CORPORATE LAW

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
Semester: FIFTH Semester
Name of the Subject:
CORPORATE LAW
CORPORATE LAW
UNIT-1
Incorporation of company

STEPS , DOCUMENTS AND INFORMATION REQUIRED FOR INCORPORATION
OF A COMPANY UNDER COMPANIES ACT , 2013.
1. Reservation of Company Name:
First , the applicants are required to apply for a name in Form No. INC-1. The fee
for seeking a name approval is Rs.1000/- as prescribed and 60 days are allowed for
incorporating the company. The name should not be undesirable i.e.; identical,
resembling, restricted or prohibited.
2. Provision for Entrenchment:
As per section 5(3) of The Companies Act, 2013, articles may contain provisions for
entrenchment to the effect that specific provisions of the articles may be altered
only if conditions or procedures more restrictive than as applicable in case of
special resolution, are met or complied.

Where the articles contain the provisions for entrenchment, the company shall give notice to the
Registrar of such provisions in Form No. INC-2 for one person company (OPC) or Form No. INC-
7, as the case may be, along with the prescribed fee at the time of incorporation of the company or
in case of existing companies, the same shall be filed in Form No. MGT-14 within thirty days from
the date of entrenchment of the articles, as the case may be, along with the fee as prescribed.
3. Drafting of Memorandum and Articles of Association:-
The memorandum (MOA) should be drafted keeping in mind the provisions of section 4 of The
Companies Act, 2013 and objects should not be contrary to those as per Form No. INC-1. The Model
MOA as prescribed in Table A to E of Schedule I of The Companies Act, 2013 can be adopted as
applicable.
4. Application for Incorporation of Companies :-
After obtaining availability of name (see sample name approval certificate, applicants should file
Form No. INC-7 for other than OPC and in Form No. INC-2 (for OPC) with Jurisdictional Registrar
of Companies (ROC) along with required information in attachments and along with prescribed fee.

5. Documents to be filed for Incorporation :-
Section-7 prescribes the various documents and information to be filed with ROC for registration of a
new company as under:
(1) MOA and AOA duly signed and verified.
(2) Declaration by Professionals INC-08 .
(3) Declaration from Director, Manager or Secretary.
(4) Affidavit from each subscribers and first directors INC-09.
(5) The address for correspondence.
(6) Complete Details of Subscribers with proof of identity.
(7) Complete Details of first Directors with proof of identity.
(8) Particulars of interest of first directors in other firm/body corporate and NOC.
6. Particulars of first directors of the company and their consent to act as such :- The
particulars of first directors of the company and his interest in other firms or bodies
corporate along with his consent (Form DIR.2) to act as director of the company shall be
filed in Form No.DIR.12 along with the prescribed fee.

OBJECT CLAUSE
MAIN OBJECTS
Objects incidental or ancillary to the attainment of the main
objects.
OTHER OBJECTS.
Objects stated in the main objects are to be pursued by the
company immediately after incorporation or within
reasonable time thereafter.

LIABILITY CLAUSE
• This clause states that the liability of the members is limited to the extent of the
shares subscribed by the member or shareholders if the company is formed with
share capital.
•Amount of capital with which the company is to be registered and its division
into shares of a fixed amount must be stated in the MOA of a company.
• The capital with the company is registered is called “Authorized capital” or
“Registered Capital”.

ARTICLE OF ASSOCIATION
•Defines the responsibilities of the directors, the kind
of business to be undertaken, and the means by which
the shareholders exert control over the BOD.
Contains the rules & regulations for the internal
management of the company.
AOA needs to be filed with the Registrar of
Company.
AOA can be altered from time to time.

