Sunday, February 03, 2013

Ignou solved Assignment - Eco 08


Answer of Question no.1(a).
A Company is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.
According to Section 3 (1) of Indian Companies Act 1956 " Company means a company formed and registered under this Act."
According to Professor Haney “A Company is an artificial person, created by law having a separate entity with a perpetual succession and a common seal."
Characteristics of A Company: Following are the salient features of a Company:
a)      Artificial Person: A company is an artificial person, which exists only in the eyes of law. The company carries business on its own behalf. It has a right to sue and can be sued, can have its own property and its own bank account. It can also own money and be a creditor.
b)      Created by law: A company can be formed only with registration. It has to fulfill a lot of formalities to be registered. It has also to fulfill a lot of legal formalities in order to be dissolved.
c)       Separate Legal entity: A company has a separate legal entity and is not affected by changes in its membership.
d)      Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members. The members may come or go but the company may go forever. Only law can terminate its existence
e)      Limited Liability: The liability of every member is limited to the amount he has agreed to pay to the company on the shares held by him.
f)       Voluntary Association: A company is a voluntary association. It cannot compel any one to become its member or shareholder.
g)      Capital Structure: A company has to mention its maximum capital requirements in future in its memorandum of association. Its capital is divided into shares, which are easily transferable from person to person.
h)      Transferability of Shares: The shares of a company are freely transferable by its members except in case of a private company, which may have certain restrictions of such transferability.
i)        Common Seal: As a company is an artificial person, so it cannot sign any type of contracts. For this purpose its requires a common seal which acts as the official signatories of the company. All the contracts prepared by its directors must bear seal of the company.
j)        Democratic Ownership: The directors of a company are elected by its shareholders in a democratic way.
k)      Maintenance of Books: A limited Company is required by law to keep a prescribed set of account books and failure in this regard may attract penalty.
l)        Periodical audit: A Company has to get its accounts periodically audited through the chartered accountants appointed for this purpose by the shareholders.
Answer of Question no.1(b).
Meaning of Holding Company
Section 4 of the Companies Act, 1956 defines a holding company. According to this section, one company can become the holding company of another in any of the following three ways:
1. By holding more than 50% of nominal value of the equity shares of the other company i.e. the holding company holds the majority of voting power in the subsidiary company.
For example, if A ltd holds 51% shares of B ltd. Then A ltd is said to be holding company of B Ltd.
2. By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.
For example, if 3 directors of A ltd out of total 5 is from B ltd then B ltd is said to be holding company of A ltd.
3. By controlling a holding company which controls another subsidiary or subsidiaries.
For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.

Meaning of “subsidiary Company” 
A company is a “subsidiary” of another company, its “holding company”, if that other company—
1.       holds a majority of the voting rights in it, or
2.       is a member of it and has the right to appoint or remove a majority of its board of directors, or
3.       is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.
An example will illustrate the point. Company B is a subsidiary of company A, and company C is a subsidiary of company B. Company C will be a subsidiary of company A.
A subsidiary company cannot hold shares or be a member of its holding company except as a legal representative of a deceased member of the holding company or any trustee.

Answer of Question no.2.
Memorandum of Association
Section 2 (28) of the act defines Memorandum as “Memorandum means the 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”.
Memorandum of association is the document which contains the rules regarding constitution and activities and objects of the company. It is fundamental charter of the company. Its relation towards the members and the outsiders are determined by this important document.
One of the essentials for the registration of a company is memorandum of association (sec 33). It is the first step in the formation of a company. Its importance lies in the fact that it contains the fundamental clauses which have often been described as the conditions of the company’s incorporation.
Memorandum of association is divided into 5 clauses:
1)      Name clause
2)      Registered office clause
3)      Objects clause
4)      Liability clause and
5)      Capital clause

Artilces of Association 
Section 2 (2) of the companies act defines articles as “Articles means Articles of Association of a company as originally framed or altered from time to time in pursuance of any previous law or of this act including so far as they apply to the company the regulations contain as the case may be in Table A to Schedule I of this act”
The Articles contain rules and regulations for the internal management of the company. They are framed with the object of carrying out the aims and object of the memorandum of association and also to monitor that the same are carried as prescribed.
The Model contents of the Article of association as per Table ‘A’ are as under
1)      the business of the company;
2)      the amount of capital issued and the classes of shares into which the capital is divided; the increase and reduction of the share capital;
3)      the rights of each class of shareholders and the procedure for variation of their rights;
4)      the execution or adoption of a preliminary agreement, if any;
5)      the allotment of share; calls and forfeiture of shares for non – payment of calls;
6)      transfer and transmission of shares;
7)      company’s lien on shares;
8)      exercise of borrowing powers including issues of debentures;
9)      general meeting, notices, quorum, proxy, poll, voting, resolution, minutes; etc.

