Taxmann's Company Law – UGCF | NEP by Taxmann

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Contents % ' ! 0

Preface to Fourth Edition

I-5

Syllabus

I-7

Chapter-heads

I-9

UNIT I

INTRODUCTION CHAPTER 1

Journey of the Companies Act so far

Registration and the Effect of Registration

Concept of Corporate Veil or Doctrine of Separate Legal Entity

Public Financial Institution

Characteristics of a Company

Lifting up (or Piercing) the Corporate Veil

Illegal Association (Sec. 464)

Applicability of the provisions of the Companies Act

Meaning of Body Corporate

Ǯ ǯ Ǯ ǯ

or Title (Sec. 453)

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Ǧͳʹ

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CHAPTER 2

Administrative set-up for the Company Law

25 26

ȋ Ǥ ͶͲͺȌ

26 28

Special Courts

31 32 32 32 32

Some Important Mechanisms in the Functioning of the Companies

Act, 2013

(Sec. 410)

ȋ Ȍ ϐ ȋ

Indian Institute of Corporate Affairs (IICA)

Investor Education and Protection Fund (IEPF), Insolvency and

Bankruptcy Code (IBC), 2016, have been explained in Chapters 12 & 14 respectively

33 33

CHAPTER 3

ϐ ϐ Difference between private company and public company ϐ

Power Company on the basis of Government Shareholding ϐ ϐ ϐ Companies on the basis of objective Difference between producer company and private company ϐ

34 35 35 38 43

45 47 51 53 53 58 60 61

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UNIT II

FORMATION AND INCORPORATION DOCUMENTS CHAPTER 4

Promotion

Commencement of Business, etc. (Sec. 10A)

Process of Formation or Incorporation of Company (Sec. 7)

Online Registration of a company

CHAPTER 5

Memorandum of Association [Sec. 2(56)]

Doctrine of Ultra Vires

Alteration of Memorandum of Association

Difference Between Diminution of Capital & Reduction of Capital

CHAPTER 6

Articles of Association [Sec. 2(5)]

Doctrine of Indoor Management (Turquand Rule)

Contents of Articles (Sec. 5)

Difference between Memorandum of Association & Articles of

Alteration of Articles of Association (Sec. 14)

Association

ǦͳͶ

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UNIT III SHARE CAPITAL CHAPTER 7

Prospectus [Sec. 2(70)]

Meaning of Mis-statement in Prospectus

Remedies for Mis-statement in Prospectus

101 102

106

CHAPTER 8

Meaning of Share

108

Meaning of Allotment

114

Further Issue of Share capital (Sec. 62)

121

Demat System

126

General Principles as to Allotment

114

Difference between Right Shares and Bonus Shares

122

132

Statutory Provisions with Regard to Allotment

114

Buy-Back of Shares (Sec. 68)

122

CHAPTER 9

ǡ Requisites of a Valid Call

133

Provisions Regarding Calls on Shares

134

Transmission of Shares (Regulations 23 to 26 of Table F)

138

Forfeiture of Shares (Regulations 28 to 32 of Table F)

135

Difference between Transfer and Transmission of Shares

140

Transfer of Shares (Sec. 56)

136

142

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UNIT IV MANAGEMENT AND MEETINGS CHAPTER 10

Introduction

145

149

Appointment of Directors (Sec. 152)

157

Powers of Directors (Sec. 179)

171

Director

145

Small Shareholders’ Director (Sec. 151)

153

Duties of Directors (Sec. 166)

163

Key Managerial Personnel

174

Woman Director

148

ϐ ȋ Ȍ

154

Meetings of the Board (Sec. 173)

166

177

CHAPTER 11

Introduction

178

Extraordinary General Meeting

182

Postal Ballot

191

199

Annual General Meeting (Sec. 96)

178

184

Voting through Electronic Means (E-Voting)

193

Difference between ordinary business and special business

181

Difference between ordinary resolution and special resolution

190

Virtual Meeting (Online Meeting)

