than equity or preference shares, if so provided in its
Memorandum or Articles of Association - Vide MCA Notification dated 5.6.2015.
12.
Rights Issue - In case of rights issue under section 62,
as against minimum period of 15 days, a private company may close its offer of
rights issue before that. In other words, it need not keep its rights issue
open for minimum period of 15 days - Vide MCA Notification dated 5.6.2015.
13.
ESOPs : For issue of shares to its employees under Employee’s
Stock Option Scheme, a private company may pass an ordinary resolution as
against special resolution - Vide MCA Notification dated 5.6.2015.
14.
Loan for purchase of its own securities : A private company
may provide loans for purchase of its own shares provided the following
conditions are satisfied:
· No
other body corporate should have invested any money;
· Borrowing
from banks, FIIs or bodies corporate should be less than double of its paid up
capital or Rs.50crore, whichever is lower;
· The
private company should not have defaulted in repayment of borrowings as may be
existing on the date of the transaction.
15.
Exemption from filing Board resolutions : A private company
has been exempted from filing resolutions of the Board of directors with the
Registrar of Companies.
16.
Participation of interested director in Board meeting :
Under section 184, an interested director of a private company can participate
in the Board meeting after declaring his interest.
Q – What are the Functions of
a promoter towards a company.
Ans.
In
their capacity as promoters, they perform the following functions in order to
incorporate a company and to set it going:
i)
To
originate the scheme for formation of the company:
Promoters are generally the first persons who conceive the idea of business. They
carry out the necessary investigation to find out whether the formation of a
company is possible and profitable. Thereafter, they organize the resources to
convert the idea into a reality by forming a company. In this sense, the
promoters are the originators of the plan for the formation of a company.
ii)
To
secure the co-operation of the required number of persons willing to associate
themselves with the project: The promoters, in
accordance with whether they want to incorporate a private or public company,
try to secure the co-operation of persons needed to form the company. Minimum
number of members required to form a public company is seven and that for a
private company the minimum number is two. Depending upon the form chosen, the
promoters may decide upon the number of primary members.
iii)
To
seek and obtain the consent of the persons willing to act as first directors of
the company: company has a system of representative
management and is managed by individuals appointed as directors. The first
directors of the company are, however, are either the promoters themselves or
are appointed by them. The promoters seek the consent of some individuals whom
they consider appropriate so that they agree to be the first directors of the
proposed company. Many a time, promoters themselves become the first directors
of the company.
iv)
To
settle about the name of the company: The promoters have to
seek the permission of the Registrar of Companies for selecting the name of the
company. The promoters usually give three to four names in order of preference.
The promoters should ensure that the names selected are not identical with or
too closely resemble the name of another existing company. They should also
ensure that the suggested names also conform to the draft rules and other
guidelines issued by the Ministry of Corporate Affairs in this regard.
v)
To
get the documents of the proposed company prepared:
You will study that certain documents like the Memorandum of Association and
the Article of association are required to be filed with the Registrar of
Companies before the company is registered and brought into existence. As the
company itself does not exist before incorporation, this work of preparation of
these documents has to be undertaken by the promoters. The promoters, on the
advice of legal experts get the Memorandum and Articles of Association prepared
and arrange for their printing. In case the proposed company is a public
limited company, intending to issue shares to the public after incorporation,
the promoters must also arrange to get the prospectus prepared and printed.
vi)
To
appoint bankers, brokers and legal advisers for the company:
The incorporation of a company involves a lot of legal formalities. The
promoters may need to consult the legal experts on several of these matters.
They, therefore, appoint solicitors to assist them in the process of formation
of the company. The company is formed for the purpose of carrying on business
and as such deals with funds and their management. The promoters must,
therefore, also appoint bankers for the company who will receive share
application moneys. If the proposed company is a public limited company and
proposes to raise funds from the public, the promoters must also ensure the
success of the first capital issue made by the company by appointing
underwriters and brokers.
vii)
To
settle preliminary agreements for acquisition of assets:
The promoters may be required to acquire a suitable site for the factory, make
arrangements for plant and machinery and may even make tentative arrangements
for key personnel. Sometimes, in order to run the business, the company may be
required to take over property of a running business. Promoters fulfill the
function of seeing that such property and business is acquired by the proposed
company on justifiable terms.
viii)
To
enter into preliminary contracts with the vendors:
In respect of the properties and assets mentioned above, the promoters would
need to settle the terms of contracts with the third parties from whom these
properties are to be bought. These contracts are called preliminary contracts.
ix)
To
arrange for filing of the necessary documents with the Registrar:
The promoters are required to pay the stamp duty, filing fee and other charges
for registration of the company. The promoters are to see that the various
legal formalities for incorporating the company are duly complied with.
Q – Comment on the Following
–
A. Serious Fraud Investigation
Office (SFIO)
Ans.
Serious
Fraud Investigation Office (SFIO) Serious Fraud Investigation Office (SFIO) has
been constituted under section 211 and 212 of Companies Act, 2013, is a multi
disciplinary organisation having experts from financial sector, capital market,
accounting, forensic, audit, taxation, law, information technology, company
law, customs and investigation.