The difference between Memorandum of Association & Article of Association is given here :
It is a charter of a company .It sets the constitution .It defines limits ,powers and objects of the company
It contains rules and regulation for the internal management of the company
It governs relationship with the external world i.e. creditors, sellers, buyers & debtors
It governs internal relationship between the members of the company.
It is the primary document. It is the foundation of the company.
It is the secondary document & it is based on the memorandum of association.
It is a compulsory document for all the companies
It is compulsory for private companies, unlimited companies and companies limited by guarantee.
It is an unalterable document. Alteration can only be done by the permission of court
It can be stitched according to the management a resolution is to be passed and it is within the limits of Memorandum of Association
Ultra Vires Actions
It lays down the boundaries beyond which a company cannot work.All such acts are illegal.
& they are called ultra vires acts.
The articles are controlled by the memorandum Within it the shareholders and the directors may make such regulations as they feel fit for internal management.

Importance of Memorandum of Association.
It is the foundation of a business. It shows the capacity to contract of a company. It is constitution of a company which relates with the outside world. No company is allowed to temper with its contents without the sanction of central government or court of law. Any act of the company outside the scope of activities as laid down in the memorandum is said to be ultra vires and non binding on it.
Importance of Articles of Association
Under sec 36, the memorandum and the articles when registered, shall bind the company and its members to the same extent as if it had been signed by them and had contained a covenant on their part that the memorandum and the articles shall be observed.
With respect to the above section, the importance of articles of association can be summed up as follows:
1)      Binding on members in their relation to the company- the members are bound to the company by the provisions of the articles just as much as if they had all put their seals to them.
2)      Binding on company in relation to its members- just as members are bound to the company, the company is bound to the members to observe and follow the articles.
3)      Neither company, nor members bound to outsiders- articles bind the members to the company and company too the members but neither of them is bound to an outsider to give effect to the articles.
4)      Binding between members inter se- the articles define rights and liabilities of the members. As between members inter se the articles constitute a contract between them and are also binding on each member as against the other or others. Such contract can be enforced only through the medium of the company.
Answer of Question no.3(a).
Pre-incorporation Contracts
 Sometimes contracts are made on behalf of a company even before it is duly incorporated. These are called as pre-incorporation contracts. Two consenting parties are necessary to a contract, whereas a company before incorporation is a non-entity. Therefore, following are the effects of pre-incorporation contracts.
Company cannot be sued on pre-incorporation contracts- A company, when it comes into existence, cannot be sued on pre-incorporation contracts. In English and Colonial Produce Co, Re, a solicitor on the request of promoters prepared a company’s documents and spent time and money in getting it registered. But the company was not held to be bound to pay for those services and expenses.
Company cannot sue on pre-incorporation contracts- A company cannot by adoption or ratification obtain the benefit of a contract made on its behalf before the company came into existence. In Natal Land and Colonization Co v. Pauline Colliery Syndicate, the promoters of a proposed company obtained an agreement from a landlord that he would grant lease of coal mining rights to the company. The company could not, after incorporation, enforce this contract.
Agents may incur personal liability- The agents who contract for a proposed company may sometimes incur personal liability. In Kelner v. Baxter, the promoters of a projected hotel company purchased wine from the plaintiff on behalf of the company. The company came into being but, before paying the price went into liquidation. They were held personally liable to the plaintiff.
 Ratification of a pre-incorporation contract
 So far as the company is concerned it is neither bound by nor can have the benefit of a pre-incorporation contract. But this is subject to the provisions of the Specific Relief Act, 1963.
 Section 15 of the Act provides that where the promoters of a company have made a contract before its incorporation for the purposes of the company, and if the contract is warranted by the terms of incorporation, the company may adopt and enforce it. In Vali Pattabhirama Rao v. Ramanuja Ginning and Rice Factory, a promoter of a company acquired a leasehold interest for it. He held it for sometime for a partnership firm, converted the firm into a company which adopted the lease. The lessor was held bound to the company under the lease.
 Section 19 of the Specific Relief Act provides that the other party can also enforce the contract if the company has adopted it after incorporation and the contract is within the terms of incorporation.