CONTENTS OF AOA
 Share capital
 Payment, calls, transfer, lien, conversion, transmission, forfeiture etc. Of
shares
 Share certificate & warrants
 Rights of shareholder
 Meetings
 Appointment, remuneration, qualification, powers etc. of Board of Directors
 Accounts & Audit
 Payment of dividends
 Winding up
 Indemnity

ALTERATION OF ARTICLE OF ASSOCIATION
• It can be altered with special resolutions.
Approval of the central government for conversion of
company from public to private.
 AOA should not violate provisions of MOA and
company law board.
 Special resolution passed or approved by central
government must be filed with the Registrar within 1
month..

LIMITATIONS OF ARTICLE OF ASSOCIATION
The alteration cannot be made so as to increase the
liability of members without his/her written consent.
Limit the number of members to 200.
 Prohibit any invitation to the public to subscribe for
any share in, or debenture of the company.
 Restrict the right to transfer shares.
 Approval of central government: - Appointment or
re-appointment of Director
 Increase in remuneration of Director

CORPORATE LAW
CORPORATE LAW
UNIT-II
SHARES

SHARES
•A SHARE is the interest of the share holder in a company.
•A Share is evidenced by a share certificate (sec.84). A share certificate is
issued by a company under its common seal.
•Stock is the aggregate of fully paid-up shares ,consolidated & divided for the
purpose of convenient holding into different parts. It may be transferable or split
up into fractions of any amount, without regards to the original face value.

• SHARE CERTIFICATE is a document under the seal of the company,
Signed by at least 2 directors & secretary ,Specifying the shares,
Amount paid-up & name of the share holder.
• SHARE WARRANT is a document issued by a public company
stating that its bearer is entitled to the shares specified therein.

TYPES OF SHARES
•Preference Shares is a stock which may have any combination of features not
possessed by common stock including properties of both an equity and a debt
instrument, and is generally considered a hybrid instrument.
•Equity Shares are those shares which are ordinary in the course of company's
business. They are also called as ordinary shares.
•Sweat Equity Shares are equity shares issued by a company to its employees
or directors at a discount, or as a consideration for providing know-how or a
similar value to the company.

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

FORFEITURE OF SHARES
•The articles generally give powers to Board of Directors to forfeit shares as
under:
I. If a member fails to pay any call or installment of a call
II. Any other circumstance which the articles may provide.
•The articles may also provide that the failure by a member to fulfill any
engagement with any other member would forfeit his share.
•Power of forfeiture is not inherent in a company and therefore this power exists
only when it is given by the articles.

ISSUE OF SHARES AT A PREMIUM [SECTION 78]
•Companies may issue shares at premium irrespective of the fact whether the shares are
listed or not.
•No restriction in Companies Act on issue at premium, the only restriction is on the
utilization of premium amount.
•Premium cannot be treated as profit as such the amount not available for distribution as
dividend.
•Premium amount must be kept in separate account called Securities Premium Account

ISSUE OF SHARES AT A PREMIUM
•If premium is received in kind, an amount equal to premium amount must be transferred
to Securities Premium Account.
•Premium to be used only for the following purposes as mentioned in Section 78(2):
• For issuing fully paid bonus shares;
• For writing off preliminary expenses;
• For writing off commission, discount expenses on issue of debentures; and
• For providing for premium payable on redemption of Redeemable Preference
Shares or debentures.

Further Issue of Shares [Section 81]
•Called Right Shares.
•May be issued at any time after two years from incorporation or one year from first allotment, whichever is earlier.
•Must be offered to the existing shareholders in proportion to their holding.
•For listed company, information on quantum and proportion shall be supplied to the concerned stock exchange.
•Company must give notice of offer and the number of shares offered to existing shareholders.
•Give shareholders 15 days to decide.
•The notice must state the shareholder's right to renounce the offer in whole or in part in favour of some other
person.

FURTHER ISSUE OF SHARES
•The board may dispose of the shares in a manner beneficial to the company.
•Condition of issue of shares to persons other than existing shareholders.[Section
81 (1A)]:
I. Pass a special resolution in general meeting, and
II. In case of ordinary resolution Central Govt.'s approval must be obtained.

