Company Law Notes

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Company law is a branch of business law that deals with the creation and operations of registered companies. It examines the law that protects those who invest their money in such companies.

One fundamental principle is that a company has a separate legal personality. This means that it can contract and sue in its name.

Definition

Company law is the body of rules which governs companies. This includes the rights and obligations of the shareholders (majority and minority), directors and employees, those who deal with the company (such as creditors and customers), and members of the community within which it operates.

Unlike individual persons, a company has a legal personality, and its existence is independent of the death, retirement, or insolvency of its members. A company also has a common seal, which is used to validate official documents.

A company cannot effectively do anything that is outside the powers that are expressly or implied conferred upon it by its memorandum of association. Any purported activity that is beyond these powers is ultra vires and will not be effective even if agreed to unanimously by its members. This doctrine is known as the doctrine of limited liability. A company can be limited either by shares or by guarantee.

Objectives

The main goal of company law is to protect the interests of the shareholders and creditors. It does this by limiting the activities of a company and prohibiting it from engaging in any activity that is not expressly allowed by its memorandum or objects clause.

One way to avoid ultra vires transactions is to ensure that the Objects clause contains only the current business of the company. However, this is not always possible, and it is often difficult to decide whether a particular transaction falls within the scope of the objects. The courts must ask whether the transaction is reasonably incidental and conducive to the carrying on of the business of the company.

Section 399 of the Companies Act allows the Company Law Board to provide relief to shareholders if they can show that there is oppression within the company that adversely affects their interests or that the company has been mismanaged. However, for this to succeed, the Company must be a public limited company, and the mismanagement must be a breach of statutory duty.

Memorandum

The memorandum is a document that defines the scope of activities and powers of a company. It specifies the objects of the company, the maximum capital the company is authorized to raise through the issue of shares, and the liability of the members. The memorandum also states whether the company is limited or not.

It should be signed by seven persons if it is to be a public company and two persons if it is to be a private company with a share capital. A witness must attest the signatures.

It should also state the name of the company and its registered office address. The name should not be identical to or resemble the name of another registered company. It should also include the word ‘Limited’ or ‘Private Limited’ at the end of the name, depending on the type of company. The memorandum should also state the liabilities of the members in the event of liquidation.

Articles

The articles of a company regulate such matters as the alteration of shares, general meetings, voting rights, directors, powers of directors, and other vital issues. An alteration of the articles affecting a member’s contract with the company may be invalidated.

Here, the company’s articles provided that if any member wished to transfer his shares, he must inform the directors, who will take them among themselves equally at a fair value. The Plaintiff wanted to move his shares, but the defendants refused. The court held that the articles did not give rise to a contract between the Plaintiff and the Defendants in their capacity as directors but only as members.

In this case, the articles gave a lien on the partly paid shares for members’ debts. The majority of the shareholders, who held 98% of the shares, wanted to buy out the minority, so they passed a special resolution adding a clause extending the lien to fully paid-up shares as well. The Plaintiff, who owned a large number of fully paid-up shares, claimed damages for breach of contract.

Shares

Shares are an interest in a company entitling the owner to a proportionate part of the profits and, in case of liquidation, a proportional portion of the assets. The amount paid for the shares is called the ‘share capital.’ A share is a transferable property and may be bought or sold.

A company can reserve certain shares by special resolution not to be called in the event of winding up. The company can use such reserve capital to pay off debts or for any other purposes.

The memorandum and articles of a company may allow different classes of shares to be issued. These may have differential rights to voting and dividends. For example, equity shares will get full voting rights while preference shares will only receive a fixed rate of dividend. Usually, preferential shareholders will have a priority in the distribution of dividends and assets in case of winding up.

Resolutions

Resolutions are essential documents that document the actions of a company’s board. They create accountability and transparency for the company, which can help reduce liability. They also prove that a company complies with the law and its internal regulations.

Resolutions can be used to resolve a variety of business issues, including opening bank accounts, amending the bylaws, and registering intellectual property rights. They are also needed for significant decisions, such as buying or selling real estate, hiring C-suite executives, and taking out loans.

Resolutions must be recorded in the minutes of a meeting or writing and signed by the board of directors or secretary of the company. They should be kept in the company’s records and available for inspection. Typically, extraordinary and ordinary resolutions must be delivered to Companies House within 15 days of being passed. Other types of resolutions must be filed with the state.