Unit 1
The Companies Act
Q1) EXPLAIN THE COMPANY AND ITS FORMATION
A1) A company is a legal entity formed by a group of people to engage in and operate a business—commercial or industrial—enterprise. A company may be organized in various ways for tax and financial liability functions depending on the corporate law of its jurisdiction.
The line of business the corporation is in will generally determine which business structure it chooses such as a partnership, proprietorship, or corporation. These structures also denote the ownership structure of the company.
They can also be distinguished between private and public companies. Both have different ownership structures, regulations, and financial reporting requirements.
A company is a legal entity formed by a group of people to engage in and operate a business enterprise in a commercial or industrial capacity.
A company's business line depends on its structure, which can range from a partnership to a proprietorship, or even a corporation.
Companies may be either public or private; the former issues equity to shareholders on an exchange, while the latter is privately-owned and not regulated.
A business enterprise is generally organized to earn a profit from business activities.
STAGES IN THE FORMATION AND INCORPORATION
The whole process of company formation is often divided into four stages as given below.
1. Promotion of a company
2. Registration of a company
3. Certificate of Incorporation; and
4. Commencement of the Business.
Q2) EXPLAIN THE FEATURES OF COMPANY THE COMPANIES ACT, 2013
A2) SALIENT FEATURES OF THE ACT, 2013
Based on the above definitions, given below are the main features of company structure of ownership:
1. Class action suits for Shareholders: the companies Act 2013 has introduced new concept of sophistication action suits with a view of creating shareholders and other stakeholders, more informed and intimate their rights.
2. More power for Shareholders: the companies Act 2013 provides for approvals from shareholders on various significant transactions.
3. Women empowerment within the company sector: the companies Act 2013 stipulate appointment of a minimum of one woman Director on the Board (for certain class of companies).
4. Corporate Social Responsibility: The Company Act 2013 stipulates certain class of Companies to spend a particular amount of cash per annum on activities/initiatives reflecting Corporate Social Responsibility.
5. National Company Law Tribunal: the companies Act 2013 introduced National Company Law Tribunal and therefore the National Company Law Appellate Tribunal to exchange the company Law Board and Board for Industrial and Financial Reconstruction. They might relieve the Courts of their burden while simultaneously providing specialized justice.
6. Mergers: the companies Act 2013 proposes a quick track and simplified procedure for mergers and amalgamations of certain class of companies like holding and subsidiary, and little companies after obtaining approval of the Indian government.
7. Cross Border Mergers: the companies Act 2013 permits cross border mergers, both ways; a foreign company merging with an India Company and vice versa but with prior permission of RBI.
8. Prohibition on forward dealings and insider trading: the companies Act 2013 prohibits directors and key managerial personnel from purchasing call and put options of shares of the company , if such person is fairly expected to possess access to price-sensitive information.
9. Increase in number of Shareholders: the companies Act 2013 increased the amount of maximum shareholders during a private company from 50 to 200.
10. Limit on Maximum Partners: the utmost number of persons/partners in any association/partnership could also be up to such number as could also be prescribed but not exceeding 100. This restriction won't apply to an association or partnership, constituted by professionals like lawyer, chartered accountants, company secretaries, etc. who are governed by their special laws. Under the companies Act 1956, there was a limit of maximum 20 persons/partners and there was no exemption granted to the professionals.
11. One Person Company: the companies Act 2013 provides new sort of private company, i.e., one Person Company. It's going to have just one director and one shareholder. The Companies Act 1956 requires minimum two shareholders and two directors just in case of a private company.
12. Entrenchment in Articles of Association: the companies Act 2013 provides for entrenchment (apply extra legal safeguards) of articles of association are introduced.
13. Electronic Mode: the companies Act 2013 proposed E-Governance for various company processes like maintenance and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, financial statements to be placed on company’s website, etc.
14. Indian Resident as Director: Every company shall have a minimum of one director who has stayed in India for a complete period of not but 182 days within the previous civil year.