Answer of Question no.3(b).
A promoter is a person who does the necessary preliminary work incidental to the formation of a company. It is a compendious term used for a person who undertakes, does and goes through all the necessary and incidental preliminaries, keeping in view the object, to bring into existence an incorporated company. Chronologically, the first persons who control a company’s affairs are its promoters.
The promoter of a company decides its name and ascertains that it will be accepted by the Registrar of Companies.
He settles the details of the company’s Memorandum and Articles, the nominations of directors, solicitors, bankers, auditors and secretary and the registered office of the company.
He arranges for the printing of the Memorandum and Articles, the registration of the company, the issue of prospectus, where a public issue is necessary
He is responsible for bringing the company into existence for the object which he has in view.
                Quasi-trustee-a promoter is neither an agent nor a trustee of the company under incorporation but certain fiduciary duties have been imposed on him under the Companies Act, 1956.He is not an agent because there is no principal born at the time and he is not a trustee because there is no cesti que trust in existence. Hence he occupies the peculiar position of a quasi-trustee.

Fiduciary position
Not to make any profit at the expense of the company-the promoter must not make, either directly or indirectly, any profit at the expense of the company which is being promoted. If any secret profit is made in violation of this rule, the company may, on discovering it, compel him to account for and surrender such profit.
To give benefit of negotiations to the company-the promoter must, when once he has begun to act in the promotion of a company, give to the company the benefit of any negotiations or contracts into which he enters in respect of the company. Thus where he purchases some property for the company, he cannot rightfully sell that property to the company at a price higher than he have for it. If he does so, the company may, on discovering it, rescind the contract and recover the purchase money.
To make a full disclosure of interest or profit-if the promoter fails to make a full disclosure of all the relevant facts, including any profit and his personal interest I a transaction with the company, the company may sue him for damages for breach of his fiduciary duty and recover from him any secret profit made even though rescission is not asked or is impossible.
Not to make unfair use of position-the promoter must not make an unfair or t take care to avoid any unreasonable use of his position and must take care to avoid anything which has the appearance of undue influence or fraud
Further, a promoter cannot relive himself of his liability by making provisions to that effect in the Articles of the company.
Duty of promoter as regards prospectus-the promoter must see, in connection with the prospectus, if any is issued, that the prospectus –
(a)    contains the necessary particulars
(b)   does not contain any untrue or misleading statements or does not omit any material fact.

