COMPANY LAW (PART - 4) UNIT - 1 COMPANY LAW INTRODUCTION

Transcription

1 COMPANY LAW (PART - 4) UNIT - 1 COMPANY LAW INTRODUCTION 1. INTRODUCTION Dear students, welcome to the lecture series on Company Law. Before I discuss the subject in detail, I would like to explain to you that how the company form of the business organization emerged and what were the objectives of incorporating the law? So company law is made up of two things, a company and the law.the law which governs the company is known as the company law. If we look into the business history or look into the historical prospective, then we can say that there are three major forms of the business organization and that too on the basis of ownership, the number one is the sole proprietorship form of the business, the second is partnership form of the business and the third is the company form of the business. Before starting the discussion on the company form of the business, it is necessary for us to understand what was the sole proprietorship form of the business? Company form of the business organization which we are seeing in today s society has evolved from the partnership form of the business. The disadvantages of the partnership form of the business gave birth to the company form of the business, but disadvantages of the sole proprietorship form of the business gave birth to the partnership form of the business, so if we want to dual the past then we will find that today s form of the business which is very much popular and that is the company form of the business but it has got its roots in the sole proprietorship form of the business. Sole proprietorship form of the business will be the part of my discussion o n the company form of the business organization. So first of all I will discuss the sole proprietorship form of the business with you. 1

2 2. THE SOLE PROPRIETORSHIP Now we will discuss the sole proprietorship form of the business, this form of the business organization is an existence since the dawn of the civilization, in this form of the business organization one person manages the complete affairs of the business, he takes the decision regarding the activities of the business. He manages the capital either he borrows it or if he owns the capital he can start the business, so this is the simplest form of the business organization in which one person looks after the complete activities of the business. He is free to hire and fire any employee in the organization. He is the one who can earn the complete profit by the decision he takes and he is the one who suffer all the loses, so he bears the risk and enjoy the fruits also. Anyone who is competent to enter into the contract can start this form of the business organization. We do not require any special legislation to run this business but this type of the business has got certain disadvantages also. It has got only a limited capital, but unlimited liability. Unlimited liability can put a question mark on the future of that man as well on his family also. So this is the greatest disadvantage of this form of the business organization but he has got a limited managerial capability also. Therefore with the passage of time, it was realized that this form of the business organization will not be useful for the changes which are coming in society. As you know with the development of the economy as well as the development of trade and the business, this sort of the business started losing its importance. But it has not lost its importance completely. Even in today s business scenario this form of the business organization has not lost his sheen SHEEN, still this type of the business is conducted performed by certain individuals, One person who looks after the complete activities of the business, therefore we can call it that there is always a one man show in this business but with the passage of time, this form of the business organization started attracting certain disadvantages and because of these disadvantages, the another form of the business organization emerged and that is known as the partnership form of the business. After understanding the sole proprietorship form ofbusiness, now we will discuss the partnership form of the business organization. 2

3 3. PARTNERSHIP When I discuss the sole proprietorship form of the business and at the end when I touch the limitations of the sole proprietorship form of the business, I mentioned that in sole proprietorship form of the business, a person has got limited managerial capability, unlimited liability and limited capital also and with these disadvantages, it was realized by certain people in the society that this business will not be useful or will not serve the need of the society. So when the changes started coming in the society, changes at the social front and changes at the economic front, certain people came under one umbrella and thought of starting the business and this is how the partnership form of the business emerged. You may find it that in our day to day life also that a one person may have finance with him, but he doesn t have the technical capability to run the business. On the other hand we may find a person who is technically expert but doesn t have the finance with him. A person may have a finance but doesn t have the managerial capability at his level, so it was realized that by the certain people that they should come under the umbrella and should start the business. So in partnership form of the business, people start this business by an agreement and whatever the profit emerges, they share the profit according to the profit sharing ratio which they have decided at the time of entering into the contract, I mentioned it that sole proprietorship form of the business is not specifically govern by any legislation but partnership is govern by the Indian Partnership Act The partners are known individually as partners, collectively a partnership firm and the name under which they start the business is known as the firm s name. But this form of the business organization also started attracting certain disadvantages; certain limitations started creeping in this form of the organization. This business is popular only at the local level and a limited area can be covered by the partnership form of the business to cater the need of the society. So there was a limited capital also. So these disadvantages started coming in partnership form of the business and by the time there was a complete change in the trade and commerce and industrial revolution took place, certain technical aspect started coming in and it 3

