Concept Of Lifting Of Corporate Veil Has The Answer To Everything

WHAT ARE ARTICLES OF ASSOCIATION

Articles of Association (AOA) is the Company’s essential Rule Book which contains the set of guidelines and regulations necessary for every Company to function. The document is set to define the Company’s purpose as an organization and the tasks it is supposed to accomplish internally; ie. handling official financial records; handling company meetings along with defining the role and the powers of the Directors of the Company. The Articles also manage and maintain the rights of the shareholders as well as their relationship with the Directors. Companies who need mandatory Articles of Association are Unlimited Companies, Companies Limited by Guarantee and Private Companies Limited by Shares.

CONTENTS OF ARTICLES OF ASSOCIATION

It is important to pay extra attention to the Contents of the Articles of Association (AOA) at the initial phase since they are important for the ability of the Company to make profits and keep their shareholders satisfied. It is also important to make sure that they are as per the Company’s interests because amending the Articles later require a two-thirds majority of the votes at the general meeting of shareholders.

The following are the contents that a Company’s Articles of Association (AOA) usually possesses:

DIRECTORS

The AOA defines the guidelines of the Directors’ appointment; their qualifications for appointment; their remuneration once appointed and the powers of the Board of Directors in the Company meetings.

GENERAL MEETINGS

The AOA provides the basic framework of all the General Meetings to be conducted as well as all the provisions that are related to the functioning of the General Meetings in any manner.

ACCOUNTING AND AUDITING

The provisions in AOA will define the guidelines subjected to the Auditing of the accounting of the Company.

SHAREHOLDERS

The AOA streamlines the sub-division of the Share capital of the Company including the rights of the Shareholders and the relationship of these rights with other elements of the Company. The shareholders have to pay the whole or part of the remaining unpaid amount on each share purchased on the Company’s demand; i.e Call on Shares.

LIEN OF SHARES

The Company is eligible to retain the Shares of any member of the Company in case they fail to pay the debt to the Company. The member will not be allowed to transfer their shares unless they pay their debt.

TRANSFER AND TRANSMISSION OF SHARES

The AOA defines the procedure during the process of transfer of shares between the transferee and the shareholders. Transmission of shares comes into effect with death, insolvency, marriage, succession, etc. It is also a part of AOA despite being involuntary.

FORFEITURE AND SURRENDER OF SHARES

The AOA provides for the rules of forfeiture of shares if the member is not able to meet the purchase payments like paying call money or any allotment on the Shares. Shareholders may choose to surrender or voluntary return their shares to the Company pertaining to the guidelines of the AOA.

CONVERSION OF SHARES IN STOCK

The Company can pass an ordinary resolution in a General Meeting to convert their shares into stock. The management of the decision and resolution passed should be in accordance with the AOA.

ISSUING SHARE WARRANT

Public Limited Companies are eligible to issue a share warrant staying within the provisions mentioned in AOA. A share warrant is a bearer document which is related to the title of shares issued by the Company.

ALTERATION OF CAPITAL

Similar to the conversion of Shares into Stock, AOA provides the rules of the procedure to alter capital as per the Company’s interests. The Company can decide to increase, decrease or rearrange the Capital.

VOTING RIGHTS

The AOA notes down the specific Company matters which calls for voting by members as well as the procedure of voting whether by a poll or through proxies.

DIVIDENDS AND RESERVES

The AOA also provides the distribution of dividends among the Shareholders of the Company.

WINDING UP

Winding up of the Company means the liquidation of all the assets of the Company to pay its debt. The remaining monies left after the payment of all debt and expenses are distributed among the shareholders of the Company. The AOA also provides the provisions and procedure related to the Winding Up of the Company and has to proceed in accordance with the AOA.

ALTERING ARTICLES OF ASSOCIATION

SPECIAL RESOLUTION AND IT’S PROVISIONS

A Company can alter its Association of Articles if the need arises. The Company has to pass a Special Resolution (a 2/3rd majority of members present in the General Meeting) in order to alter its provisions. It is also important to remember that the Court does not have the power to alter the AOA. These are the specific guidelines that a company has to adhere to achieve a successful alteration:

1. The copy of Special Resolution has to be filed with the Registrar within 30 Days of its Passing.
2. The proposed should not go against the provisions of the Companies Act or the established Memorandum of Association (MOA).i.e. a document that is prepared during the formation of a Company and defines the Company’s relationships with the shareholders.
3. The Company should not propose any illegal activity.
4. The alteration proposed cannot be bonafide for the benefit of the Company.
5. The alteration should not increase the liability of the existing members in any manner.

