Year: 2020

As per section 2(1)(c) of the Company Secretaries Act, 1980 ‘Company Secretary’(“CS”) means a person who is a member of the Institute of Company Secretaries of India. CS has been defined as ‘Key managerial personnel’, in relation to a company

S.203 of Companies Act, 2013 read with Rules 8 and 8A of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provide that following companies must appoint a qualified company secretary:

(a) Listed Company 

(b) Public company which have a paid-up capital of Rs.10 crores or more; 

(c) Other companies which have a paid-up capital of Rs.5 crores or more. 

It is to be noted that the provisions of compulsory appointment of CS are not applicable to S.8 (licensed i.e. non-profit) companies.

Process of appointment of CS: A CS shall be appointed by resolution of Board of Directors, containing the terms and conditions of appointment including the remuneration.

Penalty for not appointing CS when mandatory: If any company makes any default in complying with the provisions of section 203, such company shall be liable to a penalty of Rs.5 lakh  and every director and key managerial personnel of the company who is in default shall be liable to a penalty of Rs.50,000 and where the default is a continuing one, with a further penalty of Rs.1,000 for each day after the first during which such default continues but not exceeding Rs.5 lakh. Until 2-11-2018, the section provided for a fine which could be imposed only by Court but now, the penalty can be imposed by Registrar of Companies (“ROC”) who is authorized for this purpose. Earlier, the offence was compoundable but the procedure of compounding had to be complied with but now, directly penalty can be imposed.

Role and Functions of CS

The profession of CS began on a humble note in the late 19th century. There have been many instances of courts viewing CS as a clerk or even a servant in the past. This view was changed by the landmark English decision of Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd. Lord Denning MR observed that there has been a change in the role of CS’s over a period of time, they are no longer mere clerks and may sign contracts on the company’s behalf. Salmon LJ observed that CS is like ‘chief administrative officer’ of the company so he has ostensible authority regarding administrative matters.

This view has been incorporated in the Companies Act, 2013 which has included CS in the category of Key Managerial Persons.

Functions

The functions of Company Secretary shall include the following u/s 205(1) of Companies Act, 2013:

1. to report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the company;
2. to ensure that the company complies with the applicable secretarial standards;
3. to discharge such other duties as may be prescribed.

Other duties of Company Secretary: Other duties of Company Secretary, as specified in Rule 10 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 such as guiding directors of a company, facilitate the convening of Board meetings, obtaining approvals, representing before regulators, assisting the Board in discharge of affairs including good corporate governance and such other matters as may be entrusted to him.

Record keeping and filing of returns: A CS is expected to maintain registers and keep records as are required under Companies Act. CS has to ensure that required returns and documents are filed with ROC in time as per legal requirements. CS has to coordinate between Registrars and Share Transfer Agents.

Demat shares: CS coordinates between depository and stock exchange in case of issuance of Demat shares.

Service to shareholder: A CS is expected to serve as a link between shareholders and the company. He has to ensure that shareholders get proper service, like transfer and transmission of shares, keep proper records of members, payment of dividend, rights/bonus issue, etc. He has to solve the difficulties and problems of shareholders and reply to their correspondence.

Meeting of members and board: CS is required to coordinate Board meetings and general meetings e.g. finalising dates, sending notices, making arrangement for meetings, advise Chairperson of meeting on legal requirements, etc. He has to draft minutes of meetings of members, the board of directors and committee of directors, get them approved by Chairperson, record the minutes and get them signed within the prescribed time.

Service to Board: CS is expected to provide services to the Board of Directors to enable them to do their work effectively. He should organise Board meetings, keep minutes, etc. If the Board of Directors is the brain of the company, the Secretary is the ears, eyes, and hands of the Board. He is expected to work as ‘friend, philosopher and guide’ of the Board of Directors to advise them about legal provisions. It is expected that he advises directors about their legal responsibilities. He should keep them informed of the company’s operations so that they can make effective decisions for the management of the company and ensure that provisions of the law are not violated.

