Prospectus: Introduction, Meaning, Characteristics, Issue, Legal Rules, Contents,

Key Points:

1. Meaning of Prospectus
2. Introduction of Prospectus.
3. Characteristics of Prospectus.
4. Who can issue prospectus?
5. Steps to be taken one by one Issue of Prospectus.
6. Legal Rules Regarding Issue of Prospectus.
7. Contents of Prospectus.

(I) Matters specified under rule 3 of companies (Prospectus and Allotment of security) rules, 2014.

(II) Matters specified under rule 4, 5 of companies (Prospectus and Allotment of securities) Rules, 2014.

(III) Other matters and reports specified under rule 5 of companies (Prospectus and Allotment of securities) Rules, 2014.

 

Link : https://smckk14.blogspot.com/2023/08/promotion-and-incorporation-of-companies.html

1. Meaning of Prospectus:

"Prospectus" means a document issued by a company through which the public is invited to purchase shares or debentures or for making deposits in the company. i.e. prospectus is a document obtain capital form the public.

Under Section 2 (70):

"Prospectus means any document prescribed or issued as a prospectus and includes a Red Herring Prospectus refund to in section (32) or shelf prospectus refunded to in section (3) for any notice, circular, advertisement or other documents inviting offer from public for subjects or purchase of any security of a body corporate".

2. Introduction of Prospectus:

After obtaining certificate of the incorporation, a private company and company without share capital may start their business but a public company having share capital cannot do so. It has to obtain certificate of Commencement of Business and this certificate is issued after following the prospectus of section (32). To obtain this certificate, the company has to make declaration before ROC under section (31) that the prospectus or the state in lieu of prospectus has been submitted to the office of ROC or Registrar of Company. Prospectus is issued to arrange capital. A public company having share capital may arrange the capital through its own sources or may invite the public to buy its shares and debentures. The company which arranges capital through own sources, it has to submit state in lieu of prospectus to the office of ROC or Registrar of Company. While the company which invites public to purchase its shares and debentures or both, has to submit prospectus by submitting the one copy of prospectus to the Registrar of Company. Thereafter it can obtain certificate of Commencement of business.

So, any notice, circular, advertisement or document through which a company invites common public to make deposits in the company or to purchase shares or debentures is called a “Prospectus”.

3. Characteristics of Prospectus:

(i) A private company cannot issue prospectus.

(ii) It can be issued by an incorporated organisation.

(iii) Mention of date is compulsory.

(iv) Prospectus includes offer for sale also.

(v) For every public company having share capital, it is mandatory to issue prospectus or statement in lieu of prospectus.

(vi) It has many forms - Notice, Circular, Advertisement or any other documents.

(vii) It must certain signature of each director or proposed director.

(viii) It can be issued to invite public deposits from the public.

(ix) Through prospectus, offer from public invited to subjects or purchase shares or debentures.

4. Who can issue prospectus?

(i) By public company.

(ii) By any person on behalf of public company.

(iii) By any person who is related with formation of the company or having interest in formation of the company.

(iv) By any person on behalf of the person related with formation of the company or having interest in the formation of the company.

(v) By any person or organisation to whom the shares have been allotted to resell it.

5. Steps to be taken one by one Issue of Prospectus:

(i) Appointment of different experts like Banker, Auditor, Secretary, Legal Advisor etc.

(ii) Making Underwriting Commission.

(iii) Cannot for brokerage.

(iv) Listing of shares in any recognised stock exchange.

(v) Determining Capital Structure.

(vi) Ascertaining the all-time date of Commencement of company.

6. Legal Rules Regarding Issue of Prospectus:

Registration of prospectus is mandatory and it is possible only when it is legal.

(i) Cannot be issued before Incorporation.

(ii) Compliance of guidelines of SEBI.

(iii) Person having rights of issuing the prospectus.

(iv) Must be dated.

(v) Must be registered:

Before issuing to public, its copy must be signed by each director or proposed director. Thereafter, should be sent to ROC or Registrar of Company with following documents -

(a) Written consent of experts.

(b) Written consent of officers.

(c) Copies of important contracts (according to 16th rule of the section II of the Act)

(d) Copy of contracts with managerial personnel.

(e) Report of adjustment.

(vi) Issued to public within 90 days.

(vii) Making available the prospectus having features of prospectus with the application form.

(viii) Penalty on the violation - Minimum ₹50,000 maximum ₹3 lakhs of three years under section (26).