15. Independent Directors: The Company Act 2013 provides that each one listed companies should have a minimum of one-third of the Board as independent directors. Such other class or classes of public companies as even be |is also"> could also be prescribed by the Central Government shall also be required to appoint independent directors. No independent director shall hold office for quite two consecutive terms of 5 years.
16. Serving Notice of Board Meeting: the companies Act 2013 requires a minimum of seven days’ notice to call a board meeting. The notice could also be sent by electronic means to each director at his address registered with the company.
17. Duties of Director defined: Under the companies Act 1956, a director had fiduciary (legal or ethical relationship of trust) duties towards a corporation. However, the companies Act 2013 have defined the duties of a director.
18. Liability on Directors and Officers: the companies Act 2013 don’t restrict an Indian company from indemnifying (compensate for harm or loss) its directors and officers just like the Companies Act 1956.
19. Rotation of Auditors: the companies Act 2013 provides for rotation of auditors and audit firms just in case of publicly traded companies.
20. Prohibits Auditors from performing Non-Audit Services: the companies Act 2013 prohibits Auditors from performing non-audit services to the company where they're auditor to make sure independence and accountability of auditor.
21. Rehabilitation and Liquidation Process: the whole rehabilitation and liquidation process of the companies in financial crisis has been made time bound under Companies Act 2013.
Q3) EXPLAIN THE MAIN FEATURES OF COMPANY STRUCTURE
A3) Based on the above definitions, given below are the main features of company structure of ownership:
1. Artificial Legal Person:
A company is an artificial person created by law. Though it has no body, no conscience, still it exists as a person. Like a person, it can enter into contracts in its own name and likewise may sue and be sued in its own name.
2. Separate Legal Entity:
A company has a distinct entity separate from its members or shareholders. Therefore, a shareholder of the company can enter into contract with the company. He/she can sue the company and be sued through company.
3. Common Seal:
Being an artificial person, company cannot sign the documents. Hence, it makes use of a common seal on which its name is engraved. Putting the common seal on papers relating to company’s transactions makes them binding on the company.
4. Perpetual Existence:
Unlike partnership, the existence of a company is not affected by the death, lunacy, insolvency or retirement of its members or directors. This is because the organisation enjoys a separate legal existence from that of its members. It is said, “Members may come, members may go but the company goes for ever”. It is created by law and is dissolved by regulation itself.
5. Limited Liability:
The liability of the members of a company is normally limited to the amount of shares held or guarantee given by them.
6. Transferability of Shares:
The member of a public limited company can sell his shares to others without the consent of other shareholders. Yes, he has to follow the technique laid down in the Companies Act for transferring his shares. However, there are restrictions for transferring shares to others in case of a private limited company.
7. Separation of Ownership from Management:
The shareholders, i.e., owners being scattered all over country provide right the directors to manage the affairs of the company. The directors are the representatives of the shareholders. Thus, possession is separated from management.
8. Number of Members:
In case of a public limited company, the minimum number is seven and there is no maximum limit. But, for a personal limited company, the minimum number of members is two and the most number is fifty.
Q4) EXPLAIN THE TYPES OF COMPANIES IN DETAIL
A4) TYPES OF COMPANIES
a) Companies Limited by Shares
Sometimes, shareholders of some companies won't pay the whole value of their shares in one go. In these companies, the liabilities of contributors are limited to the extent of the amount not paid by them on their shares.
This ability that just in case of winding up, members will be liable only until they pay the ultimate amount of their shares
b) Companies Limited by Guarantee
In some companies, the memorandum of association mentions amounts of money that some members guarantee to pay.
In case of winding up, they're going to be liable only to pay only the amount so guaranteed. The company or its creditors cannot compel them to pay any greater money.
c) Unlimited Companies
Unlimited companies haven't any limits on their members’ liabilities. Hence, the company can use all personal assets of shareholders to satisfy its debts while winding up. Their liabilities will extend to the company’s entire debt.