197

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UNIT V

DIVIDENDS, AUDIT AND WINDING UP CHAPTER 12

Meaning of Dividend

203

Concept of Interim Dividend

208

Provisions regarding Declaration and Payment of Dividend

203

Punishment for Failure to Distribute Dividend (Sec. 127)

209

Investor Education and Protection Fund (Sec. 125)

206

210

CHAPTER 13

Introduction

211

ϐ ȋ Ǥ ͳͶͳȌ

214

Secretarial Audit

217

Appointment

211

Rotation of Auditor and Audit Firm [Sec. 139(2)]

216

219

ϐ ȋ Ǥ ͳͶͳȌ

213

Removal of Auditors

217

CHAPTER 14

Meaning of Winding up

220

Winding up under Insolvency and Bankruptcy Code, 2016

225

Modes of Winding up

Winding up by Tribunal (Sec. 270)

220 221

Ǧͳ͹

Voluntary Winding up (under Sec. 59 of IBC) and

Regulations, 2017 (amended upto 16.9.2022)

Pre-Packaged Insolvency Resolution Plan for MSMEs

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Process as per

229 232

234

ANNEXURES ͳǣ

237

ʹǣ

239

Bibliography

243

Ǥ Ǥ ȋ

245

Ȍ ȋ Ȍ Ǧ ʹͲʹ͵ǡ Ǧ Ȍ Ǧ ʹͲʹ͵ǡ Ǧ

247

Ȍ ȋ Ȍ Ǧ ʹͲʹͶǡ Ǧ

249

Ǥ Ǥ ȋ Ȍ ȋ Ǥ Ǥ ȋ

Ǥ Ǥ ȋ Ȍ ȋ

Ȍ Ǧ ʹͲʹͶǡ Ǧ

252

C H A P T E R

FORMATION OF COMPANY

All the companies other than statutory companies come into existence only through the process of registration under the Companies Act. Various stages in formation of company are: 1. Promotion

2. Incorporation

3. Declaration for Commencement of Business in case of a company having a share capital: A company having a share capital shall not commence any business or exercise any borrowing powers unless the conditions stipulated under Sec. 10A are fulfilled.

PROMOTION

Persons who initiate formation of a company are known as promoters. It needs to be noted that person acting only in professional capacity e.g. solicitor, bankers, accountant etc. are not regarded as promoters. Promoters do everything from inception of idea of forming the company and take all steps required for it as entering into agreements with bankers and drafting the memorandum and articles etc. Meaning of Promoter: As per Sec. 2(69) Promoter means a person

1. who has been named as such in a prospectus or is identified by the company in the annual return referred to in Sec. 92; or

2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or 3. in accordance with whose advice, directions or instructions the Board of directors of the company is accustomed to act. 65

UNIT II : FORMATION AND INCORPORATION DOCUMENTS

A person shall not be covered by this clause who is acting merely in a professional capacity.

Legal position of promoter

1. Promoter as Agent of the Company: Promoter is an agent as he acts for the company. But he is not agent in complete sense of the term as there is no principal who has appointed him. Company is yet to come into existence. 2. Promoter as Trustee: Promoter acts in trust for the company. Again he is not trustee in real sense because the company (trust) is yet to be formed. 3. Promoter Stands in Fiduciary Relationship with the Company i.e. the relationship of utmost good-faith. It is the best description of promoter’s position viz-a-viz company. Promoter is to act in the best interest of the company which he is going to form. By virtue of this relationship he is to give benefit of all the negotiations made by him relating to the affairs of the company. This position of promoters was emphasized by various judgments. Case Law: Erlanger v. New Sombrero Phosphate Co. (1874-1880) A ‘syndicate’ represented by Erlanger purchased the lease of the island (in the West Indies, in which were deposits or beds of phosphate of lime) from the liquidator of a former company for £ 55,000 and re-sold it to the company promoted by them (new company registered on Sept. 21st, 1871) for £ 1,10,000. In November, 1871 the purchase price was paid. Contract of purchase was ratified by directors who were all nominated by Erlanger. In February, 1872, the first meeting of shareholders took place. ‘Committee of shareholders’ after investigating the matter of purchase, filed the case for setting aside the purchase on December 24th, 1872. It was held that company could do so as promoters did not discharge their fiduciary duty in the manner expected of them as directors who ratified purchase transaction were their nominees only. Lord Cairns said “the promoters of a company stand undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company.... I do not say that the owner of property may not promote and form a joint stock company and then sell his property to it, but I do say that, if he does, he is bound to take care that he sells it to the company through the medium of a Board of Directors who can and do exercise an independent and intelligent judgment on the transaction... . ” Lord Justice Lindley in Lidney & Wigpool Iron Ore Co. v. Bird described the position of a promoter as follows: “Although not an agent for the company, nor a trustee for it before its formation, the old familiar principles of law of agency and of trusteeship have been extended and very properly extended to meet such cases. It is perfectly