(ix) Expert to be not connected with formation or management of the company under section (26).

(x) Terms of contracts not to be varied under section (27).

(xi) Contents as per section II (26).

(xii) Not to apply in fictitious name (38).

(xiii) Refusal by the ROC to register the prospectus:

(Opposite to legal rules regarding issue of prospectus)

7. Contents of Prospectus:

(I) Matters specified under rule 3 of companies (Prospectus and Allotment of security) rules, 2014.

(II) Matters specified under rule 4, 5 of companies (Prospectus and Allotment of securities) Rules, 2014.

(III) Other matters and reports specified under rule 5 of companies (Prospectus and Allotment of securities) Rules, 2014.

(I) Matters specified under rule 3 of companies (Prospectus and Allotment of securities) Rules, 2014:

Matter specified in part 1 of scheme II may be divided into eight parts -

1. General Information:

(i) Name and address of registered office of company.

(ii) Names of stock exchanges where application has been submitted to enlist the shares.

(iii) Declaration regarding refund of amount received if till the closing date minimum 90% of issuance or nor subscribed.

(iv) Declaration of issuing allotment letter/refund order within 10 weeks and in case of late in refund, declaration to pay interest.

(v) Opening date of issue.

(vi) Closing date of issue.

(vii) Names and address of auditor and lead managers.

(viii) If proposed debentures /proposed shares have been valued through any rating Agency and afterwards not valued, it should be mentioned as 'Not valued'.

(ix) Names and address of underwriters along with the amount underwritten, in addition,

(x) Permission of central Govt. for proposed issue along with letter of interest and included licence, on behalf of Central Government should be earlier given that for truthfulness of statements and financial soundness, the central government would not be liable.

(xi) Declaration regarding punishment for the applicant (s) with fictitious name U/S (38).

(xii) Board of director's will submit a declaration that the amount received from issue shall be deposited into Bank in a separate account. The amount utilised, amount unutilised shall be shown in the balance sheet under appropriate head.

2. Capital Structure of Company:

(i) Authorised, issued, subscribed and paid up capital of company.

(ii) Size of issue. In this, amount referred for or allotment to promoters and others shall be started separately.

3. Terms of Present Issue:

(i) Terms of payment.

(ii) How to make application.

(iii) Any special tax benefit available to company and its shareholders.

(iv) Rights of holders of Institution.

4. Details of issue:

(i) Purpose of issue.

(ii) Cost of project.

(iii) Sources of finance.

5. Company Management and Project:

(i) Background and main objective of company. Present business of company and if it has any subsequent company then the name and address of that company.

(ii) Background of promoters.

(iii) Place of project.

(iv) In case of any collaboration, detail of Guarantee of performance or assistance in control (if any).

(v) Nature of product, possibility of export, guarantee of export,

(vi) Data of capital market related to shares and debentures of company. It should include minimum and maximum value of each year for last 3 years and minimum and maximum value of every month for last 6 months.

(vii) Name, address, occupation of MD or Managing Director, WTD or Whole Time Director, other directors in which Nominee directors and managements will be included also and number of posts of directors hold by them each in other companies.

(viii) Details of Plant & Machinery and Technology.

(ix) Implementation of scheme of project with progress report. It will include dates of land acquisition, production work, installation of plant and machinery, dummy production and commercial production.

(x) Proposed marketing strategies.

(xi) Fundamental facilities like Raw Material, Water, and Electricity etc.

(xii) Future possibilities.

6. Details of Companies listed under same management who have issue any capital in last 3 years:

(i) Name of company.

(ii) Year of issue.

(iii) Type of issue.

(iv) Date of closing issue.

(v) Date of allotment of shares and debentures certificate.

(vi) Date of completion of project, if the purpose of the issue is to fulfill the financial needs of any project.

(vii) Amount of issue.

(viii) Rate of dividend paid.

7. Outstanding Litigation:

(i) The cases which can affect the activities and financial position of the company. It includes all tax disputes.

(ii) Such criminal cases against company or its directors which come under part I of scheme XIII.

(iii) Default made in case of payment of legal dues, institutional dues and instrument holders like debentures, FD and accumulated preference shares.

(iv) Details of important charges happened after the date of latest balance sheet and their effects on performance of possibilities of company.

8. Perception of Management regarding risk factors:

Perception of management of company regarding fluctuation in foreign exchange rates, differentials in availability of raw materials, differentials in marketing of products, delay in commerce of business (cost) etc.

