Unit 4: Company Law

Section 2(20), Companies Act, 2013: a company means a company incorporated under this Act or under any previous company law. In the words of Lord Justice Lindley, a company is an association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose.

Lifting (piercing) the corporate veil means disregarding the separate entity of a company and looking at the persons behind it, holding them personally liable.

Statutory grounds (under the Act)

• Misstatement in prospectus — Sections 34 and 35.
• Fraudulent conduct of business — Section 339 (during winding up).
• Failure to refund application money and acting without proper incorporation.
• Investigation into ownership of a company — Section 216.

Judicial grounds

• Fraud or improper conduct — Gilford Motor Co. v. Horne (1933): a company formed to evade a non-compete covenant.
• Determining enemy character — Daimler Co. v. Continental Tyre & Rubber Co. (1916).
• Evasion of tax — Dinshaw Maneckjee Petit (1927): companies formed only to split income.
• Sham or façade company, avoidance of welfare legislation, protecting public policy.
• Agency or trust relationship; single economic entity in groups.

Companies named in the syllabus

• Small companies enjoy relaxations: no cash-flow statement required, fewer board meetings (two a year), lower fees and penalties.
• Section 8 company: formed to promote commerce, art, science, sports, education, charity; profits applied to objects, no dividend.

• SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) is an integrated web form on the MCA portal offering 10+ services in one application.
• Certificate of incorporation is conclusive evidence that all requirements have been complied with (Section 7(7) allows action if obtained by fraud).
• Commencement of business: a company with share capital must file a declaration (INC-20A) within 180 days that subscribers have paid for shares (Section 10A).
• Registered office must be established within 30 days and verified (Section 12).

The MOA is the charter of the company — it defines its constitution and the scope of its powers. Defined in Section 2(56); contents in Section 4.

Form

• Must be in the form given in Tables A to E of Schedule I (Table A — company limited by shares; B — limited by guarantee without share capital; C — guarantee with share capital; D — unlimited without share capital; E — unlimited with share capital).

Contents (clauses)

Alteration of MOA (Section 13)

The AOA contains the rules and regulations for internal management — Section 2(5); contents in Section 5.

• Forms in Tables F to J of Schedule I (Table F — company limited by shares).
• A company limited by shares may adopt Table F wholly or partly.
• Contents: share capital, rights of shareholders, transfer and transmission, calls, forfeiture, meetings and voting, directors and their powers, borrowing powers, dividends, accounts, audit, winding up.
• Entrenchment provisions (Section 5(3)): specified provisions can be altered only if stricter conditions are met.
• Alteration (Section 14): by special resolution; conversion of public to private requires Tribunal/Central Government approval.
• Alteration must not conflict with the Act or the MOA, must be bona fide for the benefit of the company as a whole, and cannot increase a member's liability without consent.

Section 2(34): a director is a person appointed to the board of a company. The board is the collective body of directors.

• Minimum: public company 3, private 2, OPC 1; maximum 15 (more by special resolution).
• At least one resident director (stayed in India 182 days in the previous calendar year).
• Listed companies and specified public companies: at least one woman director; listed companies — at least one-third independent directors.

DIN (Director Identification Number)

• Unique number allotted by the Central Government (MCA) to an individual intending to be a director — Sections 152–159.
• Applied in Form DIR-3 (or through SPICe+ for first directors); valid for life; KYC (DIR-3 KYC) filed periodically.
• One person can hold only one DIN.

Appointment

• First directors: named in the articles; otherwise subscribers to the MOA (individuals) are deemed directors.
• By shareholders in general meeting (ordinary resolution); retirement by rotation — at least two-thirds of directors of a public company are rotational and one-third of them retire at each AGM.
• By the board: additional, alternate, casual vacancy.
• By third parties (nominee) and proportional representation.
• By the Tribunal/Central Government in cases of oppression and mismanagement.
• Consent in Form DIR-2; appointment filed in DIR-12.

Disqualification (Section 164)

• Of unsound mind declared by a court; undischarged insolvent.
• Convicted of an offence with imprisonment of 6 months or more (7 years or more — disqualified for life).
• Order of disqualification by a court or Tribunal.
• Unpaid calls for 6 months.
• Convicted for related party transactions in last 5 years.
• No DIN.
• Director of a company that has not filed financial statements or annual returns for 3 years, or failed to repay deposits — disqualified for 5 years from other appointments.

Legal position of directors

Powers

• General powers (Section 179): the board may exercise all powers the company can, except those requiring a general meeting.
• Powers exercised only at board meetings (Section 179(3)): make calls, authorise buy-back, issue securities, borrow money, invest funds, grant loans, approve financial statements, diversify business, approve amalgamation or takeover.
• Powers with consent of shareholders (Section 180, special resolution): sell undertakings, borrow beyond paid-up capital + free reserves + securities premium, give time for repayment of debts.

Duties (Section 166)

• Penalty for breach: ₹1 lakh to ₹5 lakh.
• Liability: for breach of trust, ultra vires acts, negligence, fraud, misstatements in prospectus.

Key managerial personnel (KMP) — Section 2(51)

• CEO, managing director or manager.
• Company secretary.
• Whole-time director.
• Chief financial officer (CFO).
• Such other officer not more than one level below the directors in whole-time employment, designated KMP by the board, and any other officer prescribed.
• Section 203: every listed company and specified public companies (paid-up capital ₹10 crore or more) must appoint a whole-time KMP — MD/CEO/manager (or WTD), CS and CFO.

Annual General Meeting (Section 96)

• Every company other than an OPC must hold an AGM every year.
• First AGM within 9 months of the close of the first financial year; thereafter within 6 months of the close of the financial year, and gap between two AGMs not more than 15 months.
• ROC may extend by up to 3 months (not for the first AGM).
• Held during business hours (9 a.m.–6 p.m.), not on a national holiday, at the registered office or in the same city.
• Ordinary business (Section 102): adoption of financial statements and reports, declaration of dividend, appointment of directors in place of those retiring, appointment and remuneration of auditors. All else is special business.

Extraordinary General Meeting (Section 100)

• Called by the board for urgent business, or on requisition of members holding at least one-tenth of paid-up voting capital (or one-tenth of voting power in companies without share capital).
• If the board fails to call within 21 days (meeting within 45 days), requisitionists may call it themselves; the Tribunal may also order a meeting (Section 98).

Board meetings (Section 173)

• First board meeting within 30 days of incorporation.
• At least four board meetings a year, with not more than 120 days between two meetings (OPC, small, dormant companies: at least one in each half of the year, gap of at least 90 days).
• Notice of at least 7 days; quorum one-third of total strength or two directors, whichever is higher.

Quorum for public companies (Section 103)

Resolutions

• Resolutions requiring special notice (Section 115): removal of a director or auditor — notice of 14 days by members holding 1% voting power or ₹5 lakh paid-up shares.
• Minutes (Section 118): prepared and signed within 30 days; evidence of proceedings.