COMPANY LAW

Dr. Vasilica Mlesnita

 ESSENTIAL SKILLS FOR A
COMPANY LAWYER
▪a good knowledge of contract
▪a proper understanding of equity
▪good statutory and common law interpretation skills
▪a certain flexibility of mind needed to deal with the legal creation of
corporate personality.

➢ With this base of skills, you will be equipped to deal with the
hazardous waters of company law.
 Money
WHAT IS A COMPANY Risk
People
A company is defined as an association of persons for
some common object or objects.
Purpose may or may not be economic.
For common practice the word company is normally
reserved for those associated for economic purposes.
Our area of focus remains to only those companies that
are registered under the Companies Act , 1956 or under
any of the earlier Companies Acts (2006)
DEFINITION OF A COMPANY

Section 3(1)(i) of the Act states that “a company

means a company formed and registered under
this Act or an existing company as defined in
section 3(1)(ii).
Section 3(1)(ii) lays down that “ an existing
company means a company formed and
registered under any of the previous Company
Law”.
 UK

In the UK:
A company is a body corporate or an incorporated
business organization registered under the
companies act. It can be a limited or an unlimited
company, private or a public company, company
limited by guarantee or a company having a share
capital, or a community interest company.
 USA

According to the law in the USA:

A company can be a “corporation, partnership,
association, joint-stock company, trust, fund, or
organized group of persons, whether incorporated or
not, and (in an official capacity) any receiver, trustee in
bankruptcy, or similar official, or liquidating agent, for
any of the foregoing”
 Companies act 2006
Companies and Companies Acts
1Companies
(1)In the Companies Acts, unless the context otherwise requires—
“company” means a company formed and registered under this Act,
that is—
(a)
a company so formed and registered after the commencement of this
Part, or
(b)
a company that immediately before the commencement of this Part—
(i)
was formed and registered under the Companies Act 1985 (c. 6) or the Companies
(Northern Ireland) Order 1986 (S.I. 1986/1032 (N.I. 6)), or
(ii)
was an existing company for the purposes of that Act or that Order,
(which is to be treated on commencement as if formed and registered under this Act).
 CHARACTERISTIC FEATURES
OF A COMPANY
Incorporated association : –
▪The company must be incorporated or registered under
the Companies Act.
▪Minimum number required for this purpose is seven in case
of a ‘public company’ and two in the case of a ‘private
company’
▪An association of more than 10 persons in the case of
banking business and 20 persons in other commercial
activities , if not registered as a company or under any
other law, becomes an illegal association
 CHARACTERISTIC FEATURES OF A
COMPANY (cont)

Legal Entity distinct from its members :-

▪Unlike partnership, the company is distinct from the person
who constitute it.
▪It is capable of enjoying rights and of being subjected to
duties which are not the same as those enjoyed or borne
by its members.
▪The subscribers as members are not liable, in any shape
or form except to the extent and in the manner provided
by the Act.
 CHARACTERISTIC FEATURES OF A
COMPANY (cont)
Limited Liability :
▪A company may be a company limited by shares
or a company limited by guarantee.
▪In a company limited by shares, the liability of
members is limited to the unpaid value of shares.
▪In a company limited by guarantee, the liability
of members is limited to such amount as the
members may undertake to contribute to the assets
of the company, in the event of its being wound
up.
 CHARACTERISTIC FEATURES OF A
COMPANY (cont)
Perpetual Succession :-
▪A company is a juristic person with a perpetual succession.
▪It never dies nor does its life depend on the life of its members.
▪It is not in any manner affected by insolvency, mental disorder or
retirement of any of its members.
▪It is created by a process of law and can be put to an end only by
a process of law.
▪Perpetual succession therefore means that a company’s existence
persists irrespective of the change in the composition of its
membership
 CHARACTERISTIC FEATURES OF A
COMPANY (cont)

Common Seal : -
▪A company has no physical existence.
▪It must act through its agents and all such
contracts entered into by its agents must be under
the seal of the company.
▪The common seal acts as the official signature of
the company.
 CHARACTERISTIC FEATURES OF A
COMPANY (cont)

Transferability of shares : -
▪The capital of a company is divided into parts , called
shares.
▪These shares are subject to certain conditions , freely
transferrable, so that no shareholder is permanently or
necessarily wedded to a company.
▪When the joint stock companies were established the
great object was that the shares should be capable of
being easily transferred.
 CHARACTERISTIC FEATURES OF A
COMPANY (cont)