DIVIDENDS
A dividend is a payment made by a corporation to its shareholders, usually as a
distribution of profits . When a corporation earns a profit or surplus, it can either
re-invest it in the business (called retained earnings), or it can distribute it to
shareholders.
Rules
I. To be paid only out of Profit
II. Resolution at the AGM
III. Payment of Dividend in Proportion to paid-up capital
IV. Establishment of Investor Education & Protection Fund
V. To be paid to Registered Shareholder
VI. Unpaid Dividend to be transferred to Unpaid Dividend Accounts
VII. Penalty for Defaulting Director

BONUS SHARES
•When company accumulates large distributable profits it convert it into capital.
•Divide the capital among the existing shareholders in proportion to their entitlement.
•Members do not have to pay for such shares.
•Bonus issue is a machinery for capitalizing distributable profits.
•Must be sanctioned in the AGM on the recommendation of the board.
•Bonus shares is not income and hence not taxable.

ALLOTMENT OF SHARES(RULES TO OBSERVED)
•A prospectus shall be filed with Registrar.
•No allotment of shares shall be made to public unless the minimum subscription
amount stated in the prospectus is raised and received by the company.
•Application for shares should be made in prescribed form.
•No allotment shall be made until the beginning of the 5th
day after a date on
which prospectus is issued.

CONT.
•Companies intending to offer must make an application to one or more stock
exchanges for permission.
•The whole of the application money should have been paid and received by
company in cash.
•All moneys received shall be deposited in a Scheduled Bank until the certificate
to commence business is obtained.

TRANSFER OF SHARES
•A share is a movable property, transferable in the manner provided by the articles.
•A share holder has a statutory right, in the absence of restrictions in the articles, to
transfer shares to any person without consent of anybody.
•A private company with share capital may restrict the right to transfer its shares by its
articles. Transfer of shares is less strict in a public company.

TRANSMISSION OF SHARES
•Where shares pass by operation of law from one person to another.
•For example, by holder’s insolvency, or lunacy or by death and inheritance.
•The person to whom shares are transmitted shall make an application to the company
for transmission of shares in his name.
•In case if the company refuses to register transmission, right of appeal arises in the same
manner as in case of transfer.
•No instrument of transfer is required.

Corporate law
Corporate law
UNTI-III
DIRECTORS AND MEETINGS

DIRECTORS
The Legal Status of the director occupies the
position of a:
•As a trustees – in relation to the company
•As Agents - When they act on behalf of the company.
•As Managing Partner- As they are entrusted with the responsibility of the
company.
•Qualification Shares :- In case there is requirement as per the AOA for the
director is bound to buy qualification shares . If acts are done by the director prior
to he or she being disqualified, the acts are considered to be valid.

Disqualifications
As per the company law, the following persons are disqualified from
been appointed as a director:
•Unsound mind
•An undischarged insolvent
•A person who is convicted by the court
•Who has applied for being adjudged insolvent
•Not paid for the call on shares
• Persons who are already directors in maximum number of companies
as per the provisions of the Act or
•Any other person who has been disqualified by the court for any other
reason

Appointment of Directors
• The appointment can sometimes be by based on the
proportional representation like minority shareholders.
• There can be alternate directors, additional directors, casual
directors.
• The third parties can appoint the directors
• Other than the shareholders and the first directors ,the central
government and NCLT may also appoint directors.