4 was realized that this form of the business will not be suitable to run it in the present scenario. So this business gave birth to the company form of the organization. Before I take up the discussion on company form of the organization, I would like to remind you that company form of the organization has emerged out of the limitations of the sole proprietorship form of the business and the partnership form of the business. The change in the trade and commerce and the change in the business industry started coming in. Business started becoming more and more complicated and it was realized that now the limited capital and limited managerial ability, unlimited liability will not give the answer to the problem. So we started the company form of the business organization. When we will discuss the company law in great detail, I will mention you, what is the meaning of the company? How it is formulated? How it is functioned? How it is managed? And what are the other technicalities which are with the company form of the organization, so with this we end our discussion on the origin of the company form of the organization, we started with the sole proprietorship and then we went to partnership and then we went to the company form of the organization. As you know this form of the organization is very popular now days, it is popular because of certain advantages, certain characteristics it has got with it and that we will discuss when we will talk about the company law and each and every unit which has been prescribe in your syllabus deals with the functioning of the company and when we will discuss the each and every unit in detail, then we will come to know how company functions, how it operates, how it is established, how it is managed. With this we simply end our discussion on the origin of the company form of the organization. Now I will tell you how the law came into the picture, to govern the company form of the business organization. In brief I will mention the origin of company s act. The first time the British government realized that the Indian company should be govern by an Act. Earlier it use to happen that companies used to get registered in Britain and use to do the business in India, but with the passage of time when it was realized by the British rulers that an Act is needed for the Indian companies also so they enacted a law and that was later on codified and it became Indian 4

5 Companies Act 1850, which was applicable for the joint stock companies in India but with the passage of time, the companies act got amended, it was codified again and again and the act which we see today has got its origin from 1850 s Act. The Indian Companies Act, 1956 is applicable in whole of India, after understanding the origin of the Company s Act 1956, and its root and its historical perspective, what was the necessity of enacting the law to govern the companies, as you know we have discuss the company form of the business organization, on the other hand we are talking about the law was enacted to govern the company form of organization. What were the objectives of that? Now I will tell you the objectives of company law. 4. THE OBJECTIVES OF COMPANY LAW Indian Companies Act, 1956 is applicable for the joint stock companies here in India, time to time it have been amended, there are objectives of incorporating the law, the first and the foremost objective is that we want the activities of the company should be govern in a proper fashion, the company should perform the activities in a proper manner, therefore we have enacted the law. What are the activities which are perform by the company that we will discuss the subject in great detail; the second objective is that we want that a company should maintain a minimum standard of integrity and transparency that is why we have enacted the law. We have enacted the law because we also wish that sometime majority of the share holder should not do the miss management and operation in the company on the minority shareholders. So company should run in a proper fashion, we also do not want that the shareholder should do any activity which is against the norms of the society, as you know the shareholders are the true owners of the company, so therefore the laws of enacted to protect not only the shareholders but to protect the society also. By incorporating the law, we have also given certain powers to the government, whenever the government realizes that company is not performing the activities in the interest of society. The 5

6 management of the company is not fruitful for the nation or for the society, the government can intervene. We have enacted the law; another object of enacting the law is that we want the company should give the full disclosure of its activities, the true and the fair picture of the company should be projected infront of the stake holders. Stake holder is entirely a different word; shareholder is entirely a different word. Since large number of the people are associated with the company form of the organization because the shareholders when they invest the money and that money comes to the company from all parts of the society it comes, we want that their investment should be properly looked after. So we have enacted the law to protect the large number of the shareholders of this country. Government can intervene when government find that company is not working according to the norms of the company law. These reasons we have enacted the law and that law is applicable on the company. So this was the basic logic of studying the law also or enacting the law also. For us this paper has been designed so that when we are dealing with the company, we should properly know what is the law and how the company functions, what are the rights which are available to the shareholders or what are the rights available to the government, what are the rights available to the directors of the company. Now I will tell you the certain things or certain points which have been mentioned in your syllabus and that too in unit, I will take up each and every unit and will give you a bird s eye view, I will tell you what is covered in each unit, so with this we are giving a pause to the objectives of the company law and will start a discussion on each unit and each unit. 5. COURSE INPUTS The subject matter of company law is very vast, but if we see it from the syllabus point of view it has been divided into 9 units, the first unit contains corporate personality and kinds of company, unit number two deals with the promotion on an incorporation of companies, it will include the role of the promoter, what are the documents which are 6

7 required for promoting a company? What is the certificate of incorporation and what is the certificate of commencements of business? Unit number three deals with memorandum associations, article of association and prospectus, if any activity which is performed by the company beyond the memorandum of association that will be known as the ultra-vires. So this is the fundamental and the most important document of the company, article association is that document which is required to support the memorandum of association, it is the second most important document the article association tell us about the internal management of the company, this document is framed by the company to incorporate the by-laws for the company, prospectus is that document which issued to the public to collect the deposits or to subscribe the capital. When we will discuss this particular topic then we will also study that what are the cautions which are to be taken by the people those who issue the prospectus this document should not contain any missstatement or should not contain any omission so that people can be misled by this document, this document is a document which tells the true picture about the company. When we will talk about unit number 4, which deals with the share, share capital member, share capital transfer and transmission, we will study what are different types of the shares which can be issued by the company, what is the share capital? What are the types of the share capital and how the shares are transferred and how the share can be transmitted? When we will talk about unit number 5 which is related with the capital management, borrowing power, mortgages and the charges and debentures, then we will talk about how the company s capital will be managed, share capital is not sufficient to meet the demand or will not be possible for the company to meet the objectives, then company borrow the money from the market mortgages, its means the company sometimes mortgages the assets and get the loan on that. Debenture is also a certificate of loan which the company has taken, so what are the provision when we are doing the business at the company form of the business, a large capital is required, a vast capital is required and when we are not able to get the vast capital company borrow the money from the market, company get the loan, that loan is 7