This office is empowered
to investigate frauds relating to a company. Where Central Government is of the
opinion, that it is necessary to investigate the affairs of a company by
Serious Fraud Investigation Office, it may assign the investigation to Serious
Fraud Investigation Office. The Central Government may make that assignment to
this office in following circumstances:
a) On receipt of a report
of the Registrar or an inspector;
b) On intimation of a
special resolution passed by the Company that its affairs are required to be
investigated;
c) In the public interest;
d) On request from any
department of Central or State Government.
It has the exclusive jurisdiction
and once a case has been assigned to SFIO no other agency shall initiate or
proceed with investigation. It has a power to arrest and seek information and
explanation from any person involved in the fraud.
B. National Financial Reporting
Authority (NFRA)
Ans. National Financial Reporting Authority
(NFRA)
The Central Government may
by notification, constitute a National Financial Reporting Authority.
It is an apex body for the
purpose of various matters relating to accounting and auditing standards. It
would be responsible for matters relating to formulation, monitoring and
enforcement of accounting standards. The NFRA shall make (a) recommendations to
the Central Government on formation and laying down of accounting and auditing
policies and standards to be adopted by companies or class of companies or
auditors, as the case may be; (b) monitor and enforce the compliance with
accounting standards and auditing standard in such a manner as may be
prescribed. (c) Oversee the quality of service of the professions associated
with ensuring compliance with such standards and suggest measures required for
improvement in quality of service and such other related matters as may be
prescribed and (d) performs such other functions relating to clauses a, b and c
as may be prescribed. It is vested with the powers of a civil court. It can own
its own or on a reference made to it by Central Government, investigate any
body corporate, or persons or professionals or other misconduct by any member
or firm of Chartered Accountants (Section 132).
Q – What do you understand by
Memorandum of Association?
Ans.
Memorandum of Association not only defines the powers of the
company but also confines them. A company cannot 95 act beyond the powers given
to it by the Memorandum. Any action outside the scope of Memorandum shall be
void and inoperative. The purpose of the Memorandum is to enable the
shareholders, creditors and those who deal with the company to know what its
permitted range of activities is. It tells the shareholders the purposes for
which their money is likely to be used.
Memorandum of Association is a document on the basis of
which a company is formed. Therefore, it is but desirable that the clauses of
this document should not be allowed to be changed frequently. It is for this
purpose that the Companies Act has laid down elaborate rules for making
alterations in the Memorandum. Section 13 of the Act provides that except the
capital clause (which may be altered by passing an ordinary resolution), a
company may, by a special resolution and after complying with the procedure
specified in this section, alter the provisions of its memorandum. The
provisions referred in section 13 relate to the name, registered office,
objects, and liability clauses. These are deemed to be the conditions contained
in the Memorandum. For making alterations in the name clause or shifting of the
registered office from one State to another, it is necessary to obtain the
approval of the Central Government. Again, for alteration of objects by a
company which has raised money from public through prospectus and still has any
unutilised amount out of the money so raised, shall not change its objects for
which it raised the money through prospectus unless the dissenting shareholders
have been given an opportunity to exit by the promoters and shareholders having
control in accordance with regulations to be specified by the Securities and
Exchange Board (SEBI).
Thus, we can state that though Memorandum of
Association is the charter of the company, but it is not unalterable. The
different clauses of this document can be altered by following the procedure
laid down in the Act in this respect.
Q – Disinuish Between Right
Share & Bonus Share.
Ans.
|
Right
Share |
Bonus
share |
|
1.
They are issued when a
company having share capital proposes to increase its. subscribed capital by
further issue of shares |
They
are issued when a company decides to capitalise its free reserves, securities
premium account or capital redemption reserve account. |
|
2.
It only confer a privilege
on the existing shareholders to have a claim on the shares offered after the
first public issue. |
They
are issued to the existing members free of charge. |
|
3.
A letter of offer is sent
to the equity shareholders, specifying the number of shares in proportion to
the paid-up share capital of those shares. |
No
such letter of offer need be sent to the shareholders since the company
capitalises profits or reserves if it is authorised by articles and on the
recommendation of Board has been authorised in general meeting. |
|
4.
If equity shareholder
accepts the offer, he has to pay the specified amount. |
Members
do not have to pay any amount for such shares. |
|
5.
If the equity shareholder does not accept
the offer, the Board of Directors may dispose them off in such a manner as it
is advantageous to company and shareholders |
The
company which has announced the decision of its Board recommending bonus
issue, shall not subsequently withdraw the same. |
|
6.
The existing shareholding
of the members as well as rights shares may be partly paid |
Bonus
shares are always fully paid. |
|
7.
Rights shares may be
renounced in favour of his nominee. |
No
such facility is available in case of bonus shares. |
Q – Distinguish between
Memorandum & Articles.
Ans. DISTINCTION BETWEEN MEMORANDUM AND ARTICLES
The main points of distinction between memorandum and
articles may be noted as follows:
1. The memorandum contains the fundamental conditions
upon which alone the company is allowed to be incorporated. They are conditions
introduced for the benefit of the creditors, and the outside public, as well as
the shareholders. The articles of association are the internal regulations of
the company; they only regulate the relationship between company and the
shareholders/members and amongst the members themselves.
2. Memorandum lays down the area beyond which the
activities of the company cannot go. Articles provide for regulations inside
that area. Thus, memorandum lays down the parameters for the articles.
3. Memorandum of association can be altered only under
certain circumstances and in the manner provided in the Act. In most of the
cases permission of the Central Government or Tribunal, is required, besides
the approval of the shareholders in a general body meeting either by way of an
ordinary resolution or special resolution. Generally, articles can be altered
by the members by passing a special resolution only.
