Companies Act 1956, India – Tips for Lawyers and Layman
Q1. Section 391 to 394 of the Companies Act, 1956 provide provide interalia for amalgamation of companies through order of the court. In understand that once the transferor company merge with the transferee company, existence of transferor company is lost by virtue of court order. In the light of above my question are :
1. Is my understanding correct ?
2. What is the difference between loss of existence of company by way of liquadation and winding up.
Q2. In connection with amalgamation u/s.395 i.e. by takeover of shares by the acquiring company, my questions are as follows :
1. This section contemplates amalgamation of companies without reference to court ; does it means that after complying with all the formalities amalgamation in real sense i.e. vesting of all the assets and liabilities of the transferor company is affected?
2. Is existence of the transfer of company is lost by virtue of this provision.
A. With respect to your query on Section 391 to 394 of the Companies Act, it is correct that once amalgamation take place under Section 391 to 394 of the Companies Act, the existence of transferor company is lost by virtue of court order. With respect to your query no. 2 of this very subject, the company is liquidated by winding-up procedures and accordingly it loses its existence once it is wound up. Regarding your query of amalgamation under Section 395, i.e.; by take over of shares by the acquiring company, it is submitted that this section contemplates another form of arrangement and not amalgamation and does not require any application to the court under Section 391 for carrying out the scheme. In this case also the usual mode is for the acquire company, i.e.; transferee company to make an offer to the shareholders of transfer of company to purchase their shares in the transferor company at a stated price which is usually higher or more attractive than the prevailing marketing price and to fix a time within which the offer is to be accepted with a condition usually added to the effect that if a specified percentage of the shareholders do not accept the offer the offer is to be void. The offer is to buy the Transferor Company’s share either for cash or in exchange for the shares of the said company. If the offer is accepted by all the transferor company shareholders, there is no problem. If the specified percentage of the transferor company’s shareholders accept the offer, the Transferee Company will then purchase their shares and would acquire the shares in the manner provided by the said Section. The merit of this scheme is that without resort to tedious court procedures take over is effected. Only in the cases where the dissenting shareholders interest, the procedure describe by the section will have to be followed. It provides machinery for adequately safeguarding the rights of the dissenting shareholders also. It may also be noted that the approval by the 9/10th in value of the shareholders need not necessarily be given at the meeting of the shareholders nor is the court direction necessary for holding the meeting nor the same is required to be held under the courts supervision. The consent of the members given in any other manner such as subscribing one’s signature to the scheme will be sufficient. Section 395 applies only where there is a scheme and in there is not scheme or contract involving transfer of shares the section will not apply. Furthermore, for the section there must be a transfer company and transferee company. The Transferee Company must be a company registered under the Act. With respect to your query no.2, the existence of the transferor company will not be lost as it only an arrangement and rather than a hostile take over it is a normal take over where all the shareholders have agreed such other persons in the transferring company to buy the shares. It will depend on the scheme of the contract as to what will happen to the Transferor Company.
Q3. I have not yet registered my.com company with the registrar of companies. Please tell me as to how should I pay the taxes concerned on the revenues earned through it.
A. If you have not got the company registered with the Registrar of Companies then you would be taxed as association of persons or if you are the sole controller then as proprietorship.
Q4. Can a NRI be a director of an Indian Company.
A. Yes NRI can be a director of an Indian Company.
Q5. I have noticed that some companies are registering themselves as export oriented company in Software Parks set up by the Government, to get the full benefit of various schemes as per the recent budget. But they carry no such activity, instead they have no such export businesses as stated by them in the legal document. This registration is taking place with customs department with full excise inspection. I request you to tell me certain foolproof methods to bring the culprit to book of law. Whom should I approach for justice.
A. The course available for you would be to file a public interest litigation, by way of a writ petition in the High Court, giving details of the companies which are indulging in such illegal activities ( with documentary proof, if possible/available ) and highlighting the callousness and inaction on the part of the Government Department in checking such illegalities. You should make the Finance Ministry, Ministry of Industries, the Custom Authorities and Excise Authorities alongwith the companies indulging in the said illegal activities as party to the said writ petition.
