Post on 03-Apr-2018
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THE COMPANIES ACT 1956
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WHAT IS COMPANY
It is an association of persons for some
common objects. In common parlance the
word company is normally reserved for
thoswe associated for economic purposes.
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DEFINITION OF COMPANY
The Companies Act1956 does not define
company. In terms of its features
Section 3 (1)(i) lays down that A
company means a company formed and
registered under Companies Act
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DEFINITION OF COMPANY BY
LORD JUSTICE LINDLEY
A company is an association of many personswho contribute money worth to common stockand employed in some tradeiich the charter ofor business and who share the profit and lossarising therefrom
As per Chief Justice Marshall, A corporation isan artificial being, invisible, intangible existingonly in contemplation of law, it possess the onlyproperties which the charter of its creationconfers upon it either expressly or an incidentalto its existence
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Professor Haney defines company
A company is an artificial person created
by law, having separate entity with a
perpetual succession and common seal
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CHARACTERISTIC
FEATURES/NATURE OF A
COMPANY 1. Incorporated Association - minimumnumber required in a public company - 7
Private company - two u/s. 12
2. Legal entity distinct from its members
Soloman vs Soloman & Co.Ltd. (1895)
Lee vs Lees Air Farming Ltd(1960) Gramophone & Type writer Ltd vs Stanley
1908
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3. Artificial Person - It has to depend
upon natural persons.
4. Limited Liability - Members are liableto contribute to limited extent.
5. Separate Property - Share holders are
not part owners of undertaking - Bacha F,Guzdar vs Commissioner of Income Tax.
Transferability of shares - Shares,
debentures shall be movable propertytransferable in the manner provided in
Article of Association.
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7.Perpetual Succession - It continues
even if all its human members are dead
King is dead, long live the king.
8. Common seal - It does not have mind
or limbs of human being. It can be held
bound by only those documents whichbears its signature, common seal is
signature of company.
9. Company to sue - and to be sued.
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KINDS OF COMPANY
Companies may be classified on following
basis:
I. CLASSIFICATION ON BASIS OF
INCORPORATION -
(1) Statutory Co. created by special Act
of the legislature
(2) Registered Company
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II. ON BASIS BASIS OF LIABILITY;
1 Company with limited liability
(a) Company limited by shares(b) Company limited by guarante
2 Company with unlimited liability Sec 12(2)
3 Classification on the basis of number ofmembers:
i.Private company - minimum paid upcapital 1 lakh. Maximum 50 members
ii.Public company - Min. paid upcapital 5
lakhs.
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4. Classification on basis of control
1. Holding company
2. Subsidiary company
5. Government company - 51 per cent ofpaidup share held by central or any stategovernment.
6. Association not for profit 7. Foreign company Sec.591 - company
incorporated abroad but having place ofbusiness in India
8. Producer company 9. Public financial Institutional Sec 4 A
- UTI,LIC,IFCI etc.
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SPECIAL PRIVILEGES AND EXEMPTION
AVAILABLE TO PRIVATE COMPANIES:
1. A minimum of two persons may form Co.2. Allot shares without issuing prospectus
3. In the event of further issue of capital,
need not be first offered to the existingshareholders
4. A certificate of commencement of
business is not necessary5. Need not hold statutory meeting
6. A demand for poll u/s 179 may be made
by only one member
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7. Need not have more than two directors
8. Directors are not required to file their
consent in writing9. A life director appointed by a private
company on or before 1st April 1952
cannot be removed by the co. in generalmeeting
10.Need not keep index of members S. 151
11. Quorum for general meeting of S.H. istwo persons
12. Financial assistance S. 77(2) & (3)
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13. Share capital and voting rights S. 85 89.
14. Right of appeal to company law board (now
Tribunal) against rejection of transfer of sharesS. 111(13)
15. Provisions as to General Meeting S.170
shorter notice than 21 days is permissible
16. Managerial remuneration S.198 rxempted.
17. Appointment of firms or body corporate
S.204 the restriction of not exceeding 5 years
period is not applicable
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18. Restriction on disclosure of profit and loss
S.220 not to be made open.
19. Rotational retirement of directors S. 255 notapplicable.
20. Notice for election as director S. 257 not
applicable
21. Filing casual vacancies S. 262 do not apply
22. Filing of consent of directors
S. 264 not applicable
23. Appointment of managing or whole timedirectors S. 268-69 no approval of central
government is required.