Coordination between departmental heads and Board: CS is a link between the Board of Directors and other executives who have to function under overall supervision and control of the Board. He has to coordinate approvals required by various departments. He is also normally expected to advise other departments about legal requirements.

Secretary of the audit committee: CS will be secretary of the Audit Committee which is required to be formed by listed companies under SEBI’s listing agreement. He is appointed as ‘Compliance Officer’.

CS as Compliance Officer ofa listed company: As per Regulation 6 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed entity shall appoint a qualified company secretary as the compliance officer (not applicable to mutual funds). The CS should (a) ensure conformity with regulatory provisions applicable (b) coordinate with Board, stock exchange and depositories (c) ensure that correct procedures have been followed (d) monitoring email address of grievance redressal division for registering complaints by investors.

Conscious keeper: CS is often termed as ‘conscious keeper’ of the company. He should ensure that all legal requirements in respect of various laws are complied with and the company is a ‘good corporate citizen’, fulfilling its social obligations as well.

Additional duties: In addition to duties as CS, he is entrusted with additional duties like looking after legal, personnel, financial matters and even general administration.

Removal of CS

A CS can be removed/dismissed like other employees. Since he is appointed by Board, the removal can also be only by Board. The removal has to be in accordance with the employment agreement. A resolution from the Board would be necessary for removal. There is a need for clear and sufficient reason for removal. Principles of natural justice (“PNJ”) like Audi alteram partem, nemo judex in causa sua, reasoned order etc. need to be followed. A Secretary appointed for a fixed period can also be removed. If a Secretary resigns or is removed, the change must be filed with ROC within 30 days in e-Form.

Memorandum of association for a company is like the constitutional law for a country. It is the document which contains the rules regarding constitution and activities of the company. It is a fundamental charter of the company.

It defines the extent of powers of the company, beyond that it cannot go. It is a document filed at the time of incorporation.

It is a public document i.e any interested public can get a copy on payment of prescribed fees.

Contents of memorandum

1. Name clause
2. Registered office clause
3. Object clause
4. Liability clause
5. Capital clause
6. Association clause or subscription clause.

1. Name clause

The first clause of memorandum requires a company to state its name

Rules: Should not adopt identical with or resembles that of an existing company.  Ltd for public company and Pvt Ltd for private company. Should not use a name prohibited by the Name and Emblems Act. 

2. Registered office clause

The memorandum must specify the state in which the registered office of the company is to be situated.

3. Object clause

This is the most important clause of the memorandum of association. It defines the object of the company and the extent of its powers. The object of the company must be state very clearly and a company cannot do anything beyond object clause. The objects of the company shall not be illegal or against public policy. 

4. Liability clause

This clause state the nature of liability of members.

5. Capital clause

This clause contains the total amount of capital with which the company is registered. This capital is known as authorized capital or nominal capital or registered capital.

6. Association clause or subscription clause

The memorandum concludes with subscription clause. The memorandum must be subscribed by at least 7 persons in case of public company and 2 in case of private company. Each subscriber must sign the document and write the number of shares taken by him.

Alteration of Memorandum

The alteration of the memorandum is possible only by strictly following the procedure laid down in the Act

1. Alteration of a name clause

The name of a company can be changed by passing a special resolution and with approval of central govt. If a company is registered with a name which is in the opinion of central govt is identical with or too closely resemble to the name of an existing company, it can be changed by passing an ordinary resolution but with the approval of central govt.

2. Alteration of registered office clause

If the shift of office is within local limits, i.e from one place to another place in the same city, town or village that can be done by giving a notice of change to registrar.

If the shift is outside local limits, a special resolution has to be passed.

If the shift is from the jurisdiction of one registrar to another’s the special resolution should be confirmed by the regional director of the state. (new sec 17 A Amendment Act 2000)

3. Alteration of object clause

The alteration of object clause is subject to so many restrictions. A company may change its objects for the following purposes;

1. To carry business more economically or more efficiently.
2. To attain its main purposes by new or improved means.
3. To enlarge or change local area of operation
4. To restrict or abandon any of its objects specified in the memorandum.
5. To amalgamate the company with any other company.
6. to sell or dispose of the whole or any part of the undertaking of the company.