4. Memorandum of association cannot include any clause
contrary to the provisions of the Companies Act. The articles of association
are subsidiary both to the Companies Act and the memorandum of association.
5. Acts done by a company beyond the scope of the
memorandum are ultra vires and, thus, absolutely void. They cannot be ratified
even by unanimous vote by all the shareholders. But the acts beyond the
articles can be ratified by the shareholders provided the relevant provisions
are not beyond the memorandum.
Q - Write a note on:
i)
‘Shelf Prospectus’.
Ans. Shelf
Prospectus (Section 31)
“Shelf
prospectus” means a prospectus in respect of which the
securities or class of securities included therein are issued for subscription
in one or more issues over a certain period without the issue of a further
prospectus- Explanation to Section 31.
Sub section (1) of Section
31 provides that a ‘Shelf prospectus’ may be issued by any class or classes of
companies as the Securities and Exchange Board (SEBI) may provide by
regulations in this behalf. Raising finance from the public by means of various
securities is a time consuming process. Every time any such issue comes, a
fresh prospectus is required to be filed. Although it is a repetitive matter,
the procedural aspects take a lot of time. In order to minimise the burden on
such institutions, ‘shelf prospectus’ has been introduced. The validity period
of a ‘shelf prospectus’ cannot exceed one year from the date of opening of the
first offering of securities under that prospectus. For subsequent offerings,
information memorandum updating the information under the various heads will
have to be filed and entire set comprising of shelf prospectus and the
information memorandum shall constitute the prospectus and have to be
circulated to the general public. The
provisions of Section 31, in this regard, are as follows:
i)
A shelf prospectus may be issued by any
class or classes of companies as the Securities and Exchange Board of India
(SEBI) may provide by regulations in this behalf.
ii)
A company filing a shelf prospectus with
the Registrar shall not be required to file prospectus afresh at every stage of
offer of securities by it within the period of its validity which cannot be
more than one year.
iii)
A company filing a shelf prospectus shall
be required to file an information memorandum on all material facts relating to
new charges created, changes in the financial position as have occurred between
the first offer of securities, previous offer of securities and the succeeding
offer of securities within such time as may be prescribed, prior to making of a
second or subsequent offer of securities under the shelf prospectus.
iv)
An Information Memorandum shall be issued
to the public along-with shelf prospectus filed at the stage of the first offer
of securities. Information memorandum together with the shelf prospectus shall
be deemed to be a prospectus.
ii)
Red herring Prospectus.
Ans. Section 32 of the Companies Act, 2013
contains the following provisions with respect to ‘red herring prospectus’:
1. A company proposing to
make an offer of securities may issue a red herring prospectus prior to the
issue of a prospectus. “Red herring prospectus” means a prospectus which does
not include complete particulars of the quantum or price of the securities
included therein.
2. A company proposing to
issue a red herring prospectus shall file it with the Registrar at least three
days prior to the opening of the subscription list and the offer.
3. The red-herring
prospectus shall carry same obligation as are applicable in the case of a
prospectus.
4. Any variation between
the red herring prospectus and a prospectus shall be highlighted as variations
in the prospectus.
5. Upon the closing of the
offer of securities, the prospectus stating therein:
o
the total capital raised, whether by way of
debt or share capital,
o
the closing price of the securities, and
o
any other details as are not included in
the red herring prospectus shall be filed with the Registrar and the Securities
and Exchange Board of India
Q – State the Meaning &
Types of Share Capital.
Ans. You know that to carry on any business,
some money is needed, usually called ‘capital’. In the case of a company where
large amount of money is required, it is raised by issue of shares. The amount
so raised is called the ‘share capital’ of the company.
A company having share capital should state its amount
of share capital in the Memorandum of Association. The capital clause of the
Memorandum of Association states the amount of capital that the company may
raise during its lifetime unless it is increased. It’s called authorized
capital or nominal capital. The authorized capital is divided into specified
number of shares of a fixed amount. For example, the authorized share capital
of a company may be divided into shares of Rs.10 each. The persons contributing
towards the share capital are known as ‘shareholders’. You should note that the
money borrowed by the company by issuing debentures, is not part of the share
capital of the company. It is in the form of a long-term loan to the company.
In view of the stages involved in collecting the money
on shares, the share capital of a company may be classified as follows:
1)
Nominal or Authorised Capital: It refers to the amount
stated in the Memorandum of Association as the capital of the company with
which it is to be registered. This is the maximum amount of capital which a
company is authorised to raise by issuing the shares. This is also known as
‘registered capital’, as this is the amount of capital with which the company
is registered. This amount is divided into shares of a fixed amount. It can be
increased by adopting the prescribed legal procedure.
2)
Issued Capital: It is that part of the authorised capital
which is issued to the public for subscription. It is not necessary for a
company to issue all the nominal capital in the beginning itself. In fact, the
term ‘issued capital’ means that part of the share capital which has been
actually issued or offered by the company. The balance of nominal capital
remaining to be issued is called ‘unissued capital’.
3)
Subscribed Capital: It is that part of nominal value of issued
capital which has been actually subscribed by the public. In other words, it is
that part of issued capital for which the applications have been received from
the public and shares allotted to them. A company cannot accept for
subscription an amount greater than the issued amount. Where the shares issued
for subscription are wholly subscribed, issued capital will be the same as the
subscribed capital.