ENTRENCHMENT CLAUSE

The Company can choose to include Entrenchment Provisions in their Articles of Association under Section 5(3) Of Companies Act, 2013.  An Entrenchment Clause refers to the effect that a Company may choose to apply to its certain provisions. These provisions, then, can be altered only after meeting specified conditions that are more restrictive than the normal passing of a 2/3rd majority special resolution. The Entrenchment Clause renders the provision difficult or impossible to alter.

Under Section 5(4) and Section (5), Companies Act,2013, the Company can choose to include the Entrenchment Clause in the AOA during the incorporation of the Company, or through an amendment to the AOA of the Company later.

DIFFERENCE BETWEEN MEMORANDUM OF ASSOCIATION (MOA) AND ARTICLES OF ASSOCIATION (AOA)

Memorandum of Association is a document that consists of all the data essential for the incorporation of the Company. On the contrary, the Articles of Association are provisions and rules set up the regulate and govern the Company. The Company has to register the MOA at the time of the incorporation of the Company.  The Company is not bound to register the AOA during the time of incorporation.

The Memorandum of Association restraints the powers of the organization while the Articles of Association only demonstrate the rights, obligations that the members of the organization are responsible to follow and adhere.

The Articles of Association is subordinate to the Memorandum which holds the Supreme status in the hierarchy of the documents of the Company while

The Memorandum of Association must contain six clauses in total but the Articles of Association can have clauses according to the decision of the Company, given it does not go against the Companies Act, 2013.

The Memorandum specifies the objectives of the Company while the Articles of Association specifies the rules through which the objectives are to be fulfilled by the Company.

Any provisions of the AOA that goes against the Memorandum is rendered invalid and the Memorandum of Association controls the Articles. 

IMPORTANCE OF THE ARTICLES OF ASSOCIATION

The Articles of Association is one of the most important documents in the organization.

The importance of the AOA rests in the important guidelines it provides for handling financial affairs of the Company, managing the powers and responsibilities of the Directors and their relationship with the Shareholders of the Company.

The Articles details the voting rights of the members as well as the procedure of the voting. The Articles of Association protects the interests of the investors and the Shareholders. It keeps the interests of the Directors in any competing business and prevents from any conflict of interest if the Articles specifies that in its provisions.

In conclusion, the Articles of Association are important for the welfare of the Company as an organization and for its smooth functioning in fulfilling its objectives as an organization.

Original blog is published at LEGODESK  please read the blog for more content and for legal help

Legodesk is a legal practice management tool using which lawyers can manage their matters, win new clients and do their legal research all in one platform. Legodesk’s unique case management features helps to keep your legal practice organized and accessible everywhere.

10 Doubts About Private Limited Company Need To Know About Companies Act 2013 You Should Clarify

Introduction To Companies Act 2013

The term ‘company’ implies an association of a number of persons for some common object or objects. In fact, the purposes for which people may wish to associate are multifarious. But companies act 2013 where the term ‘company’ normally refers to the associations for economic purpose i.e., to carry on a business.

In legal terminology, a company means a company incorporated or registered under ‘the Company Act, 2013’ or under any of the other Companies legislation.[i] In its legal form, the law creates an artificial entity i.e. a company. It has a separate identity independent of its members.
Hence, This artificial legal person like any other ordinary human being:

• has many rights and
• incurs many liabilities.

Basically, Companies are of various types such as:

• One Person Company (OPC)
• Private Limited Company
• Public Limited Company[ii]
• Company Without Share Capital (Charitable Company).[iii]

Aforesaid first three types of company are private in its nature. Means they are a private company while the ‘public limited company’ is not a private company.

A company is registered initially as a private company may be converted into a public company. Such conversion may be by choice, or by default or by operation of law.[iv]

However, the conversion of a company does not affect the legal identity of the company.