COMPANIES ON THE IDEA OF MEMBERS
a) One Person Companies (OPC)
These types of companies have just one member as their sole shareholder. they're separate from sole proprietorships because OPCs are legal entities awesome from their sole members. Unlike other companies, OPCs don’t got to have any minimum share capital.
b) Private Companies
Private companies are those whose articles of association restrict free transferability of shares. In terms of members, private groups got to have a minimum of two and a maximum of 200. These members encompass present and former employees who also hold shares.
c) Public Companies
In contrast to private companies, public companies allow their members to freely transfer their shares to others. Secondly, they need to have a minimum of seven members, but the maximum quantity of members they will have is unlimited.
COMPANIES ON THE BASIS OF CONTROL OR HOLDING
In terms of control, there are two types of companies.
a) Holding and Subsidiary Companies
In some cases, a company’s shares might be held fully or partly by another company. Here, the company proudly owning these shares becomes the holding or parent company. Likewise, the company whose shares the parent company owns becomes its subsidiary.
Holding companies exercise control over their subsidiaries by dictating the composition of their board of directors. Furthermore, parent companies also exercising control by owning quite 50% of their subsidiary companies’ shares.
b) Associate Companies
Associate organizations are those during which other companies have significant influence. This “significant influence” amounts to ownership of a minimum of 20% shares of the associate company.
The other company’s control can exist in phrases of the associate company’s business decisions under an agreement. Associate companies also can exist under joint venture agreements.
COMPANIES IN TERMS OF ACCESS TO CAPITAL
When we believe the access a company has got to capital, companies could also be either listed or unlisted.
Unlisted companies, on the other hand, don't list their securities on stock exchanges. Both, public, also as private companies, can come under this category.
OTHER TYPES OF COMPANIES
a) Government Companies
Government companies are those during which more than 50% of share capital is held by either the central government, or by one or more state government, or jointly by the central government and one or more nation government.
b) Foreign Companies
Foreign companies are incorporated outside India. They also conduct business in India employing a place of business either by themselves or with some other company.
c) Charitable Companies (Section 8)
Certain companies have charitable purposes as their objectives. These companies are called Section 8 companies because they're registered under Section 8 of Companies Act, 2013.
Charitable companies have the promotion of arts, science, culture, religion, education, sports, trade, commerce, etc. as their objectives. Since they are doing not earn profits, they additionally don't pay any dividend to their members.
d) Dormant Companies
These companies are generally formed for future projects. they are doing not have significant accounting transactions and don't need to perform all compliances of normal companies.
e) Public Financial Institutions
Life Insurance Corporation, unit trust of India and other such companies are treated as public financial institutions. they're essentially government companies that conduct functions of public financing.
Q5) EXPLAIN THE DIFFERENCE BETWEEN PUBLIC AND PRIVATE COMPANY
A5) The main points of difference between a public company and a private company are as follows:
i. Minimum paid-up capital – a corporation to be in company as a private company must have a minimum paid-up capital of Rs. 1, 00,000, whereas a public company must have a minimum paid-up capital of Rs. 5, 00,000.
ii. Minimum number of members – The minimum number of members required to make a private company is 2, whereas a public company requires a minimum of 7 members.
iii. Maximum number of members – Maximum number of members during a private company is restricted to 50; there's no restriction of maximum number of members during a public company.
iv. Transferability of shares – there's complete restriction on the transferability of the shares of a private company through its Articles of Association, whereas there's no restriction on the transferability of the shares of a public company.
v. Issue of prospectus – a private company is prohibited from inviting the general public for subscription of its shares, i.e., a private company cannot issue prospectus, whereas a public company is liberal to invite public for subscription, i.e., a public company can issue a prospectus.
vi. Number of directors – a private company may have 2 directors to manage the affairs of the company, whereas a public company must have a minimum of 3 directors.
vii. Consent of the directors – there's no got to give the consent by the directors of a private company, whereas the directors of a public company must have file with the registrar’s consent to act as director of the company .
viii. Qualification shares – the directors of a private company needn't sign an undertaking to acquire the qualification shares, whereas the directors of a public company are required to sign an undertaking to accumulate the qualification shares of the general public company.
