An Overview of Company Law

Definition & characteristics of a private limited company

A private company is one that has a minimum paid-up share capital of one lakh rupees or such greater paid-up share capital as may be stipulated by the Companies Act, 2013 and is governed by its articles.

The Companies Act of 2013 defines private companies in section 2(68). According to this definition, private firms are those whose articles of organisation limit the transferability of shares and prohibit the general public from purchasing them. This is the primary criterion by which private corporations are distinguished from public enterprises.

The section also states that private firms can have no more than 200 members (except for One Person Companies). This figure does not include members who are current or previous employees. Furthermore, more than two people who own shares together are classified as a single entity.

Features of Private Companies

These are some characteristics that set private corporations apart from other types of companies:

There is no minimum capital need: Previously, a minimum paid-up share capital requirement of Rs. 1 lakh was necessary, however, this is no longer the case.

Share transferability is restricted: Unlike public corporations, private corporations cannot freely transfer their shares to the public. This is why private enterprises are never listed on stock markets.

Minimum 2 and maximum 200 members: A private business can have as few as two members (although one is sufficient if it is a Person Company) and as many as 200.

“Private Limited”: The words “Private Limited” or “Pvt. Ltd.” must appear in the name of all private corporations.

Privileges and exemptions: Because private firms do not readily transfer their shares and have limited member interest, the law has provided them with many exemptions that are not available to public corporations.

Illegal association under companies act 2013

Section 464 of the Companies Act governs illegal associations. No corporation, association, or partnership with more than 50 members may be formed to carry on any business for profit unless it is registered under the Companies Act or another Indian law, according to Section 464 of the Act. It is not essential to register such an organisation under the Indian Companies Act. It might be registered under another Indian law.

A legal body corporate is, for example, a limited liability partnership created for the purpose of carrying on business for profit by professionals and registered under the Limited Liability Partnership Act, 2008.

Section 464 further provides that the above restriction as to the number of persons shall, not apply to a Hindu Undivided Family (HUE) carrying on any business or an association or Partnership formed by Professionals who are governed by special Acts. In a limited liability partnership, the maximum number of members is unlimited.

The goal of such an organisation must be to run a profitable business. Non-Profit Organizations and Charitable Associations are exempt from Section 464 since their goal is not to make a profit.

Dormant company and defunct company

What is a defunct company?

A defunct company is one that has no assets and no liabilities and did not begin operations within one year of establishment. According to the Companies Act of 2013, a defunct company is one that is no longer in business. Section 248 of the Companies Act of 2013 removes the names of such companies from the Register of Companies.

What is a Dormant company?

In common usage, the term “dormant” refers to something that is inert or inoperative. Section 455 of the Companies Act of 2013 defines a dormant corporation. According to the Companies Act, a dormant company is one that was created or registered for the following purposes:

• Incorporated for the purpose of a future project; • Possess a valuable asset or intellectual property;
• There haven’t been any notable transactions;
• Is a dormant business.

Such a company can apply to become a dormant company by filing an application with a registrar.

Restrictions upon the borrowing powers of a company

Limitations on a company’s borrowing authority

The amount that contemporary companies can borrow is not limited by their Memorandum of Association. The amount of money that the directors can borrow without the approval of the shareholders meeting is normally limited by the articles of incorporation. The following restrictions apply to directors’ borrowing powers:

1. Statutory Restrictions:

The Indian Companies Act, 1956, bans directors from borrowing more than the sum of the company’s paid-up capital plus free reserves (section 291(1)(d)). If the company incurs a debt that exceeds this limit, the debt will not be lawful or effective unless the lender can show that the loan was issued in good faith and without knowledge that the relevant clause’s restrictions had been exceeded.

2. Limitation under Memorandum or Articles

The Directors must adhere to the borrowing power limitations set forth in the Company’s Memorandum or Articles.

Ultra Vires the Directors

When the directors are given restricted borrowing powers, but they borrow beyond those powers, the borrowing is irregular, and the securities issued in that regard are ineffective. Borrowing like this is Intra Vires for the corporation, but Ultra Vires for the directors. The company’s confirmation of such borrowing may make it lawful.

Ultra Vires the Company

Borrowing by the company outside its powers or beyond the restrictions set out in the Memorandum is ultra vires the company, and the securities issued in exchange are worthless. In this instance, the contract is null and void and cannot be ratified, even though every member of the company claims to be rectifying it.