Duties and Liabilities of the Directors
Fiduciary Duties
•To act honestly and with good faith
•Not to use confidential information of the company for their own purpose
•Duty of Care and to act reasonably while acting for the company
•Statutory Duties
•Not to contract with company, where he/she or his relative has an interest in the contract
•where he/she has a interest, they need to
•inform the board or seek prior approval
•while entering into contract, otherwise the contract is voidable
•Duty to attend and convene meetings
•Duty not to delegate

THE DIRECTORS LIABILITIES
• The liability of the directors can be either civil or criminal.
• If provided in the MOA, the liability may be unlimited, for
a limited company, otherwise it may be altered.
• Liability may be for breach of fiduciary duties
• The directors are personally liable for the following:
a) Ultra vires acts
b) malafide acts
c) negligent acts
d) liability for the acts of third parties

Criminal Liability
• Liability of the director for any untrue statement in
the prospectus
• Inviting any deposits in contravention of the law
• Liability for false advertisement
• Failure to repay the application money, which was
excess
• Concealing the names of the creditors
• Failure to lay the balance sheet.
• Failure to provide information to the auditor etc

Company Meetings
• A meeting may be convened by the director, requisitionist, or the NCLT
• Notice to be given by the secretary after the time and place have been
fixed by the directors
• Even the shareholders can call a meeting as an extraordinary general
meeting (EGM)
• The NCLT can call an Annual General Meeting (AGM)

CLASSIFICATION OF MEETINGS
• Shareholders meetings
a) Statutory meetings ( which happens only once in the lifetime of the
company)
b) EGM- Convened to transact some special or important decision to be
taken
c) Class meetings-This is the meeting of the shareholders-which is
convened by the class of shareholders based on the kind of shares they
hold.

OTHER MEETINGS
► AGM-it can be conducted based on the provisions
given in the Articles or by passing a resolution in one
AGM for the subsequent AGM’s
► Board Meetings- This is conducted for the smooth
running of the company and for collectively
taking the decisions. The meetings may be conducted
to call on shares, issue debentures, borrow money, to
make loans, To invest the funds etc

How to conduct meeting?
• Written notice to be given
• Notice to be issued under the authority of the
company
• In case of failure to give a notice, the persons
concerned may be punished with fine and the
proceedings of the meeting will be rendered
invalid.

Corporate law
Corporate law
UNIT-IV
PROSPECTUS , SHARES , DEBENTURES

PROSPECTUS
•It is an invitation issued to the public to purchase or subscribe shares or debentures of the company.
•Every prospectus must be dated. The date of publication and the date of issue must be specifically
stated in the prospectus.
•The golden rule of the prospectus is that every detail has to be given in strict and scrupulous
accuracy. The material facts given in the prospectus are presumed to be true.( New Brunswick and
Canada Railway. Land & Co. Vs. Muggerridge).

Various forms in which the prospectus can be issued.
•Shelf Prospectus: Prospectus is normally issued by financial institution or bank for one or
more issues of the securities or class of securities mentioned in the prospectus.
•There can be deemed prospectus also if it is issued by the issue house
• ‘Information Memorandum’: It means a process, which is undertaken prior to the filing of
prospectus.
•Even an Advertisement , that the shares are available is considered to be prospectus

CONTENTS OF THE PROSPECTUS
•General information
•Capital structure
•Terms of present issue
•Management and projects
•Management and perception of risk factor It is compulsory to register the prospectus
with the Registrar.

Civil Liability for Misstatements In case of any untrue statement in the prospectus
• The liability will be on the director of the company , whose name was written during the time of
issue
•The persons who have authorized their names to be theirs in the prospectus to be named as directors
• Promoter
• Every person including the person who is an expert and has authorized his name to be issued with
the prospectus

Remedies for misstatements in the prospectus
•Relying on the prospectus if any person buys shares, the person may
•Rescind the contract ( only when there is misrepresentation relating to the
material facts. The rescission has to be done within a reasonable time
•Claim damages- it can be claimed from the directors, promoters or other
persons who has authorized their name to be written during the issue of the
prospectus

Share Capital
•Share: Share is defined as “an interest having a money value and made up of diverse
rights specified under the articles of association”.
• Share capital: Share capital means the capital raised by the company by issue of shares.
• A share is a share in the share capital of the company including the stock.
•Share gives a right to participate in the profits of the company, or a share in the assets
when the company is going to be wound up.

