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BBS 3rd year business law important Question | Unit 8 (LAW OF COMPANY AND INSOLVENCY)

 


Unit 8: LAW OF COMPANY AND INSOLVENCY

👉🏻MEANING OF COMPANY

In simple terms, a company means a group of persons associated together for the attainment of a common end, social or economic. In common law, a company is a legal person or legal entity separate from, and capable of surviving beyond the lives of, its members.

👉🏻FEATURES/CHARACTERISTICS OF A COMPANY

  • Separate legal entity/corporate personality
  • Limited liability
  • Perpetual succession
  • Common seal
  • Separate property
  • Capacity to sue and be sued
  • Transferability of shares
  • Management by representatives
  • Formalities, publicity, and expense

👉🏻INCORPORATION OF A COMPANY

Informal or Primary Stages

  • Selection of the name of the company
  • Preparation of the memorandum and articles

Formal or Legal Stages

  • Application and submission of documents
  • Investigation of the application
  • Registration and certificate of incorporation

👉🏻BOARD OF DIRECTORS

A company is itself a legal person with an existence independent of that of its members. Yet it remains an artificial person; its policy can be formulated and decided upon only by individual human beings and can be put into effect and carried out only by human agencies. In practice, the initial constitution of the company will provide for the appointment of a board of directors and expressly delegate all the powers of management to it.

👉🏻The Director's Report

The directors must prepare a report for each financial year. This must contain a fair view of the development of the business of the company and its subsidiaries during the financial year and the position at the end of it. They must state what amount, if any, they recommend should be paid as a dividend, and what amount, if any, they propose to carry to reserves. In addition, it must give the name of all persons who at any time during the financial year were directors of the company and describe the principal activities of the company and its subsidiaries and any changes therein during the course of the year.

👉🏻GENERAL MEETINGS

The formal relationship between the shareholders and the board of directors is that the shareholders elect the directors, the directors report on their stewardship to the shareholders, and the shareholders appoint the auditors to provide the external check on the directors' financial statements.

👉🏻Importance of General Meetings

  1. It helps in the formulation and implementation of policies.
  2. It provides an opportunity for discussion and direction to the officers.
  3. Shareholders can get a chance to know the true facts.
  4. Appointment and removal of the directors and auditor.
  5. Ratification of transactions.
  6. Decisions can be made over major issues affecting the business of the company.
  7. Accountability of the directors about their acts can be assured.
  8. Appointment of Auditor.

👉🏻Types of General Meetings

  • Primary General Meeting
  • Annual General Meeting
  • Extra-Ordinary General Meeting

👉🏻Extra-Ordinary General Meeting

Any meeting other than the AGM shall be called an extraordinary general meeting, and it may be convened by the directors whenever they think fit. An extraordinary meeting can be called by either Shareholders, Auditors, or the Office of the Companies Registrar.

👉🏻Special Resolution

The following matters are to be presented in the company's meetings as a special resolution:

  1. Increase of authorized capital of the company.
  2. Decrease of share capital.
  3. Conversion of the company from a private to a public company or public to a private company.
  4. Amalgamation or merger of the company.
  5. Bonus share.
  6. Change of name and objectives of the company.

👉🏻AUDIT

Audit of the annual accounts of a company is compulsory and is an indispensable part of an incorporated business.

👉🏻Appointment of Auditor

Auditor may be appointed in a company in any of the following ways:

  1. By the board of directors
  2. By the general meeting of shareholders
  3. By the Office of the Company Registrar
  4. By the Auditor General Office

👉🏻Rights and Powers of Auditors

The rights and powers of an auditor are as follows:

  1. Right of access to books, accounts, and vouchers.
  2. Right to obtain information and explanations.
  3. Right to visit branch offices and right of access to books kept therein.
  4. Right to receive notice of general meeting and to attend the meeting.
  5. Right to receive remuneration.
  6. Right to prepare and present his report to the members.

