The function of promotion can be divided into:-
(i) Discovery of the idea
(ii) Detailed Investigation
(iii) Assembling the proposition
(v) Presentation of the Proposition.
A company is generally brought into existence by a person, or a number of people, who are commonly known as ‘Promoters.’
The term ‘promoter’ has been defined by various learned Judges, but the gist of all the definitions, is that any individual, syndicate, association or partnership, etc., which puts into motion the machinery by which a company is brought into existence may be described by that designation.
These promoters generally get the original documents like the memorandum and the articles, as well as the prospectus, prepared; take an active part in the selection of directors, and in the purchase of property by the company for the purpose of carrying on its proposed business; and generally speaking float or assist in floating a company, or do any one or more of these operations.
Sir Francis B. Palmer divides promoters into three classes, viz. (a) professional promoters, (b) occasional promoters, and (c) promoters pro have vice. The first are those who make a business or profession or promoting a company, whereas the second do this occasion ally as a part of their business.
The third, however, are those who take part in the promotion of one particular enterprise in which they are directly or indirectly interested, e.g. the inventors of a certain thing forming a company to work that invention. All these promoters, no doubt, expect some benefit or profit through this promotion, and as long as the remuneration is obtained in good faith, and with due disclosure, it could not be objected to at low.
The remuneration may take the form either of the grant of fully or partly-paid share, or of a lump sum, or the promoter may be the original purchaser of some property which he now arranges to sell to the company at a profit. As he promoter takes a prominent part in bringing the company, and is thus expected to make a full and fair disclosure of the benefits accruing to him through the promotion.
This disclosure is generally made in the prospectus of the company or in its Memorandum or Articles. Now we shall deal briefly with each stage of promotion.
(i) Discovery of the idea.
The person who gets the idea for forming a company may bean inventor who wants to know the commercial possibilities of his invention. He may not have a head for organisation and therefore may need the assistance of an experienced promoter who may form a promotion syndicate with other members managing it an all contribution to its 9 funds.
(ii) Presentation of the Proposition
This is the last Stage in promotion. Here the promoters get the incorporation documents prepared and issue the prospectus to invite the public to buy the shares or debentures,
(iii) Assembling the Proposition
After satisfying himself as to the practicability and profitability of the proposition he brings together the various necessary factors such as arrangements for employment of managerial and technical personnel, for buying options i.e., securing the right to buy assets when the company comes into existence, etc.
(iv) Detailed Investigation
The promoter or syndicate will now consider the proportion from all angles, its weaknesses and strength, it’s probable income, the amount of finance needed and its various other problems. The purpose of this is to see whether the proposition is workable in practice taking into consideration such factors as availability of raw materials and labour transportation, markets, demands, etc.
A public company must have at least three directors, and private companies must have at least two directors. Only individuals, i.e. not firm or companies, can be appointed directors.
The directors work as a Board under the powers given to them by the act and in the articles and have generally the management and supervision of the business, which is carried on by (a) managers or (b) managing directors or (c) managing agents or (d) secretaries and treasurers. The Act prohibits the simultaneous appointment of more than one of the appointment of more than one of the above- mentioned four categories of managerial personnel.
Directors may exercise their powers by passing resolutions at Board meetings or by circular. The following powers can only be exercised by the directors at Board meetings and not by circulars:-
(i) To make loans.
(ii) To borrow moneys otherwise than on debentures.
(iii) To make calls.
(iv) To issue debentures.
(v) To invest the company’s funds.
(i) Managing Director
A managing director is an officer who combines the offices of the managers and director in himself. The definition of “managing director” shows that:-
(i) The managing director must exercise his powers under the superintendence, control and direction of the Board of directors;
(ii) The managing director is under the superintendent, control and direction of the Board of directors;
(iii) A managing director is a director who is entrusted with substantial powers of management, but not a director who has the authority to exercise powers merely of a routine nature; and
(iv) The appointment of a managing director may be made by an agreement with the company or by a resolution of the company in general meeting, by the Board of directors, or under the memorandum or articles.
A person cannot be appointed managing director of more than two companies unless permitted by the Central government. The appointment, re-appointment, and variation in the terms of appointment of managing directors require Government approval.
(ii) Position of Directors
The position of directors is partly that of agents and partly that of trustees; trustees in regard to the money and property of the company and agents in regard to the transaction which they enter into on behalf of the company. They can only exercise the powers given to them by the articles. If they exceed such powers, the act is ultra vires and they are personally liable.
