Companies act 2013

KEY NOTES TO COMPANIES ACT 2013
• DESINED AS PER SYLLABUS FOR DETAILED
KNOWLEDGE AND CASE STUDIES PLZ STUDY
N.D. KAPOOR

4. Companies Act 2013
• 4.1 Meaning & nature of Company
• 4.2 Formation of Company
• 4.3 Memorandum of Association
• 4.4 Article of Association
• 4.5 Prospectus
• 4.6 Share capital & Membership
• 4.7 General Meetings & Proceedings
• 4.8 Directors & Powers

Meaning & nature of Company
• A voluntary association of persons formed for
some common purpose.
• “company” means a company incorporated
under this Act or under any previous company
law;

Lifting of Corporate Veil
• The doctrine of lifting the corporate veil means
ignoring the corporate nature of the body of
individuals incorporated as a company. A
company is a juristic person, but in reality it is a
group of person who are the beneficial owners of
the property of the corporate body. Being an
artificial person, it (company) cannot act on its
own, it can act only by natural persons. The
doctrine of lifting the veil can be understood as
the identification of the company with its
members.

ctd
• Lifting of corporate veil means disregarding the corporate
personality and looking behind the real person who are in the
control of the company. In other words, where a fraudulent and
dishonest use is made of the legal entity, the individuals concerned
will not be allowed to take shelter behind the corporate personality.
In this regards the court will break through the corporate veil.
According to the definition of Black Law Dictionary," the piercing
the corporate veil is the judicial act of imposing liability on
otherwise immune corporate officers, Directors and shareholders
for the corporation's wrongful acts."Aristotle said, when one talks
of lifting status of an entity corporate veil, one has in mind of a
process whereby the corporate is disregarded and the incorporation
conferred by statute is overridden other than the corporate entity
an act of the entity.

When the veil is lifted:
• 1.Fraud
The courts have been more that prepared to pierce the corporate veil when it
fells that fraud is or could be perpetrated behind the veil.
• 2. Group Enterprises
Sometimes in the case of group of enterprises the Solomon principal may not
be adhered to and the court may lift the veil in order to look at the economic
realities of the group itself.
• 3. Agency
In the case of Bodrip v. Solomon Justice Vaughan Williams expressed that the
company was nothing but an agent of Solomon " That this business was Mr.
Solomon's business and no one else's; that he chose to employ as agent a
limited company; that he is bound to indemnify that agent the company and
that this agent, the company has lien on the assets………"
• 5. Tort
Usually the English courts have not lifted the veil on the ground of tort it is a
phenomenon not witnessed in most common law jurisdictions apart from
Canada

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• 4. Trust
The courts may pierce the corporate veil to look at the characteristics of the
shareholders. In the case of Abbey and Planning the court lifted the corporate veil.
In this case a school was run life a company but the shares were held by trustees
on educational charitable trusts. They pierced the veil in order to look into the
terms on which the trustee held the shares.
6. Enemy character-
In times of war the court is prepared to lift the corporate veil and determine the
nature of shareholding as it did in the Daimler case where germen shareholders
held the shares of an English company during the time of world war 1.
7. Tax-
At times tax legislations warrant the lifting of the corporate veil. The courts are
prepared to disregard the separate legal personality of companies in case of tax
evasions or liberal schemes of tax avoidance without any necessary legislative
authority.

Formation of Company
Incorporation of Companies
STEPS, DOCUMENTS AND
INFORMATION REQUIRED
FOR INCORPORATION OF A
COMPANY UNDER THE
COMPANIES ACT, 2013

