Company

Company
A company is a legal entity formed by a group of individuals to engage in and operate a business.

Nature of a Company
- Separate Legal Entity: It is an artificial person, distinct from its members. It has its own name, seal, and can sue or be sued in its own name
- Limited Liability: Shareholders are generally not personally liable for the company's debts beyond their investment in shares
- Perpetual Succession: The company continues to exist even if the owners dies
- Transferable Shares: Ownership can be transferred easily through the sale of shares

Advantages of Company
Easier Capital Raising: Companies can raise capital by issuing shares to the public or private investors
Limited Liability: This protects the personal assets of owners from the company's debts and liabilities
Perpetual Existence: The company continues to exist even if the owners change or pass away
Professional Management: Companies can employ professionals to manage their affairs, ensuring expertise and efficiency.
Tax Benefits: Companies may enjoy certain tax advantages compared to other business structures

Disadvantages of Company
Complex Legal and Regulatory Requirements: Companies must comply with various laws and regulations, which can be time-consuming and costly
Double Taxation: Companies may face double taxation, where profits are taxed at the corporate level and again when distributed as dividends to shareholders
Less Control: Owners may have less control over the company compared to sole proprietorships or partnerships
Increased Paperwork and Record Keeping: Companies are required to maintain detailed records and file regular reports with regulatory authorities
Potential for Conflicts: Shareholders may have different interests, leading to conflicts between management and owners
Difficulty Dissolving: Closing a company can be more complicated than winding up a sole proprietorship or partnership

Condition when company is wound up by tribunal
When affairs have been conducted fraudulently or it was formed for fraudulent and unlawful purposes
Company simply being unable to pay its debts or being wound up voluntarily.

Member of a Company
A person whose name is entered in the company's register of members(eg: By subscribing to the memorandum of association)
Who can be a member:
  Subscribers to the memorandum of association
  Persons who agree in writing
  Shareholders
  Legal representatives
  Beneficial owners (in the case of dematerialized shares)

Director of Company

Directors are individuals elected by shareholders to manage the company's affairs and act on its behalf
They are responsible for the company's overall governance, decision-making, and strategy.
The first director is appointed at the time of company registration, typically those who sign the Memorandum of Association (MOA)

Appointment of 1st Director
When a new company is formed, the first directors are appointed by the people who are signing the MOA.
Once the company is registered, the appointment of subsequent directors is usually done through a resolution passed by the shareholders

Role of Directors:
Directors act as the company's trustees, ensuring the company's assets are used responsibly and that the company operates ethically and legally.

Powers of Director:
Manage the company's affairs, delegate responsibilities, and make strategic decisions
Company's financial oversight, ensuring compliance with regulations, and promoting the company's success

Liabilites of Director
  Civil liabilities:
Liable for Ultra vires act   Criminal liabilities:
for fraud and other unlawful activities.   Breach of Fiduciary(trust) Duty: Act in the best interests of the company and avoid conflicts of interest.
  Negligence and Mismanagement

Cases
Dovey v Cory: Accounting Fraud was done by manager and chairman in bank. Question is whether co-director was at blame to not discover the fraud. House. House of Lords held that he was not liable, as he was not in charge of the day-to-day operations of the company
1872. Great Eastern Railway Company v. Turner: Directors are not mere employees, but rather trustees of the company's assets.

Auditor of Company

Appointment: either the board of directors or the shareholders at the Annual General Meeting (AGM)
Removal: shareholder approval and, in some cases, prior approval from the Central Government
Who can be Auditors: Chartered accountants or firms
Powers and Duties:
  Access to Books: Auditors have the right to access all books of accounts and vouchers of the company.
  Queries: They can ask questions to company officers and employees.
  Reporting: Auditors are responsible for reporting any discrepancies in financial statements.
  Attending Meetings: They can attend general meetings and discuss audit outcomes.
  Independent Assessment: The auditor's role is to provide an independent assessment of the financial statements.

Prospectus

A formal document issued by a company to offer its like shares to the public for purchase
Information Disclosure: disclose all relevant information about the company
Prospectus must be issued to public.