Power to give security

When a business uses its borrowing capacity, it might put up security in the form of a mortgage or a change on all or part of its assets. It is commonly established that a company’s borrowing abilities include the ability to mortgage or charge its assets. The security of reserve capital cannot be used to secure a loan.

Any charge on the company’s assets must be reported to the registrar of companies within 30 days by completing form No. 8. The Registrar of Companies has the authority to grant a 30-day extension. You must apply to the Company Law Board for condonation of delay if the delay exceeds 60 days.

Allotment of shares

The appropriation of a specific number of shares to an applicant, as well as the distribution of those shares among those who have submitted a written application, is referred to as allotment of shares. It is governed by the Companies Act, 2013 and the rules and regulations incorporated therein, and for Listed Companies) whose shares are listed on the NSE and BSE or any other applicable Stock exchanges in India and whose shares are freely tradable without any restrictions) and Subsidiaries of Listed Companies, the provisions of the SEBI Act, 1992 and the Securities Contracts (Regulation) Act, 1956, apply.

MODE OF ALLOTMENT OF SHARES:

• A public company can allocate shares in a variety of ways:

1. to the general public via prospectus (public offer)
2. by way of a private placement
3. by way of a rights or bonus issue

• Shares can be distributed in the following ways by a private company:

1. by way of a rights or bonus issue
2. through preferential allotment/private placement

Power of company to purchase its own securities

1. The power of a company to purchase its own securities is governed by Section 68 of the Companies Act 2013 and the Companies (Share Capital and Debentures) Rules, 2014.

A company can use to buy its own stock or other specified securities.

• its limitless reserves
• the premium account for securities; or
• the proceeds of any shares or other specified securities that have been issued

The proceeds of an earlier issue of the same kind of shares or other specified securities may not be used to buy back any kind of shares or other specified securities.

2. No company is allowed to buy back its own shares or other specified securities under the sub-sections unless and until the buyback is sanctioned by the company’s articles. If a special resolution authorising the buyback has been passed by the company’s general meeting.

The buyback represents no more than 25% of the company’s total paid-up capital and free reserves. If equity shares are to be bought back, the amount included in the buyback should not exceed 25% of the paid-up equity share capital in that financial year.

The total amount of secured and unsecured debts held by the company after the buyback is not more than twice the paid-up capital and free reserves.

Specified securities and all the shares for buyback are wholly paid up.

3. The notice of the meeting in which the special resolution is proposed to be passed under clause (b) of sub-section (2) will include the following explanatory statement.

• Complete and total disclosure of all material facts.
• The necessity of the buyback.
• The stock class and security to be purchased as part of the buyback.
• The deadline for completing the buyback.

4. Each buyback must be completed within one year of the special resolution’s enactment.
5. The buyback beneath the sub-section (1) maybe

• From the prevailing shareholders or security holders on a proportionate basis.
• By purchasing the securities issued to the company’s employees in accordance with a scheme of sweat equity or stock option.
• From the open market.

Provision related to buyback of shares

1. Approval – Depending on the buyback percentage, the buyback might be approved by the board of directors at a board meeting or by a special resolution passed by shareholders at a public meeting.

• The board of directors has the authority to approve up to 10% of total paid-up equity capital and free company reserves.
• Shareholder approval up to 25% of paid-up capital and free corporate reserves in total.

2. The buyback should be sanctioned by the company’s AOA (articles of association). If the articles of association (AOA) do not have a provision for it, they would have to change them before proceeding.
3. Notice of general meeting – The notice of a general meeting in which the special resolution is proposed to be enacted must include an explanatory statement in which the relevant particulars must be filled out in accordance with section 68(3) and rule 17(1) of the Companies Rules, (share capital and debentures) 2014.
4. The buyback methods – the buyback of shares of private and unlisted public companies, maybe;

• From the prevailing shareholders on a proportionate basis.
• By purchasing the securities issued to the company’s employees following a sweat equity scheme or stock option.

The buyback techniques – perhaps buybacks of shares in private and unlisted public companies; – proportional buybacks from existing shareholders. By acquiring the company’s securities provided to employees as part of a sweat equity plan or stock option.