(II). Matters specified under rule (4), 5 of companies (Prospectus and Allotment of securities) Rules, 2014:

1. General information:

(i) Written consents from Directors, Auditors, Legal Advisors, Issue Managers, Issue Registrar, Bankers of Issue, Bankers of Company and Experts.

(ii) Advice /suggestion received from experts (if any).

(iii) If there has been any change in directors and auditors in previous 3 years, its details with reason.

(iv) Detail of authority of issue and resolution passed for issue.

(v) Method and duration of allotment and issue of certificate.

(vi) Names and address of company security, Technology advisor, Lead Managers, auditors, banker's, issue bankers and Agents.

2. Financial information:

(a) Report of auditors of company:

(i) Detail of projects, losses, Assets and payables.

(ii) Report regarding dividend distribution on each type of shares for each year preceding the five years of issue of prospectus. It should also include details of those shares on which no dividend has been paid in the previous year.

(iii) If no accounts have been prepared before 3 months of issue of prospectus preceding five years, then the statement that no such accounts have been prepared.

(iv) If the company has no subsequent company then report of auditors of each year preceding five years of prospectus regarding Profit and Loss and Assets and Liabilities of each year, which should be related to the financial ending just before issue of prospectus.

(v) If the company has subsidiary company (s), report of subsidiary companies or the companies may be prepared jointly or separately.

3. Statutory and Other Information:

(i) Minimum subsequent amount.

(ii) Expenses on issue in which the expert made on the fees of the following -

(a) Consultant /Advisors.

(b) Issue register.

(c) Issue management.

(d) Trustee of the debenture holders.

(iii) Underwriting commission and brokerage.

(iv) Prior issues for cash.

(v) Detail of any public or right issue in previous 5 years.

(vi) Commission or brokerage paid on previous issues.

(vii) Shares issued other than cash.

(viii) On the date of issue of prospectus, detail of issued outstanding debentures, unredeemed preference shares and other documents.

(ix) Detail of opinion for subscribing/opinion of exchange of share from depository interest.

(x) Detail of assets to be purchased from the amount of issues.

(xi) Detail regarding directors, proposed directors, WTD, their remuneration, appointment and remuneration of MD, interest of directors, their borrowing powers and qualification shares.

(xii) Rights of members regarding voting, dividend and lien on share and method of amalgamation and method of forfeiture of share.

(xiii) Restriction on transfer and transmission of shares. (If any) amalgamation of shares and their division.

(xiv) If assets have been valued in previous 5 years, its detail.

(xv) Inspection of important contents.

(III) Contents of Prospectus and SEBI guidelines:

As per SEBI guidelines, 2000, following information and statement should be included in prospectus -

Cover page - The front cover page will be of white colour and without any pattern for picture. It should be sufficient thick.

This page shall contain following particulars -

(i) The word 'Prospectus'.

(ii) Name and address of Registered Office.

(iii) Nature, number, value and amount of proposed documents.

(iv) Risk regarding first issue.

(v) General risk factors.

(vi) Liabilities clause.

(vii) Names and address of legal merchant bankers. 

"Promotion and Incorporation" of Companies

Key Points:

1.Meaning of Promotion.
2. Definition of Promotion.
3. Meaning of Promoter.
4. Definition of Promoter.
5. Who are Promoters?
6. Types of Promoters.
7. Functions or Duties of a Promoter.
8. Rights of Promoters.
9. Liability of Promoters.
10. When the liability of Promoters Commences?
11. Preliminary Contract.
12. Legal Position.
13. Meaning of Incorporation.
14. Process of Incorporation.
15. Certificate of Incorporation.
16. Effects of Incorporation.
17. Commencement of business: section (11).

Link : https://smckk14.blogspot.com/2023/07/prevention-of-oppression-and.html

 

Formation of Companies:

Company is an artificial person created by law. So it cannot be created instantly. It requires various legal formalities which is a long process.

From an idea to estimate a company to commencement of business, there are three steps -

(i) Promotion, (ii) Incorporation and (iii) Commencement.

A private company requires first and second steps only to commence business. While the public company has to follow all three steps to commence of business.

1.Meaning of Promotion:

(Dictionary meaning Film promotion, Job promotion)

Promotion means 'start'. This is the first step towards formation of a company.

Idea - Collection of resources with abilities - Experts etc.

Promotion is process in which the journey of formation of a company starts with an Idea and includes all the formalities /works till the company is formed in real.