ix. Commencement of company – a private company can commence its company immediately after its incorporation, whereas a private company cannot start its company until a certificate to commencement of company is issued thereto.
x. Shares warrants – a private company cannot issue share warrants against its fully paid shares, whereas a private company can issue share warrants against its fully paid up shares.
xi. Further issue of shares – a private company needn't offer the further issue of shares to its existing shareholders, whereas a public company has got to offer the further issue of shares to its existing shareholders as right shares. Further issue of shares can only be offer to the overall public with the approval of the existing shareholders within the general meeting of the shareholders only.
xii. Statutory meeting – a private company has no obligation to call the statutory meeting of the member, whereas of public company must call its statutory meeting and file statutory report with the Register of Companies.
xiii. Quorum – The quorum within the case of a private company is 2 members present privately, whereas within the case of a public company 5 members must be present privately to constitute quorum. However, the Articles of Association may provide and number of members more than the required under the Act.
xiv. Managerial remuneration – Total managerial remuneration within the case of a public company cannot exceed 11 per cent of internet profits, and just in case of inadequate profits a maximum of Rs. 87,500 are often paid. Whereas these restrictions don't apply on a private company
xv. Special privileges – a private company enjoys some special privileges, which aren't available to a public company.
Q6) EXPLAIN THE ADVANTAGES AND DISADVANTAGES OF PRIVATE COMPANY
A6) A private Limited company can easily be began and registered by combination of two members. The day to day affairs of management is administered by the directors. Books of money owed are properly prepared, maintained and their audit is compulsory once during a year. a private confined company are often wound up with the consent of members and also through court. Shareholders during a private limited company are well known to every other due to close relationship.
ADVANTAGES OF A PRIVATE LIMITED COMPANY
The major advantages of a personal Ltd. are as under:-
• One of the benefits of private limited company is that members are well known to each other; however control is within the hands of owners of capital.
• In the management of affairs and conduct of business is bigger flexibility.
• Statuary meeting is not required also as submitting of a statuary report.
• The number of directors during a private confined company is a minimum of two.
• One of the advantages of private limited company is that its limited liability, due to which each members enjoy this facility. it's the advantage of a public company and a partnership firm.
• A private company after receiving certificate of incorporation can begin business immediately.
DISADVANTAGES OF A PRIVATE LIMITED COMPANY
The disadvantages of those companies under section 2 (25) of the company Ordinance 1984 are as under:
• In a private limited company the number of participants in any case cannot exceed 50.
• Another disadvantage of personal limited agency is that it cannot issue prospectus to general public.
• In stock change shares can't be quoted.
ADVANTAGES OF A PUBLIC COMPANY
• Better access to capital – i.e. raising share capital from existing and new investors
• Liquidity – Shareholders are ready to buy and sell their shares (if they're quoted on a stock market
• Value of shares – The value of the firm is shown by the market capitalization (based on the share price)
• The opportunity to more easily make acquisitions – E.g. by offering shares to the shareholders of the target firm
• To provides a company a more prestigious profile
• As always there are some disadvantages to being a PLC (as opposed to remaining as a private company). the most downsides are:
• Once listed on a stock market , the company is probably going to possess a way larger number of external shareholders, to whom company directors are going to be accountable
• Financial markets will govern the value of the company through the trading of the company's shares, and can represent the market's view of the company's performance over time
• Greater public scrutiny of the company's financial performance and actions.
DISADVANTAGES OF A PUBLIC COMPANY
• Red Tapism & Nepotism: get ready to face in long queues as a PUBLIC limited company has got to undergo too many legal formalities. Too much of legal formalities further cause delay in every decision of the public limited company. Thus with the involvement of public, the broad negatives of public sector undertakings also inherit the play.
• Controls and regulations: Public Limited Companies are governed by large no of Acts, rules & regulations. Higher is that the external degree of control on the internals and lesser the autonomy rests within the hands of directors. If you're a flying bird, you better curb your feathers soon.