When Prospectus is not required to be issued?
- Private Companies: are not permitted to invite the public to subscribe to their shares, so they don't need a prospectus to raise capital.
- No need to give to existing shareholders.
- Shelf Prospectus: facilitate future public offerings

Liabilites of person issueing prospectus
if prospectus contains untrue or misleading statements, issuer may face criminal and civil liability under company law.
He becomes responsible for loss of someone who purchases the shares.
sec-34 of the Companies Act, 2013. Criminal Liability: Min 6 months improsonment, extended to 10 years. 3 times to amount involved in fraud.
Sec-35, Civil Liability: must compensate those who subscribed to securities
Defenses:
  Withdrawal of Consent: person can avoid liability if they withdraw their consent
  Lack of Knowledge or Consent: prove the prospectus was issued without their knowledge or consent
  Reasonable Belief: they had reasonable grounds to believe and did believe the statement was true

Cases:
1925 Pramatha Nath Sayal v Kali Kumar Dutt
  Company issued adv in newspaper that some shares are available for purchase
  Court held that this was not a prospectus, as it was not an invitation to the public to subscribe for shares

MoA(Memorandum of Association) & Article of Association(AoA)

Doctrine of Lifting the Veil of Incorporation

Definitions of Company

Cases

Company v partnership Firm

Joint Hindu Family vs Partnership

Private Company

Defined in Section 2(68) as a company that restricts the transfer of its shares
Limits the number of its members to 200
Joint Share Ownership: Two or more persons holding shares jointly are treated as a single member.

Disadvantages of Private Company
Limitations on attracting capital: limited access to capital markets compared to public companies. They cannot issue shares to the public, making it harder to raise large sums of capital for expansion or investment.
Restricted share transferability
Increased compliance burdens: annual filings, audits, and record-keeping, lead to higher compliance costs.
Potential for personal liability for the owners or directors: personal assets of the owners or directors could be at risk
Difficulty in Attracting Talent: have a stronger brand recognition and may offer more career opportunities, making it easier to attract and retain top talent.
Restrictions on Company Activities: eg: limitations on the number of members, the ability to issue shares to the public

Circumstances under which Private becomes Public company
When it chooses to conduct an Initial Public Offering (IPO), allowing the public to invest in its shares.
This is need to raise capital for growth, expansion, or strategic initiatives, as well as increased visibility
Factors:
1. Raising Capital: Public companies can easily raise funds through the issuance of shares to the general public
2. Expanding Market Reach: Going public increases a company's visibility and market credibility, attracting a broader investor base
3. Strategic Goals: can be a strategic move to achieve specific business objectives(expanding into new markets.)
4. Increased Liquidity: provide investors with more liquidity, making it easier for them to buy and sell shares.

Circumstances under which Public becomes Private company
Process: shareholder approval, Central Government approval, and modifications to the company's articles
Reasons to become private
- Reduced Regulatory Requirements:
- Increased Control:
- Restructuring and Turnaround:
- Financial Considerations:

Private vs Public Company

Steps to create Public Company

1. Director Identification: Minimum number of shareholders (7) and directors (3)
2. Digital Signature Certificate (DSC): Each director needs a DSC for electronic signature of documents.
3. Name Reservation: Check the availability of the proposed company name and reserve it.
4. Memorandum and Articles of Association: Draft the Memorandum of Association (MoA) and Articles of Association (AoA) outlining the company's objectives and rules
5. Submit docs to Registrar of Companies
6. Certificate of Incorporation: Upon successful submission and verification, the company receives its certificate of incorporation.
7. PAN and TAN: Apply for a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for tax purposes
8. GST Registration: If applicable, register for Goods and Services Tax (GST) to comply with tax regulations

Promoters/Founders

Promoters are individuals or entities who conceive of a business idea and take the necessary steps to form and register a company
Responsible for the company's formation, preliminary expenses, and securing initial funding

Legal position of Promoters
Fiduciary(Involving trust) Duty: must act in the best interests of the company and avoid conflicts of interest.
Not Agents or Trustees: they are not considered agents or trustees of the company
Liability for Misconduct: held liable for any losses or damages caused to the company
Duty to Disclose: Must disclose any personal interests, profits, or positions related to the company
Role in Preliminary Stages: primarily involved in the initial stages of company formation

Rights of Promoters:
Right to indemnity(security or protection against a loss or other financial burden)
Reimbursement for preliminary expenses: Eg: advertising and legal fees
Potentially remuneration for their services Is Company Liable for Pre-incorporation Contract
Generally, a company is not liable for pre-incorporation contracts before company registration
This is because a company doesn't legally exist until it's incorporated, hence promoters are typically personally liable for these contracts.

