Company law

UNIT -11

Introduction :-Company law is the

branch of law which deals with the
management,regulation,incorporation and other
concerns of companies.Anyperson who want to
carry on any business he can do it either by
himself alone or with the help of others. When
several people do any business they have choice
to carry out it as partnership firm or as
company.The partnership is suitable for small
enterprise or small scale business so when
business is to start at large scale which requires
huge financial resources and which can not be
fulfilled by few people then company becomes
necessity and moreover company provides better
flexibilities as compared to other business
methods.As a result huge number of companies
have come into existence.Company law is
mainly concerned with the following
objectives:-
a.To confer legal status and sanctity to
companies.
b. To fix minimum standards of business
integrity and conduct in the promotion and
management of companies.
c. To protect the legitimate interest of the
shareholders by ensuring effective participation
and control by them.
d.To prevent misconduct and malpractices on
the part of companies and abuse of powers
vested in them by the general body of
shareholders.
e. To enforce proper performance of duties by
persons responsible for the management of the
companies.
f. To empower the govermment to intervene and
investigate into the affairs of the company where
the business of the company or the general
public.
 CORPORATE PERSONALITY
From legal point of view persons are of two
kinds,first ,natural persons and second are legal
persons.we all are aware about natural persons
as we ourselves who do all functions but legal
persons do not breathe or move like us even due
to legal and social requirements they are deemed
persons like us.Company is a legal person.Legal
persons are created by law and they can be
diminished only by law.For the proper running
of legal functions law creates these legal
functions as Hindu Idol,State,Crown President
of India etc.These legal persons have rights and
duties though sometimes they do not perform
these functions themselves but with the help of
others as company does its functions with the
help of its management,directors etc.But despite
this company has its own independent and
separate legal personality.
Company is also known as corporate personality
because company is engaged in commercial and
business activities.So company’s legal
personaliy is called corporate personality.
Under section-3(1)(i) of Companies Acts,1956
company has been defined as
“Company means a company formed and
registered under this Act or an existing
company”
In general sense company may be defined as
“A company is a voluntary association of
persons formed to achieve some common
objectives,having a separate legal
entity,independent and separate from its
members,with a perpetual succession and a
common seal and with capital divisible into
transferable shares.”

INCORPORATION OF COMPANY:-A
company is regarded as a legal person which has
rights and duties at law so it can do every thing
like a natural person but before become legal
person company is required to be registered
properly as per law.This procedure of
registrationof a company is called incorporation
of a company.So Incorporation of a company is
a process by which company registered and
become a legal separate and independent
person.Incorporated company becomes
corporate personality.
As we know that company is better in many
respects than partnership firm or other business
methods but these betterments are available only
when company is properly incorporated meaning
thereby Incorporation of a company has many
advantages.
Characterstics or advantages of
incorporation:-

1.INDEPENDENT CORPORATE EXISTENCE

The most significant characterstic of
incorporation is company’s independent legal
existence separate from its members.It has its
own name and identity.In a landmark decision in
this regard in case of SALOMAN Vs SALOMON
&CO.LTD.(1897).
Facts of the case:-One Mr. Salomon was
running a business of shoe manufacturing he
transformed his business into a company named
Salomon and co.ltd.This company took over all
his earlier business.Members of company were
Mr. salomon,his wife,four sons and his
daughter.In Board of directors Mr.salomon and
his two sons. Earlier business of salomon was
transferred to this company for 40000 pound.In
payment of this consideration,Salomon took
20000shares of one pound each and debentures
worth 10000pound with a charge created in his
favour on the asset of the company.Due to trade
depression company went into liquidation.On
winding up company assets of the company were
6000 pound and liabilities amounted to 17000
pound out of which 10000 pound were of
salomon as secured credit and rest was
unsecured debt.After paying salomon nothing
was left with the company to pay the unsecured
creditors.Unsecured creditors filed a suit
contending that company never had separate
existence because
-It was being run by one family members.
-Most of the share and debentures were being
held by salomon’s family members. it was not a
company but a family business so when
company and its members are same how
company can pay to itself while unsecured
creditors are separate so they should pay firs.
House of Lord decided as soon as company is
properly incorporated it becomes an independent
and separate personality from its members.Here
mr.salomon and his company both were
different so as secured creditors he was entitled
to receive the payment firs.Thus principles laid
down in this case were:
1.company has its independent and separate
personality.
2.One person and company does not becomes
one person merely because that person is having
most of the shares.
Q. what do you mean by oppression and
mismanagement? Explain the power and
procedure to prevent it through central
government as well as of central company law
tribunal?
Ans. Oppression is said when essence of the
matter seems to be that the conduct complained
of should at the lowest,involve a visible
departure from the standards of fair dealing and
violation of the conditions of fair play on which
every shareholders who entrusts the money to
the company is entitled to rely.”
Thus a compalaining member must be under a
burden which is unjust and harsh or tyrannical.
Therefore,it is necessary to proves a persistent
unjust conduct on the part of majority
shareholders and isolated acts of oppression will
not normally be sufficient to justify relief.The
central government may however may authorize
any member or members to apply to the
company law tribunal even without fulfilling the
requirements of section 397 or 398. and may
before granting such authoritry require such
member or members to give security. No prior
notice is necessay to the company concerned
because the nature of this function of the central
government is purely administrative and not
quasi-judicial.
INSTANCES OF OPPRESSION
1.DEPRIVATION OF MEMBERS OF THEIR ORDINARY
MEMBERSHIP RIGHTS:When company functions in such a way
that it is resulted into deprivation of rights of members then
members suffered can apply to the court for appropriate relief
under section 397.
2.REMOVING A MEMBER FROM DIRECTORSHIP:
SOMETIMES, A MEMBER IS REMOVED FROM
AUDITORSHIP OF THE COMPANY WITHOUT ANY
JUSTIFICATION. In such cases the act of the company as a matter
of fact is an instance of oppression and the person suffered may go
to the tribunal for the appropriate relief.
3.REFULSAL TO REGISTER THE TRANSFER OR
TRANSAMISSION OF SHARES IN AN UNREASONABLE
MANNER:If company refuses unreasonably to register the transfer
or transmission of shares in favour of a person.In such cases the act
of the company amounted to oppression and the aggrieved person
may apply to the tribunal for appropriated relief.