OTHER FEATURES OF A SHARE
• A share is not a negotiable instrument, but it is a movable property.
• It is also considered to be goods under the Sale of Goods Act, 1930.
• The company has to issue the share certificate.
• It is subject to stamp duty.
• The ‘Call’ on Shares is a demand made for payment of price of the shares allotted to the members
by the Board of Directors in accordance with the Articles of Association.
• The call may be for full amount or part of it.

SHARE CERTIFICATE AND SHARE WARRANT
•Share Certificate: The Share Certificate is a document issued by the company and is prima facie evidence to
show that the person named therein is the holder ( title) of the specified number of shares stated therein.
• Share certificate is issued by the company to the ( share holder) allottee of shares.
• The company has to issue within 3 months from the date of allotment. In case of default the allottee may approach
the central government.
•Share Warrant: The share warrant is a bearer document issued by the company under its common seal. As share
warrant is a negotiable instrument, it is transferred by endorsement and by mere delivery like any other negotiable
instrument.

DEBENTURES
According to Thomas Evelyn “ A debenture is a document under the
company’s seal which provides for the payment of a principle sum and interest
thereon at regular intervals, which is usually secured by a fixed or floating
charge on the company’s property or undertaking and which acknowledges a
loan to the company.” A debenture holder is a creditor of the company. A
fixed rate of interest is paid on debentures. The interest on debentures is a
charge on the profit and loss account of the company. The debentures are
generally given a floating charge over the assets of the company.

FEATURES
•Date of Maturity: For all the non convertible and redeemable debentures, the issuing
company has to issue repayment to the debenture holders on the date of maturity. This
date is also mentioned on the certificates and it infers the total time for which the
money is invested by the lenders which is interval between the date of issue to the date
of maturity.
•Charge on Assets and Profits in case of Default: The debenture holders may have
claims over the profits and assets of the company in case the company has defaulted in
the payment of either the interest or the capital repayment.
•Convertibility: Certain types of debentures are issued with the option of conversion
into equity. The ratio of conversion and the time period after which conversion will
take place is mentioned in the agreement of debenture. Debentures may be fully or
partly convertible in nature.

FEATURES(CONT’D)
•Debenture holders are not the owners of the company. They are
considered the creditors of the corporation or in other words, the
company borrow money from them through issuing debenture.
•No voting rights: The debenture-holder is not a shareholder and
cannot vote in the company's general meetings.
•Fixed rate of interest: A debenture with a fixed charge has a fixed rate
of interest. It can be presented as "10% Debenture". They are always
unsecured and earns a fixed rate of interest but has no share of the profit.
•Control: Since, debentures holders are creditors of the company and
not its owners, they do not have any control over the management of the
company. They do not have any voting rights to elect the directors of
the company or on any other matters. But, at the time of the liquidation
of the company they have prior claim over share holders and if remain
unpaid, they may take control over the company.

Security:
•Secured/Mortgage Debentures: Debentures secured against assets of the
company .i.e. if the company is winding up, assets will be sold and debenture
holders will be paid back. The charge/mortgage may be fixed or a floating
charge. If it is fixed, charge is on a specific asset say plant, machinery etc. If it is
floating charge, it means it is on general assets of the company. Which assets are
charged: The ones available with the company presently and also assets in future.
•Unsecured/Naked Debentures: Debentures not secured against assets of the
company .i.e. if the company is winding up, assets will be not be sold in order to
pay the debenture holders. In other words, no charge is created on the assets of
the company which means that there is no security of interest and principal
payment. The creditworthiness and soundness of the company serves as a
security.

Tenure:
•Redeemable Debentures: Debentures which have to be repaid within
a certain specified period.
E.g.: 5% 2 years Rs. 1000 debenture means redeemable period is 2
years(5%:interest/coupon payment). After redemption, they can be
reissued.
•Irredeemable/Perpetual Debentures: These can be paid back at any
time during the life of the company .i.e. there is no specified period for
redemption. Hence they are also called Perpetual Debentures.
Nonetheless if the company has to wind up, then they have to repay the
debenture holders.