2. Definition of Promotion:

According to Professor ES Mead - 'Promotion involves four elements - Discovery, investigation, assembling and financing'.

According to CW Gerstenberg - 'Promotion maybe defined as the discovery of business opportunities and the subsequent organisation of funds, property and managerial ability into a business concern for the purpose of making profits therefrom'.

3. Meaning of Promoter:

Promoter means a person, partner, company or any group of a persons who do the work of promotion. Promoter is a person who generates the idea of formation of a company in his mind and take necessary steps to convert the idea into reality. He investigates about business, forms of a company according to a fixed plan, assembles necessary resources and performs preliminary expenses. He takes the complete risk because if company gets failed, he would have to bear all the losses.

4. Definition of Promoter:

U/s 2 (69): Promoter means a 'person' -

(i). Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section (92). or

(ii) Who has control over the affairs of the company directly or indirectly whether as a shareholder, director or otherwise, or

(iii) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

Provided that nothing in the sub clause (c) shall apply to a person who is acting merely in a professional capacity.

According to Francis Palmar - 'Promoter means a person who originates a scheme for the formation of a company, has the memorandum and articles get prepared, get them registered, and appoints the first directors, settles the terms of preliminary contract and prospectus, if any, and make arrangements for an advertising and circulating of the prospectus and placing the capital.

5. Who are Promoters?

A promoter does the work of formation and incorporation of the company and is responsible as a promoter under provisions of Companies Act. It is not mandatory for a promoter that he should take part directly or completely in promotion of company.

Advocates, Chartered Accountant, Legal Experts and Accountants are not promoters because they do not take part in the process.

(i) Promoters Need not be a Person -

Not necessary that a person, or group of persons a firm, incorporation, originations maybe promoters. At present, generally companies perform the work of promoter.

(ii) Need not be a Partner in Proposed Company –

He /they can receive remuneration but in practice generally the promoters participate in the company by accepting the post of managerial post or director.

(iii) Being a Promoter Depend upon Facts –

Any person is a promoter of a company or not, is a matter of fact. In each case, by reviewing the circumstances, it is decided. If a person gets Incorporation of company as a chief person or assists in promotion, he cannot get rid of responsibility that the works had been done by his representatives. This is to be noted that person doing the work of promotion in the capacity of a professional cannot be called promoters. e.g. lawyer, printer and publisher of a prospectus, accountant, chartered accountant, engineers. One who assists in promotion only, can be promoter.

6. Types of Promoters:

(i) Professional Promoters -

They promote (establish) a company and handover to the shareholders. there are many professional Promoter in India to promote a company.

(ii) Occasional Promoters -

Their main profession is not to promote a company but other business. sometimes they promote a company. e.g. Engineer, Architect, Lawyer etc.

(iii) Financial Promoters -

Some financial companies take up the work of promotion depending on situation of the market. They do so to earn financial profits and provide financial assistance too.

(iv) Technical Promoters.

7. Functions or Duties of a Promoter:

(i) Idea in mind.

(ii) Thinking about initial problems - Place of business, Labour, Raw materials, Power, Market etc.

(iii) Determining deciding Name, Objects and Capital and Place of business.

(iv) Finding the signatories of MOA - Private minimum 2, public 7.

(v) Appointment of first Directors.

(vi) Appointment of Legal advisors, Bankers, Auditors etc.

(vii) Preparing important documents.

(viii) Payment of preliminary expenses.

(ix) Contract with underwriters.

(x) Issue of prospectus - Prepare printing and issuing.

(xi) Obtaining license - If needed.

(xii) Application to Stock Exchange.

(xiii) Obtaining Certificate of Incorporation.

(xiv) Obtaining Certificate of Commencement of Business.

If promotion of a company, is to be performed by purchasing any existing business, then dealing with buyers of Assets and selling of assets with mutual agreement.

8. Rights of Promoters:

(i) Right to Receive Preliminary Expenses -

Expenses incurred in connection with promotion are called preliminary expenses. e.g. - Preparation of MOA and AOA, Advertisement, Fees to Legal advisor, Primary investigation etc. They can get back the amount of preliminary expenses under AOA of company by submitting necessary documents but cannot file suit against the company because (i) There was existence of the company before incorporation, (ii) In case of nonexistence of the company, there cannot be any contract /agreement between company and promoter (s), (iii) If there is no contract, no liability of payment arises.