Meaning of Private Limited Company

As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed and by its article

(a) restricts the right to transfer its share;

(b) limits the number of its members to two hundred; and

(c) prohibits any invitations to the public to subscribe for any shares in, or debentures of, the company.

However, After the 2015 amendment of Companies Act, the restriction of minimum capital requirement is waived off for all types of companies.

Let us now discuss the implications of each of these restrictions on the company i.e Private Limited Company.

Restriction on the right of members to transfer their shares

The articles of association(AoA) of a private company must specifically have a provision restricting the right of the members to transfer their shares. It means that the shares of a private company are not as freely transferable as those of the public companies. But it does not mean that the shares of a private company cannot be transferred at all. Further, the AoA generally provide that whenever a member of a private company desires to transfer his shares, he must offer them to the existing members at a price to be determined by the directors.

Restriction on the maximum number of members

A private limited company is also required to limit the maximum number of its members to two hundred. It means that the number of members in a private company can be between two and two hundred.

While counting the members, the following are not to be included:
i) persons who are in the employment of the company and by virtue of their employees happen to be members of the company, and
ii) persons, who, having been in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased.

Where two or more persons hold one or more shares of the company jointly, they shall be treated as a single member for the purpose of counting the number.

Prohibition on the invitation to the public

This restriction implies that a private limited company must not issue a prospectus or any other public invitation, directly or indirectly to the general public so as to invite them to invest in its shares or debentures.

The public may include any section of the public whether selected as members or the debenture holders of the company or as customers of the person issuing the prospectus, or in any other manner.

In simple words, it means that a private company cannot issue an invitation to the public. It has to make its own private arrangement to raise its capital.

[i] S. 2(20) of Companies Act, 2013.

[ii] S. 3 of Companies Act, 2013.

[iii] S. 8(1) & (2) of Companies Act, 2013.

[iv] S. 14(1) of Companies Act, 2013.

[v] S. 4(1)(a) of Companies Act, 2013.

5 Things You Needs To Know About 2018 Amendment To The Companies Act, 2013 These Companies Act Is Effective From 7th May 2018

These companies amendment act is effective from 7^th May 2018.

1. Changes in section 2 (Definition) under Companies amendment Act

• Associate Company (S. 2(6)): “significant influence” shall now be mean control of at least 20 percent of the Total voting powers (earlier it was total share capital) or control of or participation in business decisions under an agreement. Joint Venture: Earlier joint venture was not defined. Now Joint venture is defined as a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;
• Subsidiary Company (S. 2(87)): the exercise or control of more than one-half of the total voting power (earlier share capital).

2. Insertion of Section 3 in Companies amendment Act –A: If at any time the number of members in a company is reduced below the requisite level (7 for a public company and 2 for private company) and the company carries on business for more than six months, then after six months, each member shall be severally liable for the whole debt of the company contracted during that time.
3. Section 12 (Registered office of the Company) in the Companies Amendment Act: Earlier the time limit to have a registered office was before the fifteenth day of its incorporation. Now the time limit is within thirty days of its incorporation.
4. Prospectus (Section 26) in Companies amendment Act: SEBI in consultation with Central Government is empowered to prescribe the contents of the prospectus. Clause a, b, c is omitted (Name, Address of the registered office, opening and closing of the issues, capital structure and auditor’s report on profits/losses need not be provided)
5. Private Placement (Section 42) under Companies amendment Act:
6. A company can make a private placement of securities.
7. PP can be made only to a selected group of people who have been identified by the board, and such person shall not be more than 50.
8. Section 54 (Sweat Equity Shares) under the Companies Amendment Act: Now the companies are permitted to issue sweat equity shares within the period of one year from the commencement of business.
9. Section 77 and Section 78 (registration of charges): The amendment does not require registration of such charges as may be prescribed in consultation with the RBI.
10. Section 90 (Significant Beneficial owner of the company): the person who is the significant beneficial owner has to give a declaration to the company. The person alone or together, or through person or persons have a beneficial interest of not less than 25 % shall be considered of having a beneficial interest in the company. This provision will be applicable to all the companies and the company has to register them as a significant beneficial owner.
11. Section 92 (Annual Returns) under Companies amendment Act: The central Government is now empowered to prescribe a form of Annual Return. It is now mandatory for the company to provide for the entire annual report on the website of the company. Section 93 omitted so now the registrar need not be informed when the stake of promoter’s change.
12. Section 96 (Annual General Meeting): For unlisted Companies, the Annual General Meeting can be held anywhere in India with the consent of all members either in written or electronic mode in advance.
13. Section 100 (EGM): The wholly-owned subsidiary of a company incorporated outside India has been allowed to hold its extraordinary general meeting outside India. Such Companies or subsidiaries can hold EGM at any place where they want in the world.
14. Section 101: Now a meeting can be commenced with a shorter notice period if 95% of voting power consents to such notice.
15. Section 123 (Declaration of Dividend): The BoD may declare interim dividend during any financial year at any time during the period from closure of financial year till holding of any of annual general meeting out from surplus in profit & loss account or else out from profits of fiscal or the financial year for which such dividend (interim) is required to be stated or out from the profits generated in such financial year until quarter prior the date of declaration of the dividend.