4)
Called-up Capital: It is that part of nominal value of
issued capital which has been called-up or demanded on the shares by the
company. Many times, a company does not collect the full amount on shares it
has allotted. It collects it in installments known as application money,
allotment money, first call, second call and so on. The amount of installments
which have been demanded for the time being are termed as ‘called-up capital’
and the amount not yet demanded is termed as ‘uncalled capital’ and the
shareholders continue to be liable to pay this amount as and when called.
5)
Paid-up Capital: It is that part of the called-up capital
which has actually been received from the shareholders. For example, a company
has calledup Rs.5 lakhs, but it has actually received Rs.4,90,000 then
Rs.4,90,000 is the paid-up capital of the company. The amount not paid in
respect of allotment and calls made is known as ‘calls in arrears’. In the
above example, Rs.10,000 is the amount of calls in arrears. In case there are
no calls in arrears, the paid-up capital will be the same as the called-up
capital
Q – Difference between
Preference Share and Equity Share.
Ans. Difference
between Preference Share and Equity Share
1) Preference shares are entitled to a fixed
rate/amount of dividend. The rate of dividend on equity shares depends upon the
amount of net profit available after payment of dividend to preference share-holders
and the fund requirements of the company for future expansion, etc.
2) Dividend on the preference shares is paid in
preference to the equity shares. In other words, the dividend on equity shares
is paid only after the preference dividend has been paid.
3) The preference shares have preference in relation to
equity shares with regard to the repayment of capital on winding-up.
4) If the preference shares are cumulative, the
dividend not paid in any year is accumulated and until such arrears of dividend
are paid, equity shareholders are not paid any dividend. 5) Redeemable
preference shares are redeemed by the company on expiry of the stipulated
period, but equity shares cannot be redeemed.
6) The voting rights of preference shareholders are
restricted. An equity shareholder can vote on all matters affecting the company
but a preference shareholder can vote only when his special rights as a
preference shareholder are being varied or on any resolution for the winding up
of the company or for the repayment or reduction of its equity or preference
share capital or where preference shares dividend is in arrears for at least
two years.
7) A company may issue rights shares to the company’s
existing equity shareholders whereas it is not so allowed in case of preference
shares (Section 62).
Q – Distinguish between Share
& Debenture.
Ans.
DIFFERENCE BETWEEN A SHARE AND A DEBENTURE
The points of distinction between ‘share’ and
‘debenture’ may be noted as follows:
1. A holder of a share is a member of the company. A
debenture-holder, on the other hand, is a lender to the company.
2. A shareholder has a right to vote. A
debenture-holder does not enjoy such a right. Sub-section (2) of Section 71 of
the Companies Act, 2013 declares that no company shall issue any debentures
carrying voting rights.
3. Income on shares depends on the profits.
Shareholders are entitled to get dividend only out of profits. Debenture
holders are entitled to a fixed rate of interest which the company must pay
irrespective of profits, i.e., profits or no profits.
4. Shareholders cannot be paid back (except in case of
redeemable preference shares) until its winding-up. Debenture holders may be
paid back on the expiry of the specified time.
5. In the event of winding-up, shareholders cannot
claim payment unless all outside creditors have been paid in full. Debenture
holders, normally, being secured lenders, have prior claim for repayment.
6. Dividend on shares is not a charge against profit.
Interest on debentures, on the other hand, is a charge against the profits and
is deducted from revenues for the purpose of calculating tax liability.
Q – Explain in brief transfer
of shares held under Depository mode.
Ans. The Depositories Act, 1996 provides for an
alternate mode of effecting transfer of shares. Investors, however, have the
choice of continuing with the existing share certificates (i.e., in physical
form).
As per the
available statistics at BSE and NSE, 99.9% transactions take place in
dematerialised mode only. Therefore, in view of the convenience of trading in
dematerialised mode, it is advisable to have a beneficial owner (BO) account
for trading at the exchanges.
Benefits of Dematarialisation (Demat) The benefits of
Demat are enumerated below:-
· A
safe and convenient way to hold securities;
· Immediate
transfer of securities;
· No
stamp duty on transfer of securities;
· Elimination
of risks associated with physical certificates such as bad delivery, fake
securities, delays, thefts etc.
· Reduction
in paperwork involved in transfer of securities;
· Reduction
in transaction cost
· No
odd lot problem, even one share can be traded;
· Nomination
facility;
· Change
in address recorded with depository participant (DP) gets registered with all
companies in which investor holds securities electronically eliminating the
need to correspond with each of them separately;
· Transmission
of securities is done by DP eliminating correspondence with companies;
· Automatic
credit into demat account of shares, arising out of bonus/split/
consolidation/merger etc.
· Holding
investments in equity and debt instruments in a single account.
The Depositories Act, 1996 provides for the
establishment of one or more depositories. Every depository will be required to
be registered with the SEBI and receive a certificate of commencement of
business on fulfilment of such conditions as may be prescribed. At present two
Depositories, viz. National Securities Depository Limited (NSDL) and Central
Depository Services (India) Limited (CDSL) are registered with SEBI. Investors
opting to join the system will be required to be registered with one or more
participants who will be agent for depositories. The participants will be
custodial agencies like banks, financial institutions as well as large
corporate brokerage firms. Upon entry into the system, share certificates
belonging to the investor will be dematerialised and their names entered in the
books of participants as beneficial owners. The investors’ names in register of
companies concerned will be replaced by the name of the Depository as the
registered owner of the securities. The investors will, however, continue to
enjoy the economic benefits, from the shares as well as voting rights on the
shares concerned. Investors are called as the beneficial owners under this system.