(ii) Right to Receive Proportionate Amount from Co-Promoters –

If due to any misstatement given in prospectus, anyone of the promoter has to indemnify, he can recover the proportionate amount from co-promoters because promoters have joint and separate liability towards company.

(iii) Rights to Receive Documents -

Promoters are allotted to receive the amount spent by them on incorporation and formation of the company, but in this regard, they cannot file a Suit against the company as long as there is such a contract between them and company after formation of the company. They can receive remuneration, through - (i) Commission on purchase price of business or assets (ii) Profit on assets (iii) Fixed amount (iv) Allotment of shares and debentures.

9. Liability of Promoters:

(i) To Disclose Secret Profits -

Promoters have fiduciary relationship with company. So it is expected not to earn any secret profits. If they have earned, it has to be disclosed and returned to the company with proper detail. If they do not do so and company comes to know, the company can recover the Secret profit from them.

(ii) Liability in Purchase of Property -

If promoters induce the company to purchase any property or purchases property from the money of company, it is necessary for them to disclose important facts to the company. If any property is purchase without disclosing important facts and details and company bears any loss due to it, the promoters will have to reimburse the loss.

(iii) Liability for Default in Prospectus -

If there is only statutory error in prospectus due to carelessness of promoters, the promoters will be liable to shareholders.

(iv) Liability for Misrepresentation or Fraud in Prospectus - To shareholders.

(v) Liability in case of Death - His assets are liable for his work done.

(vi) Liability in case of Insolvency - Amount of liability can be recovered from assets.

(vii) Liability for works done before Incorporation -

Personally liability for preliminary works. if after incorporation, the company approves the works of promoters, they are released from their liability.

(viii) Liability on report of official liquidator -

If at the time of liquidation of company, the official liquidator submits report to the court, the promoters have done fraud in promotion, the court may order for public enquiry. If fraud guilty, they will be liable.

(ix) Liability for Breach of duty - In case of loss, liable

(x) Liability in case of promotion - Liability for all the works.

(xi) Liability for offence -

If they violate the provisions of Companies Act, 2013, they will be liable financially and punishable offence. e.g. misrepresentation or fraud in prospectus, maybe fined or imprisoned or both.

10. When the liability of Promoters Commences?

Liabilities starts as and when the works of promotion gets started. but to be noted that this liability arises only when the company is Incorporated.

11. Preliminary Contract:

These are the contracts which are done by on behalf of company before Incorporation.

12. Legal Position –

Promoters are personally liable for preliminary contract. A promoter is neither an agent nor a Trustee of a company. He acts in a fiduciary position towards the company. He takes steps for the formation of the company and incurs the preliminary expenses for incorporation of company like registration expenses, payment of stamp duty, professional fees etc. The persons with whom the preliminary contract were made cannot file a suit against the company because at the time of making contract, there was no existence of the company. Such contract cannot even be rectified because nobody can rectify that contract. Which were done before coming into existence. If the company after its registration decides to accept the contract made by promoters with vendors, then it will make a fresh contract directly. Thereafter, promoters will be relieved from their liability and company will be liable for that contract. This new contract with company will eliminate the old contract done with promoters.

Second stage

Incorporation of company: under section (7):

13. Meaning of Incorporation:

Registration of a company under section 2 (20), of Companies Act is called Incorporation. Legal existence of a company comes after incorporation. A company is treated as an artificial person only after incorporation and its existence becomes separate from its members.

14. Process of Incorporation:

(1) Preliminary process:

(i) Determining name of company -

First decide then confirm with ROC about availability. For this an application with prescribed fees is send to ROC. If the proposed name is similar to the name (s) of any existing company, ROC rejects. Name should not be objectionable as per Central Government. After scrutiny, ROC send reply within 7 days. After getting approval, company must be incorporated within 6 months. If not done so, that name maybe allotted to other company by ROC.

(ii) Determining place of registered office - Name of state.

(iii) Preparing agreements.

(iv) Preparing MOA and AOA.

(v) Appointment of experts – Advocate, Engineer, Charted Accountant, Agents, Underwriters, Financial Advisor etc.

(2) Submitting the document to the ROC –

An application form should be annexed with following documents –

(i) MOA or Memorandum of Association –

This is the most important document of the company also known as constitution of the company. Every company has to prepare it and has to submit in ROC office. In MOA name of company, place of registered office, main and incidental object, liability of members, capital are mentioned. in case of public company, signature minimum of 7 persons and in case of private company signature of minimum 2 done in MOA. It is printed, divided into paragraphs, serially number and signed by members. Stamp of required value is must. Value of stamp vary from state to states.