4.PERSISTENT DISREGARDING THE DECISION OF THE

BOARD IN ORDER TO GAIN CONTROL OVER COMPANY’S
AFFAIRS:Sometimes the majority shareholders having control
over company’s affairs persistently disregard the decisions of the
board and make it impossible for the company to apply to the
tribunal for appropriate relief.
5.FORCING NEW AND MORE RISKY OBJECTS UPON AN
UNWILLING MINORITY : If the majority shareholders try to
force force new and more risky object upon the minority
shareholders against their wil. In such cases the acts of the majority
amount to oppression and any member may apply to the tribunal
for appropriate relief under section 397.
6. OMISSION TO DO SOMETHING WHICH IS OTHERWISE
JUST TO DO FOR PROTECTING COMPANY’S INTEREST:If
the shareholders do nothing to protect the interest if the company
when they ought to do something.In such cases, the omission on
the part f the majority amounts to oppression,and any member may
apply to the tribunal for appropriate relief under section397.

INSTANCES OF MISMANAGEMENT
1.INFIGHTING AMONG DIRECTORS RESULTING IN
SERIOUS LOSSES TO THE COMPANY:Sometime due to
infighting among directors,the directors do not take any interest in
the affairs of the company.In such cases,the attitude of the
directors amounts to mis-management if such a non-antion on
directors part adversely affects company’business and the
company suffers losses.The members may apply to the tribunal for
appropriate relief under section 398.
2.CONTINUATION IN OFFICE-BY THE MANAGING
DIRECTORS AFTER THE EXPIRY OF THEIR TERM:
In the managing director of the company continue in office even
after the expiry of their terms and no meeting is held to reappoint
them. In such cases,the continuation if office under these
conditions amounts to mismanagement. And the members may
apply to the tribunal for appropriate relief under section 398.
3.Where the directors prefereed objects of their liking and made a
huge allotment of shares for consideration other than cash,this was
held to be a maismanagement of company’s affairs.
4.Where there were only two directors in a private company and
one was keeping the other totally in the dark about the affairs of
the company,this was held to be a mismanagement of company,s
affairs.
5.Where the controlling group in power was conspiring to defraud
the members,this was also held to be a mismanagement of
company,s affairs.
6.Where a company had no record,registers etc.whatsoever,it was
held to be a case of mismanagement.
PERSONS WHO CAN APPLY TO PREVENT OPPRESSION
AND MISMANAGEMENT
As mentioned above aggrieved person can apply to Natinal Law
Tribunal for the appropriate relief.The requisite number of
members may apply to the tribunal for the prevention of
oppression or mismanagement. According to section-309 of the
Companies Act,1956-
i.In case of a company having a share capital,the application must
be made by
a.at least 100 members,or by at least 1/10th of the total number of
its members,or
b.any member or members who hold at least 1/10th of the issued
share capital of the company provided that the applicats have paid
all calls and other sums due on share.
ii.In the case of a company not having a share capital, the
application must be made by at least 1/5th of total number of
members.
But if central government thinks it appropriate then it can allow to
less number of people then abovementioned.
POWERS OF THE NATIONAL COMPANY LAW TRIBUNAL
It may be noted that the powers of the tribunal in this regard are
very wide.The tribunal may make any order for the regulation of
the conduct of company’s affairs on such ters and condtions as it
thinks just and equitable in all the circumstances of the case.
Under section-402 Tribunal may make any of the following order
1.The regulation of the conduct of the company’s affairs in future.
2. The purchase of the shares or interest of anhy members of the
company by other members of the company or by the company
itself.In the case of a purchase of its shares by the company the
consequent reduction of its capital.
3.The termination,setting aside or modification of any agreement
between the company and any of the following persons,namely any
director,the manager,or the managing director.
4.The termination setting aside or modification of any agreement