CH. 4 : FORMATION OF COMPANY

well settled that a promoter of a company is accountable to it for all monies secretly obtained by him from it just as the relationship of the principal and agent or the trustee and cestui que trust had really existed between him and the company when the money was obtained.”

In Gluckstein v. Barnes (1900) case it was held that part of the profits which was not disclosed (secret profits) needs to be paid back to the company. Promoter can make profits but no secret profits. Now the question arises to whom the disclosure is required to be made. Disclosure can be made to the independent Board of Directors or whole body of prospective shareholders or in prospectus or Articles of the company.

Remuneration of Promoter

Law nowhere speaks about the remuneration of promoter but in practice his efforts ϐ ǡ proper disclosure. Liability of Promoters

1. Related to Incorporation: As per Sec. 7(6), where at any time after the incorporation of a company, it is proved that the company has been got incorporated by furnishing any false information or by suppressing any material fact in any of the documents or declaration filed for incorporating such company, the promoters shall be liable for action under Sec. 447.

2. Related to Matters to be Stated in Prospectus: Every prospectus issued shall state such information and set out such reports on financial information as may be specified by the Securities and Exchange Board in consultation with the Central Government (Sec. 26). If a prospectus is issued in contravention of the provisions of Sec. 26, every promoter who is knowingly a party to the issue of such prospectus shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees.

3. Civil and Criminal Liability for Misleading Prospectus

Civil Liability for Misleading Prospectus: Where a person has subscribed for securities of a company relying on misleading prospectus and has sustained any loss or damage as a consequence thereof then promoter of the company shall be liable to pay compensation to every person who has sustained such loss or damage.

Criminal Liability for Mis-statements in Prospectus: Where a prospectus issued includes any statement which is untrue or misleading, every promoter who authorized the issue of such prospectus shall be liable under Sec. 447.

UNIT II : FORMATION AND INCORPORATION DOCUMENTS

Pre-Incorporation Contracts (or Preliminary Contracts) Pre-incorporation contracts are the contracts entered into by promoters before incorporation of the company, like purchase of land, ordering machinery etc. Whether these contracts shall be binding on the company or not needs to be Ǥ ϐ ǡ ͳͻ͸͵ judgments i.e. Kelner v. Baxter, that such contracts are not binding on the company and promoters themselves shall be liable for such contracts. ϐ ǡ ͳͻ͸͵ǡ Ǥ ͳͷȋ Ȍ ͳͻȋ Ȍ ϐ prudence provided that such contracts shall be binding on the company if it can be established that these were entered into for the purpose of the company and warranted by the terms of incorporation (i.e. very well related to the business for which company is being formed) and adopted by the company later on and such acceptance is communicated to the other party to the contract.

Formation of company (Sec. 3)

As per Sec.3(1) A company may be formed for any lawful purpose by: 1. seven or more persons, where the company to be formed is to be a public company; 2. two or more persons, where the company to be formed is to be a private company; or 3. one person, where the company to be formed is to be One person company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration. A company formed may be either: 1. a company limited by shares, or 2. a company limited by guarantee, or 3. an unlimited company.