STEPS, DOCUMENTS AND INFORMATION REQUIRED FOR
INCORPORATION OF A COMPANY UNDER THE COMPANIES ACT, 2013
1. Reservation of Company Name:
First, the applicants are required to apply for a name in Form No. INC-1. The fee for seeking a
name approval is Rs.1000/- as prescribed and 60 days are allowed for incorporating the
company. The name should not be undesirable i.e.; identical, resembling, restricted or
prohibited.
2. Provision for Entrenchment:
As per section 5(3) of The Companies Act, 2013, articles may contain provisions for
entrenchment to the effect that specific provisions of the articles may be altered only if
conditions or procedures more restrictive than as applicable in case of special resolution, are
met or complied. Where the articles contain the provisions for entrenchment, the company
shall give notice to the Registrar of such provisions in Form No. INC-2 for one person
company (OPC) or Form No. INC-7, as the case may be, along with the prescribed fee at the
time of incorporation of the company or in case of existing companies, the same shall be filed
in Form No. MGT-14 within thirty days from the date of entrenchment of the articles, as the
case may be, along with the fee as prescribed.
3. Drafting of Memorandum and Articles of Association:
The memorandum (MoA) should be drafted keeping in mind the provisions of section 4 of The
Companies Act, 2013 and objects should not be contrary to those as per Form No. INC-1. The
Model MoA as prescribed in Table A to E of Schedule I of The Companies Act, 2013 can be
adopted as applicable.

4. Application for Incorporation of Companies
After obtaining availability of name (see sample name approval certificate, applicants should
file Form No. INC-7 for other than OPC and in Form No. INC-2 (for OPC) with Jurisdictional
Registrar of Companies (ROC) along with required information in attachments and along with
prescribed fee.
5. Documents to be filed for Incorporation
Section-7 prescribes the various documents and information to be filed with RoC for
registration of a new company as under:
(1) MoA and AoA duly signed and verified.
(2) Declaration by Professionals INC-08 .
(3) Declaration from Director, Manager or Secretary.
(4) Affidavit from each subscribers and first directors INC-09.
(5) The address for correspondence.
(6) Complete Details of Subscribers with proof of identity.
(7) Complete Details of first Directors with proof of identity.
(8) Particulars of interest of first directors in other firm/body corporate and NoC.
6. Particulars of first directors of the company and their consent to act as such
The particulars of first directors of the company and his interest in other firms or bodies
corporate along with his consent (Form DIR.2) to act as director of the company shall be filed in
Form No.DIR.12 along with the prescribed fee.

7. Notice of Situation of Registered Office:
The particulars of the registered office of the company should be filed in Form No. INC-22.
8. Payment of Fee:
While uploading various documents prescribed fee can be paid online including stamp duty
for MoA.
9.Certificate of incorporation:
After the RoC is satisfied that all documents and information which is required has been
filed in the prescribed manner and along with prescribed fee, the Certificate of
Incorporation shall be issued by the Registrar in Form No. INC-11
 Every company must have a registered office from the day it starts its business or within 30
days of getting the Certificate of Incorporation, whichever is earlier. Memorandum of
Association must state the name of the State in which the registered office of the company
is situated.
 This clause is important as it mentions the residence for the purpose of the communication
with the company. It determines the jurisdiction of the company and also mentions the
place where all the records of company are maintained. Where the company wants to
change its registered office from one state to another then it can do so by passing a special
resolution as well as by confirmation of Company Law Board.

Object Clause
MAIN OBJECTS
Objects incidental or ancillary to the attainment of the
main objects.
OTHER OBJECTS.
Objects stated in the main objects are to be pursued by
the company immediately after incorporation or within
reasonable time thereafter.

Liability clause
 This clause states that the liability of the members is
limited to the extent of the shares subscribed by the
member or shareholders if the company is formed with
share capital.
 Amount of capital with which the company is to be
registered and its division into shares of a fixed amount
must be stated in the MOA of a company.
 The capital with the company is registered is called
“Authorized capital” or “Registered Capital”.