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24. Qualification shares S. 270-273 not
applicable
25. Special disqualification for appointmentas directors S. 274 a private co. may by
its AOA provide special disqualifications
for appointment of directors26. Restrictions on number of directorships
S 275-79 (15 in case of Pub. Co.)
27. Restriction of powers of directors S. 29328. Loan to directors S. 295 no restriction
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29. Interested directors S..300 not apply
30. Determination of net profits for remuneration S.
349-5031. Loans to other companies S 372 A
restriction not applicable to Prvt. Co.
32. inter-corporate investments S. 372A
33. Power to prenent changes in Board of
Directors S. 409 not applicable
34. Paid-up capita S. 3 : A private company can be
registered with a paid-up capital of Rs.1 lakhwhereas a public co. is required to have a
minimum paid-up capital of Rs. 5 lakh.
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COVERSION OF A PRIVATE COMPANY
INTO A PUBLIC COMPANY:
1. Conversion by default; S. 432. Conversion by operation of law; S. 43A ;
Deemed public company; certain
managements incorporated theircompanies as private companies but
employed substantial public funds.S. 43A
introduced certain criteria according towhich such private companies were
treated as deemed public companies.
3. Conversion by choice.
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CONVERSION BY CHOICE; S. 44.
The following steps are necessary for this purpose:
1. Special resolution deleting from its articlesthe requirement of s. 3(1)(iii)
2. Increase in membership S. 12
3. Increase in number of directors S. 2524. Raising of paid-up capita to the minimum
prescribed for public companies
5. Within 30 days from the passing of the special
resolution, a prospectus or a statement in lieuof prospectus in the prescribed form must be
filed with the registrar S. 44(1)(b)
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DISTINCTION BET. PUB.&
PRVT.Company
Sl. No. Details Private Public
1. Min.capital 1 lakh 5 lakhs
2. Min.No.of
members
2 7
3 Max.No.of
Members
50 No
restriction
4. No.of
directors
2 3
5 Restriction
on a tt.
consent Not
re uired
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6. Ragerialest
n. Oninvita.subs.
shares
Prohibits
genl.invita.
Genl.
Pub.subs.
7. Transferability of share Restricted Free
8. Special
privilege
Privilege
enjoyed
No such
privilege
9. Quorum 2 5
10 Remunerati
on mangl
No restn. 11% profit
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FORMATION OF COMPANY
Any 7 or more persons (2 or more in case
of prvt. Co. may form a company.
DOCUMENTS TO BE FILED WITH
REGISTRAR:
The MOA and AOA - agreement, if any,
reg. apptt. Of MD or whole time Director
A list of Directors - agreed to become
Declaration about co. law compliance
CERTIFICALE OF
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CERTIFICALE OF
INCORPORATION
After filing requisite documents and
Registrar being satisfied,he retains and
registers MOA & AOA and Certificate of
incorporation is issued.
EFFECT OF REGISTRATION:
1. The company becomes distinct entity
2. The com. acquires,perpetu.succession
3. The co. property not shareholdrs.prop.
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PROMOTERS
The role of promoters is to decide name of
co., nominate Directors, MOA &AOAfinalisation, registration of company.
Fiduciary relations
Not to make any profit To give benefit of nego.to company
To make full disclosures
Not to make unfair use of position CO.NOT BOUND BY
PRE.INCORPN.CONTRACT
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Memo.of Assn.(MOA)
MOA contains fundamental conditions
upon which alone the co. has beenincorporated.
FORM AND CONTENTS
The name clause Sec.13(1)(a)
The regd. Office clause Sec.13(1)(b)
Doctrine of ultra virus
Liability clause
Capital clause - Subscrip. clause
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ALTERATION OF MOA Sec.16
1. change of name can take place bypassing special resolution at a genl.meet.with
approval of centl.govt.
2. change of regd. Office Spl.
Reso.confirmation of R.Dir.copy to ROCo.
3. Alteration of object clause
4. Alteration of liability clause 5. Alteration of capital clause authorise cap.
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ARTI. OF ASSN.(AOA) BYE
LAWS OF COMPANY
Contents:
1.share capital
2.lien on share
3.calls on share
4.transfer of share
5.transmission of shares
6.forfeiture of shares
7.surrender of shares
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8.conversion of shares into stock
9.share warrants
10.alteration of capital
11.general meetings & proceedings
12.voting rights of members, by poll,proxy
13.directors,their apptt.remu.quali.BOD
14.dividends and reserves
15.accounts and audit 16.borrowing powers
17.winding - up.