(ii) AOA or Article of Association –

In AOA, rules for systematic operations of the business, to obtain the objectives of MOA are mentioned. It is also signed by those persons who have signed in MOA. To be noted that preparation of AOA in all types of the companies and submitting to the ROC is not compulsory. If a company limited by shares does not prepare its AOA then rules of schedule ‘F’ will be applicable on the company. At the time of submitting MOA to ROC, if AOA has not been made, it should be marked with ‘registered without articles’. Making and submission of AOA is compulsory for private company, unlimited company and companies Limited with guarantee.

(iii) Contract Relating to Appointment of Managerial Personnel –

If the company resolves to appoint a person as Managing Director, Whole Time Director or Manager, contract of appointment must be presented before ROC.

(iv) List of Directors –

In this list, names, addresses and other details of those person are to be given who are ready to become a director in the company. This is not compulsory for a private company. In case of public company, there must be particulars of minimum 3 persons.

(v) Written Consent of Directors –

Must for public company but not must for private company.

(vi) Notice of Registered Office –

Along with other documents, information about registered office is also sent. This information maybe send within 30 days of Incorporation.

(vii) Prescribed Fee –

Prescribed amount of registration fees should also be sent. This fees is based on capital of the company. Fees are given in 2013. The fees is deposited into RBI government account. In addition to registration fees, filing fees is also charged.

(3) Verification of Documents –

(a) Issue of receipt of receiving the document and registration fees.

(b) Verification of MOA and AOA –

(i) Name of company is appropriate or not.

(ii) Objectives of MOA should not be illegal and against public policy.

(iii) Signatures on MOA and AOA. In case of company with share capital, each signatory must take at least one share. Signs of signatories must be authenticated by such person who is not member of company.

(c) Verification of a document.

(d) Return of document in case of default.

(4) Issue of Certificate of Incorporation –

When Registrar is satisfied with all the documents submitted for incorporation, he incorporates the company and issues a certificate of incorporation. In this regard, following provisions exist –

(i) Incorporation cannot be denied by ROC after completion of all conditions.

(ii) Writ petition can be filed on refusal by ROC.

(iii) Registration - Issue of Certificate of Incorporation.

15. Certificate of Incorporation:

After registration the ROC issues a certificate under his signature and official seal that the company has been incorporated and (in case of limited liability Company) it is a company with limited liability. This certificate is known as "Certificate of Incorporation".

Following points are given in certificates – (i) Full name of company (ii) Liabilities of members (iii) Date of issue of certificates (iv) Amount of stamp duty (v) Official seal of ROC and (vi) Signature of ROC.

16. Effects of Incorporation:

(i) Company becomes an incorporated organisation.

(ii) Date of company coming into existence is the date of issuance of certificate of Incorporation.

(iii) Contract between company and its members through MOA and AOA.

(iv) Separate legal entity.

(v) Pre Incorporation Contract –

Company is not bound to accept pre incorporation contracts and if they are accepted, there must be fresh /new contract.

(vi) Perpetual Existence –

After Incorporation, the company becomes of permanent existence and it is not affected by death, insanity or insolvency of any member.

(vii) No Dispute in Relation of Existence –

After incorporation, no one can challenge the existence of it in the court.

(viii) Effects on Creditors –

After incorporation, creditor can file suit against company to recover their money.

(ix) Funds payable by members is considered to be loan of company –

After incorporation, under the provisions of MOA and AOA, any amount payable by members is treated as loan of the company.

(x) Incorporation will not be void due to Irregularity of Pre Incorporation –

If after incorporation, it comes to the knowledge that there were some discrepancies in the process of incorporation, in such a case incorporation would not be void. Certificate of incorporation is a conclusive prove that incorporation is valid.

Once the certificate of incorporation is issued, it cannot be declared invalid. But under provisions of Companies Act, company may get liquidated.

Stage 3

Commencement of business: section (11)

17. Commencement of business: section (11):

(i) Any company with share capital shall not exercise the power of purchase of business or borrowing powers, until –

(a) One director shall file a declaration to ROC that every subscriber of MOA has paid the amount of shares taken by them and in case of public company paid up share capital, is not less than ₹ 5 lakhs and in case of private company is not less than ₹ 1 lakhs.

(b) The proof of registered office has been submitted to ROC.

