Procedure to establish company under complete self control

Mr. X is engaged in trading activities as a grocer. The business at present is a sole proprietary concern. He wants to expand the business by entering into the food processing industry, for which a minimum investment of Rs. 200 lakhs as capital is required. His existing business is worth Rs. 25 lakhs. He may be able to invest a total amount of Rs. 120 lakhs provided the business is rum as a corporation. There are a few others who are prepared to be associated in the new venture of X . But he is apprehensive. He wants to be quite sure that in spite of the association of his two friends and few others in the capital; the control over the business concern shall always remain with him.
(1) Which type of company is suitable to achieve the purpose? Explain how this would ensure X's perpetual control.
(2) Assume that the company may require another 300 lakhs in the near future for its expansion. The present members of the company are not in a position to make further investments. But, the members of the public and a few other friends of X will be inclined to take shares of the company. What would be the device to be resorted to?
(a) Assuming that Mr. X is agreeable to form a company advice him as to the steps to be taken for the purpose.
(b) Assume that the company was formed with an initial membership is six persons. Of these, two persons were minors at the time when they subscribed to the constitutional documents of the company, but they attained majority within three months of incorporation of the company. One of the members pleads that the company is not legally incorporated. Advise.

Solution

(A) In this case the Private Limited Company is suitable to achieve the purpose, because,
1) In private limited Company there is restriction of on transfer of its shares.
2) The number of its members is limits to 50.
3) In private Company the articles prohibits invitation to the public to subscribe for any shares is or debentures the Company
4) In private Company the issue of prospectus is not necessary.
5) In this Company the minimum number of directors is only 2.
6) In private Company permission of the directors consults for signing the memorandum of association.
7) For appointing the directors resolution is not necessary and there are not required to retire by rotation due to the above reason the private limited Company is suitable X for having perpetual control.

(B) In this situation my advice to X is, he should issue the shares to the public but the allotment should not exceed the amount, which he has invested that means he should issue shares for each subscribers below than 75 lakhs, which he has invested in the present Company then only he can have the control over the Company

(C) Mr. X has to take the following steps to form a Company.
i) First he has to make plan or an idea for the promotion of the Company
ii) Then he has to design the project outline.
iii) Then he has to make viability study and legal implications.
iv) Then he has to assemble or search the promoters.
v) Then apply for necessary license or permit to start the Company
vi) Then he has to make agreements for infrastructure.
vii) Then in case necessary he has to make pre incorporation contracts and appoint the lawyer to face the legal consequences.
viii) Then he has to prepare the documents like memorandum of association and articles of association.
ix) Then he has to apply for registration according to Sec. 33 (1)
x) Ones the registration is made and certificate of incorporation is given then,
(a) If his Company is private limited Company then he can start business immediately.
(b) If his Company is public limited Company then,
(1) Invite the public to subscribe by issue of prospectus according to Sec. 149 (1) read with Sec. 55
(2) Then arise minimum subscription mentioned in prospectus Sec. 149 A, read with Sec. 69
(3) Then he has to allot shares to each subscriber.
(4) There certificate to act, as a director has to be given.
(5) Then he has to make statutory declaration.
(6) After this the certificate to commence the business will be given according to Sec. 149 then the public Company can commence business.

(D) Here the plea of one of the member is not valid. Because, in this case the Company was formed with membership of 6 persons that means the certificate of incorporation was already issued to the Company

Because the certificate of incorporation is considered as the conclusive proof of the Company In Mossa Gulam Arif Vs. Ibrahim Gulam Arif [ILR (1913) 40 Cal I (pc)] it was held that ones the certificate of incorporation as issued that cannot be revoked. Because in this case 2 of the subscribers of a company’s memorandum were infants.

So according to the above principles in this case also even though out of 6, two persons were minors then also the Company is treated as legally incorporated.

So the plea of one of the member is not valid and it is not maintainable.

Changes in Articles of Assosiation in a Public Company

Dear Friends,
let us take an example to understand the concepts as : -
Suppose, X Company Ltd. is a public limited company having its object clauses like the following:
Main object:
(a) Manufacturing, branding, selling, etc., cigarettes and other tobacco products.
(b) Purchasing all materials needed to manufacture, brand, patent of the above products and all assets including plants and machineries needed.
Ancillary objects:
(a) Enter into any contracts, lease agreement etc., for the purpose of the main objects.
(b) Manufacture, sale and otherwise disposal of any by-products.
Other objects:
(a) Manufacturing consumable foodstuffs and selling the same.
(b) Doing any other business that the company deems it profitable and beneficial to the company.
(i) Directors of the Board of the said company ask for your advice on the proposal of starting Hotel business at Bangalore. Give a detailed advice to the company.
(ii) Suppose any change in the object clause is necessary, Can the company change and how?
(iii) How can the company change its name?