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Companies which must have AOA Sec 26
A. Unlimited company
B. Co. limited by guarantee C. Prvt. co,. by shares
ADOPTION OF TABLE A
There are 3 alternative forms
Pub.Co.may adopt:
1. It may adopt Table A in full
2. It may set out its own AOA
3. Own AOA and part of Table A.
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LIMITATION TO ALTER AOA 1.must not be inconsistent with the Act
2.must not conflict with the MOA
3.must not sanction illegal thing
4.must be for the benefit of co.
5.must not increase liability of members 6.alteration by special resolution
7.approval of central government
8.breach of contract 9.must not result into expulsn. Of members
10. No power of Tribunal to amend AOA
11.alteration may be with retros.effect
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DOCTRINE OF CONSTRUCTIVENOTICE
S. 610 provides that the MOA and AOA
when regd. become public document They can be inspected on payment of fee.
Any person who contemplate entering into
contract with the co. has the means ofascertaining and presumed to know the
powersof the company.
This is known as doctrince of constructivenotice.
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DOCTRICE OF INDOOR MANAGEMENT
Normally, those dealing with the co. can
assume that if the Directors or otherofficers are entering into those
transactions, they would have obtained the
ncecessary sanctions.This is known as doctrine of indoor
management. This doctrine was laid down
in the case of ROYAL BRITISH BANK VSTURQUARD (1856) 6 E.
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IN FOLLOWING CASES IMCAN NOT
BE CLAIMED BY AN OUTSIDER:
1.when outsider has knowledge about
irregularity
2.no knowledge of AOA 3.forgery
4.negligence
5.when question is in regard to existenceof agency
Where pre-condition is required.
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PROSPECTUS Sec. 2(36)
A public co. Ltd. by shares generally issues
shares to public for which it has to issueprospectus.
After Certificate of Incorporation is obtained, theaffairs of the co. are taken over by the first
Directors. The Board attends to the following: Appointment of Bankers,Auditors, Secretary etc
Entering into u/writing contract,brokerage etc.
Listing of shares on Stock Exchange Drafting Prospectus for the purpose of issue to
public.
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Definition of prospectus u/s 2(36): Any
document described or issued as a pros-
pectus and includes any notice,circular,advertisement or other document inviting
deposits from public for subscription or
purchase of shares in, or debentures of, abody corporate. Prospectus should be in
writing and is an invitation to public.
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SHARES:
Meaning - the capital of co. is divided into a
number of indivisible units of a fixed amount.These units are known as shares.
A share is not a sum of money but is the
interest of the share holder in the company. A share is regarded as goods u/s 2(7) Sales of
Goods act 1930.
A share is not a negotiable instrument Share represents property and share
certificate is an evidence of title of member to
such property
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SHARE VS STOCK;
Share represents a unit into which capital of
Co is divided. If share capital is 500000.00divided into 50000 units of rupees 10/-each
unit shall be called share of company.
The term stock may be defined as theaggregate of fully paid up shares of a
member merged into one fund of equal
value. It is set of shares put together in abundle. Stock is expressed in terms of
money and not as so many shares.
TYPES OF SHARES
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TYPES OF SHARES:
A company can issue two types of shares
viz. (1) Preference share and (2) Equityshare.
Preference shares Sec. 85(1) have two
characteristics: (a) they have a preferential rights to be
paid dividend during life time of company.
(b)preferential rights to the return of capitalwhen the company goes into liquidation.
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2.Equity shares Sec 85(2) are those whichare not preference shares.
Sweat equity shares Sec79-A means equityshares issued at a discount or forconsideration other than cash for providingknow-how.
KINDS OF PREFERENCE SHARES:
1.cumulative pref. shares - dividend goeson accumulating till it is fully paid
2.non-cumulative pref. share - 3.participating pref.share - fixed dividend as
well as share in surplus profit.
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4.non-participating pref, shares toconvert into equity shares within certain
period. 5.convertible pref. shares to convert into
equity shares within certain period
6.non-convertible preference shares
7.redeemable pref. shares Sec.80 ifAOA permits it can be redeemed
SHARE WARRANT Sec. 114 and 115
Docu. Issued by pub.co.bearer is entitledto shares specified therein.
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DISTINCTION BET. SHARE WARRANT
AND SHARE CERTIFICATE
1. All companies are required to issue SC.Share warrant can be issued by pub. Co.
2. Approval of CGovt. For issue of SW by
pub.co. As per law, every co. has to issueSC.
3.SW. can be issued only with respect to
fully paidup shares. SC is to be issuedeven where shares are partly paid up.
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4.the holder of SC is member of co. Holder of
SW is not member unless AOA authorises.