Membership of a Company
 Who is a member of a company: -
 The subscriber to the memorandum of a company shall be deemed
to have agreed to become members of the company and on its
registration, shall be entered as members in the register of the
members.
 Every other person who agrees in writing to become a member of a
company and whose name is entered in its register of members,
shall be a member of the company.
 Every person holding equity share capital of the company.
 Other ways:
1. Succession
2. Insolvency of a member
3. Beneficial owner

Who can be a Member
 Minor
 Company
 Trust
 Partnership Firm
 Society
 Non-Resident

Rights of a Member
 To receive notices of all general meetings.
 To attend and vote at general meetings, appoint
directors and auditors of the company.
 To receive copies of accounts of the company.
 To transfer his/her shares.
 To receive share certificate.
 To receive dividends in case of preference shares.
 To make an application to the central government for
ordering investigation into the affairs of the company.
 To be registered as a shareholder in company books.
 To present a petition to the court for winding up of the
company.

“Memorandum of Association of a
company is its charter & defines the
limitations of the powers of a company. It
contains the fundamental condition upon
which alone the company is allowed to be
incorporated”
- Lord Cairns
MEMORANDUM OF ASSOCIATION

Definitions
“Memorandum of Association of a company as
originally framed or as altered from time to time in
pursuance of any previous companies law or of this
Act”
Sec.2 (28)

“The purpose of Memorandum of Association is to
enable the share holders, creditors and those who
deal with the company to know what its permitted
range of enterprise is.”
- Lord Macmillan

• Form as given in table B, C, D, & E in Schedule I
• Printed
• Divided into paragraphs
• Numbered consecutively
• Signed by at least 7 persons for public & 2 for
private company. Signatures attested by one
witness. Subscribers shall at least take one share
FORM OF

Six Clauses
CONTENTS OF MEMORANDUM OF
ASSOCIATION
Name Registered
office
Liability Capital
Association
or subscription
Objects

The words :
• Ultra means beyond
• Vires means the powers
• Ultra Vires means beyond the powers
A company which owes its incorporation to statutory
authority cannot effectively do anything beyond the
powers expressly or impliedly conferred upon it by the
statute or Memorandum of Association.
DOCTRINE OF ‘ULTRA VIRES’

The company has been formed with the object :
• To make and sell, or lend or hire railway carriage
and wagons and all kinds of railway plants, to
carry on the business of mechanical engineers and
general contractors etc.
• The company contracted with Riche to finance the
construction of Railway line in Belgium. The
company repudiated the agreement and was sued
for breach of contract.
ASHBURY RAILWAY CARRIAGE & IRON
COMPANY LTD. Y. RICHE

Rich Contended :
• Firstly, that the contract in question came well
within the meaning of the words ‘general
contractors’, and, was therefore, within the powers
of the company, secondly, that the contract was
ratified by the majority of the shareholders.
ASHBURV RAILWAY CARRIAGE & IRON
COMPANY LTD. Y. RICHE

• Void ‘Ab Initio’
• Injunction
• Personal Liability of Directors
• Acquisition of Property that is Ultra Vires
• Directors personally liable to third parties
EFFECTS OF DOCTRINE OF ULTRA
VIRES

• Special Resolution.
• Written Approval of Central Government.
• No Approval of Central Government is
necessary if the change of name involves only
the addition or deletion of the word “Private”.
• Change by ordinary resolution and approval of
Central Government when name is identical or
too closely resembles the name of an existing
company.
ALTERATION OF NAME CLAUSE

From one premises to another premises in the
same city, town or village
• By passing a resolution of Board of Directors
CHANGE OF REGISTERED OFFICE

From one town or city or village to another town
or city or village in the same state
1. Special Resolution.
2. Confirmation of Regional Director — when
jurisdiction of Registrar of companies is
changed.
3. Copy of (i) & (ii) to be filed with ROC.
4. Notice of new location to ROC within 30
days.