Answer of Question no.4(a).
Kinds of Company Meetings:
A company is an association of several persons. Decisions are made according to the view of the majority. Various matters have to be discussed and decided upon. These discussions take place at the various meetings which take place between members and between the directors. Needless to say, the importance of meetings cannot be under-emphasised in case of companies. The Companies Act, 1956 contains several provisions regarding meetings. These provisions have to be understood and followed.
For a meeting, there must be at least 2 persons attending the meeting. One member cannot constitute a company meeting even if he holds proxies for other members.
Broadly, meetings in a company are of the following types :-
a. Meetings of Members :
These are meetings where the members / shareholders of the company meet and discuss various matters. Members meetings are of the following types :-
A. Statutory Meeting :
A public company limited by shares or a guarantee company having share capital is required to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the company. Such a meeting must be held within a period of not less than one month or within a period not more than six months from the date on which it is entitled to commence business i.e. it obtains certificate of commencement of business. In a statutory meeting, the following matters only can be discussed :-
1)                  Floatation of shares / debentures by the company
2)                  Modification to contracts mentioned in the prospectus
The purpose of the meeting is to enable members to know all important matters pertaining to the formation of the company and its initial life history. The matters discussed include which shares have been taken up, what money has been received, what contracts have been entered into, what sums have been spent on preliminary expenses, etc. The members of the company present at the meeting may discuss any other matter relating to the formation of the Company or arising out of the statutory report also, even if no prior notice has been given for such other discussions but no resolution can be passed of which notice have not been given in accordance with the provisions of the Act.
A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. A statutory meeting may be adjourned from time to time by the members present at the meeting.
B. Annual General Meeting: Every company must in each year hold an annual general meeting. Not more than 15 months must elapse between two annual general meetings. However, a company may hold its first annual general meeting within 18 months from the date of its incorporation. In such a case, it need not hold any annual general meeting in the year of its incorporation as well as in the following year only. A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. The notice must state that the meeting is an annual general meeting. The time, date and place of the meeting must be mentioned in the notice.
The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated. The Central Government may, however, exempt any class of companies from the above provisions.
C. Extraordinary General Meeting: Every general meeting (i.e. meeting of members of the company) other than the statutory meeting and the annual general meeting or any adjournment thereof, is an extraordinary general meeting. Such meeting is usually called by the Board of Directors for some urgent business which cannot wait to be decided till the next AGM. Every business transacted at such a meeting is special business. An explanatory statement of the special business must also accompany the notice calling the meeting. The Articles of Association of a Company may contain provisions for convening an extraordinary general meeting.
D. Class Meeting: Class meetings are meetings which are held by holders of a particular class of shares, e.g., preference shareholders. Such meetings are normally called when it is proposed to vary the rights of that particular class of shares. At such meetings, these members dicuss the pros and cons of the proposal and vote accordingly. (See provisions on variations of shareholders rights). Class meetings are held to pass resolution which will bind only the members of the class concerned, and only members of that class can attend and vote.
Unless the articles of the company or a contract binding on the persons concerned otherwise provides, all provisions pertaining to calling of a general meeting and its conduct apply to class meetings in like manner as they apply with respect to general meetings of the company.
b. Meetings of the Board of Directors
-Meeting of the Board of Directors
-Meeting of a Committee of the Board
c. Other Meetings
A. Meeting of debenture holders: A company issuing debentures may provide for the holding of meetings of the debentureholders. At such meetings, generally nmmatters pertaining to the variation in terms of security or to alteration of their rights are discussed. All matters connected with the holding, conduct and proceedings of the meetings of the debentureholders are normally specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed majority are valid and lawful and binding upon the minority.
B. Meeting of creditors: Sometimes, a company, either as a running concern or in the event of winding up, has to make certain arrangements with its creditors. Meetings of creditors may be called for this purpose. Eg U/s 393, a company may enter into arrangements with creditors with the sanction of the Court for reconstruction or any arrangement with its creditors.

Answer of Question no.4(b).
Issue of shares at discount
As a general rule, a company cannot ordinarily issue shares at a discount, except in case of ‘reissue of forfeited shares’ and in accordance with the provisions of Companies Act.
But according to Section 79 of company act 1956, a company is permitted to issue shares at discount provided the following conditions are satisfied: -
(1) A company shall not issue shares at a discount except as provided in this section.
(2) A company may issue at a discount shares in the company of a class already issued, if the following conditions are fulfilled, namely:-
(i) the issue of the shares at a discount is authorised by a resolution passed by the company in general meeting, and sanctioned by the Company Law Board;
(ii) the resolution specifies the maximum, rate of discount 1[ at which the shares are to be issued: 2[ Provided that no such resolution shall be sanctioned by the Company Law Board if the maximum rate of discount specified in the resolution exceeds ten per cent., unless that Board is of opinion that a higher percentage of discount may be allowed in the special circumstances of the case;]
(iii) not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business; and
(iv) the shares to be issued at a discount are issued within two months after the date on which the issue is sanctioned by the Company Law Board or within such extended time as the 3[ Company Law Board] may allow.
(3) Where a company has passed a resolution authorising the issue of shares at a discount, it may apply to the 3[ Company Law Board] for an order sanctioning the issue; and on any such applica- tion, the 3[ Company Law Board], if, having regard to all. the circum- stances of the case, it thinks proper so to do, may make an order sanctioning the issue on such terms and conditions as it thinks fit.
(4) Every prospectus relating to the issue of the shares shall contain particulars of the discount allowed on the issue of the shares or of so much of that discount as has not been written off at the date of the issue of the prospectus. If default is made in complying with this sub- section, the com- pany, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees. 4[ Issue and Redemption of Preference Shares]