👉🏻Functions and Duties of Auditors

While performing his function, the auditor shall have to comply with the following duties:

  1. Duty of care and caution
  2. Duty to verify the accounts.
  3. Duty to conduct necessary interrogations and inquiries.
  4. Duty to report to the members with the matters to be stated in his report as per sub-section (3) of section 115.
  5. Duty to give suggestions if any to the company.
  6. Duty to attend the meeting.

👉🏻Tenor of Office

An auditor appointed at the annual general meeting holds the office from the conclusion of the annual general meeting at which he is appointed until the conclusion of the next annual general meeting.

👉🏻WINDING UP OF A COMPANY

Winding up or liquidation is a process by which the life of a company can be brought to an end where the management of the company's affairs is taken out from the director's hands, the assets of a company are disposed of, the debt is paid off and the surplus, if any, distributed among the members in proportion to their holdings in the company.

👉🏻Voluntary Winding Up

  1. Where a company was formed for a fixed period or the Articles had provided that the company was to be dissolved on the happening of certain events or events.
  2. Where the company passes a special resolution that the company is wound up voluntarily either passed by the general meeting of shareholders or meeting of the creditors.

👉🏻Compulsory Winding Up

A company may be wound up by an order of the court. It is also called compulsory winding up. The cases in which a company may be wound up by the order of the court are as follows:

  1. Special resolution
  2. Default in holding the statutory meeting
  3. Non-commencement or suspension of business
  4. Reduction in membership
  5. Failure to pay off debt
  6. Just and equitable ground

👉🏻LIQUIDATOR

A liquidator is an officer of a company appointed to carry on the liquidation process who after his appointment can collect all the assets and calculate all the debts or liabilities of the company, pays off the debts to all the creditors and other persons as per the priority and finally distributes the remaining surplus if any to the shareholders as per the ratio of shares they have subscribed in the company.

Appointment of Liquidator

A liquidator may be appointed either:

  1. The company itself, which includes:
    • By the shareholders.
    • By the creditors.
  2. By the order of the court.

👉🏻Powers, Functions, and Duties of Liquidator

👉🏻Rights and Powers

  1. Right to institute or defend any suit or legal proceeding in the name and on behalf of the company.
  2. Right, to conduct business of the company being liquidated in a profitable manner.
  3. Right to sell the assets of the company.
  4. Right to make a call for partly paid-up shares.
  5. Right to settle all the debts.
  6. Power to issue, accept, or endorse negotiable instruments on behalf or in the name of the company.
  7. Right to pledge the assets of the company.
  8. Power to summon and interrogate the directors and officials of the company.
  9. Right to convey the meeting of creditors.
  10. Right to pay debts of the company.

👉🏻Functions and Duties

  1. Duty to take the company's assets into his custody.
  2. Duty to exercise all his powers.
  3. Duty to call the meeting of shareholders and creditors.
  4. Duty to notify the fraud committed against the company or creditors.
  5. Duty to settle the liabilities according to the property of the company.
  6. Duty to submit the accounts to the office of the Company Registrar.
  7. Duty to maintain correct and accurate records and accounts.
  8. Duty to submit particulars to the general meeting.
  9. Duty to submit the final report for the dissolution of the company.

👉🏻MEANING OF INSOLVENCY

It refers to a state of being unable or appearing to be unable, to pay any or all the debt due and payable to or payable in the future to creditors or a situation where the amount of liabilities of a company exceeds the value of its assets. A company shall be deemed to have become insolvent on the following condition:

  1. The general meeting of shareholders adopts a resolution that the company has become insolvent or a meeting of the board of directors of the company makes such a decision; or
  2. The Court issues an order requiring the company to pay the debt and the debt is not paid up within thirty-five days from the date of receipt by the company of such order, or
  3. The company fails to pay the debt within thirty-five days after the service by the creditor on the company a notice for the payment of the debt or fails to make an application to the Court within the period to void such notice.