Q6.We propose to merge two companies with the other, all three being in the same line of business. The purpose of the same is present consolidated picture and to bring in synergy. We have proposed following modes of bringing this companies together. (a) By amalgamation u/s.391-395 of the Companies Act, 1956. (b) By transferring all the assets and liabilities to the surviving company and winding up the other two companies. The only problem in following first option is the time taken by the Court for completing formalities of amalgamation. With reference to second option, I have the following questions : 1. Is it possible to transfer all assets and liabilities of two companies and then take these company into Members Voluntary Winding-Up as per the provisions of sections 49 onwards of the Companies Act for dissolution of the company ? As per my view there should not be any difficulty for the same. 2. Can we rather than taking two companies into Members Voluntary Winding-up apply to Registrar of Companies u/s. 560 of the Act to strike off the name of the two companies as defunct company ? My view for the above is that conditions to Section 560 states that “company is not carrying in any business”. Therefor can we say immediately after transfer of all assets and liabilities of these two companies, it ceased to carry on business and it also does not intend to carry on any business (which is fact). Can on above ground ROC proceed to strike off the name ?
A. You propose to merge two companies with the third company in respect of which you have proposed the following two options:- 1. By amalgamation under Section 391-395 of the Companies Act. 2. By transferring all the assets and liabilities of the transferor companies to the surviving transferee company and winding up the other two companies voluntarily under Section 494 of the Companies Act. With respect to the second option of transferring the assets and liabilities of the company to another company while winding up voluntarily the transferor company, we would draw your attention to section 494 of the Companies Act, which provides that where the transferor company is proposed to be, or is in the course of being wound up voluntarily, and the whole or any part of its business or property is proposed to be transferred or sold to the transferee company, the liquidator of the transferor company, may, with the sanction of a special resolution of the company, do the following :- (a) Receive, by way of compensation for the transfer or sale of the property of the transferor company, shares policies or other like interests in the transferee company, for distribution among the members of the transferor company. or (b) Enter into any other arrangement, whereby the members of the transferor company may in lieu of receiving cash shares etc, participate in the profits of the transferee company. This section gives the liquidator the power to sell the property of the company for money or shares, debentures or other interests, where the transferor company is proposed to be wound or is in the course of being wound up voluntarily, and it is also proposed that the company’s property may be transferred or sold to another company. Such a sale or arrangement shall be binding on the members of the transferor company. The dissentient members who did not vote in favour of the special resolution giving sanction to the sale or arrangement , may give note of their dissent to the liquidator within seven days from the date of passing of the resolution. Where the dissentient shareholder and the liquidator do not come to any agreement as to the value of his interest, the value has to be decided by arbitration under the provisions of the Arbitration and Conciliation Act, 1996. For winding up the company voluntarily as a members’ voluntarily winding up , you shall have to follow the procedures laid down under Sections 484-488 of the Companies Act, 1956. In view of the above, the procedure for transferring the property of the transferor companies to the transferee company shall take place where the transferor company is proposed to be wound up or is in the course of winding up voluntarily. With respect to your query no.2, where you propose to get the name of the transferor companies struck off as a defunct company after transferring all the assets and liabilities of the two companies, I would remind you that there are only two ways whereby you can transfer the assets and liabilities of the transferor company to the transferee company, which are as follows :- 1. By amalgamation under Section 391-395 of the Companies Act. 2. By sale or transfer of property of the transferor Company under Section 494 of the Act. In case you opt for amalgamation, the transferor companies are automatically dissolved without going through the procedures of winding up. However, you shall have to go through the court procedures as laid down under the provisions of section 391-394 of the Companies Act. If you opt for the second option, that is under Section 494 of the Companies Act, then you can transfer the property of the transferor companies to the transferee companies only where the transferor company is proposed to be wound up voluntarily, or is in the course of being wound up voluntarily. Hence, in both in the above two options, whereby you transfer the property of the transferor companies to the transferee company, there is no applicability of section 560 of the Companies Act, which provides for striking off the name of defunct company.
Q7. I want to register a Pvt. Ltd. company. I want to know the procedure – exactly whom to go to and what to do ( I am based in Delhi) What will the whole procedure cost ? I also want to know what are the minimum capital requirements. Can I capitalize a company with sweat equity.
A. The procedure for registering a Private Limited Company is given below :-
1. For registering a Private Limited Company 2 or more persons are required who would be the subscribers to the Company’s Memorandum.
2. Select a few suitable names in order of p[reference, which should indicate the main object of the proposed Company. An application in Form No. IA is prescribed in this regard by the Companies (Central Government’s) General Rules and Forms, 1956, and a fee of Rs.500/- is payable with each application.
3. See that one of the promoters is kept as the subscriber to the memorandum and articles of association of the proposed company.