–A special resolution and approval of company law board is necessary for alteration.

4. Alteration of liability clause

Liability clause cannot be altered so as to make the liability of members unlimited.

5. Alteration of capital clause

Alteration can be made to

• To increase share capital
• To convert fully paid share to stock
• Cancellation of shares  etc

Doctrine of ultra vires

Memorandum contains the rules regarding constitution and activities of the company. It is a fundamental charter of the company. It defines the extent of powers of the company, beyond that it cannot go.

A co can act and function within the limits of memorandum. Any act which is beyond the memorandum is ultra vires the company. Such acts are void.

Ultra means beyond and vires means powers. So ultra vires means ‘beyond powers’.

The purpose of this doctrine is to helps the shareholders, creditors and every third person dealing with the company to ensure that their investment are not diverted to unauthorized objects.

Liabilities of Promoter:

The liabilities of promoters are given below:

1. Liability to account in profit:

As we have already discussed that promoter stands in a fiduciary position to the company. The promoter is liable to account to the company for all secret profits made by him without full disclosure to the company. The company may adopt any one of the following two courses if the promoter fails to disclose the profit.

(i)The company can sue the promoter for an amount of profit and recover the same with interest.

(ii) The company can rescind the contract and can recover the money paid.

2. Liability for mis-statement in the prospectus:

Section 62(1) holds the promoter liable to pay compensation to every person who subscribes for any share or debentures on the faith of the prospectus for any loss or damage sustained by reason of any untrue statement included in it. Sec. on 62 also provides certain grounds on which a promoter can avoid his liability. Similarly Sec. 63 provides for criminal liability for mis-statement in the prospectus and a promoter may also become liable under this section.

The promoter may also be imprisoned for a term which may extend to two years or may be punished with the fine upto Rs. 5,000 for untrue statement in the prospectus. (Sec. 63).

3. Personal liability:

The promoter is personally liable for all contracts made by him on behalf of the company until the contracts have been discharged or the company takes over the liability of the promoter.

The death of promoter does not relieve him from liabilities.

4. Liability at the time of winding up of the company:

In the course of winding up of the company, on an application made by the official liquidator, the court may make a promoter liable for misfeasance or breach of trust. (Sec. 543).

Further where fraud has been alleged by the liquidator against a promoter, the court may order for his public examination. (Sec. 478).

Preliminary Contracts/Pre-Incorporation Contracts Made by the Promoters:

Preliminary contracts are those contracts which are made by the promoters with different parties on behalf of the company yet to be incorporated. Such contracts are generally entered into by promoters to acquire some property or right for and on behalf of the company to be formed.

The promoters enter into preliminary contracts, generally as agents or trustees of the company. Such contracts are not legally binding on the company because two consenting parties are necessary to a contract whereas the company is non­entity before incorporation.

The company has no legal existence until it is incorporated. It therefore follows:

1. That when, the company is registered, it is not bound by the preliminary contract.
2. That the company when registered cannot ratify the agreement. The company was not a principal with contractual capacity at the time of contract. A contract can be ratified only when it is made by an agent for a principal who is in existence and who is competent to contract at the time when the contract is made.
3. That if the agent undertook any liability under the agreement, he would be personally liable notwithstanding that he is described in the agreement as an agent and that the company may have attempted to ratify the agreement.
4. The company cannot enforce the preliminary agreement.

The preliminary contracts made by promoters generally provided that if the company adopts the agreement the promoter’s liability shall cease and if the company does not adopt the agreement within a certain time either party may rescind the contract. In such a case promoter’s liability would cease after the lapse of fixed time.

Rights of Promoters:

Since promoters have duties, it implies that they have rights too.

Rights are:

(i) They are entitled to take assistance of the experts in preparing the documents.

(ii) They can enter into preliminary or pre-incorporation contracts on behalf of the proposed company.

(iii) They may claim reasonable remuneration for their services.