Q – Explain methods of
becoming a Membor & Termination of a Member ?
Ans. MODES
OF BECOMING A MEMBER
A person may become a member in a company in any of the
following ways:
1)
By subscribing to the memorandum: A signatory to the
memorandum automatically becomes a member of the company on its incorporation.
Neither application nor allotment of shares is necessary to constitute them
members of the company. Even if his name is not entered in the register of members,
he will still be treated as a member of the company.
2)
By application and allotment of shares: A person who agrees in
writing to become the member of the company and whose name is entered in the
Register of Members is also a member of the company. An application for shares
is an offer to take shares and allotment is the acceptance of that offer. The
rules regarding offer and acceptance (Law of Contract) are applicable. Thus, if
a person applies for shares subject to certain conditions, the allotment by the
company must be made according to those conditions; otherwise the allottee
shall not be bound to accept the shares.
3)
By transfer of shares: You know that the shares of a public
company are freely transferable. Thus, a person may buy shares in the open
market and get those shares registered in his name. On the registration of
transfer of shares, transferee becomes the member of the company.
4)
By transmission of shares: A person may become a member by
operation of law i.e. transmission. On the death of a member, his nominee/legal
representatives have the right to get the shares of the deceased member
registered in his/their names. No instrument of transfer is necessary in this
case.
5)
By estoppels/holding out: This arises when a person holds
himself out as a member or knowingly allows his name to remain on the register
when he has actually parted with his shares. In the event of winding-up, he
will be liable, like other genuine members as a contributory (Hans Raj v.
Asthana). But in view of the rule laid down in Section 2(55) of the Companies
Act that the person must agree in writing to be a member, a person cannot be
treated as a member of a company simply because his name is entered in the
register of members. Thus, he enjoys no rights of a member though he may be
held liable as a member. However, he may escape liability by applying to
Tribunal for rectification of register of members under section 59.
TERMINATION
OF MEMBERSHIP
You learnt that a person becomes a member of a company
when his name appears in the Register of Members. Accordingly, a person ceases
to be a member of a company when his name is removed from the Register of
Members. A person may cease to be a member in any one of the following ways:
1)
Transfer of Shares: When he transfers his shares to another
person and the transfer is duly registered by the company, the name of the
transferor is removed from the Register of Members.
2)
Transmission of Shares: On the death of a member, his shares
get transmitted to his nominee/legal representatives.
3)
Forfeiture of Shares: Shares may be forfeited for non-payment of
calls and other reasons contained in the articles. The membership terminates on
share forfeiture.
4)
Surrender of Shares: When a member validly surrenders his
shares to the company, he ceases to be a member.
5)
Insolvency of Member: When a member is declared insolvent, his
shares vest in the Official Receiver or Official Assignee. The Assignee or
Receiver may sell these shares and when the transferee’s name is entered in the
Register of Members, insolvent member cases to be a member.
6)
Winding up of Company: Membership terminates on the
winding-up of the company, but he continues to be liable as a contributory.
7)
Repudiation of Contract: If he repudiates the contract to take
shares on the ground of misrepresentation or mistake in the prospectus or on
the ground of irregular allotment.
8)
Enforcement of Lien: When the company has a lien on the shares
and the shares are sold by the company to enforce this lien or if the shares
are sold in the execution of a decree of the court, the membership terminates.
9)
Redemption of Shares: If a member is holding redeemable
preference shares, then on their redemption his membership terminates.
10)
Tribunal’s Order: When the Tribunal passes an order for the
purchase of shares of a member under Section 242 of the Companies Act, his
membership terminates.
Q – Discuss the duties of
directors.
Ans.
DUTIES OF DIRECTORS
You have learnt that directors of a company occupy an
important position in the management of the company and they have vast powers.
However, it is expected of them to exercise these powers for the public good
and protect and safeguard the interests of the company and shareholders.
The duties of directors depend upon the nature and size
of the company. While discharging their duties, they must comply with the
provisions of the Articles 271 and the Companies Act. The duties given in the
Articles will certainly vary from company to company.
The duties of directors can broadly be classified under
the following two heads:
1) Statutory duties; and
2) General duties
Statutory
Duties
Some of the statutory duties of directors are:
a) To file return of allotments (Section 39) –
Directors are under a statutory obligation to file with the Registrar, within a
period of 30 days, a return of the allotments stating the specified
particulars.
b) To disclose interest (Section 184) - A director who
is interested in a transaction of the company must disclose his interest to the
Board. The disclosure must be made at the first meeting of the Board held after
he has become interested.
c) To disclose receipt from transfer of property
(Section 191) - Any money received by the directors from the transferee in
connection with the transfer of the company’s property or undertaking must be
disclosed to the members of the company and approved by the company in general
meeting.
d) Duty to attend Board meetings - A number of powers
of the company are exercised by the Board of directors in their meetings held
from time to time. Although a director may not be able to attend all the
meetings but if he absents himself from all the meetings of the Board of
Directors held during a period of twelve months with or without seeking leave
of absence of the Board, his office shall automatically fall vacant [Section
167(1)(b)].
e) To convene Annual General Meeting (AGM) and also
extraordinary general meetings [Sections 96 & 100].
f) To prepare and place at the AGM along with the
financial statements including consolidated financial statement, if any, and
auditors’ report, a report by the Board of Directors covering the specified
particulars (Sections 134).
g) To authenticate annual financial statement including
consolidated financial statement, if any (Section 134). h) To appoint first
auditor of the company (Section 139).
i) To appoint cost auditor of the company (Section
148).
j) To make a declaration of solvency in the case of
voluntary winding-up (Section 305).