Management and Administration

A company is made up of members, however, it is a separate entity from the members. A company’s members are the people who, for the time being, make up the business as a legal entity. A firm, on the other hand, cannot act on its own since it is an artificial person. As a result, it expresses its will or makes choices through resolutions adopted at legally convened Meetings.

The primary purpose of a Meeting is to guarantee that individuals eligible to participate in the Meeting are given a reasonable and fair chance to make choices in accordance with the rules.

A company’s decision-making abilities are vested in its Members and Directors, who exercise such rights through Resolutions passed by them. Members’ General Meetings provide them with a chance to express their opinions on how the company’s operations are managed. Every year, one of these meetings must be held. More general meetings are held at the discretion of management or if a certain number of shareholders use their right to compel the firm to do so.

Procedure for the meetings and proceedings of a company

Conducting a Board Meeting

The way or technique in which an item or business must be done during a Board Meeting is specified in the company’s articles of association. All discussions, questions, or decisions are resolved by a majority of votes, and if a consensus cannot be reached, the Chairman of the Board of Directors has the casting vote in the event of a tie.

The directors of the committee summon a Board meeting. At a Board Meeting, the corporate directors use their collective authority. A board meeting was required to be convened once every three months under the former Companies Act of 1956, with at least four meetings each year.

Every business must conduct a board meeting at least once every three months, and at least four such meetings should be conducted every year, according to Section 285 of the Companies Act, 2013. If a meeting is called within the time limit, it is not considered a violation, even if it cannot be convened owing to a lack of quorum.

Resolutions of a company and its kinds

Company resolutions are usually passed (approved) by a majority vote of members at a public meeting or directors at a board meeting, although resolutions can also be passed in writing.

The following are the many sorts of business resolutions:

• A member’s ordinary resolution
• The members’ special resolution
• A member’s written resolution (either ordinary or exceptional)
• A resolution of the board of directors (sometimes known as a ‘board resolution’).
• Written resolution of the Directors

The Companies Act 2006 and the articles of association, which generally stipulate when a resolution is necessary and the sort of resolution that should be adopted, set out the decision-making norms and processes that a limited company must follow.

Books of accounts to be kept by Company (Section 128)

The books of accounts, which must include honest and fair financial statements, as well as any related documentation, must be stored at the company’s registered address. The books must be kept on an accrual basis and using the double-entry accounting method. The books of accounts and associated documentation may be stored in India at the discretion of the BOD. The ROC must be provided seven days’ notice before communicating the change address. The accounting can be maintained in an electronic format.

The branch office’s books of accounts can be kept there, but suitable summary returns must be forwarded to the registered office on a regular basis.

Inspection, inquiry and investigation under companies act 2013

Power to investigate, inspect and inquire is vested in Section 206 of the Companies Act where on scrutiny of any document filed by any company or information received by Registrar, he is of opinion that further information or explanation of documents relating to the Company is necessary he may by written notice require the company

(a) to furnish in writing such information or explanation or

(b) to produce such documents, within such reasonable time as may be specified in the notice

It is the responsibility of the business and its executives to provide such information or explanations to the Registrar to the best of their knowledge and ability. If the Central Government believes the circumstances warrant it, it may instruct the Registrar or an inspector nominated by it to conduct an investigation. Every officer of a corporation who is in default is liable for fraud under Section 447 of the Companies Act. Past workers’ details may also be included in the data.

The Central Government can order a company’s books and documents to be inspected by an inspector it has designated for that reason. A fine will be imposed on any officer of the firm who is in default. The penalties may be increased to one lakh rupees for each day if the failure persists after the first.

Prevention of oppression and mismanagement – companies act, 2013

Previously, section 397 of the Companies Act of 1956 dealt with complaints of tyranny and mismanagement. Section 241 of the Companies Act of 2013 establishes the right to file a complaint against oppression. The Company Act’s Chapter XVI explicitly defines who can file a complaint of oppression and mismanagement, as well as when and how they can do so.

First, imagine a circumstance in which a company member files a complaint against the business’s activities, particularly when the affair appears murky and threatens the public’s or the business’s interests, or when the business’s affairs are oppressive in character and against the member filing the complaint. A member may also file a complaint against a major change in the firm’s management or control that appears to be detrimental to the firm. If the central government considers that a company’s dealings are detrimental in character, it can submit an oppression and mismanagement application with the tribunal on its own.