8 known as the borrowing and company issue the debentures the provisions are related in unit number 5, unit number 6 deals with the directors, managing directors, whole time directors. As you know company is an artificial person, it is run by the board of directors, directors are the individuals appointed to run the company, how the directors are appointed, how the directors can be removed? How the directors can be dismissed? What will be the remuneration of the directors? What are the powers of the directors? What are the liabilities of the directors? So when we will talk about the topic of directors, the total discussion will rotate around the directors and their position in the company because company is run by the directors, it is run by the managing director also, so when we will talk about unit number 6 which is related with the directors and the managing directors and the whole time director, then we will focus on the rights and the duties and the power attached with the directors. This is a so important unit that from here we will talked about the management of the company, the earlier unit which I had discussed like unit number 1, unit number 2, unit number 3 and unit number 4 and unit number 5, they were related with the company, what is the company? How the company can be formulated? What are the documents to be submitted? How company gets the capital from the market? After incorporating the company and getting the capital from the market, we require human beings to run the company, therefore the topic of the director is of great significance, details will be discussed when we will talk about this unit, next unit is related with the company meetings, kinds, quorum, voting, resolution and minutes and when we will talk about this unit, we will say how the affairs of the companies are conducted, we will study the types of the meetings, generally the shareholders meetings are of three type, one is known as the statutory meeting, other is known as the annual general meeting, the third one is known as the extra ordinary meeting but there are directors meeting also, there are debenture holder meeting also. In meeting we pass the resolution and those resolution become a binding force for the company and when we will talk about the resolution, the resolution is also of two type, one is known as the general resolution, another is known as the 8

9 special resolution when the affairs of the companies are conducted, we had to have the quorum, the meaning of the quorum is the minimum number of the people those who should be present, then we can start the proceedings in the company, so quorum will tell us what is the minimum number of the people required to conduct the business in the company and when we will talk about the voting and the minutes, minutes means what are the important happenings which has taken place in the company. Next when we will talk about the unit number 8 which deals with majority powers and minority rights, prevention of operation and miss-management. When I discuss the objectives of company law, there I also mentioned that company law is enacted, it is framed to protect the minority shareholders, because sometime it happens the majority people try to exploit the minority shareholders or minority rights, therefore when we will talk about this unit, then we will study what are the rights which are given to the minority people to protect themselves. A company has to be run on a proper way, its business has to be conducted in a fair and true manner, so we do not want that there should be any operation and missmanagement in the company, so when we will study the unit number 8, we will talk about what are the methods which are suitable for us to protect the company from the miss-management. We will define what the miss-management is; we will define what the operation is and what are the remedies available to the shareholder to protect themselves from the operation and miss-management. In the last when we will talk about the winding up and the kinds of conduct, then we will talk about how the company can be wound up, now if you look at the unit number 1, from there we started defining the company and if you look at the unit number 9, we are talking about the winding up of the company, unit number 1 to 9, since the inception of the company to the winding up of the company, we have covered all the units, a company is born in unit number 1 company is going into liquidation in unit number 9, so in between this whatever the units or whatever the literature we have studied, it is related with the affairs, it is related with the management of the company. So when we will talk about the winding up, as you know 9

10 winding up means company at this stage starts windup the business, then we will talk about what are the ways through which the winding up affairs should be conducted, in winding up the assets of the companies are sold, the list of the liabilities is prepared, assets are realized, the money is realized to pay the debt of the company after paying the debt, if there is a surplus or the profit or the assets are there, then those assets are distributed to the shareholders but it s a very-very long process, sometime as you know it is not easy to conduct the winding up of the company when I discuss the sole proprietorship form of the business with you, it is very easy to wound up a sole proprietorship form of the business but it is a time consuming affair when we are doing the winding up of a company, so in winding up the liquidator will be appointed, So this was the introduction for unit number 1 to unit number 9, so in today s lecture I have mentioned that how the company form of the business originated, I started my discussion on sole proprietorship form of the business, then I discuss the partnership form of the business, then I discuss the company form of the business, then I discussed how the company law originated and then I discussed what are the objectives of formulating the company law and then I discussed with you that what I will teach you, now we will take up each and every unit in great detail, today I had given you a very brief view about the syllabus and its contents, now in my next lecture when I will start the unit number 1, we will start discussion in great detail. With this I say thank you. 10