It may be noted
that the above is not an exhaustive listing of statutory duties of the Board.
General
Duties
There are some duties of a general nature which every
director must discharge
The following are some of the general duties:
i) Duty of good faith: The directors occupy a fiduciary
position in a company. Fiduciary position means a position of trust and
confidence. Therefore, directors must act honestly and diligently in the
interest of the company and shareholders. They just not make any secret profits
from their dealings with the company. If a director makes some secret profits
by utilising his position, he shall be liable to account for it.
ii) Duty of reasonable care: The directors should
discharge their duties with reasonable care. The degree of care expected from
him is the same as is reasonably expected from persons of their knowledge and
status. If the directors fail to exercise due care and skill in the performance
of their duties, they shall be liable for negligence. But they cannot be held
liable for mere errors of judgement.
iii) Duty not to delegate: The directors must perform
their duties personally. They are appointed because of their skill, competence
and integrity, therefore, the maximum delegatus non potest delegare (a delegate
cannot delegate further) is applicable to them. But if permitted by Articles of
the company, the directors can delegate certain functions to the extent
permitted by the Act of the Articles.
Q – Discuss the statutory and
contractual liabilities of a company secretary.
Ans.
The
liability of a company secretary can be discussed under two headings, namely,
statutory liabilities and contractual liabilities.
Statutory
Liabilities
The company secretary may be held liable for the
following matters under Companies Act :
i)
Default
in filing returns as to allotment - If a default is made in
filing returns as to allotment of shares within the prescribed time, he shall
be punishable with fine which may extend to one thousand rupees for every day
during which the default continues or one lakh rupees, whichever is less
[Section 39(5)].
ii)
Default
in the preparation of share/debenture certificates –
As per section 56(4) the company shall deliver the certificates of all
securities allotted, transferred or transmitted—
a) within a period of two
months from the date of incorporation, in the case of subscribers to the
memorandum;
b) within a period of two
months from the date of allotment, in the case of any allotment of any of its
shares;
c) within a period of one
month from the date of receipt by the company of the instrument of transfer
under sub-section (1) or, as the case may be, of the intimation of transmission
under sub-section (2), in the case of a transfer or transmission of securities;
d) within a period of six
months from the date of allotment in the case of any allotment of debenture:
Where the securities are
dealt with in a depository, the company shall intimate the details of allotment
of securities to depository immediately on allotment of such securities.
In case of default, the
company secretary, as an officer in default, shall be punishable with fine
which shall not be less than ten thousand rupees but which may extend to one
lakh rupees [Section 56(6)].
iii)
Default
regarding Register of members/debenture-holders, etc. –
Failure will make company secretary, if he is in default, punishable with fine
which shall not be less than fifty thousand rupees but which may extend to
three lakh rupees and where the failure is a continuing one, with a further
fine which may extend to one thousand rupees for every day, after the first
during which the failure continues. [Section 88].
iv)
Default
in the filing of particulars regarding charges -
If a default is made in filing with the Registrar the particulars of any charge
created by the company, every officer of the company who is in default which
includes a company secretary shall be punishable with imprisonment for a term
which may extend to six months or with fine which shall not be less than
twenty-five thousand rupees but which may extend to one lakh rupees, or with
both [Section 86].
v)
Default
regarding the publication of name of company -
If a default is made in getting the name and address of the registered office
of the company painted or affixed or printed outside every office or place of
business or printed on all its business letters, bill heads, etc., company
secretary, if he is in default, shall be liable to a penalty of one thousand
rupees for every day during which the default continues but not exceeding one
lakh rupees [Section 12].
vi)
Default
in filing of annual returns - If a company secretary
fails to file the annual return in or a company secretary in practice certifies
the annual return otherwise than in conformity with the requirements of this
section or the rules made thereunder, he shall be punishable with fine which
shall not be less than fifty thousand rupees but which may extend to five lakh
rupees [Section 92].
vii)
Default
in holding annual general meeting - Default in holding
theannual general meeting in accordance with the provisions of sections 96 to
98, shall make him liable to a fine which may extend to one lakh rupees and in
the case of a continuing default, with a further fine which may extend to five
thousand rupees for every day during which such default continues. [Section
99].
viii)
Default
in circulation of members’ resolutions - If a default is made in
circulating members’ resolution of which they have given notice to the company,
he shall be punishable with fine which may extend to Rs. 25,000 [Section 111].
ix)
Default
in registering certain resolutions and agreements - This
default shall be punishable with fine which shall not be less than one lakh
rupees but which may extend to five lakh rupees. [Section 117].
x)
Default
in recording the minutes of the meetings - If a default is
made in recording the minutes of all proceedings of every general meeting and
meetings of the Board, a fine of Rs. 5000 may be levied upon an officer in
default which includes company secretary [Section 118].
xi)
Default
in maintaining minute books or allowing inspection or furnishing copies of
minutes to members - If a default is made in furnishing a copy
of the minutes within seven working days after the date of request by any
member or if inspection is not allowed, he shall be liable for a fine of Rs.