Section 244 of the Companies Act is also important since it specifies who has the authority to make such an application. The company has the right to file on behalf of the other members, and one member has the right to file on behalf of the other members. The right may be differentiated further in a firm dependent on the entities that have a stake.

Compromises, Arrangements and amalgamations – companies act, 2013

The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, are a set of rules that govern the mergers and acquisitions of companies. These regulations will take effect on December 15, 2016. As a result, beginning on December 15, 2016, all proceedings pertaining to Compromises, Arrangements, and Amalgamations (hereinafter referred to as “CAA”) shall be handled in accordance with the provisions of the Companies Act, 2013 and the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.

Sections 230-233 and 235-240 deal with the CAA.

The compromise and agreement method shall be followed in accordance with the most recent recommendations.

1. Whom the Compromise & Arrangement can be proposed to:
2. Who has the authority to file a Compromise and Arrangement application?

Joint Application:

When more than one firm is participating in a scheme, the application may be filed as a joint application at the option of the firms participating.

In the case where the application is not handled by the Company, the following conditions apply.

If the Company fails to file the application, it must do so at least 14 days before the date set for the tribunal’s hearing on the notice.

• The Company must be served with a copy of the notice of admission and the affidavit
• On the liquidator, where the firm is being wound up.

In the application, the applicant must additionally give to the Tribunal the information required by sub-rule, the foundation for identifying each type of members or creditors for the purposes of approving the scheme

Removal of names of companies from the register of companies

The Companies Act, 2013 (the Act) and the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 deal with the removal of company names from the Register of Companies. With effect from December 26, 2016, the same has been announced.

Section 560 of the Companies Act, 1956, had similar provisions, and the method for striking out the company’s name was essentially the same. RoC is increasingly using its authority to filter out organisations that aren’t complying with the law and aren’t conducting any business.

Revival and rehabilitation of sick companies – companies act 2013

Section 253 of the Companies Act of 2013 deals with determining a company’s disease. According to it, if a secured creditor represents 50% or more of a company’s outstanding debt and the company fails to pay the debt within thirty days of receiving the notice of demand or secure or compound it to the reasonable satisfaction of the creditors, the secured creditor must file an application with the tribunal in a prescribed manner.

The tribunal will order a firm to repay its obligations whenever it is satisfied that it has become a sick company and is in a position to do so within a reasonable time.

Following satisfaction, the tribunal will grant the company a fair amount of time to settle its obligations.

Section 254 of the Companies Act, 2013 deals with applications for revival and rehabilitation, and states that any business that has been declared a sick company under section 253 of the Act can apply to the tribunal for an order to take the required procedures for its revival and rehabilitation.

The procedure of winding up of a company – companies act 2013

The term “winding up” refers to the process of dissolving a company. Its major goal is to realise the company’s assets, pay the company’s debts, and divide any excess among the members according to their rights.

The first step of a companies winding-up is when the company’s assets are realised. The firm does not lose its legal position at this point, but in the last stage, dissolution, the legal position of a business is no longer valid. And when a company is dissolved, it comes to an end.

The Companies Act of 2013, which deals with winding up by the Tribunal, and the Insolvency and Bankruptcy Code of 2016, which deals with voluntary liquidation. This article will solely cover the Companies Act of 2013’s provisions for winding up by a tribunal.

Intimation of Winding-up (Section 277)

If the tribunal issues an order for the company’s winding up or appointment of a provisional liquidator, the tribunal must notify the Registrar of Companies within seven days of the order, who must then notify the official gazette after keeping a record of it; in the case of publicly traded companies, the Registrar must also notify the stock exchange.

Modes of winding up of a company

1. A) By the Tribunal-

As per Section 271 of the Companies Act 2013, a company can be wound up by a tribunal under six conditions, mentioned hereinafter-

If the company has by the means of special resolution resolved that it be wound up by the tribunal;

If the Tribunal comes to the conclusion that the company has engaged in fraudulent activities or was formed for unlawful purposes or the persons who have been engaged in the formation of the company have priorly been guilty of fraud;

If the company defaults in the filing of financial statements or annual returns with the registrar for immediately preceding five consecutive financial years;

If the company has acted against the interest of the integrity or morality of India, the security of the state, or has spoiled any kind of friendly relations with foreign or neighbouring countries;

If the Tribunal passes an order for the company to be wound under chapter XIX;

1. Voluntarily winding up

The procedure for a company’s voluntary winding up is outlined in the Insolvency and Bankruptcy Code of 2016, and it applies to a corporate person. After the members’ consent, the decision to voluntarily wind up a corporation can be taken, and the liquidation procedure can begin. The goal of voluntary winding up is to end operations, sell assets, and distribute them while also paying off obligations.