The company may ratify, i.e. adopt an ultra vires act of directors provided the act is intra vires i.e. within the powers of the company itself.
(iii) Liability of Directors
The Liability of Directors arises when they exceed the limit of the powers given to them, and the company suffers losses, or where they neglect their duties, or act fraudulently or dishonestly. They are not liable for mire errors of judgment, and though they are not bound to attend Board meetings continuously, they must attend whenever they are reasonably able to do so.
It is their duty to see that the company’s money is used for the proper use of the company according to the memorandum and articles; and if they fail to do so and losses arise, they must make good such loss to the company. They must also see that dividends are paid out of the profits and not out of capital; otherwise they may have to make good these amounts.
They expected to exercise that degree of skill and intelligence in the discharge of the company’s affairs as would be exercised by a man of ordinary produce on his on his own behalf, but they need not show a greater degree of care than may reasonably be expected from a man of his skill and experience.
They are therefore liable in proceedings for negligence, breach of trust and fraudulent conduct of business. They may also e criminally prosecuted under the Indian Penal Code.
(iv) Interested Directors
A director who is directly or indirectly interested in a contract or arrangement, or proposed contract or arrangement, entered into or about to be entered into by the company, must disclose the nature of his interest at a meeting of the Board.
A general notice may be given to the board by a director that he is a director or a member of a particular corporation or of a firm and is to be regarded as concerned or interested in any contract or arrangement which may, after the date of the notice, be entered into with such body corporate or firm, Such a notice will be deemed to be a sufficient disclosure, will expire at the end of the financial year, but may be renewed. This also applies to directors of private companies.
An interested director must not participate in the discussion of or vote in, any contract or arrangement by the company and his presence will not count for the required quorum at the time of such discussion or vote. This does not apply to directors of a private company which is not a subsidiary of a public company.
(v) Disqualification of Directors
The following are disqualified from being appointed directors.
(a) A person who has not paid any calls for six months from the date they became payable.
(b) A person found to be of unsound mind by the Court.
(c) A person whose application to be adjudicated an insolvent is pending.
(d) An undercharged insolvent.
(e) A person convicted of an offence in connection with the promotion, for making or management of the company or found, during winding up proceedings, to be guilty of fraudulent conduct.
These expenses run up to a large figure and are always allowed to stand in the account books under the heading of ‘Preliminary Expenses Account’ and shown on the balance sheet on the assets side. The expenditure in incurred is sometimes partly paid by the vendors of founders and the other portion is borne by the company.
In such a case only that portion of the expenditure which falls on the company has to be taken into account. This expenditure though of a capital nature, is no represented by any tangible asset, and therefore has to be written off from the profits of subsequent years.
Every company must keep the following books, known as ‘Statutory Books’ because they are compulsory under a statute, the Companies Act.
(i) Register of Directors Shareholdings.
(ii) Register of Members.
(iii) Register of Mortgages and Charges.
(iv) Proper Books of Account.
(v)Register of Investments in shares and debentures of bodies corporate of the same group.
(vi) Register and Index of Debenture holders.
(vii) Register of contracts, Companies and firms in which Directors are interested.
(viii)Register of Directors, Managing Director, Managing Agent or Secretaries and Treasurers
(ix) Register of Company’s investments not held in its own name.
(x) Minute Books.
The following are some of the meetings that are usually held by a company.
(a) Annual General Meetings.
(b) Board Meetings.
(c) Statutory Meetings.
(d) Extraordinary General Meetings.
(e) Class Meetings.
Every public limited company with a share capital must hold statutory meetings not less than one month and not more than 6 months from the dare it is entitled to commerce business. A statutory report must be sent to the members at least 21 days before the date of the meeting and a copy filed within the Registrar.
Every company must hold an annual general meeting, the first within 18 months of incorporation and later ones within 9 months of the expiry of each financial year and except where “the Registrar extends such time, more than 15 months should elapse between two annual general meetings.
The annual general meetings must be held during business hours on a day which is not a public holiday and at either the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated.
The following business is the ordinary business to be transacted at annual general meetings. All other business is deemed to be special.
(i) The appointment of and the fixing of the remuneration of, the auditors.
(ii) The declaration of dividend.
(iii) The consideration of the accounts, balance sheet and the reports of the Board of Directors and of the Auditors.
(iv) The appointment of directors in place of those retiring by rotation.
Every general meeting other than the annual general meeting is an extraordinary meeting. Such meetings are called generally by the Board of Directors when some business is to be transacted in between annual general meetings.