4. The Registrar of Companies will ordinarily inform within a period of seven days from the submission of your application whether any of the names applied for is available.
5. If the name is not available, you will have to apply again selecting fresh names.
6. Get the Memorandum and Articles of Association drafted suitably for a private limited company:- (a) For contents of form of Memorandum, refer to Sections 13 and 14. (c) Both the Memorandum and Articles of Association be printed and divided (d) into paragraphs numbered consecutively (Section 15 & 30) There is no form given in the Act for the Memorandum and the Articles of Association of a private company limited by shares. (Section 29).
7. Before finally printing the Memorandum and Articles of Association, get them vetted by the concerned Registrar of Companies, so that at the time of their registration there are less corrections and alternations.
8. Keep in mind that computer printed Memorandum and Articles of Association will be accepted and taken on record by all the Registrar of Companies from now on.
9. Get both the Memorandum and Articles of Association stamped as per the Indian Stamp Act or the relevant State Act and the notifications thereunder in force in your State.
10. Get both the Memorandum and Articles of Association signed by at least two subscribers, each of whom will also write in his own hand, his father’s name, occupation, address and the number of shares subscribed for.
11. There will be at least one witness to these signatures as mentioned above who will sign and write in his own hand, his father’s name, occupation and address.
12. The aforesaid two documents may be signed on behalf of the subscribers by their agents duly authorised by power of attorney.
13. In case of an illiterate subscriber ensure that he gives his thumb impression or mark which is described as such by the person writing for him.
14. Both the documents will then be dated.
15. See that the date given on these documents is any date after the date of stamping of them and not before that date.
16. Get the following forms duly filed up and signed :- (i) Declaration of compliance in Form No.1 by an advocate of the Supreme Court of a High Court, an attorney or a pleader entitled to appear before a High Court or a Secretary or a Chartered Accountant, in whole-time practice in India who is engaged in the formation of a company, or by a person named in the Articles as a director, manager or secretary of the company that all the requirements of the Companies Act, 1956 and the rules thereunder have been complied with in respect of registration and matters precedent and incidental thereto. (Section 33(2))’ (ii) Notice of the situation of the registered office of the company in Form No.18 (Section 146). (iii) Particulars in favour of one of the subscribers to the memorandum of association or any other person authorising him to file the documents and papers for registration and to make necessary corrections, if any. This should be executed on non-judicial stamp paper of the requisite value. (Forms stated in sub-items (ii) and (iii) though required to be filed within 30 days of the incorporation of the company, are generally filed together with the Memorandum and Articles of Association.)
17. File the following with the Registrar of Companies within 3 months from the date of availability of name with necessary registration and filing fees. (i) The stamped and signed copy of the Memorandum and Articles of Association (Section 33). (ii) The forms mentioned above; (iii) Any other agreement, if referred to in the Memorandum and Articles of Association, as in that case, it will form a part of the Memorandum and Articles; (iv) Any agreement which the company to be incorporated proposes to enter into with any individual for appointment as its managing or whole-time director or manager. (Section 33(I)(c) (v) Original true copy of the Registrar of Companies’ letter intimating about the availability of name.
18. Pay the registration and filing fee by way of cash or demand draft or treasury challan for registration of memorandum of Association and for filing of
19. The Registrar of Companies will then scrutinize the documents and papers filed for registration and, if necessary, on intimation, the authorized person will make necessary correction in them under his initials.
20. The Registrar of Companies will then register the company and issue the certificate of incorporation. (Sections 33 & 34).
21. The date given by the Registrar of Companies on the certificate of incorporation will be the date of incorporation of the company and on that date, the company will come into being as a separate legal entity. The cost for registering the Company will vary, depending particularly upon the Capital Structure of the Company. Registration Fees is prescribed under Schedule X of the Companies Act, which shall depend upon the Authorised Capital of the Company. The minimum Capital with which a Private Limited Company can be registered is Rs. 1 Lac. The provisions for issue of Sweat Equity as contained in S 79A of the Companies Act is as under : A company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled , namely : (a) the issue of sweat equity shares in authorized by a special resolution passed by the company in the general meeting. (b) The resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued. (c) not less than one year has, at the issue elapsed since the date on which the company was entitled to commence business. (d) The sweat equity shares of a company whose equity shares are listed on a recognized stock exchange are issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf. (e) In view of the above provisions, you can’t issue Sweat Equity at the time of incorporation of your Company as one year has not elapsed since the date on which the company was entitled to commence business. Consequently, you can issue sweat equity shares only after the period of one year since incorporation.