Answer of Question no.5(a).
Procedure to remove the managing director before the expiry of period by the shareholders under section 284 of the companies act, 1956
1)      A Special notice of the intension to move a resolution for the removal of director be furnished by any member to the company not less than 14 days before the meeting at which it is to be moved, exclusive of the day on which the notice is served and the day of the meeting.
2)      Send a notice, immediately after the notice of the intention to move any such resolution has been received by it, in the same manner as it gives notice of the meeting.
3)      If is not possible for the company to give notice to all the members, publish by advertisement in the newspaper having an appropriate circulation not less than 7 days before the meeting.
4)      Hold and convene a General meeting to discuss  besides others the following matters:To pass a [Ordinary resolution] for the removal of Managing director.
5)      The company must give intimation to the Managing director of the intended resolution by sending a copy of the special notice received by it, forthwith on receipt thereof. The Managing director shall have the right to be heard on the resolution at the meeting.
6)      The Managing director, who is sought to be removed, can make a representation in writing against his removal and request the company to notify it to the company's members [section 225(4)]. If the director requests the company to notify the members of the company his representation against his removal and the representation is of reasonable length and it has been received not too late, the company must
mention in the notice of the resolution to be moved at the annual general meeting, the fact of the representation having been received; and
send a copy of the representation to every member along with the notice of the meeting if the representation has been received before sending the notice of the meeting or separately if the representation has been received after sending the notice of the meeting.
7)      If the representation could not be sent to the members because it was received too late or because the company made a default in sending it, the company must read out the representation at the annual general meeting, if the director requires it to do so. In addition, director can make oral representation at the annual general meeting.
8)      In case of listed companies, notify the Stock Exchange with which shares of the Company are listed about the change in the company directors [Clause 30(a) of the Standard Listing Agreement].
9)      File [e-form no. 32] with the Registrar of Companies with in 30 days of passing the resolution.
10)   Pay the requisite fees, as prescribed by the Companies (Schedule X) of Companies Act, 1956.
11)   Make necessary entries in the Register of Directors and in the Register of Director’s Shareholding. [Section 303(1) & 307].
12)   Fees can be paid through Credit Card / by cash / by cheque in favour of “MCA Collection Account ICICI Bank” at the prescribed rates. (Fee Calculator)
13)   Notify the Stock Exchange with which shares of the Company are listed about the change in the company directors [Clause 30(a) of the Standard Listing Agreement]

Answer of Question no.5(b).
A secretary is a representative of the company who is selected to carry out the ministerial or administrative duties. He is mainly anxious to make sure that the relationships of the company are accomplished according to the provisos of the Companies Act and articles of association of the company.
The Indian Companies Act, 1956 (as amended by the Companies Amendment Act, 1974) in Section 2(45) has expressed the term secretary as "any individual, possessing the prescribed qualifications, appointed to perform the duties which may be per by a secretary under the Act and any other ministerial or administrative duties".
The definition of Company secretary has given various points of concern they are that a person can only be appointed as a company secretary rather than the firm, he or she should have the qualifications prescribed by the Central Government and the duties have ministerial or administrative nature.
Section 2(45) of the Companies Act has given the guidelines for the qualifications of a company secretary. Under Section 383-A of the Act states that company with a paid up share capital should appoint a whole time secretary
There are two qualifications of company who can appoint secretary are the company having a paid up share capital of Rs.2 crores or more and the other one is that those companies having lesser paid up share capital. Companies having a paid up share capital of less than Rs.2 crores might not appoint a whole-time secretary as it is not an easy appoint company secretary with the companies having a paid up share capital of less than Rs.2 crores.
An individual having one or more of the following qualification be able to be appointed as a secretary for small sized companies such as he or she should be a member of the Institute of Company Secretaries of India; have passed the Intermediate examination conducted by the Institute of Company Secretaries of India; possessing a Post-graduate degree in Commerce or Corporate Secretary ship being approved by any University in India; Law graduate from any University; can be a member of the Institute of Chartered Accountants of India; an individual holding post-graduate degree or diploma in Management science granted by any University or the Institutes of Management i.e., Ahmedabad, Calcutta, Bangalore, or Lucknow, can be a member of the Institute of Cost and Works Accountants of India; should have Post-graduate diploma in company secretaryship granted by the Institute of Commercial Practice. Delhi, under Delhi Administration or diploma in corporate laws and management granted by the Indian Law Institute, New Delhi; or a Post-graduate diploma in Company Law and Secretarial Practice granted by the University of Udaipur, or should be a member of the Association of Secretaries and Managers, Calcutta.
Besides these statutory qualifications he or she have got the general knowledge together with the knowledge of the industry and trade, so that he can make useful suggestion to directors. He should have a sound knowledge of different laws affecting the business. He should also have knowledge of economics, banking and finance. He must have a good personality as he is supposed to co-operate with the staff at all times.