Separate Property : -
▪Company is a legal person distinct from its members.
▪It is capable of owning , enjoying and disposing of
property in its own name.
▪Although its capital assets are contributed by its
shareholders, they are not the private and joint owners of
its property.
▪The company is the real person in which all its property is
vested and by which it is controlled , managed and
disposed off.
 CHARACTERISTIC FEATURES OF A
COMPANY (cont)

Capacity to Sue
▪A company can sue and may be sued in its
corporate name.
▪It may also inflict or suffer wrongs.
▪It can do or in fact have done to it most of the
things which may have been done by or to a
human being.
CLASSIFICATION OF COMPANIES
BY MODE OF INCORPORATION
Royal Charted Companies
Statutory companies
Registered or incorporated companies
 TYPES OF COMPANIES (CONT)
Classification according to the liability of its members:
➢Limited companies – 1.limited by shares 2.limited by guarantee
➢Share company - Liability of the shareholders to creditors of the
company is limited to the capital originally invested. A shareholder's
personal assets are protected in the event of not being able to pay up,
but money invested in the company will be lost.
➢Guarantee company - This type of Company does not have share
capital but is guaranteed by its "members", who agree to pay a fixed
amount in the event of the company's liquidation. These companies do
not have share capitals, the working funds are obtained from donations,
fees, subsidies , etc.
➢Unlimited company – Does not have any limit on the liabilities of its
members. Members are liable to the full extent of their assets in case of
the company becoming insolvent. The creditors should petition the court
which will then direct the members to contribute to pay up the debts.
 PRIVATE COMPANY:

It is a company formed by 2 members who are

bound by a Memorandum of Association.
Such a company must :
➢‘Prohibit’ an invitation to the public to subscribe
to its shares and debentures.
➢‘Restrict’ the rights of its members to transfer
shares, so that it remains private.
➢‘Limit’ the number of members to 50.
 PUBLIC COMPANY:

It is a company which raises its capital and other

resources from the public. The company should have at
least 7 members.
➢Invitation to the public to subscribe to its shares should
be done through a prospectus.
➢No provisions that restrict the right to transfer shares,
shares and debentures are dealt in only on a stock
exchange.
➢No limitation on the maximum number of members.
a directors' duties
b management roles
c company definition
d company health
e partnership definition
f company formation

1.____ A company is a business association which has

the character of a legal person, distinct from its officers
and shareholders. This is significant, as it allows the
company to own property in its own name, continue
perpetually despite changes in ownership, and insulate
the owners against personal liability. However, in some
instances, for example when the company is used to
perpetrate fraud or acts ultra vires, the court may ‘lift’
the corporate veil' and subject the shareholders to
personal liability.
 a directors' duties
b management roles
c company definition
d company health
e partnership
definition
f company formation

2._____ By contrast, a partnership is a business association

which, strictly speaking, is not considered to be a legal
entity but, rather, merely an association of owners. However,
in order to avoid impractical results, such as the partnership
being precluded from owning property in its own name,
certain rules of partnership law treat a partnership as if it
were a legal entity. Nonetheless, partners are not insulated
against personal liability, and the partnership may cease to
exist upon a change in ownership, for example, when one of
the partners dies.
a directors' duties
b management roles
c company definition
d company health
e partnership definition
f company formation

3._____ A company is formed upon the issuance of a certificate of

incorporation by the appropriate governmental authority. A
certificate of incorporation is issued upon the filing of the
constitutional documents of the company, together with statutory
forms and the payment of a filing fee. The ‘constitution’ of a company
consists of two documents. One, the memorandum of association,
states the objects of the company and the details of its authorised
capital, otherwise known as the nominal capital. The second
document, the articles of association contains provisions for the
internal management of the company, for example,
shareholders annual general meetings, or AGMs, and extraordinary
general meetings, the board of directors, corporate contracts and
loans.
a directors' duties
b management roles
c company definition
d company health
e partnership definition
f company formation

