INTRODUCTION OF COMPANY LAW

 

1. Company.

   Lindley, L.J., defines a company as “an association of many persons who contribute money or money’s worth to a common stock, and employ it in some common trade or business(i.e., for a common purpose), and who share the profit or loss (as the case may be) arising therefrom.  The person who contribute it, or to whom it belongs, are members.  The proportion of capital to which each member is entitled is his share.  Shares are always transferable although the right to transfer them is often more or less restricted”.

 

1. one person company

 Section 2(62) of Companies Act defines a one person company as a company that has only one person as to 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 company that has only one shareholder as its member.  Such companies are generally created when there is one founder/promoter for the business.

 

2. Doctrine of Ultra Vires

   Ultra vires is a Latin word meaning “beyond the powers”.  An act which requires legal authority but is done without it, is characterised in law as ultra vires.  Its opposite, an act done under proper authority, is intra vires (“within the power”).  Acts that are intra vires may equivalently be termed “valid” and those that are ultra vires “invalid”.

 

3. Memorandum of Association  

   A Memorandum of Association (MOA) is a legal document prepared in the formation and registration process 0f a limited liability company to define its relationship with shareholders.  The MOA is accessible to the public and describes the company’s name, physical address of registered office, names of shareholders and the distribution of shares.  The MOA and AOA serve as the constitution of the company.  The MOA is not applied in the U.S. but is a legal requirement for limited liability companies in European countries including the United Kingdom, France and Netherlands, as well as some Commonwealth nations.

 

4. Articles of Association

    According to Section 2(5) of the Companies Act, 2013, “Articles means the Articles of Association of a company originally framed or as altered from time to time or applied in pursuance of any previous Companies Law or of this Act”.

 

5. Prospectus.

  A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public.  A prospectus is filed for the stock, bond, and mutual fund offerings.  A prospectus is used to help investors make a more informed investment decision.

 

6. Lieu of Prospectus.

 The Statement in Lieu of Prospectus is a document filed with the Registrar of the Companies when the company has not issued prospectus to the public for inviting them to subscribe for shares.  The statement must contain the signatures of all the directors or their agents authorized in writing.  It is similar to a prospectus but contains brief information.

 

7. Doctrine of Indoor Management

  The Doctrine of Indoor Management was first coined by Lord Hatherley in the case Royal British Bank vs. Turquand.  It is basically an exception to the doctrine of constructive notice.  Its purpose is to safeguard the ignorant stranger who deals with the company in good faith.  According to this doctrine, the outsider who deals with the company has the right to assume that so far as the internal proceedings are concerned everything has been done regularly and in accordance with the Memorandum and Articles.

8.  Red Herring Prospectus

     A red herring is a preliminary prospectus filed by a company with the Securities and Exchange Commission (SEC), usually in connection with the company’s initial public offering (IPO).  A red herring prospectus contains most of the information pertaining to the company’s operations and prospectus but does not include key details of the security issue, such as its price and the number of shares offered.

 

9. Shelf Prospectus

     Shelf prospectus is a type of public offering where certain issuers are allowed to offer and sell securities to the public without a separate prospectus for each act of offering.  The provisions relating to the issue of Shelf Prospectus are contained in Section 31 of the Companies Act, 2013.

 

10. Share.

     Section 2(84) defines the term ‘share’ as a share in the share capital of a company and includes stock.  Section 44 provides that the shares in a company shall be a movable property transferable in the manner prescribed by the articles of the company.

 

11.  Share Capital

   Every company limited by shares must have a share capital.  Share Capital of a company refers to the amount invested in the company for it to carry out its operations.  The share capital may be altered or increased subject to certain conditions.  A company’s share capital may be divided into small shares of different classes.

 

12. Equity Shares

     Equity Shares with reference to any company limited by shares, means all share capital which is not preference share capital.  Equity shares are two types;

     *With voting rights

     *With differential rights to voting, dividends, etc.,

 

13. Preference Shares

     Preference shares are those shares of a company which carries or would carry a preferential right with respect to payment of dividend, repayment in case of a winding up of repayment of capital.  In case of winding up, the preference shareholders can get back their capital before any other classes of shareholders.

 

14. Debenture

     The word debenture is derived from the Latin word “debere” meaning “TO OWE”.  In its simplest sense, it means a document, which either creates or acknowledges a debt.

 

15. Types of Debenture

On the basis of registration

*Registered debentures

     *Bearer debentures

On the basis of Security

     *Secured debentures

     *Unsecured debentures

On the basis of Redemption

*Redeemable debentures

     *Perpetual or irredeemable debentures

On the basis of conversion

 *Non-convertible debentures

         *Partly convertible debentures

         *Fully convertible debentures

          *Optionally convertible debentures

 
16. Types of Preference Shares

     *Cumulative preference shares

     *Non-cumulative preference shares

     *Participating preference shares

     *Non-participating preference shares

     *Convertible preference shares

     *Non-convertible preference shares

     *Redeemable preference shares

     *Guaranteed preference shares

 

17.  Member in a company

The company law does not prescribe any disqualifications, which would depart a person form becoming a member of a company.  It appears that any person who is competent to enter into valid contract can become a member of a company.  The reason is obvious.  Subscribing for shares is basically a contract between the company and the shareholder.  However, the memorandum or articles may impose certain restrictions or restrain certain persons from acquiring membership in a company.  In the absence of any express provision regarding the capacity of a person, as stated already the previous of section 11 of the contract act shall apply.

 

18. Member

A member is one of the company’s owners whose name has been entered on the register of members.  Members delegate certain powers to the company’s directors to run the company on their behalf.  What is a shareholder?  A shareholder is a person who buys and holds shares in a company having a share capital.

 

19. Director

 A director is a person from a group of managers who leads or supervises a particular area of a company.  Companies that use this term often have many directors spread throughout different business functions or roles (e.g. director of human resources).

 

20. ESOP

 Employee Stock Option Plan is an employee-owner method which provides ownership stake to its employees.  This method is used by the organization to attract, encourage and retain its employees.  The employees are given an option and it does not obligate the employee to accept this scheme.  An ESOP is an option given to its whole time directors and permanent employees the benefit or the right to purchase the stock of the company at a predetermined price.

 

21. Rights issue

    A right issue is an invitation to existing shareholders to purchase additional new shares in the company.  This type of issue gives existing shareholders securities called rights.  With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.

 

22. Bonus share

  Section 63 provides for the issue of bonus shares.  Section 63(1) provides that a company may issue fully paid up bonus shares to its members out of its,

     *free reserves

     *the securities premium account; or

     *the capital redemption reserve account.

 

23.  Sweat Equity Shares

   Section 2(88) defines the expression ‘sweat equity shares’ as such equity shares as issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

 

24.  Types of share capital

 *Registered, Authorised or Nominal capital

     *Issued capital

     *Unissued capital

     *Subscribed capital

     *Called up capital

     *Uncalled up capital

     *Paid up capital

     *Reserve capital or Reserve liability