(ii) If any violation is made in compliance to this section, the company shall be punishable with penalty of up to ₹ 5000 and every officer shall be punished at the rate ₹ 1000 per day, till the default continues.

(iii) If after incorporation within 180 days, the declaration is not filed to registrar and the registrar comes to know that the company is not commencing its business, the registrar may initiate the procedure to eliminate the name of company from the register of company. 

"Prevention of Oppression and Mismanagement": Under Section (241 to 246)

Key Points:

1. Introduction.
2. Meaning of Oppression.
3. Meaning of Mismanagement.
4. Who can apply to Tribunal?
5. Powers of Tribunal: Under Section (242)
6. Effects of the order of Tribunal.
7. Class Action: Under Section (245)
8. Reasons / Bases to File Application.

• Rights of Tribunal regarding Prevention of Oppression and Mismanagement Section (241)
• Consequence of Termination /Modification of Certain Agreement: Under Section (243)

 

Link : https://smckk14.blogspot.com/2023/07/winding-up-of-company-detailed.html

1. Introduction:

Members of a company control the management and its policies. It is done by majority. Directors are appointed by members to manage the affairs of the company and directors manage the company with consent of the members. Thus the majority succeed in doing those works what they want.

It creates oppression against the minority and this evil gradually spreads to the entire company which severely affect the interest of minority.

To curb this oppression /evil, there are some provisions in Companies Act, 2013 which prohibit the misuse of oppressions committed by majority and gives rights to minority to present their plea before the Tribunal to get remedy.

These provisions are given from section (241 to 246).

2. Meaning of Oppression:

Oppression is a social act of inflicting severe reactions on an individual group or institution.

Cambridge dictionary - A feeling of being very uncomfortable and worried.

Oppression is not defined in company law 2013. But the court defines it as a conduct that includes a visible departure from the standards of fair dealing and violation of conditions that require fair practice for rights of shareholders.

Oppression involves fraud, breach of duty and misconduct.

3. Meaning of Mismanagement:

Mismanagement is also not defined in company law 2013. It may be described as a control on matters of the company in unjust and dishonest matter.

It also refers the process of managing incompetently, wrongly or badly.

4. Rights of Tribunal regarding Prevention of Oppression and Mismanagement Section (241):

On submitting the application before the Tribunal, the Tribunal can exercise its powers in two conditions -

(i) In case of oppression. (ii) In case of Mismanagement.

5.. Who can apply to Tribunal?

In case of oppression and mismanagement, following members may apply to Tribunal for remedies -

(i) In case of Company with a Share Capital -

Not less than 100 members or not less than 1/10^th of the total number of its members whichever is less, or

Any member or members holding not less than 1/10^th of the issued share capital of the company.

Note - The applicant should have paid all the calls and other sums payable on shares.

(ii) In case of a company with no share capital -

Not less than 1/5^th of the total number of its members. Section (244)

Anyone or more than one members, after obtaining consent of other members, may apply on behalf of all of them. The Central Government may allow less number of applicants, if deems think appropriate under section (241)

(1) Application in Tribunal in case of Injustice -

If members complain about Injustice and the Tribunal is of the opinion that (a) The management of the company is being performed which is against public policy or unjust against anyone or more members and (b) The Order of winding up of the company shall be harmful to the interest of such members,

The Tribunal may order to rectify the related matters as it thinks fit.

Such an order is an alternative to order of winding up.

Case Laws - (i) N R Murthy Vs ID corporation of Odisha.

(ii) Elder Vs Elder and Watson Limited.

(2). Application in Tribunal in case of Mismanagement -

If members of the company, feel that -

(i) The functions of the company are against Public Interest or companies interest, or

(ii) Due to any substantial change in control of management of the company, it is possible that such change may go against Public Interest or company’s interest,

The members may apply to Tribunal for prohibiting this mismanagement.

If on the basis of such application, the Tribunal believes that there is Mismanagement in the company which may cause harm to interest of public or company, that Tribunal may pass such an order as it thinks appropriate.

Note - As provided in section (241), change made in management or control of the company, which negatively affects the interest of company, is called 'Mismanagement'. e.g. (i) Change in Board of Directors or Management, (ii) Change in ownership of shares, (iii) In case of company with no share capital, any change occurred in membership of company etc.

Case Laws - (i) V J Thomas Vs Kuttanav Rubber Company Limited.

(ii) Kumar Exporters Private Limited and Others Vs Naini Oxygen and Acetylene Gas Company Limited and Others.