4.____ The management of a company is carried out by its officers, who include a
director, manager and/or company secretary. A director is appointed to carry out
and control the day-to-day affairs of the company. The structure, procedures and
work of the board of directors, which as a body govern the company, are
determined by the company's articles of association. A manager is delegated
supervisory control of the affairs of the company. A manager’s duties to the company
are generally more burdensome than those of the employees, who basically owe a
duty of confidentiality to the company. Every company must have a company
secretary, who cannot also be the sole director of the company. This requirement is
not applicable if there is more than one director. A company's auditors are appointed
at general meetings. The auditors do not owe a duty to the company as a legal
entity, but, rather, to the shareholders, to whom the auditor's report is addressed.
 a directors' duties
b management roles
c company definition
d company health
e partnership definition
f company formation

5. ____The duties owed by directors to a company can be classified into

two groups. The first is a duty of care and the second is a fiduciary
duty. The duty of care requires that the directors must exercise the care
of an ordinarily prudent and diligent person under the relevant
circumstances. The fiduciary duty stems from the position of trust and
responsibility entrusted to directors. This duty has many aspects, but,
broadly speaking, a director must act in the best interests of the
company and not for any collateral purpose. However, the courts are
generally reluctant to interfere, provided the relevant act or omission
involves no fraud, illegality or conflict of interest.
a directors' duties
b management roles
c company definition
d company health
e partnership definition
f company formation

6.____ Finally, a company’s state of health is reflected in its

accounts, including its balance sheet and profit-and-loss account.
Healthy profits might lead to a bonus or capitalisation issue to the
shareholders. On the other hand, continuous losses may result in
insolvency and the company going into liquidation.
 HOLDING AND SUBSIDIARY COMPANIES

Holding company – company which has control over another company.

Subsidiary company – company which is controlled by another
company.
A company is said to be a subsidiary to another company if :
➢The other controls the composition of its Board of Directors.
➢The other holds more than half of equity share capital.
COMPANY LAW Illegal association,
Incorporation, promoter
 ILLEGAL ASSOCIATION

Under the Companies Act, 1956, not more than 10 persons can come together
for carrying on any banking business and not more than 20 persons can come
together for carrying on any other business, unless the association is registered
under the Companies Act or any other Indian law. Any association which does
not comply with the above norms is an illegal association.
However, this provision does not apply in the following cases :-
➢A Joint Hindu Family business comprising of family members only. But where
two or more Joint Hindu families come together for business through
partnership, the total number of members cannot exceed 10 or 20 as the case
may be, but in computing the number of persons, minor members of such
family will be excluded.
➢Any association of charitable, religious, scientific trust or organization which
is not formed with a profit motive
➢Foreign companies.
 FORMATION OF COMPANIES
Before a company is formed certain preliminary decisions are to be
taken by its promoters (see 36,37,38).
❑A private company or a public company
❑What its capital should be
❑Form a new company or take over an already established business
 INCORPORATION OF COMPANY