Extraordinary meetings may even be called on a requisition of holders of 1/ 10th of the paid up share capital carrying voting rights or where there is no share capital, by holders of 1 /10th of the total voting power of the company. If the directors do not within 21 days from the deposit of the requisition proceed to call the meeting on a day not later than 45 days from the deposit of the requisition the meeting may be called by the requisitionists themselves.
A class meeting is a meeting of a particular class of shareholders. A class meeting is held when it is necessary to get consent of a particular class of shareholders in relation to a matter which is likely to affect the rights of the class.
The Companies Act, 1956 requires a majority of at least three-fourths of the issued share of that class for passing such a resolution at a class meeting but the Articles may provide for a larger majority.
Board Meetings are meetings of the board of directors. Board meetings must be held once in every three months and at least four times every year. The usual business which is transacted at Board meetings includes allotment of shares, passing of transfer applications, recommendation of dividends, appointment of officials and fixing the date and business of general meetings.
An explanatory settlement giving all material facts concerning each item of business if required to be annexed to the notice of general meetings in the case of special business All business at general meetings other than the usual business at the annual general meeting and all business at extraordinary meetings, is special business.
A Quorum is the minimum number of person required to attend a meeting. According to the Companies Act unless the articles provide a larger number, five members personally present in the case of a public company and two members personally present in the case of a private company is the quorum for a general meeting.
A proxy means either the person appointed by a member to vote on his behalf or the instrument by which he is appointed.
The List of Contributories
In winding up the liquidator prepares two lists, viz. ‘A’ and “B’ lists of contributories. In the ‘A’ list he includes all those members who were members of the company at the time of the commencement of the liquidation and who have not paid up the face value of their shares in full. In the *B’ list he places all those who have transferred their shares within one year of the date of liquidation.
The liquidator will try to recover what he can first from the ‘A’ list of contributories, but if this is not sufficient to pay the debts of the company, calls are made on person placed on the “B’ list.
Duties of the Liquidator
The duty of the Liquidator is to pay all the creditors first, and in so paying, he has to proceed in the following order:
(a) Costs of liquidation, including his own remuneration.
(b) Adjust the claims of contributories among themselves from the surplus, if any, and pay them out.
(c) The secured creditors out of the proceeds of securities.
(d) All preferential debts.
(e) Ordinary unsecured creditors
Dividends in Liquidation
The usual practise is to make this payment from the surplus left with the liquidator after paying all creditors and expenses. This is made in so many instalments and is called ‘Dividends.’
The Companies Act, 1956 has provided that the books of the company must be audited at least once in every year and the auditor shall report on the balance sheet prepared by the company. In the case of both public and private companies, only Chartered Accountants can be appointed.
The first auditors are to be appointed by the Board Directors within only month of registration; otherwise the company in general meeting may do so. Subsequent auditors are appointed at each annual general meeting and they hood office from the conclusion of one annual general meeting to the conclusion of next. Failing such appointment, the Central Government may do so.
Winding Up of Companies
Winding Up is a process by which a joint company closed and all its assets realized with a view to paying out its creditors, the surplus being distributed among the shareholders and members according to their rights.
The liquidation may be voluntary, that is, liquidation brought about voluntarily by the shareholders by a resolution passed in the general meeting of the company; or Compulsory Liquidation ordered by the Court on the petition of creditors of the company or’ of member. There is also a third type of liquidation known as winding up under the Supervision of the Court.
In this case a resolution to wind up the company under the supervision of the Court is passed by the members or Shareholders and the liquidator is a mere agent, whereas in the case of liquidation under supervision or compulsory liquidation, the liquidation is under the control of the Court, and the liquidator is an officer of the Court.
In the case of Joint stock companies, the decision of shareholders and directors are arrived at meetings by passing resolutions. These resolutions may be (a) Ordinary Resolutions, (b) Special Resolutions, and (c) Resolutions requiring Special Notice.
An Ordinary Resolutions is resolutions passed by the majority of such members as are entitled to vote who are present in person or by proxy.
A Special Resolution is a resolution passed by a majority of three-fourth of those voting in person or by proxy at a general meeting of which not less than twenty-one days’ notice specifying the intention to propose the resolution as a special resolutions has been duly given.
A Resolution which Requires Special Notices was introduced by the companies Act, 1956 for certain purpose and where such a resolution is required by the companies Act or the Articles, notice of the intention to move such resolutions must be given to the company at least 14 days before the meeting and the company in turn must give notice in the same manner as it gives in the case of a meeting at least 7 days before the meeting.