5,000 for each such refusal or default, as the case may be. [Section 119].
xii)
Failure
to give notice of Board’s meeting - A meeting of the Board
shall be called by giving not less than seven days’ notice in writing to every
director at his address registered with the company and such notice shall be
sent by hand delivery or by post or by electronic means. Failure to give notice
will make every officer of the company whose duty is to give notice under this
section (company secretary is such an officer) and who fails to do so shall be
liable to a penalty of twenty-five thousand rupees [Section 173].
xiii)
Failure
to maintain the register of directors and key managerial personnel and their
shareholding – Company secretary in default shall be
punishable with fine which shall not be less than fifty thousand rupees but
which may extend to five lakh rupees. [Section 172].
xiv)
Failure
to maintain register of inter-corporate loans and investments -
For this default company secretary, if he is in default shall be punishable
with imprisonment for a term which may extend to two years and with fine which
shall not be less than twenty-five thousand rupees but which may extend to one
lakh rupees [Section 186].
Apart from the liability
under the Companies Act, a secretary shall be liable for fine and punishment if
he violates the provisions of the Income Tax Act, Indian Stamp Act, Sales Tax
Act and labour and industrial laws.
Contractual
Liabilities
In addition to the various
statutory liabilities, a company secretary has several contractual liabilities
which arise out of his service agreement, they are as follows:
i)
he shall be liable for any loss or damages
caused to the company by willful neglect or negligence in the discharge of his
duties;
ii)
he shall be personally liable if he acts
beyond his authority;
iii)
he shall be liable to account for the
secret profits made by him by virtue of his position as a secretary;
iv)
he shall be liable to indemnify the company
for any loss suffered by the company as a result of disclosure of some secret
information relating to the company;
v)
he shall be liable for any fraud or wrong
done to the company during the course of his employment.
Q – When auditor’s report is
given ? What information is given in auditor’s report.
Ans.
AUDITOR’S REPORT
The auditor has a duty to report to members on the
accounts examined by him and on every financial statements which are required
to be laid before the company in general meeting. The report shall also confirm
that accounting and auditing standards have been followed and matters which are
required to be included have been duly included.
The auditor should report whether to the best of his
information and knowledge the said accounts and financial statements give a
True and Fair view of the state of affairs at the end of financial year and
Profit and Loss and cash flows for the financial year.
The auditor shall include in his report the following:
a) Whether he has sought and obtained all the
information and explanations which to the best of his knowledge and belief were
necessary for audit.
b) Whether in his opinion, proper books of account as
required by law have been kept by the company so far as appears from his examination
of those books and proper returns adequate for the purpose of his audit have
been received from branches not visited by him.
c) Whether the report on accounts of any branch office
audited under section 143 (8) by a person other than company’s auditor has been
sent to him and how he has dealt with the same in preparing auditor’s report.
d) Whether company’s Balance Sheet and Profit and Loss
Account dealt with in the report are in agreement with books of account and
returns.
e) Whether the report the Profit and Loss Account and
Balance Sheet have complied with accounting standards.
f) The observations and comments of the auditor on
financial transactions or matters which have any adverse effect on the
functioning of the company.
g) Whether any director is disqualified from being
appointed as director.
h) Any qualification, reservation or adverse remarks
regarding maintenance of accounts and other matter connected therewith.
i) Whether the company has adequate internal financial
controls with reference to financial statements in place and operative
effectiveness of such controls.
j) Other matters to be reported :
i) Whether the
company has disclosed the impact, if any, of pending litigation on its
financial position in its financial statements.
ii) Whether the company has made provisions as required
under any lower accounting standards for material foreseeable losses, if any,
on long term contracts including derivatives contracts.
iii) Whether there has been any delay in transferring
amounts required to be transferred to Investors Education and Protection Fund
by the Company (Section 143)
Q – What are the requisites
of a valid meeting?
Ans.
REQUISITES OF A VALID MEETING
The decisions taken at the general meeting shall be
valid and binding only if the meeting itself has been properly called and
conducted. Any irregularity in calling or conducting the meeting shall
invalidate the proceedings of the meeting. The company meetings must be
conducted in accordance with the rules and regulations laid down in the Act and
the Articles of Association. The following are the requisites of a valid
meeting:
1) Proper Authority:
The meeting shall be valid only when it is called by a proper authority. The
proper authority to convene the meeting is the Board of directors. The Board of
Directors should pass a resolution at its meeting to call the general meeting,
otherwise the notice calling the meeting will become invalid and the
proceedings of the company shall not be effective (Harban vs. Phillips). Thus,
a notice issued by the secretary without the authority of a resolution of the
board is patently invalid.
Though the Board of directors is the authority to
convene a general meeting, but under certain circumstances the meeting may be
called by requisitionists or by the Tribunal.
2)
Proper Notice: ‘Notice’ means an advance intimation of
the meeting so as to enable the person concerned to prepare himself for it. A
proper notice should be given to every member, legal representative of every
deceased member, the assignee of an insolvent member; auditors and directors of
the company. The notice must be clear and should state the purpose for which
the meeting is called. The notice must either be in writing or through
prescribed electronic mode. It must be given at least 21 clear days before the
date of the meeting.