Company Promotion in India:

The industrial history of India is the history of company promotion by managing agents during the British regime. Directors and partners of old firms did also promote business enterprises. In India, we do not have generally any professional or specialized agencies for promotion of companies.

The National Industrial Development Corporation was started in 1954 as a specialist promoting institution. It prepared project reports for a number of industrial units.

In company promotion in India, promoters usually follow the stan­dard stages. But, if necessary, they also undertake the task of incorpo­ration and formation, underwriting of shares, substantial share contri­bution and, above all, direct charge of routine management of busi­ness.

Promoters in India, therefore, perform various functions in the formational stage of a company. They act as manager and controller of new companies. A controlling interest in the affairs of the company is generally retained by the Indian promoters. Promoters are generally the first directors of a company.

A company is a third legal business structure and has entirely a different organizational structure from the sole proprietorship or partnership. Its formation is due to firstly, the sole proprietorship and partnership cannot meet the increased capital demand of industry and commerce. Secondly, the company ensures the protection of limited liability to the shareholders and investors.

According to Prof. L.H. Haney, “Company is an artificial person created by law having separated entity with a perpetual succession and common seal”. According to Justice Lindley a company means association of persons who contribute in shape of money or money’s worth to a common stock and employ it for some specific purpose.

There are three main activities of a business

1. Merchandising activities. This involve activities deal with goods in a ready to sell condition.
2. Manufacturing Activities. This involve from purchase to raw material and put labor and factory overhead on the raw material and produce a product.
3. Services Activities. This involve banking, education, insurance and training activities.

Characteristics of a Company

The company has several distinct characteristics; the significant ones are discussed here:

Separate Legal Entity

A company is a separate legal entity from its members who constitute it. It can hold, purchase and sell properties and enter into contracts in its own name. It is an artificial legal person who can sue aid be sued. Companies are owned by shareholders and they elect the Board of Directors, who run the company. The board in turn selects the management. Thus the shareholders exercise only indirect control over the affairs of the company. The separation of ownership from the management some-times results in a conflict of interests between owners and management. The best the shareholders can do is to change some of the directors through vote in the annual general meeting subsequent to any such conflict.

Limited Liability

The liability of the shareholders of a company is limited to the nominal value of the shares held by them. In the event of liquidation, the maximum loss of a shareholder is equal to the nominal value of the shares held by him. The creditors have no claim on the personal assets of the shareholders in the event of liquidation.

Transferability of Shares

The shares of a joint stock company are freely transferable. It does not require any permission from the company or consent of other shareholders. The shares of listed companies can be sold or purchased on the stock exchange and ownership transferred without any difficulty. However, in case of a private limited company, the transfer of shares is subject to the restrictions given in the company’s articles.

Ability to Acquire a Broad Capital Base

Following are significant factors that enable a company to raise large amount of capital

1. The nominal value of shares is kept small, as a result of which investment of any size is possible.
2. Limited liability minimize the risk of the investors and makes investment attractive and safer.

An Artificial Person created by Law

A company is called an artificial person because it does not take birth like a natural person but it comes into existence through the law. The company possess only those properties which are conferred upon it by its Memorandum of Association (Charter).

Continuous Existence

The companies generally have a continuous existence irrespective of changes in ownership. In the cases of sole proprietorship and partnership, change in ownership means the dissolution of the original business and formation of a new business.

Common Seal

Being an artificial person, a company can act through natural persons only. The acts of a company are authorized by the “common seal”. The “common seal” is the official signature of the company. A document not bearing the common seal is not binding on the company.

The Companies Act, 2013 details the regulations and company registration papers essential for the incorporation of a company. In this article, we will understand all such rules and documents listed in the Act.

Promoters

Section 2(69) of the Companies Act, 2013, defines promoters as an individual who:

• Is named as a promoter in the prospectus or in the annual returns of the company.
• Controls the affairs of a company, directly or indirectly.
• Advises, directs, or instructs the Board of Directors.

Hence, we can say that promoters are people who originally come up with the idea of the company, form it and register it. However, solicitors, accountants, etc. who act in their professional capacity are NOT promoters of the company.