From one state to another state
1. Special Resolution
2. Confirmation of Central Govt.
3. For certain Purposes only
(As given in section 17)

A. Special Resolution
B. Alteration is sought on any of these grounds:
• To carry on its business more economically & more
efficiently
• To attain its main purpose by new or improved means
• To enlarge or change the local area of its operations
• To carry on some business which under existing
circumstances may conveniently or advantageously be
combined with the business of the company
• To restrict or abandon any of the objects specified in the
memorandum
• To sell or dispose off the whole or any part of the
undertaking
• To amalgamate with any other company
C. Copy of (A) is filed with ROC within 30 days
ALTERATION OF OBJECTS CLAUSE

• The liability of a member of a company cannot
be increased unless the member agrees in
writing.
• From unlimited liability, it can be made limited
by re-registration of the company.
ALTERATION OF LIABILITY CLAUSE

• Increase of authorized share capital.
• Consolidation and subdivision of shares.
• Conversion of shares into stock & vice versa.
• Diminution of share capital.
ALTERATION OF CAPITAL CLAUSE

Definition
‘Article’ means the articles of association of a
company as originally framed or as altered from
time to time in pursuance of any previous
companies laws or of this Act’
Sec.2 (2)
ARTICLES OF ASSOCIATION

“…. The articles proceed to define the duties, the
right and the powers of the governing body as
between themselves and the company at large and
the mode and form in which the business of the
company is to be carried on and the mode and form
in which changes in the internal regulations of the
company may from time to time be made.
- Lord Cairns
ARTICLES OF ASSOCIATION

1. The extent to which Table ‘A’ is applicable
2. Different classes of shares and their rights
3. Procedure of making an issue of share
capital and allotment thereof
4. Procedure of issuing share certificates and
share warrants
5. Forfeiture of shares and the procedure of
their re-issue
6. Procedure for transfer and transmission of
shares
CONTENTS OF ARTICLES

7. The time lag in between calls on shares
conversion of shares into stock
8. Directors, their appointment, remuneration,
qualifications, etc.
9. Account and audit
10. Lien of shares
11. Payment of commission on shares and debentures
to underwriters
12. Rules for adoption for ‘preliminary contracts’ if
any

13. Re-organization and consolidation of shares
capital
14. Alteration of share capital & Buyback of
shares
15. Borrowing power of directors
16. General meeting, proxies and polls
17. Voting rights of members
18. Winding up

Procedure :
• Alteration by passing a special resolution.
• Copy of resolution to be sent to registrar
within 30 days.
• Copy of altered articles to be registered
within 3 months of passing of resolution.
ALTERATION OF ARTICLES (SEC 31)

1. Alteration should not be inconsistent with
a. Provisions of Company Act or any other statute
b. Conditions contained in memorandum
2. Approval of govt. to be obtained in certain cases
3. Alteration must not deprive any person of his rights
under a contract
4. Alteration must not constitute a fraud on the
minority
5. Alteration must be bonafide for the benefit of the
company as a whole
LIMITATIONS REGARDING ALTERATION
OF ARTICLES

The following are the legal implications:
• Company is bound to its members
• Each member is bound to the company
• Each member is bound to other members in
exceptional case only
• Neither the company nor the members are bound
to outsiders
BINDING FORCE OF MEMORANDUM AND
ARTICLES (SEC 36)

Memorandum of
Association
Articles of Association
Charter of Company Regulations for interal management
Defines the scope of the activities Rules for carrying out the objects of
company.
Supreme document Subordinate to the memorandum.
Must for every company Company limited by shares need
not have it (Table ‘A’ applies)
Strict restrictions, alteration only
with sanction of central govt./
tribunal.
Can be altered by special
resolution.
Act, ‘Ultra Vires’ is wholly void &
cannot be ratified.
Act ‘Ultra Vires’ (but intra vires the
memorandum) can be ratified.

• Documents are open & accessible to all.
• Presumption that any outsider dealing with
company has read & understood the
documents.
• It is a negative doctrine, acting only against
the outsiders & not the company.
DOCTRINE OF CONSTRUCTIVE NOTICE

• Persons dealing with the company in good faith
have a right to assume that the internal
requirements prescribed in public documents
have been observed
• Persons are not bound to enquire into regularity
of internal proceedings
Exceptions :
• Knowledge of irregularity
• Negligence on part of the outsider
• Forgery
• Acts outside scope of apparent authority
DOCTRINE OF INDOOR MANAGEMENT

PROSPECTUS (Companies
Act 2013)
Clause (70) of Section 2 of this Bill define “prospectus”
means any document described or issued as a
prospectus and includes a red herring prospectus
referred to in section 32 or shelf prospectus referred to
in section 31 or any notice, circular, advertisement or
other document inviting offers from the public for the
subscription or purchase of any securities of a body
corporate.