Registration:
•Registered Debentures: As the name suggested, these are debentures
that are registered with the company. It records all details of debenture
holdings such as name, address, particulars of holding
etc. Interest shall be paid only to the registered holder (treated as a
non- negotiable instrument). They can be transferred by a transfer
deed.
•Bearer Debentures: These can be transferred by mere delivery.
Company does not hold records for the debenture holder. Interest will
be paid to the one who displays the interest coupon attached to the
debenture.

Coupon:
•Zero Coupon Debentures: Does not have a specified interest rate, thereby to
compensate, they are issued at a substantial discount. Interest: Difference in face value
and issue price.
•Specific Coupon rate Debentures: Debentures are normally issued with an interest
rate which is nothing but the coupon rate. It can be fixed or floating. Floating is
associated with the bank rates.
Convertibility:
•Convertible Debentures (Fully/ Partly convertible): Debentures which can be
converted to either equity shares or preference shares by the company or debenture
holders at a specified rate after a certain period. A company can also issue Partly
Convertible Debentures whereby only a part of the amount can be converted to
equity/preference shares.
•Non Convertible Debentures (NCDs): These can’t be converted into
equity/preference shares.

SHARES DEBENTURES
1. A shareholder is the owner of the company. 1. Whereas, Debenture holder is a creditor of
the company and cannot take part in the
management of the company
2. Shareholder will get a portion of the profits
called dividend which is dependent on the
profits of the company. It can be declared by
the directors of the company out of profits
only.
2. Debenture holders will get interest on
debentures and will be paid in all
circumstances, whether there is profit or loss
will not affect the payment of interest on
debentures.
3. Shares cannot be converted into
debentures.
3. Whereas debentures can be converted
into shares.
4. There can be no mortgage shares. Assets of
the company cannot be mortgaged in favor of
shareholders.
4.But, there can be mortgage debentures
i.e. assets of the company can be mortgaged
in favor of debenture holders.
5.At the time of liquidation of the company,
share capital is payable after meeting all
outside liabilities.
5.Debentures are payable in priority over
share capital.
Shares V/S Debentures

Advantages/Merits of Debenture Issue:
• It enables a company to raise funds for a specific period.
• No dilution of control as debenture holders don’t possess voting rights
• Debenture (debt) enables the company to Trade on equity. It can pay dividend
to equity shareholders at a rate higher than overall ROI.
• Debenture holders entitled to a fixed rate of interest. E.g.: 10% debenture
• They enjoy priority over other unsecured creditors with respect to debt
repayment.
• Suitable for conservative investors who seek steady ROI with little or no risk.
• Interest on debentures is treated as expense and is tax deductible.
• Company can adjust its gearing in accordance to its financial plan.
• Debenture holders are regarded as creditors of the company and they receive
preference over equity shareholders and preference share holders.
• Opting for debentures over the equity as a source of finance saves the profit
shares of existing shareholders. Debenture holders do not share profits of the
company. They are liable to receive the agreed amount of interest only.

Disadvantages/Demerits of Debenture issue:
•They have a fixed maturity; hence provision has to be made for repayment.
•There is a limit to which funds can be raised through debentures.
•It is risky if the company fails to pay interest or principal installment on time, as
debenture holders can file petition for winding up the company.
•It is not suitable for a company with fluctuating earnings as it may also lead
to fluctuations in payment of dividend payable to equity shareholders.
•With more risk, you get more return. Debentures being secure investments, returns
are less.
•Like ordinary shares, debenture holders will not be regarded as owners of
the company and have no voting rights.
•Debenture financing enhances the financial risk.
•Debentures are a secured source of raising the long term requirements of funds and
usually the security offered to the investors is the fixed assets of the company.
•Common people cannot buy debenture as they are of high denominations.

THANK YOU

CORPORATE LAW

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CORPORATE LAW