between the company and other person. However, this can be done
only after giving a due notice to the party concerned.
5.The setting aside of any fraudulent preference made within 3
months before the date of the application. The fraudulent
preference means any payment,transfer of goods or other acts done
with the intention of defrauding the creditors.
POWERS OF THE CENTRAL GOVERNMENT
The central government may exercise following powers to prevent
oppression and mismanagement:
1POWER TO APPOINT DIRECTORS:section-408 On the
recommendation of the Tribunal the central government may
appoint directors to prevent the oppression and
mismanagement.The Government makes the appointment of
directors if the tribunbnal specifies in writing as being necessary to
effectively safeguard the interest of the company, or its
shareholders,r the public interest.The appointment can be made for
a period not exceeding 3 years at a time.
2.POWER TO PREVENT CHANGE IN THE BOARD OF
DIRECTORS SEC-409, The tribunal has also the power to
prevent any proposed change in the board of diretors which is
likely to affect prejudicially the affairs of the company. This power
can be exercised by the Tribunal on a complaint by the director,or
the managing director or the manager of the company.On receipt
of a complaint that a change in company’s board of directors is
likely to take place which would affect the company prejudicially
the tribunal may make the necessary enquiry and if satisfied ,may
direct that no change in the board of directors after the complaint
shall have the effect unless confirmed by the tribunal.
NOTE: Prior to amendment in companies’Act 1956 power of
under section 409 were vested in company law board but now in
National company law tribunal.
 CHARGES:AND ITS KINDS
MEANING OF CHARGE: A charge may be defined as a security
given for securing loans or debentures by a mortgage on the assets
of a company. The power of a company to borrow money also
includes power to give security. Generally, the debentures and
other borrowings of a company are secured by a charge on its
assets. A charge is created when a property whether existing or
future, is agreed to be made available as a security for the
repayment of debt. However, the creditor gets no legal right over
the property so charged but only gets a right to have the security
made available by an order of the court in the event of non-
payment of debt.According to section-124 a charge includes a
mortgage. It also includes a lien whenther created by a written
instrument or by the deposit of tittle deed.
KINDS OF CHARGE
1. FIXED OR SPECIFIC CHARGE: A charge is fixed or
specific when it is made specifically to cover assets which
are ascertainable and definite at the time of creating the
charge. As land,buildings, etc.A fixed charge is
therefore,against securtity of certan ascertainable specific
property. The company’s right to dispose off the property
during that period is temporarily suspended. In the event of
winding up of the company a debenture holder or a creditor
secured by a fixed or specific charge shall be placed in the
highest class of creditors.
2. FLOATING CHARGE: A floating charge, on the other hand
is not attached to any definite property but covers property
which is of a fluctuating nature such as stock in trade. It is an
equitable charge on the assets for te time being of a going
concern.
CHARACTERSTICS OF FLOATING CHARGE:
The main characterstics which distinguishes it from a fixed charge
are following;
i.It should be a charge upon a class of assets both present
andfuture.
ii.The class of assets charged must be one which in the oredinary
course of business of the company would be changing from time to
time.
iii. It should be codntemplated by the charge that until some step is
taken by the mortagagee, the company shall have the right to use
the assets in the ordinary course of business.
CRYSTALLISATION OF FLOATING CHARGE
A floating charge generally remains dormant till it cystallises or
becomes a fixed charge.A floating charge cystallises into a fixed
security under the following circumstances.
i.When company goes into liquidation.
ii.When company ceases to carry on business
iii.When debentures-holder or creditors take steps to enforce this
security
iv. On happening of an event specified in the deed.