You should note that deliberate omission to serve
notice to one or more members will invalidate the meeting. But an accidental
omission will not render the meeting invalid. Similarly, the non-receipt of the
notice will not affect the validity of the meeting. The notice must state the
place, date, day and hour (i.e., time) of the meeting.
3)
Quorum: Quorum means the minimum numbers of members whose
presence is necessary at the meeting for transacting the business of the
company. In the absence of a quorum, no meeting can be held. Any resolution
passed at a meeting without quorum shall be invalid.
4)
Chairman: Every general meeting of the company should be
presided over by a chairman. The chairman has to be there to conduct the
meeting in a proper and smooth manner. The Articles usually provide the mode of
appointment of the chairman of a meeting.
If the Articles do not provide otherwise, the members
who are personally present at the meeting shall elect one of themselves to act
as the chairman of the meeting. The chairman should act bonafide and in the
interest of the company, he must act in an impartial manner.
5)
Properly Conducted: It is essential that the business at the
meeting must be conducted according to rules. Company meetings are held for
discussing particular issues relating to the company’s working and taking a
decision on the same. The matter should be placed in the form of a resolution,
it should be discussed thoroughly, amendments to it should be carefully
considered and then it should be decided by voting by show of hands or poll.
6)
Proper Record: A proper record of the proceedings should
be kept in the Minutes Book. Every company is required to maintain minutes of
the proceedings of every general meeting and meetings of the Board and its
Committees. When the minutes are confirmed and signed by the chairman, they are
acceptable in a court of law as evidence of the proceedings.
Q – What do you mean by
‘quorum’? What happens if there is no quorum at a meeting?
Ans.
QUORUM FOR MEETINGS
A quorum is the
minimum number of persons who must be present in order to constitute a valid
meeting. If the quorum is not present, the meeting shall not be valid and the
business transacted at such meeting will be invalid. The main purpose of having
a quorum is to avoid decisions being taken at a meeting by a small minority
which may not be acceptable to the vast majority of members.
Generally, the quorum is fixed by the Articles of the
company. According to Section 103 of the Companies Act, 2013 unless the
Articles provide for a larger number,
a)
In case of a public company,—
i) five members personally present if the number of
members as on the date of meeting is not more than one thousand;
ii) fifteen members personally present if the number of
members as on the date of meeting is more than one thousand but up to five
thousand;
iii) thirty members personally present if the number of
members as on the date of the meeting exceeds five thousand.
b)
In the case of a private company, two members personally
present, shall be the quorum for a meeting of the company.
If within half an hour from the time appointed for
holding a meeting of the company, a quorum is not present, the meeting, if
called upon the requisition of members, shall stand dissolved [Section 174(3)].
In any other case, if there is no quorum within half an
hour from the time fixed for holding the meeting, the meeting shall stand
adjourned to the same day in the next week, at the same time and place, or to
such other day and at such other time and place as the Board may determine and
notify.
If at the adjourned meeting also, there is no quorum
within half an hour from the time appointed for holding the meeting, then the
members present shall form the quorum. But you must remember that there must be
at least two persons to hold the meeting.
According to Regulation 44 of Table F, the quorum must
be present at the time when the meeting begins and proceeds, to take up
business. It means that the quorum must be present at the beginning of the
meeting and it need not be present throughout or at the time of taking votes on
any resolution. But as regards the meetings of the Board of directors, the
quorum must be present throughout the meeting. You should note that a quorum is
presumed unless it is questioned at the meeting.
Q – “Dividend cannot be paid
by a company except out of profit”. Discuss.
Ans.
SOURCES OF DIVIDEND
The dividend may be paid:
i) Out of profits of current financial year after
deducting depreciation in accordance with provisions of Schedule II or
ii) Out of profits for any previous financial year or
years arrived at after providing for depreciation as per schedule II and
remaining undistributed or out of the reserves or
Out of Both (i) and (ii)
But in computing profits any amount representing
unrealised gains, notional gains or revaluation of assets and any change in
carrying amount of an assets or of a liability on measurement of the asset or
liability at fair value shall be excluded or
iii) Out of money provided by Central or State
Government for payment of dividend by the company in pursuance of a guarantee
given by that government.
a.
Provided the company may, before
declaration of dividend in any financial year, as it may consider appropriate
transfer such percentage of its profits to the Reserves.
b.
Provided due to inadequate or absence of
profits in any financial year, any company proposes to declare dividend out of
accumulated profits earned by it in previous years and transferred by company
to the free reserves, such declaration shall be made according to rules framed
by Central Government
Declaration
of Dividend
i)
No Dividend shall be declared or paid by a
company from its reserves other than free reserves.
ii)
A company shall not declare dividend unless
carried over previous losses and deprecation not provided in previous year or
years are set off against profits of the company of the current year.
iii)
A company which fails to comply with
provisions of Section 73 and 74 (acceptance and repayment of public deposits)
shall not, so long as such failure continues, declare any dividend on its equity
shares.
iv)
In case of preference shares, under Section
43(a), payment of dividend, either a fixed amount or an amount calculated at a
fixed rate, which may either be free of or subject to income tax, be paid
before equity shares.
v)
The company in annual general meeting may
declare dividend, but no dividend shall exceed the amount recommended by the
Board (Table F(80). However a company which could not declare dividend at an
annual general meeting may do so at a subsequent general meeting
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