Figure 4.1

Formation of Company

Private

Limited by shares

Limited by guarantee Unlimited company

Public

Limited by shares

Limited by guarantee Unlimited company

OPC

Limited by shares

Limited by guarantee Unlimited company

CH. 4 : FORMATION OF COMPANY

PROCESS OF FORMATION OR INCORPORATION OF COMPANY ȍ Ǥ͹Ȏ (1) Application for Registration: Application for registration shall be filed with the Registrar within whose jurisdiction the registered office of the company is proposed to be situated. (2) Documents and information to be filed for registration:

(a) Memorandum of Association, signed by all the subscribers; (b) Articles of Association, signed by all the subscribers; (c) Declaration in Form No. INC-8:

(i) a declaration in Form No. INC-8 by professionals (an advocate, a chartered accountant, cost accountant or company secretary in practice), who is engaged in the formation of the company, and

(ii) by a person named in the Articles as a director, manager or secretary of the company;

that all the requirements of this Act and the rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with;

(3) Declaration from subscribers and first directors in Form No. INC-9: A declaration from each of the subscribers to the Memorandum and from persons named as first directors, if any, in the Articles that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous Company Law during the preceding five years and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete to the best of his knowledge and belief; (4) Address for correspondence: The address for correspondence till its registered is established needs to be provided; (5) Particulars of every subscriber to the Memorandum along with the proof of identity; (6) Particulars of first directors including proof of identity along with particulars of the interest of the first directors of the company in other firms or bodies corporates; (7) Consent of the persons mentioned as first directors of the company in Form No. DIR-2. ϐ ǣ ϐ register and issue a ϐ Ǥ Ǧͳͳ to the effect that the proposed company is incorporated under this Act.

UNIT II : FORMATION AND INCORPORATION DOCUMENTS

Corporate identity Number:

ϐ ǡ ϐ ȋ Ȍǡ ϐ Ǥ CIN is a 21 digit alpha numeric number.

ONLINE REGISTRATION OF A COMPANY

Company comes into existence through a legal process of registration. The process starts with reservation of name which can be done through Part A of ϐ Proforma for Incorporating Company Electronically Plus: INC-32 (i.e. SPICe+: INC-32)*. Name proposed, if approved is available for 20 days from the date of approval under Rule 9. With effect from 26th January, 2021, Rule 9A has come into force. Rule 9A provides for extended period for name reserved, upto : (a) 40 days, on payment of fees of Rs.1000 before the expiry of 20 days from the date of approval under Rule 9;

(b) 60 days from the date of approval under Rule 9, on payment of fees of ` 2000 made before the expiry of 40 days as referred in point (a); (c) 60 days from the day of approval under Rule 9, on payment of fees of ` 3000 made before the expiry of 20 days from the date of approval under Rule 9.

In case applicant wants to apply for name, incorporation and other integrated ǡ ϐ Part B of SPICe+: INC-32 together. Memorandum of Association and Articles of ϐ Ǥ ȋ ϐ Ȍ Ǧ ϐ Ǥ Because DIN up to 3 directors can be obtained through SPICe+: INC-32 itself.

Using integrated Web Form SPICe+: INC-32, Private, Public, OPC, Section 8 company and Producer company can be incorporated in India. Web Form SPICe+ shall be accompanied by e-form AGILE-PRO-S** [Application for Goods & Services ϐ ȋ Ȍǡ Registration plus Employees Provident Fund Organization Registration, Professional Tax Registration (for States of Maharashtra, Karnataka and West Bengal), opening of Bank Account and Shops & Establishment Registration (at Delhi)] i.e., linked e-form INC-35 [as per Rule 38A of the Companies (Incorporation) Amendment Rules, 2020]. The process of incorporation ends with ϐ Ǧͳͳ. Note: In SPICe + Part-A, NIC Code 2008 have been introduced with the option of selecting three business activities (w.e.f. 23/1/2023).

*New web form SPICe+: INC-32 has replaced erstwhile SPICe Form, w.e.f. 23/2/2020. Again revised w.e.f. 23/1/2023 **AGILE-PRO has been replaced by AGILE-PRO-S w.e.f. 7th June, 2021.