Formation of a Company

Section 3 of the Companies Act, 2013, details the basic requirements of forming a company as follows:

• Formation of a public company involves 7 or more people who subscribe their names to the memorandum and register the company for any lawful purpose.
• Similarly, 2 or more people can form a private company.
• One person can form a One-person company.

Registration or Incorporation of a Company

Section 7 of the Companies Act, 2013, details the procedure for incorporation of a company. Here is the procedure:

Filing of company registration papers with the registrar

To incorporate a company, the subscriber has to file the following company registration papers with the registrar within whose jurisdiction the location of the registered office of the proposed company falls.

1. The Memorandum and Articles of the company. All subscribers have to sign on the memorandum.
2. The person who is engaged in the formation of the company has to give a declaration regarding compliance of all the requirements and rules of the Act. A person named in the Articles also has to sign the declaration.
3. Each subscriber to the Memorandum and individuals named as first directors in the Articles should submit an affidavit with the following details:

• Declaration regarding non-conviction of any offence with respect to the formation, promotion, or management of any company.
• He has not been found guilty of fraud or any breach of duty to any company in the last five years.
• The documents filed with the registrar are complete and true to the best of his knowledge.

4. Address for correspondence until the registered office is set-up.
5. If the subscriber to the Memorandum is an individual, then he needs to provide his full name, residential address, and nationality along with a proof of identity. If the subscriber is a body corporate, then prescribed documents need to be provided.
6. Individuals mentioned as subscribers to the Memorandum in the Articles need to provide the details specified in the point above along with the Director Identification Number.
7. The individuals mentioned as first directors of the company in the Articles must provide particulars of interests in other firms or bodies corporate along with their consent to act as directors of the company as per the prescribed form and manner.

Issuing the Certificate of Incorporation

Once the Registrar receives the information and company registration papers, he registers all information and documents and issues a Certificate of Incorporation in the prescribed form.

Corporate Identity Number (CIN)

The Registrar also allocates a Corporate Identity Number (CIN) to the company which is a distinct identity for the company. The allotment of CIN is on and from the company’s incorporation date. The certificate carries this date.

Maintaining copies of Company registration papers

The company must maintain copies of all information and documents until dissolution.

Furnishing false information at the time of incorporation

During the formation of a company, an individual can:

• Furnish incorrect or false information
• Suppress any material information in the documents provided to the Registrar for the incorporation, on purpose

In such cases, the individual is liable for action for fraud under section 447.

The company is already incorporated based on false information

If a company is already incorporated but it is found at a later date that the information or documents submitted were false or incorrect, then the promoters, first directors, and persons making a declaration is liable for action for fraud under section 447.

Order of the National Company Law Tribunal (NCLT)

If a company is incorporated by furnishing false or incorrect information or representation or suppressing material facts or information in the documents furnished, the Tribunal can pass the following orders (if an application is made and the Tribunal is satisfied with it):

• Pass an order to regulate the management of the company. It can include changes in its Memorandum and Articles if required. This order is either in public interest or in the interest of the company and its members and creditors.
• Make the liability of its members unlimited
• Order removal of the name of the company from the Registrar of Companies
• Order the company to wind-up
• Pass any other order as it deems fit

Before passing an order, the Tribunal has to give the company a reasonable opportunity to state its case. Also, the Tribunal should consider the transactions of the company including obligations contracted or payment of any liability.

Effect of Registration of a Company

According to Section 9 of the Companies Act, 2013, these are the effects of registration of a company:

• From the date of incorporation, the subscribers to the Memorandum and all subsequent members of the company are a body corporate.
• A registered company can exercise all functions of a company incorporated under the Act. Also, the company has perpetual succession with power to acquire, hold, and dispose of property of all forms. Also, it can contract, sue and be sued by the said name.
• Further, the company becomes a legal person separate from the incorporators from the date of incorporation. Also, a binding contract comes into existence between the company and its members as mentioned in the Memorandum and Articles of Association. Until the company dissolves or the Registrar removes it from the register, it has perpetual existence.