A red herring prospectus contains most of the information pertaining to the company's
operations and prospects, but does not include key details of the issue such as its price and the
number of shares offered. The term "red herring" is derived from the bold disclaimer in red on
the cover page of the preliminary prospectus . The disclaimer states that registration
statement relating to the securities being offered has been filed with the SEC but has not yet
become effective, the information contained in the prospectus is incomplete and may be
changed, the securities may not be sold and offers to buy may not be accepted before the
registration statement becomes effective. No price or issue size is stated in the red herring.
“Shelf prospectus” means a prospectus in respect of which the securities or class of
securities included therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus.
The shelf prospectus shall indicate that validate period of the shelf prospectus is a period not
exceeding one year from the date of first offer of securities under that prospectus. Once, a
shelf prospectus has been issued, there will be no requirement of any further prospectus for
any subsequent offer of these securities issued during this validity period.
“Information Memorandum”. This information memorandum shall contain all material
facts relating to (i) new charges created; and (ii) changes in financial position of the company
from first/previous offer to this second/subsequent offer under this Shelf Prospectus.

Information in Prospectus:
Every prospectus shall state following information:-
i. names and addresses of the registered office of the
company, company secretary, Chief Financial Officer, auditors,
legal advisers, bankers, trustees, if any, underwriters and such
other persons as may be prescribed;
ii. dates of the opening and closing of the issue, and
declaration about the issue of allotment letters and refunds
within the prescribed time;
iii. a statement by the Board of Directors about the
separate bank account where all monies received out of the
issue are to be transferred and disclosure of details of all
monies including utilised and unutilised monies out of the
previous issue in the prescribed manner;
iv. details about underwriting of the issue;

v. consent of the directors, auditors, bankers to the issue,
expert’s opinion, if any, and of such other persons, as may be
prescribed;
vi. the authority for the issue and the details of the resolution
passed there for;
vii. procedure and time schedule for allotment and issue of
securities;
viii. capital structure of the company in the prescribed manner;
ix. main objects of public offer, terms of the present issue and
such other particulars as may be prescribed;
x. main objects and present business of the company and its
location, schedule of implementation of the project;

xi. particulars relating to—
management perception of risk factors specific to the project;
gestation period of the project;
extent of progress made in the project;
deadlines for completion of the project; and
any litigation or legal action pending or taken by a Government;
xii. minimum subscription, amount payable by way of premium,
issue of shares otherwise than on cash;
xiii. details of directors including their appointments and
remuneration, and such particulars of the nature and extent of
their interests in the company as may be prescribed; and
xiv. Disclosures in such manner as may be prescribed about
sources of promoter’s contribution.

KIND OF SHARE CAPITAL (SECTION 43):
The share capital of companies limited by share
shall be of two kinds, namely;
(a) equity share capital;
(b) Preference share capital.

Equity Share Capital:
For this Section, “Equity share capital” means all share capital
which is not preference share capital. Equity share capital may be
of divided into;
(i) Equity share capital With voting right; or
(ii) Equity share capital with differential rights.
This differential rights may have difference related to dividend,
voting or otherwise in accordance with rules. The term otherwise
bring scope for innovation with in limit of rules. It may be
difference related to managing control, power to appoint director,
or power to appoint proxy and so on.

Preference Share Capital:
Preference share capital of the issued share capital of the company which carries or
would carry a preference right with respect to –
(a) Payment of dividend, either as a fixed amount or an amount calculated at a fixed rate.
Which may be either be free of or subject to income tax; and
(b) Repayment of amount of share capital or share capital deemed to be paid up, whether
or not, there is preferential right specified in the memorandum or article of the company.
Right of Dissenting shareholder:
Where, the holders of not less than 10 percent of issued shares of a class did not consent
to such variation or vote in favour of the special resolution for the variation, they may
apply to the tribunal to have the variation cancelled. Where such application is made
before tribunal, the variation shall have no effect unless and until it is confirmed by the
tribunal.
Any application before tribunal under this section shall be made within twenty – one days
after the date on which the consent was given or the resolution was passed. This
application may be made by any one or more person as these shareholders may appoint
in writing for this purpose.