CH. 4 : FORMATION OF COMPANY

Ǯ ǯ ϐ diagram below:

Figure 4.2

Online Registration of Company z Go to the Tab Sign in on mca.gov.in

z Register and login V3 Filing

Integrated Web Form SPICe+:INC-32 Part A SPICe+:INC-32 for Reservation of Name Name, If approved, available for 20 days (Rule 9)

Extension of period of reservation of name (Rule 9A)

Part B SPICe+:INC-32 for incorporation and other services

Maximum of three individuals can apply for DIN through this Form ϐ eMoA (INC-33) eAoA (INC-34) (If number of subscribers more ͹ signed outside India, physically signed copies of MoA and AoA to be submitted electronically).

In case of Licensed Company INC-13 for e-MoA INC-31 for e-AoA ȋ ϐ licensed Co. by MCA 21, Version-3 w.e.f. 23/1/2023)

z ϐ

z Attachments to INC-32 (INC 8 & 9)

UNIT II : FORMATION AND INCORPORATION DOCUMENTS

ϐ Ǧ ϐ

Document Approved

ϐ Incorporation in Form No. 11 containing PAN and TAN

ϐ ϐ ȋ Ȍ Ǥ ϐ Ƭ Registrar CRC If Registrar CRC ϐ ϐ ϐ ϐ Document found to be defective or incomplete

First opportunity for removal of defect and resubmission within 15 days still incomplete

Second opportunity for removal of defect and resubmission within 15 days if still defective REJECTED

Did you know? Ministry of Corporate Affairs (MCA) has integrated with National Single Window System (NSWS) for the Incorporation of Companies. Incorporation services can also be availed through NSWS portal.

Explanation of Terms Used in Figure 4.2: CRC means Central Registration Center

Dtd: 23/10/2023

PAN means Permanent Account Number

TAN means Tax Deduction and Collection Account Number

INC-8 for declaration by an Advocate, a Chartered Accountant, Cost Accountant, Company Secretary in practice and by Director, Manager or Secretary that all requirements related to incorporation have been complied with.

INC-9 for declaration under Sec. 7(1)(c) from each subscriber and person named as director that they are not guilty of any fraud and documents give a true and complete information.

CH. 4 : FORMATION OF COMPANY

DIR-2 for consent of directors to act in that capacity (now in form of declaration only w.e.f. 23/1/2023).

Notes: 1. In SPICe + if correspondence address provided is the address of registered ϐ Ǧ ȋ Ǥ Ǥ Ȍ Ǥ 2. Where a person seeking appointment as director is a national of a country which shares land border with India, the security clearance from the Ministry of Home Affairs is required w.e.f. 1/6/2022. Effect of Registration

Sec. 9 explains that on registration, the company shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of the incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract or to sue and to be sued, by the said name. Certificate of Incorporation (CoI) and its Conclusiveness

Under Secs. 34 & 35 of the erstwhile Companies Act i.e., Companies Act, 1956, the CoI used to be described as conclusive evidence of the fact of existence of company & compliance with legal formalities relating to incorporation stage and once the company obtained it, nothing could be enquired into its validity even if it was acquired by wrong means. However, there is no concept of conclusiveness of CoI in the Companies Act, 2013. Let us examine the consequences of incorporation by wrong means in the ensuing section. Consequences of incorporation by wrong means:

(1) If any person furnishes any false or incorrect particulars of any information or suppresses any material information being aware of it in any of the documents filed, he shall be liable for action under Sec. 447. (2) If at any time after the incorporation of a company, it is proved that the company has been got incorporated by furnishing false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company, or by any fraudulent action, the promoters, the persons named as the first directors of the company and the persons who made declaration shall each be liable for action under Sec. 447.