Q8. Can we draw a Scheme of Amalgamation u/s. 395 (not u/s.391-394) for transferring all the Assets and Liabilities to Transferee Company and to acquire all shares (this is proposed in view that we can have amalgamation w.e.f. 01.04.2000, which is important date). Note : Both, the Transferor and Transferee companies are controlled by same management, therefore theoretically we do not have any problem in acquiring shares, assets and liabilities. If we answer to above question in affirmative sense, than we can proceed to wind up the Company Voluntarily (Members Winding-up). Liquidator can be one of the Directors of the Company who can wind up the company and finally official Liquidator can submit the report to the Court for liquidation. Is above proposal correct ? If we follow transfer of assets and liabilities as per Members Voluntary Winding-up, then we will not be able give effect to the same from 01.04.2000 (this date is important for us) since certain forms and other formalities are required to be followed i.e. intimation to ROC, Solvency declaration etc., which now is not possible so as to be effective from 01.04.2000.
A. We reiterate that there are only two ways whereby you can transfer the Assets and Liabilities of the Transferor company to the Transferee company which where explained to you vide our earlier reply dated 12.04.2000. You cannot draw a scheme of amalgamation under Section 395 of the Companies Act 1956, for transferring the assets and liabilities of the Transferor Company to the Transferee Company. Section 395 provides for taking over a company without going to the court by acquiring the shares of that company. This section provides a mode for the acquiring company to make an offer to the shareholders of the Transferor Company to purchase the share at a stated price. It also provides a machinery for safeguarding the rights of the dissentient shareholders. Section 395 does not provide for any mechanism for transfer of assets and liabilities of the Transferor company to the Transferee company. So far as members’ voluntary winding up is concerned, the voluntary winding up shall be deemed to commence at the time when the resolution for voluntary winding up is passed. As soon as affairs of the company are fully wound up, the liquidator shall call the General Meeting of the Company for the purpose of laying the account of the winding up before it. Within one week after the meeting, the liquidator shall send to the Registrar and the Official Liquidator, a copy of account and shall make a return to each of them. If the Official Liquidator makes a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the company or to public interest, then, from the date of submission of the report, the company shall be deem to be dissolved. The declaration of solvency under Section 488 of the Companies Act, must be made within five weeks before the passing of the resolution for winding up. The declaration must be registered with Registrar before the date of the resolution.
Q9. How does a director resign from the board in a Pvt. Ltd., firm if the Board fails to accepts his resignation ?
A. There is no provisions in the Companies Act, relating to the resignation of his office by a director of a company. If there is any provision in the articles of the company giving the right to a direction to resign at any time, the resignation will take affect without any need for its acceptance by the Board. Where a director is elected or has contracted to act for a fix period, his resignation before the expiration of the period may make him liable for damages, unless the articles permits such resignation. In the absence of a provision in respect of resignation under the Act or under the articles of the company, the resignation tendered by a director unequivocally in writing shall take effect from the time when such resignation is tendered. It is advisable that the resignation should be in writing and also indicate the time when it is to take effect. The Directors cannot refuse the resignation of a co-director unless such a provision is there in the Articles of Association of Company.
Q10. I took the connection of internet from XYZ ISP Company. I choose Freedom plan. In that I paid lump sum amount and was told that I would be getting 1 hour daily free internet time extra time will be charged at Rs.10 per hour. I clarified and was told that whole of my use/age time will be added and on that I will be charged extra. However, when the bill came I was shocked to see the bill made in such a way that if I have used internet for about 70 minutes then they have charged it for one hour by running next ten minutes to one hour. If I have used it for two hour five minutes I am supposed to pay for two hours because extra one hour and five minutes is taken as two hour. Services are also horrible and their claim that they provide fast service is also false. I will like to mention here that when MTNL offered their service they openly claimed that their service is slow but they will improve it. The response of the company is bad and they are bent upon cheating people.
A. In the query raised by you, what is important to be seen is as to what were the terms of the freedom plan in this regard. Whether the same mentioned specifically about the fact that if the user is even for 5 minutes, the same would be construe as one hour usage. If such a term is there, then the fact that you orally clarified from the company and were informed that your entire usage time would be added, would be meaningless, since the same will not stand to reasoning and would be against a written contract. If the terms were not there in this regard then you can very well approach a Consumer Court and can also complaint about the deficiency of service before the said court. You can also file a petition before the MRTP Commission for unfair Trade Practice on the part of the company.