Read Also: All About Companies Act 2013

Final Dividend:  Any time through the period from closing of financial year till the holding of next annual general meeting out from surplus in profit & loss account or out from profits of fiscal or financial year for which such dividend is required to be stated or out from profits made in such said financial year until the quarter prior the date of declaration of the dividend.

14. Section 129 (Financial Statement): The consolidated financial statement of the company, its subsidiaries and associates should be in accordance with the applicable accounting standards and be laid before the Annual General Meeting.
15. Section 130 (Re-opening of books of Accounts): Re-opening of books of accounts is limited to 8 financial years immediately preceding the current financial year. The order for reopening of accounts can be made up to eight years unless there is a specific direction under section 128(5) from the Central Government for a longer period.
16. Section 136 (Audited Financial Statement): Amendment to sub-section (1) of section 136 provides that the copies of audited financial statements and other documents may be sent even with a shorter notice period if the same is agreed upon by ninety-five percent of the members entitled to cast their votes.
17. Section 139 (Appointment of Auditors): An auditor appointed for a period of five years need not be ratified every year at the AGM. Non-Compliance of the auditor to the terms the fine is either 50,000 or the amount received by the auditor whichever is lower. (Section 140). Contravention to the provision of 139 by the company, is 25,000 and may increase to 5 lakh Rupees or four times the remuneration of an auditor, whichever is lower.
18. Section 149 (Board of Directors): For resident Director, the director needs to stay in the country for 182 days in the previous financial year (Earlier previous calendar year).

Read Also: Section 185 of Companies Act 2013

Independent Director: the pecuniary relationship is now substituted “pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten percent of the persons’ total income in all or such sum as to be agreed upon,” shall be thus substituted;

19. Section 160 (Retiring directors and directorship) under Companies amendment Act: The necessity to deposit a number of rupees one (1) Lakh w.r.t. recommendation or nomination of the directors shall not be pertinent in the situation where the case is of appointing an independent director/directors or the directors that are nominated through the nomination and remuneration committee.
20. Section 164 (Disqualification of a director): In case the Company has defaulted on the grounds of non-filing of the financial statement or failure to repay the interest after the due dates, then the director newly appointed shall not incur any liability for a period of six months from the date of appointment.

Disqualified on the ground of conviction: If a person is disqualified for a conviction for any offense, even if an appeal is preferred against the order of conviction, it shall still serve as a ground for conviction.

21. Section 167 (vacation of Director): If a director is disqualified for not filing the financial Statements or failure in repayment of dues, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.

Vacation need not be carried out: If conviction is for less than 30 days or where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, only until the expiration of the period of seven (7) days since the date when any such petition or appeal has been disposed of; or elsewhere any similar further petition or appeal is chosen in opposition to the sentence or order within a period of seven (7) days, awaiting such additional further appeal or petition is disposed of.”.

22. Section 168 (Resignation of Director): Earlier it was mandatory for the resigning director to file a form with a detailed reason of resignation within 30 days. Now, this provision is made optional.