❑Mode of forming incorporated company

Any 7 or more persons (2 or more in case of
private company) may form an incorporated company. A
company so formed may be-
▪A company limited by shares
▪A company limited by guarantee
▪An unlimited company
 INCORPORATION OF
Documents COMPANY
to be filed with the (CONT)
Registrar
Before a company is registered, it is desirable to
ascertain from the Registrar of Companies if the proposed
name of the company is approved.
Then the following documents are to be filed along with
the necessary fees-
▪Memorandum of Association
the contract document which the various
promoters sign to form their association
▪Articles of Association
a document that shows the respective rights,
responsibilities and duties of the board of directors and
general body.
 INCORPORATION OF
COMPANY (CONT)
▪Agreement, if any, which the company proposes to
enter into with an individual for appointment as its
managing or whole-time director or manager
▪A list of directors who have agreed to become the first
directors of the company
▪A declaration stating that all requirements of the
Companies Act relating to registration have been
complied with. This can be obtained by an advocate of
high court or supreme court, CA
 INCORPORATION OF
COMPANY (CONT)
Certificate of Incorporation
If the registrar is satisfied as to the compliance of
requirements, he registers the Memorandum, the articles and
o t h e r d o c u m e n t s a n d i s s u e s a “ C E R T I F I C AT E O F
INCORPORATION” i.e. the formation of the company.
The certificate of incorporation given to a company
specifies -
▪It is a conclusive evidence that all the requirements of the
Companies Act have been complied with in respect of registration
▪Date born by the certificate of incorporation is the date of birth
of the company, i.e. the date on which the company came into
existence.
Ex. Jubilee Cotton Mills vs Lewis
 INCORPORATION OF
COMPANY (CONT)
Effects of Registration
When a company is registered and a certificate of
incorporation is issued by the registrar, it has three important
consequences-
▪The company becomes a distinct legal entity
▪The company acquires a perpetual succession i.e. the members
may come and go, but it goes on for ever, unless it is wound up
▪The shareholders have a right to share in the profits of the
company. Similarly any liability is not the liability of individual
shareholder
NOTE: A private limited company can commence business
immediately after its incorporation whereas a public company
has to obtain a certificate to commence business before it
actually commences its business.
 PROMOTER
A promoter is a person who does the preliminary work
incidental to the formation of company i.e. necessary steps to
incorporate the company, provide it with share and loan capital
and acquire the business or property which it is to manage
Functions of Promoter:
▪Decides the name of the company
▪Settles the details of the company’s Memorandum and Articles
▪Nomination of directors, bankers, auditors and the registered
office of the company
▪Registration of company
▪Issue of prospectus (where a public issue is necessary)
 PROMOTER
Fiduciary position of a promoter
A promoter stands in a fiduciary relation to the
company which he promotes. The fiduciary position of a
promoter may be summed up as follows-
▪Not to make profit at the expense of the company
▪To give benefit of negotiations to the company
▪To make a full disclosure of interest or profit
▪Not to make unfair use of position
▪He should see to it that the prospectus issued contains the
necessary information and does not contain any misleading
statements
 PROMOTER
Remuneration of promoters
A promoter may take remuneration for his services
in any of following ways-
▪He may be given a option to buy a certain number of
shares in the company at par.
▪He may take a commission on the shares sold.
▪He may be paid a lump sum by the company.
 PROMOTER
Pre-Incorporation or Preliminary Contract
The promoters of a company usually enter into
contracts to acquire some property or right for the company
which is yet to be incorporated. Such contracts are called as
preliminary contract.
▪Company is not bound by pre-incorporation contract
▪Company cannot enforce such contracts
▪Promoters are personally liable for any losses
▪Company cannot ratify such contracts
 PROMOTER
Provisional Contracts
These are the contracts entered into by a public
company after its incorporation but before it is issued the
certificate to commence business.
•If the company is unable to obtain the required certificate,
the provisional contract automatically elapses
•If it gets the certificate, the provisional contract becomes
binding on the company
Notes: 1. company (UK) – corporation (US)
2. lift – pierce (US)
3. certificate of incorporation (UK) – generally no official certificate is issued;
companies are formed upon the filing of the articles/certificate of incorporation (US)
4. memorandum of association (UK) – articles of incorporation or certificate of
incorporation (US)
5. articles of association (UK) – bylaws (US)
6. annual general meetings (UK)– annual meetings of the shareholders (US)
7. extraordinary general meetings (UK) – special meetings of the shareholders (US)
8. accounts (UK) – financial statements (US)
9. profit-and-loss account (UK) – profit-and-loss statement or income statement (US)
10. bonus (UK) – stock dividend (US)
11. capitalisation issue (UK) – cash dividend (US)
Key terms: Roles in company management
 2. Some of the important roles in company management are discussed in Reading 1 above. Which roles are mentioned?
3. Here is a more comprehensive list of roles in company management. Match the roles (1-10) with their definitions (a-j).
a. person appointed by a shareholder to attend and vote at a meeting in his/
1. auditor her place when the shareholder is unable to attend

b. company director responsible for the day-to-day operation of the company

2. company secretary
c. person elected by the shareholders to manage the company and decide its
3.director general policy
d. person engaged in developing or taking the initiative to form a company
4. liquidator (arranging capital, obtaining personnel, making arrangements for filing
corporate documentation)

e. person appointed by the company to examine the company's accounts and

5. managing director to report to the shareholders annually on the accounts

f. company’s chief administrative officer, whose responsibilities include

6. official receiver accounting and finance duties, personnel administration and compliance with
employment legislation, security of documentation, insurance and intellectual
property rights
g. member of the company by virtue of an acquisition of shares in a company
7. promoter
h. officer of the court who commonly acts as a liquidator of a company being
8. proxy wound up by the court
i. person appointed by creditors to oversee the repayment of debts
9. receiver
j. person appointed by a court, the company or its creditors to wind up the
10. shareholder company’s affairs