5.SW is by mercantile usage a negotiable
instrument. SC is not.
6.SW can be transferred mere delivery but not in
case of SC.
7.No stamp duty is payable on transfer of SW.Stamp duty is payable in case of transfer of SC
8.where a Director is required to hold some
qualification shares, SW does not constitute
such qualifications
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9.SC is prima facie title to the shares. SW
is the share security itself.
10.the holder of SC can present petitionfor winding up. The holder of SW cannot
do so.
11.Dividend is paid to holder of SC byissue of SW. Dividend due on SW is
advertised in new papers.
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BUY BACK SECURITIES: Sec. 77 A and AA permits
a company to purchase its own shares .or other
specified securities
RULES REGARDING DIVIDEND:
1.Resolution at annual general meeting
2.Payment of dividend in proportion to paid up capital
3. Dividend to be paid only out of profits
4.Unpaid dividend to be transferred to special
dividend account
5.Payment of unpaid dividend entitled to get 6.Dividend to be paid registered share holders
SHARE CAPITAL: means the capital
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SHARE CAPITAL: means the capitalraised by a company by the issue ofshares.
The capital may mean AUTHORISED,
ISSUED, AND SUBSCRIBED OR PAID
UP OR RESERVE CAPITAL1.Authorised or nominal capital This is the
nominal value of shares which a co. is
authorised to issue. This is the maximumcapital which the co. will have during itslife time unless it is increased.
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2.Issued or subscribed capital: Issued capital
is nominal value of shares which are offered
to public for subscription 3.Called up capital- This is that part of issued
capital which have been called up on shares
4.Paid up capital Which have been paid upby the share holders.
5.Un called capital This is the remainder of
the issued capital which has not been called. 6.Reserve capital This is that part of
uncalled capital of a company which can be
called only in the events of its winding up.
BORROWING POWERS:
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BORROWING POWERS:
A company needs money to finance its
activities from time to time. A part of this
requirement is met by the issue of shares:
for the rest , the company has to resort to
borrowing.
When company has express powers toborrow, it can borrow subject to the limits
set by MOA and AOA.
DEBENTURES: Sec 2(12) means toinclude debentures, stock, bonds, and
any other security of company.
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KINDS OF DEBENTURE:
1. Bearer debenture or u/regd. Debenture
2.Regd. debenture payable regd.holder
3.Secured debenture
4.Un secured or naked debenture
5.Redeemable debenture-after certain pd.
6.Irredeemable or perpetual debenture
7.Convertible debenture pref. or equity 8.Non convertible debenture duly paid
as and when matured.
COMANY MANAGEMENT
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COMANY MANAGEMENT:
A co. in the eyes of law is an artificial person. It has
no physical existence. It has neither soul or body of
its own.
It can act through Directors. The Directors are the
brain of a company.
Sec. 2(13) Director includes any person occupyingthe position of Director by whatever name called.
NO. OF DIRECTORS: Every pub.co. shall have at
least 3 directors. However a Pub. Co.having(a) paid
up capital of 5 crore or more;(b) one thousand or
more small shareholders shall have atleast one
Director elected by such small shareholders.
APPOINTMENT OF DIRECTORS
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APPOINTMENT OF DIRECTORS
1.First Director Sec 254
2.Appointment of Directors by Co.-Directors must be appointed by
shareholders in Gen. Meeting
3.Appointment by Directors Sec. 260,262 4.Appointment of Directors by third party
5.Appointment by proportional
representation 6.Appointment of Directors by C.Govt.
POSITION OF DIRECTRS:
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POSITION OF DIRECTRS:
1.Director as agent
2.Director as employer
3.Director as officer
4.Director as trustee of company
RESTRICTION ON APPTT. OF DIRECTOR: Aperson shall not be apptted.Director of a Co. bythe AOA,unless before registration of AOA orpublication of prospectus or his agent authorised
In writing has (a) signed and filed with registrarconsent in writing (b) signed the MOA for hisqualification shares.
NUMBER OF DIRECTORSHIP: No person to be
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NUMBER OF DIRECTORSHIP: No person to beDirector for more than 20 companies.
DISQUALIFICATION OF DIRECTORS:Sec 274: ADirector must be (a) an individual competent to contract
(b) hold qualification shares, if reqd. by AOA.
The following persons are disqualified :
a.person of unsound mind
b.undischarged insolvent
c.person who has applied to be adjudjudicated as aninsolvent and his case is pending
d.convicted person
e.whose calls in r/o shares held in arrears -6months
f.disqualified by anorder of Tribunal.