Voting Rights (Section 47):
Voting rights are subject to provision of Section 43 regarding differential
rights and Section 50 regarding denying voting rights on uncalled capital.
Every member of a company limited by shares and holding equity share
capital therein, shall have a right to vote on every resolution placed before
the company.
This voting right on a poll shall be in proportion to member’s share in the
paid-up equity share capital of the company.
Limited Voting Rights to Preference Shareholder:
A preference shareholder shall also be a member of the company. Preference
Shareholder shall have a right to vote only on resolution
(a) which directly affect the right attached to his preference shares;
(b) resolution for winding up of the company; and
(c) resolution for repayment or reduction of its equity or preference share
capital.

Annual General Meeting:-
As per Section 96 of the Companies Act , 2013,
Every Company other than One person Company must hold a general meeting in
each year apart from other meetings as Annual General Meeting (AGM).
Every Company has to set up a managing Committee to run its smooth working of
managerial works.
Every Company , apart from One person Company ( OPC ) must have to hold in
addition to other meetings, by giving a notice about the meeting, not more than
15 months in between the date of AGM to the next. A Company may hold its first
AGM within the period of 9 months from closing of its first financial year
otherwise in other cases within the period of 6 months. [Section 96(1) of the
Companies Act,2013]
As per the above , if a company hold its meeting, then it has no need to call an
AGM in the year of its incorporation.
However , the registrar may extend the period within any AGM ( not being the
first AGM) shall be held, not exceeding 3 months under section 96(1).

Directors & Powers
Resident Director: The new Act has made certain important changes in the
earlier regime, particularly in respect of the appointment of directors. For
instance, as per Section 149 of the New Act, Board of Directors of a company,
must have at least one resident director, i.e. a person who has lived not less
than 182 days in India in the previous calendar year. The second proviso added
to section 149 in the New Act requires all companies to comply with section
149 within a year.
Woman Director: Similarly, a new provision is introduced under section 149,
which requires certain categories of companies to have at least one woman
director on the board. Such companies are any listed company, and any public
company having-
paid up capital of Rs. 100 cr. or more, or
turnover of Rs. 300 cr. or more.
Nominee Director: Nominee Director is defined under an explanation to
section 149. He is a Director nominated by any financial institution pursuant to
any law for the time being in force, or of any agreement or appointed by any
Government or any other person to represent its interest.

Independent Director: Independent Director is for the first time introduced in the New Act, and
has been clearly defined as “any director other than a managing director, a whole time director,
and a nominee director.” Such a director not having any significant pecuniary relationship with
the company is more efficient. Section 149 (4) requires that one third of the directors should be
independent directors. Section 149(6) lists in detail the specific
qualifications for an independent director-
1.Person of integrity and relevant experience
Is not a promoter, nor has any relation with the promoters or directors of the company, its
holding, subsidiary or associate company;
2.Has no pecuniary relationship with company, its holding, subsidiary or associate company, its
promoters or directors in the preceding two years of his appointment
3.Neither he nor any of his relatives hold together with his relatives two per cent. or more of the
total voting power of the company
4.who possesses such other qualifications as may be prescribed.
5.Neither he, nor any of his relatives have held a key managerial personnel or is or has been
employee of the company or its holding, subsidiary or associate company in any of the three
financial years immediately preceding the financial year in which he is proposed to be appointed.

The Board shall exercise following powers only by means of
resolution passed in its meeting:
(a) to make calls on shareholders in respect of money unpaid on their
shares;
(b) to authorize buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board’s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in
another company;
(k) any other matter which may be prescribed.

Companies act 2013

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