1. Winding up under the “The Fast-Track Exit Scheme”

On December 26, 2016, the Ministry of Corporate Affairs notified Section 248 of the Companies Act, 2013. The section controls the Registrar’s ability to remove a company’s name from the Register of Companies. This portion provided an opportunity for defunct/idle businesses to have their names removed from the Register. It is an open invitation for large corporations to close down a section of their non-operational businesses and save yearly compliance expenditures.

Procedure before national company law tribunal

The procedure of winding up of the company by the tribunal

If the petition for the winding-up of a corporation is supported by the statement of affairs as stipulated in the form, it is allowed before the tribunal.

Before filing a petition for winding up, the creditors must get the tribunal’s consent. The petition for corporate winding-up may not be accepted unless there is a prima facie justification for the business’s liquidation.

The registrar must also write up a copy of the petition, and the registrar must provide his opinion to the tribunal within 60 days of the petition’s admission to the tribunal under section 272.

The petition is filled out in accordance with Rule 34, using form NCLT 1 and attachments in form NCLT 2, as well as an affidavit of verification in form NCLT 6.

Within 90 days of receiving the petition, the tribunal must issue an order of winding up under section 273 and may issue an interim order for the appointment of the liquidator. The affected parties are given notice of the provisional liquidator’s appointment.

Section 274 allows the tribunal to issue an order for the winding up of a corporation if it has a prima facie basis to do so, and an objection can be filed within 30 days of the order.

Within 60 days of a company’s winding up, the liquidator must submit the final report to the tribunal under section 281. Furthermore, under section 282, the full dissolution process must be finished within a certain amount of time.

The corporation is obligated to sell all of its assets and distribute the proceeds to creditors first, then to shareholders. If the firm has been involved in fraud, criminal charges will be brought against those who were involved in the scam.

Consequences of Winding Up

The most important consequences of the winding up of a company are as follows

As Regards the Company Itself:

The firm does not cease to exist once it has been wound up. The firm will continue to exist as a legal entity until it is dissolved. During the liquidation period, the liquidator is in charge of the company’s ongoing operations.

As Regards the Shareholders:

There is a new statutory responsibility created. Every share transaction made during the period without the liquidator’s authority is considered invalid.

As Regards the Creditors:

Unless the court agrees, creditors cannot initiate a lawsuit against the corporation. The creditors cannot carry out the execution if they already have decreed. They must provide the liquidator with an explanation and justification for their claims.

As Regards the Management

All of the directors’, chief executives, and other officers’ powers tend to lapse once the liquidator is appointed. The members-only have the authority to provide notice of resolutions and to appoint a liquidator in the event of the company’s dissolution.

As Regards the Disposition of the Company’s Property

If the court or the liquidator do not authorise the dispositions of the company’s assets, they are null and invalid.

Special courts under companies act 2013

The Special Courts provisions were included in Chapter XXVIII of the Companies Act of 2013. Although the laws relating to Special Courts, namely Sections 435 to 438 and 440, were not announced for implementation until 2016, they are already in effect.

The establishment/designation of Special Courts under the Act, according to the Report of the Companies Law Committee led by Shri Tapan Ray dated February 1, 2016, will result in quicker prosecution of defaulting companies.

The Special Courts should be established or designated as soon as possible, according to the Committee. It was also suggested that, in addition to the Sessions Judge or Additional Judge, Special Courts at the subordinate level be explored.

The New Act envisages an efficacious corporate governance regime based on enhanced self-regulation and corporate democracy. The framework promotes new concepts of Corporate Social Responsibility and e-governance. The New Act seeks to ensure stricter enforcement and investor/creditor protection.

Author: Shreyas Nair,
Symbiosis Law School, Nagpur / First Year / Law