• Inflexibility: because of its democracy and high degree of external control that we get another con. Rapid decisions couldn't be taken during a Public limited company, thus imparting rigidity in decision making (undesired) to the company. Again free birds cannot fly here.
• Lack of secrecy: you'll need to maintain transparency in operations and involve the overall public in your decisions. Thus even business secrets aren't secrets. If you're confident enough in your idea and it doesn’t bother you to share the delight with almost everyone, you'll choose it.
• Distribution of profits: you'll be left with very less profits in hand because the profits also are to be distributed among “I can’t even count” no. of shareholders. Per head gain is significantly reduced.
• Suitability: Public limited company isn't suitable for all kinds of business activities. Small scale businesses which cater to the needs of limited section of the society needn't be incorporated as Public limited company. it's best fitted to large scale businesses only.
• High costs: All the delight that Public limited company provide doesn't come with none cost. Beginning a Public limited company requires huge cost, time, and effort. Profits are high only investment is too. Thus initiation also as dissolution is like climbing Everest.
Q7) WRITE A NOTE ON ONE PERSON COMPANY
A7) The Companies Act, 2013 completely revolutionized corporate laws in India by introducing several new concepts that didn't exist previously. On such game-changer was the introduction of 1 Person Company concept. This led to the popularity of a totally new way of starting businesses that accorded flexibility which a company form of entity offers, while also providing the protection of limited liability that sole proprietorship or partnerships lacked.
Several other countries had already recognized the ability of people forming a corporation before the enactment of the new Companies Act in 2013. These included the likes of China, Singapore, UK, Australia, and therefore the USA.
Definition of 1 Person Company
Section 2(62) of Companies Act defines a one-person company as a company that has just one person on its member. Furthermore, members of a company are nothing but subscribers to its memorandum of association, or its shareholders. So, an OPC is effectively a corporation that has just one shareholder as its member.
Such companies are generally created when there's just one founder/promoter for the business. Entrepreneurs whose businesses lie in early stages like better to create OPCs instead of sole proprietorship business due to the several advantages that OPCs offer.
Features of a One Person Company
Here are some general features of a one-person company:
Q8) WRITE A NOTE ON DORMANT COMPANY
A8) Dormant Company may be a company which isn't carrying on any business or operation. As per Section 455 of the companies Act, 2013, where a company is made and registered under this Act for a future project or to carry an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar of Companies for changing its status from active company to dormant company.
“Significant accounting transaction” means any transaction other than:-
Prior Conditions for Dormant Status:-
The company shouldn't are carrying on any business or operation, or not made any significant accounting transaction during the last two financial years or has not filed financial statements and annual returns during the last two financial years.
In case there's any unsecured loan within the Company then consent of the lender should be obtained.
Statement of Assets and Liabilities should be obtained from Statutory Auditors of the company.
No dispute certificate should be obtained from the management or promoters of the company.
The Registrar on consideration of the appliance shall allow the status of a dormant company to the applicant and issue a certificate in such form as could also be prescribed thereto effect. The Registrar shall maintain a register of dormant companies in such form as could also be prescribed. Just in case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Registrar shall issue a notice thereto company and enter the name of such company within the register maintained for dormant companies
Understanding the concept of Dormant Company
The idea of a dormant company may be a newly introduced concept within the Companies Act 2013, previously absent within the 1956 Act. The Indian legislature seems to possess borrowed it largely from the legal principles of company law applicable within the U.K. However, certain significant differences exist like the duration of dormancy, etc. In line with India’s investor-friendly policies, the supply regarding dormant companies is often seen within the light of promoting and facilitating the procedure of in company and functioning of a company.
Why choose dormant status? What are its benefits?
The immediate question that arises upon understanding the meaning of a dormant company is that this – why would anyone creates a company and registers it only to urge it declared as dormant? The most purpose of obtaining or retaining the dormant status of a company is in order that the company retains its company status despite not carrying out any business.
The benefits derived from such a status could also be summarized under the subsequent heads –