(3) As per Sec. 7(7) where a company has been incorporated by furnishing false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company, or by any fraudulent action, the Tribunal may, on an application made to it(i) pass such orders for regulating the management of the company including changes in Memorandum and Articles; or

(ii) direct that the liability of the members shall be unlimited; or

UNIT II : FORMATION AND INCORPORATION DOCUMENTS

(iii) direct removal of the name of the company from the register of the companies; or (iv) pass an order for the winding-up of the company; or (v) pass such other orders as it may deem fit.

However, before making any such order the company shall be given a reasonable opportunity of being heard and Tribunal shall also take into consideration the transaction and obligations of the company undertaken so far.

ǡ Ǥ ȍ Ǥ ͳͲ Ȏȗ

1. A Company having a Share Capital shall not commence any business or exercise any borrowing powers unless it fulfils the conditions stipulated under Sec. l0A. Stipulated conditions are as follows:

(a) Filing of declaration: A declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company in Form INC-20A and verified by CA or CS or Cost Accountant in practice in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and

(b) Filing a verification of registered office: The company has filed with the Registrar a verification of its registered office (in Webform INC-22) under Section 12(2). Any of the following documents shall be attached to above Form: (i) the registered document of the title in the name of the company, or

(ii) the notarized copy of lease or rent agreement with rent receipt, or

(iii) authorization from the owner to use the premises, and

(iv) the evidence of any utility service like telephone, gas, electricity depicting address of the premises.

Note: At the time of incorporation company may specify the address for correspondence only. Address of registered office can be intimated to RoC within 30 days of incorporation. 2. Penalty in case of Default: If any default is made in complying with the requirements of this section, the company shall be liable to a penalty of fifty thousand rupees and every officer who is in default shall be liable to a penalty * Inserted by the Companies (Amendment) Act, 2019 w.r.e.f. 2/11/2018.

CH. 4 : FORMATION OF COMPANY

of one thousand rupees for each day during which such default continues but not exceeding an amount of one lakh rupees.

3. Consequence of non-filing of Declaration: In case no declaration has been filed with the Registrar under Sec. 10A(1)(a) and the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may initiate action for the removal of the name of the company from the Register of Companies under Sec. 248. Did you know?

There is zero fee for the incorporation of companies with: - authorized capital upto 15 lakh, or - up to 20 members where no share capital is applicable.

Company Law – UGCF | NEP AUTHOR PUBLISHER

: :

RAJNI JAGOTA TAXMANN

DATE OF PUBLICATION EDITION

JANUARY 2025 4TH EDITION

ISBN NO NO. OF PAGES

: : :

BINDING TYPE

9789364553667 272 PAPERBACK

Rs. 475

DESCRIPTION This book is a comprehensive textbook on Company Law designed to provide students with updated, concise, and clear study material in a compact manner. It addresses the regulatory and procedural aspects of company law, legal documentation, capital-raising processes, and corporate decision-making and winding-up procedures. It caters to undergraduate courses in commerce and management, particularly: • B.Com. (Hons.) under the Undergraduate Curriculum Framework (UGCF) • B.Com. under the UGCF • Non-Collegiate Women's Education Board (NCWEB) • School of Open Learning (SOL), University of Delhi • Other Universities throughout India The Present Publication is the 4th Edition (based on the National Education Policy [NEP]), authored by Dr Rajni Jagota, with the following noteworthy features: • [Latest Amendments & Developments] at relevant places, featuring: o Extended window for Demat of Shares in Producer Companies o Recent revision in SS-1 and SS-2 effective from 1st April 2024 o Virtual General Meetings allowed up to 30th September 2025 o Establishment of a Central Processing Centre (CPC) for processing e-forms (effective February 2024) • [Extensive Use of Government Websites] for authentic references • [Practical Exercises] aligned with NEP goals • [Case Laws & Illustrations] for easy comprehension (including a landmark Apex Court judgment dated 14.12.2023) • [Did You Know & Knowledge Points] to enhance understanding • [Figures & Tables] providing a bird's eye view of the legal process • [Examination Questions & Practical Problems] at the end of each chapter, along with coverage of past examination questions from various B.Com. (Hons.) and B.Com. (Pass) semesters

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