Issues involved are: -
1 If Directors of the Board need advice on the proposal of starting new business at a place. What would be the procedure?
2. Suppose any change in the object clause is necessary, Can the company change and how?
3. How can the company change its name?

Discussion: -

For issue no 1;
My detailed advice to the directors of board of X Company Ltd is as follows.
As, Other objects of the company include manufacturing consumable foodstuffs and selling the same and doing any other business that the company deems it profitable and beneficial to the company so if ‘X’ Company Ltd. want to start a hotel business then it has make changes in the main object by the procedure is given below.: -
a) The company has to call a board of meeting decide about the change and in that meeting special resolution has to be passed for suitably altering the memorandum of association.
b) As, ‘X’ and Company is a public Ltd. Company so it has to send copies of notice to all its shareholders with respect to the amendment.
c) It has to file the special resolution with explanatory statement with concerned registrar of companies.
d) To publish a general notice at least once daily newspaper, Not less than 1 month before filing the petition.
e) Forward promptly to the stock exchange with which the company is enlisted 3 copies of the general notice published in the newspaper.
f) A petition has to be filed before the Company Law Board in form No. 1 for confirming the change as prescribed in the regulation 14 (1) & (5) of the CLB regulations 1991.
g) Then, the copy of the petition has to serve to the concerned registrar of companies.
h) When the company gets the receipt of the order of Company Law Board then company have to give notice of the receipt of order to the concerned registrar of companies in form No 21.
i) To altered memorandum of association and requisite fee has to be paid within 3 months from the date of order.
j) At last the company has to make necessary changes in every copy of the memorandum of association, letters heads, vouchers, registers, office papers etc.

For issue no 2;

By Section 17 of the companies act, 1956 provisions contained in the memorandum in respect of the two matters i.e. (i) the place of its office its objects and (ii) its objects, may be altered so far it may be necessary to enable the company-
i. To carry on its business more economically or more efficiently;
ii. To attain its main purpose by new or improved means;
iii. To enlarge or change the local area of its operations;
iv. To carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company;
v. To restrict or abandon any part of the undertaking or any of the undertaking of the company; or
vi. Amalgamate with any company or body or persons.
The procedure of alteration of object clause is similar as discussed in issue 1 of this problem.

For issue no 3;

Provision is given in section 21 of the company act, 1956 regarding changing the name of a company at any time in the course of its business. When name is changed either in pursuance of section 21 or section 22, the new name must be notified to the registrar who will enter it in his register and issue a fresh certificate of incorporation to meet the circumstances of the case and also make the necessary alteration in the memorandum of association of the company concerned.
a) It must be noted that the change of name becomes and effective only on the issue of the fresh certificate by the registrar [section 23 (1) and (2)].
b) But a change of the name so effected will not affect any rights or obligation of the company not render any legal proceeding by or affect any rights or obligation of the company no render any legal proceeding by or against the company defective in any way and legal proceedings which might have been continued or commenced by or against the company in its former name may be continued by its new name [section 23 (3)]
c) The company has to obtain the assent of ¾th of the members present at a general meeting summoned for the purpose of changing of its name [Sec. 565 (1), proviso (vi) read with Sec. 572]
d) Then company has to apply to the central Government for approving the change in name.
e) After which company has to make an application to the central Government in the form of a letter on a plain paper giving all the relevant details. There is no prescribed form for this.
f) Then the requisite application fee has to be paid by way of treasury challan or demand draft.
g) Then a copy of the application along with copies of other documents attached to it shall be send to the concerned registrar of the companies for information.
h) On receipt of the approval from the central Government carry on the registration requirements of the company under Sec. 567 or 568.No such approval is, however necessary where the only change in the name is the addition thereto or, as the case may be, the deletion there from, of the word ‘private’ consequent on the conversion of a public company into a private company.

Essentials of Drafting the Articles for a Private Company

The most important step in the formation of company is the preparation of the articles of association. ‘Articles’ is defined in section 2(2) of the Act. The main provisions regarding the articles of association will be found in sections 26 to 31, 36 and 38 of the act. To frame an article of association for a private company, ten most important points are: -
1. Interpretation clause; which should explain the various terminologies used in the articles.
2. Exclusion or partial exclusion, if any of Table A;
3. Adoptions or executions or preliminary contacts, if any;
4. Regulations regarding share capital, various types of share capital, rights of shareholders, procedure of issuing share certificate, variation of the rights etc.
5. Number and value of share and rules as to share certificates;
6. Rules as to company’s lien on the members’ shares for the amount not paid in respect of them;
7. Rules as to transfer , transmission and forfeiture of shares and rules as to alteration of capital;
8. Rules as to general meeting and rules as to the directors, their remuneration, etc;
9. Rules as to dividends and audit; and
10. Rules as to indemnity and winding up.