6. Powers of Tribunal: Under Section (242):

(I) Power to Prevent Oppression and Mismanagement -

The Tribunal may issue orders for followings -

(i) To regularize the affairs of the company in future.

(ii) To purchase the interest or shares of the members of the company by other members or company itself.

(iii) To reduce the share capital of the company in case of purchase of shares by the company.

(iv) On termination or correction of any agreement done between the company and the following persons - (a) Managing Director, (b) Any other Director, (c) Managing Agent, (d) Secretary, (e) Treasurer and (f) Manager

(v) Agreement between company and the members who have not be mentioned in (iv) cannot be terminated or corrected as long as not informed to the concerned parties.

(vi) For cancellation of any transfer, delivery or payment of any property by the company.

(vii) For any other matter, which the Tribunal thinks justifiable under section (242).

(II) Power to Issue Interim Order -

On any application given by any person, before giving any Final Decision, the Tribunal may issue any such interim order to control the affairs, which it thinks appropriate and justifiable section (242).

7. Effects of the Order of Tribunal:

(i) Effects on MOA and AOA -

If subject to any order of the company, any changes have been made in AOA or MOA no company can make such a change which has been made in the contrary to the change made by Tribunal or the change made does not match with the change made by the company.

If the company makes any change in MOA or AOA, its information should be given by the company to the ROC within 30 days.

(ii) Effects on Managers /Officers -

If, as a result of the order of the Tribunal, agreements made with manager /officers (Managing Director, Director, Manager etc.) get cancelled or any amendments are made in the agreements and due to this amendment, any person is removed from his post, then - (a) No compensation shall be given to him and (b) He will not be appointed on same post till next 5 years.

(iii) Penalty – Under Section 242 (8)

If any company violates the provisions of section 242 (5), the company will be imposed with the penalty of minimum ₹ 1 lakh to maximum ₹ 25 lakhs and every defaulting officer of the company shall be punished with imprisonment of maximum 6 month or with fine of minimum ₹ 25000 and maximum ₹ 1 lakh or with both.

8. Consequence of Termination /Modification of Certain Agreement: Under Section (243)

(i) Where an order issued under section (242); terminates, sets aside or modified an agreement such as is referred to in sub - section (2) in that section -

(a) Such order shall not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise.

(b) No managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of 5 years from the date of order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company.

Provided that the Tribunal shall not grant leave under this clause unless notice of the intention to apply for leave as been served on the central government and that government has been given a reasonable opportunity of being heard in the matter.

(ii) The person who knowingly violated the clause (b) of sub-section (1) and acts as a managing director or other director or manager of the company and such every director who knowingly becomes a part of such violation, shall be punishable with imprisonment for the term which may extend to 6 months of with fine which may extend to ₹ 5 Lakhs or with both.

9. Class Action: Under Section (245)

(i) If Member (s) or Depositor (s) of the company feel that the business of the company is carrying out against the interest of them, they can file an application before the Tribunal in this regard.

(ii) The Member (s) or Depositor (s) rise the demand for action against the auditor or firm of the auditor, the concerned audit firm and every defaulting partner shall be declared as responsible.

(iii) (a) In case of a company with share capital minimum 100 members of the company or any specified number of total members of company whichever is less or any member (s) who have specified person of issued share capital of the company, may make demand.

(b) In case of company with no share capital 1/5^th of number of total members.

(iv) Order issued by Tribunal shall be applicable to the company, all the members, depositors and auditor (including firm of Auditor, Expert, Consultant and Advisor) or any person of the company.

(v) Any company, who under this section fails to implement the order issued by Tribunal, it will be fined with minimum ₹ 5 lakhs and maximum ₹ 25 lakhs, and every defaulting officer of the company shall be punished with imprisonment of a term of up to 3 years, and with fine of ₹ 25000 and maximum ₹ 1 lakh or with both.

10. Reasons / Bases to File Application:

For following purposes, application may be submitted before the Tribunal -

(i) Prohibiting of the company from ultra-virus Acts of MOA and AOA.

(ii) Prohibiting of the company from violating provisions of MOA and AOA.

(iii) If any resolution have been passed by winding the important facts or by misstatements which alter the MOA and AOA, declaring such resolution void and null.

(iv) Prohibiting the company and directors to work on resolution.

(v) Prohibiting the company to do such acts which are against the provisions of Companies Act or other laws.

(vi) Any other remedy with which the Tribunal may think appropriate.