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WHO CAN APPLY FOR WINDING UP
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WHO CAN APPLY FOR WINDING UP
1. Petition by co. if passed spl,resolution
2. Creditors petition 3. Registrars petition
4. Central Govt.petition
PROCEDURE FOR WINDING UP
As soon as a winding up order is passed,
the official liquidator attached to the High
Court or District Court becomes the
liquidator of company.
1 fi f ll f ff i b
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1. first of all statement of affairs to be
submitted by co. to liquidator Sec.454
2 Report by official liquidator Sec. 455preliminary report regarding capital details,
assets and liabilities to be submitted to
court. 3. Custody of co. property - by liquidator
Sec.456
POWERS OF LIQUIDATOR Sec. 457
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With the sanction of court:
1. Institute and defend suits against co.
2. Carry on business if necessary forbeneficial winding up
3. To sell movable or immovable property
4. To raise money on co. security of co. 5. To do things necessary for winding up.
WITHOUT SANCTION OF COURT:
To execute deeds,inspect records, proveco.claim in insolvency, to draw,acceptnegotiable instruments,appoint agent forbusiness which he cannot do himself.
O G
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VOLUNTARY WINDING UP:
1.Members winding up: A liquidator is
appointed and his remuneration fixed inAGM.
Fact to be notified to registrar when affairsare completely wound up he calls the finalmeeting and lays before it final accountwithin a week, the Accounts are filed withregistrar.
If the report shows that the affairs were notconducted in a manner prejudicial to publicinterest then the company is dissolved.
2. CREDITORS WINDING UP:
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Liquidator in addition to member callscreditors meeting. The creditors may
appoint a committee of inspectionconsisting 5 members of creditors and 5members of company. Rest procedure issame as in case of members winding up.
3. VOLUNTARY WINDINGUP UNDERSUPERVISION: When co. has passed a
resolution for voluntary winding up, thecourt may make an order that winding upshall proceed subject to its supervision.
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The advantages of voluntary winding up
under supervision are: The court may appoint an additional
liquidator and remove liquidator according
exigencies.
The court get the same power as it has in
the case kof winding up by court.
Any creditor, contributory or person mayapply to the court for determining any
question connected with the winding up
Sec.522 to 526
CONTRIBUTORIES Sec. 428
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To realise the uncalled residueof co. capital the
liquidator has to call upon shareholders, who ar
then called CONTRIBUTORIES to pay unpaidbalance.
LIST A IS DRAWN FROM THE CO. REGISTE
OF MEMBERS:
LIABILITY OF PAST MEMBERS: A past membe
is no liable to contribute inrespect of any debt or
lability of co. contracted after he ceased to be amember.
PAYMENT OF LIABILITIES Sec 528
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Another important duty of liquidator is to pay off
the companies liabilities.
But where the company in liquidation isinsolvent, insolvency rules will apply and lnly
such claims shall be provable against the
company as are provable against insolvent
person.
According to law of insolvency demands in the
nature of unliquidated damage arising other than
by reason of a contract or breach of trust anddebts and liabilities which are incapable of being
fairly estimated are not provable in insolvency.
Under section 529 by the amendment of
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Under section 529 by the amendment of
1985, workers claims have been equated
with those of secured creditors byproviding that the security of every creditor
shall be subject to pari passu charge in
favour of workmen.
Sec. 529 - A has also been added to the
Act. It says that workders dues as
equated with those of secured creditors
shall be paid in priority to all other debts.If the assets are not sufficietnt to meet
them they shall abate in equal proportion.
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LIFTING THE CORPORATE VEIL:
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LIC Vs. Escorts ltd. (1986) 59 cc 548 SC,
Held,while it is firmly established ever
since in Soloman vs Soloman and Co
1879 that a company is an independent
and legal personality distinct from
individuals who are its members, it has
since been held that the corporate veil
may be lifted.
CORPORATE VEIL MAY BE LIFTED IN FOLLOWING TWOHEADS;
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1. Under statutory provisions
2. Under judicial interpretation
Examples of statutory provisions misrptn. In prospectus.Sec 62,63.failure to return application money Sec.69 within 8 days with15% interest etc.
Examples of judicial interpretation for Protection of revenue
Prevention of fraud
Determination of enemy character of a company
Formation of subsidiary to act as agent Where co. acts as an agent of shareholders
In cases of economic offences
Where co. is used to avoid welfare legislation
Where co. is used for illegal purposes
Where co. is a mere sham or cloack Fraudulent scheme of an arrangement.