Cases:
1. Erlanger v New Sombrero Phosphate Company
  Erlanger was a syndicate that formed a company to acquire phosphate mines on the island of Sombrero
  The syndicate members, acting as promoters, sold the mines to the newly formed company for a substantial sum.
  New Sombrero Phosphate Company revoked the contract stating promoters had breached their fiduciary duty by not disclosing their interest in the transaction to the company.
  House of Lords decision: promoters owed a fiduciary duty to the company and had breached that duty by not disclosing their interest in the transaction

2. Ladywell Mining v Brookes
  5 persons purchased land for mining at Euro 5000
  They formed contract with just formed company(Brookes) at Euro 18000. Later 4 of these 5 became directors of the company
  Company sued these 4 members stating, they had not disclosed their interest in the transaction
  Court freed 4 from blame, stating at time of company formation, they were not directors

Companies Act, 2013

Features

1. One Person Company (OPC): single individual to form and manage a company
2. Corporate Social Responsibility (CSR): Mandates companies to spend a percentage of their profits on socially responsible activities
3. Independent Directors: Public companies are required to have independent directors, ensuring that the board has a diverse range of perspectives
4. Auditor Rotation and Independence
5. Stronger Penalties for Non-Compliance
6. Dormant Companies: companies that have been inactive for a specified period
7. Cross-Border Mergers: cross-border mergers with the permission of the Reserve Bank of India, facilitating international business transactions

Types of companies

Doctrines

Capital

Any asset that can be used to generate income or wealth(money, investments)

Called up Capital
Portion of a company's share capital that shareholders have been requested to pay. It's the amount of money that shareholders have pledged to invest in the company, but may not have been fully paid yet.

Kinds of Capital

Shares

Represents a unit of ownership in a company. Fractional interest in the company's assets and profits, allowing shareholders to participate in the company's growth and receive dividends.

Majority Rule among Shareholders
Decision taken by majority shareholders is taken final

General principles in allotment of shares
Proper Authority: allotment should be made by the board of directors or a committee authorized by them
Timely Allotment: allotment process must be completed within a reasonable period of time, as outlined in the Indian Contract Act, 1872.
Absolute and Unconditional: Allotment should not be subject to any further conditions or stipulations beyond those already stated in the offer document.
Transparency and Fairness:
Proper Record-Keeping: Accurate records must be maintained of all allotments( number of shares allotted, the price, and the details of the allottee. )

Calls on Shares
Demands made by a company on its shareholders to pay the outstanding amount on their shares, when shares are issued partly paid.
Method to make calls on shares:
  Call Notice: formal notice is sent to all shareholders, informing them of the call, the amount due, and the payment deadline.
  Enforcement: If a shareholder fails to pay the call, the company may enforce the payment through legal means or forfeit the shares.

Forfeited Shares
Shares that a company takes back from a shareholder because the shareholder hasn't paid the required subscription money (also known as "call money").

Share Warrant
Instrument that grants the holder the right to purchase shares of that company at a predetermined price in future(whenever shares come)

Share Certificate
Document issued by a company that serves as legal proof of ownership of shares in that company

Cases
1843, Foss v Harbottle:
  Established 2 fundamental principles regarding corporate governance and shareholder rights. Foss, Turton(Plantiffs) were minority shareholders in the Victoria Park Company. They alleged that the company’s directors had engaged in fraudulent transactions, & legal action should be taken.
  Court decision:
   a. Majority Rule principle: if majority rule can correct the wrong, do it. Court will not in intervene.
   b. Proper Plantiff Rule: Yes minority shareholders can be plantiffs if wrong is done with company.

Types of Shares

Meeting

Gathering of 2 or more people, usually company members like shareholders, directors, or other stakeholders, to discuss and make decisions related to the company's business

Can there be 1 man meeting?
While requiring group, some central government meeting, can be held with a single person present

Types of Meeting

Debentures

A debenture is unsecured debt issued by corporations or governments, rely on the creditworthiness and reputation of the issuer
Both corporations and governments frequently issue debentures to raise capital or funds
Debentures have no collateral(something pledged as security for repayment of a loan) backing

Different Kinds of Debentures

Charge

lien created on a company's assets to secure a loan. Company can put this item on mortgage and take loan.

Types of Charges
1. Fixed: Attached to a specific, identifiable asset (e.g., land, buildings, machinery).
2. Floating: class of assets that change during normal course of business (e.g., stock-in-trade, raw materials).

Terms