BORROWING POWERS OF THE COMPANY

As a matter of fact finance is the life blood of the company.It
requires money to finance its business and carry on its activities
properly.These financial needs of the company are met by two
ways i.e.
i.By issue of shares
ii. By public biorrowings.
EXTENT OF BORROWINGS:
I.Borrowing by trading company: The trading companies are those
which carry on the trading business i.e. which deal in the buying
and selling goods. Such companies has implied powers to borrow
money for the purpose of their business. Thus, it is not necessary
that these companies must be authorized by their memorandum of
association to borrow money.
II. Borrowing by non-trading companies: The non-trading
companies are those which do not deal in the buying and selling of
goods i.e. companies of professional etc. Such companies have not
implierd powers to borrow money. These companies can borrow
only if they are authorized by their memorandum of
association.The maximum amount to be borrowed may also be
fixed in companies article of association. Where as company has to
the express or implied power to borrow money. The Borrowing
power is exercised by its directors by means of a resolution passed
at the meeting of the board of directors.
1.AUTHORISED BORROWING: The authorized borrowings
means the money borrowed within the powers given by the
memorandum of association of the company. Such borrowing are
valid and company is liable for the repayment of the same.
2.UNAUTHORISED OR ULTRA-VIRES BORROWING:These
are the borrowing which are without any express or implied
authority i.e. which are beyond the powers of the company.These
are following;
i. Where the company has no borrowing power, any borrowing will
be ultra-vires the companay.
ii. Where the memorandum of association fixes a limiot to the
borrowing powers of the company, any borrowing in excess of
such limit will be ultra-vires the company.
CONSEQUENCES OF ULTRA-VIRES BORROWING:
The ultra-vires borrowings are void and unenforceable. The lender
of money has no legal or equitable debt against the company.Yet
he has following reliefs against the company:
i. INJUNCTION: The injunction means a court order
restraining a person from doing particular thing.If the
money lent has not been spent by the company the lender
of money can file a suit for injunction to restrain the
company to spend that money to get back.
ii.SUBROGATION:The subrogation means the substitution of
one person for another person. If the unauthorized borrowed
money as been used by the company in paying off its lawful
debts the lender will be subrogated to the rights of the creditors
who were paid off.Thus, he will rank as a creditor of the
company upto the amount used by the company in paying off
its debts, and can recover such money from the company.
iii. IDENTIFICATION AND TRACING:Sometimes the
unauthorized money is used by the company for the
puchase of some property, or is in its hands in the original
form. In such cases, the lender may claim the property or
money if it can be identified and traced in the possession
of the company.
iv. RECOVERY OF DAMAGE: The lender may file a suit
against, the directors personally for the recovery of
damages for exceeding their authority to borrow.
However, if the fact that the borrowing was ultra vires
could be discovered from the memorandum of association
or article of the company, then the directors will not be
liable.
METHODS OF BORROWING
A company may borrow money by one or more of the
following methods.
i. debentures and bonds.
ii. Loans from banks and financial institutions
iii.Public deposits.

QUORUM
The term quorum may be defined as the minimum number of
members that must be present at the valid meeting so that the
business can be validly transacted at the meeting if the quorum
is not present, the meeting shall not be valid and the
proceedings of such meeting shall be invalid. Generally, the
quorum is fixed by the articles of association of the company.
However, the quorum is fixed by the articles of association of
the company, under section 174 of the companies Act provides
for the minimum number of members to constitute the quorum.
a. in case of public company 5 members personally
present at the meeting.
b. In case of any other company, 2 member personally
present at the meeting
It may be noted that for the purpose of quorum only the
members present personally are counted, and no proxy
shall be counted. Even the company cannot, by its articles
of association, provide for the proxy being counted for the
purpose of company.
i. The quorum required is the minimum number
present at the time of beginning to consider the
business, and it need not be present throughout or at
the time of taking vote on any resolution.
ii. Any resolution passed without a quorum is invalid.
iii. In case the total number of members of a company
becomes reduced below the quorum fixed for a
meeting, them the rules as to quorum will be
satisfied if all the members of the company are
present,i.e. where the number of members of
company is 400 and the quorum fiex by the articles
is 75 members subsequently 350 members have sold
their sharesto the remaining 50 members. In this case
all the 5p0 members present personally will
constitute a valid quorum even if the quorum fixed
by the articles is 75%
iv. In case, the meeting is called on the requisition of
members, It shall stand sissolved if the quorum is not
present within half an hour from the time for holding
the meeting of the company. But in other cases the
meeting shall styand adjourned to reassemble in the
next week on the same day at the same time and
place, or to such other day, time and place as the
Board of directors may determine.
 RESOLUTIONS
THE term resolution may be defined as the proposal which is
voted at the meeting and accepted by the members.In other words,
it is the decision taken at the meeting. The business of a meeting is
conducted in the form of resolutions. The companies Act provides
for the two kinds of resolution, namely
I ORDINARY RESOLUTION: It is the resolution which is passed
at a validly called general meeting, by simple majority of the
members, where the votes cast in favour of the resolution exeed the
votes cast against it. The voting may be either by show of hands or
by polls, In determining the simple majority, all the votes cast by
the members whether personally or by proxy are considered the
casting vote of the chairman is also taken into account.
In detrming whether the resolution has been passed by simple
majority, only the votes cast at the meetin shall be considered. If
the votes cast in favour