👉🏻FEATURES OF THE INSOLVENCY ACT, 2063

The major features of the Insolvency Act, of 2063 can be stated as under:

  • Applicable only to the insolvency matter of body corporate
  • Approval of the judicial authority
  • Liberal procedure
  • Commencing the insolvency proceedings
  • Restructuring scheme
  • Provisions of insolvency professional
  • Insolvency and restructuring system
  • Provision of insolvency administration office
  • Protection of the company's assets

👉🏻COMMENCEMENT OF INSOLVENCY PROCEEDINGS

Any of the following persons may make an application to the Court in the prescribed form for the institution of such proceedings:

  • A company itself which has become insolvent;
  • Out of the total creditors of a company that has become insolvent, a creditor or creditors who have lent at least ten percent of the total loan of the company:
  • Shareholders or shareholders that have subscribed at least five percent of shares, out of the total shareholders of a company;
  • Debenture-holder or debenture-holders that have subscribed at least five percent of debentures, out of the total debenture-holders of a company:
  • A liquidator who has been appointed to liquidate a company;
  • In the case of a company that carries on any specific type of business set forth in Section 8, a body is authorized to administer and regulate such business.

👉🏻INTERIM ORDER

Where, in making a hearing, it appears that there exist some situations in the company which may prejudice the interests of the creditor or any other person dealing with the company, the Court may, on an application by the concerned party or at its own discretion, issue an interim order.

👉🏻RESTRUCTURING SCHEME OF COMPANY

Where the Court makes an order to restructure any company pursuant to Sub-section (2) of Section 22, the restructuring manager shall prepare a restructuring scheme of the company in writing. The scheme prepared shall contain the following programs:

  1. To capitalize on the debt of the company and alter the capital structure:
  2. To pay the claims of creditors by selling any portion of the assets of the company:
  3. To change the nature of claims of creditors of the company and issue securities for the same.
  4. To get the creditors of the company to participate in capital investment by issuing shares in consideration for their claims.
  5. To amalgamate the company with any other company.
  6. To change the management of the company.
  7. To do any such other act which the Court considers appropriate to restructure the company.

👉🏻LIQUIDATION OF COMPANY

Where the Court makes an order to liquidate a company pursuant to this Act, the Court shall make an order to appoint one person as the liquidator, from amongst the persons who are entitled to carry on insolvency business at the time of making such order.

👉🏻Functions, Duties, and Powers of Liquidator

  1. To institute or defend any case or legal action on behalf of the company.
  2. To appoint employees to assist in the discharge of his or her functions.
  3. Where any installment on any share of the company is due, make a call on the shareholder for payment of such installment.
  4. To do and execute, or cause to be done and executed, all such acts and deeds or documents as required to be done and executed on behalf of the company and in the name of the company and use the seal of the company for that purpose.
  5. To borrow loans against the security of the assets of the company.
  6. Where the liquidator considers that the sale and disposal of any property or termination of any contract or liability will render benefits to the company, to sell and dispose of such property or terminate such contract or liability.
  7. To enter into a compromise with any creditor of the company or any person who claims to be a creditor of the company in relation to the claim made by such creditor or person.
  8. To enter into a compromise with any person against whom the company may make a claim in relation to any loan, liability, or any other claim.
  9. To sell the assets of the company and distribute the proceeds of such sale pursuant to this Act.
  10. To perform, or cause to be performed, all such other acts as may be necessary to liquidate the company.

👉🏻Power of the Court to Make Order in Relation to Liquidation of Company

The Court may at any time issue the following order in respect of any company which is undergoing liquidation proceedings:

  1. To suspend or terminate the liquidation of the company.
  2. To be required to hand over the assets of the company to the liquidator.
  3. To pay any call made for payment of installment.
  4. Where there is a doubt that any person is possessing or using any property of the company, to stop such possession or use.
  5. To arrest any person who causes any hindrance in or obstruction to the performance of functions or duties or the exercise of powers by the liquidators.

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