COMPANY LAW ( ASSIGNMENT – 1 )
1. WRITE A SHORT NOTE ON EACH OF THE FOLLOWING :
(a) Rights Shares:. A company, limited by shares, is allowed to increase its subscribed share
capital by issuing new shares. However, this increase has to be within the limits of its authorised
capital as per Capital Clause of its Memorandum of Association. Such shares have to be first
offered to the existing shareholders in the proportion of their present holdings as far as possible.
Such right of the shareholders to be so offered these new shares before these are offered to the
general public or anybody else is called shareholders' right of pre-emption. The shares so offered
to these existing shareholders are called 'Rights Shares' and the issue of shares so made is
called the 'Rights Issue’.
(b) Buyback of Shares : The term buy-back of shares (or other securities) implies the act of
purchasing its own shares (or other securities) by a company.
Section 67 of the Companies Act imposes restrictions on the purchase company of its own
shares or of its holding company. According to this section, a company limited by guarantee and
having a share capital or a company limited by shares cannot buy its own shares, unless they
purchase is affected under the provision of Section 66 (which deals with reduction of share capital
). However, a company with unlimited liability is free from the restrictions of Section 67.
(c) Transfer vs Transmission of shares:
Point of Distinction Transfer of shares Transmission of
shares
1.Nature of Act Transfer takes place Transmission is an
by a voluntary and involuntary act and is
deliberate act of the the result of operation
transferor. of law.
2.Instrument of Transfer Instrument of transfer Instrument of transfer
has to be executed by is not required, only a
both the transferor and proof of title to the
the transferee in case shares of the person is
of transfer. required.
3..Consideration Shares are normally Shares are passed to
transferred to another another person
person for some without consideration.
consideration.
(d) Dematerialisation of Shares: Dematerialisation is the process by which a client can get physical
certificates converted into electronic balances. An investor intending to dematerialise its securities
needs to have an account with a DP. The client has to deface and surrender the certificates
registered in its name to the DP. After intimating NSDL electronically, the DP sends the securities
to the concerned Issuer/ R&T agent. NSDL in turn informs the Issuer/ R&T agent electronically,
using NSDL Depository system, about the request for dematerialisation. If the Issuer/ R&T agent
finds the certificates in order, it registers NSDL as the holder of the securities (the investor will be
the beneficial owner) and communicates to NSDL the confirmation of request electronically. On
receiving such confirmation, NSDL credits the securities in the depository account of the Investor
with the DP.
2. (A) STATE THE CONDITIONS TO BE SATISFIED BEFORE A COMPANY MAY
FORFEIT THE SHARES. WHAT IS THE EFFECT OF SUCH FORFEITURE?
Conditions to be satisfied before a company may forfeit the shares are as follows:
(i)Shares can be forfeited only for non-payment of call due in respect of the shares and not for
other debts.
(ii) Proper notice must be given to the defaulting member requesting him to pay the outstanding
amount of call. This notice must give at least 14 days time for payment of such amount and
must inform the member that in the event of non-payment, his shares will be forfeited.
(iii) If the member does not comply with the notice, the Board of Directors will pass a formal
resolution of forfeiture and a notice of the same will be served on the defaulting shareholder. If
this resolution is not passed, the forfeiture is invalid.
(iv) The power to forfeit shares must be exercised by the directors in good
faith and for the benefit of the company.
Effects of a valid forfeiture:
1. The defaulting shareholder, whose shares are forfeited, ceases to be a member of the
company and his name is struck off the register of members.
2. The liability of the person whose shares have been forfeited ceases only when the
company receives payment in full of all such moneys in respect of the shares forfeited.
Therefore, a member remains liable to the company for all such moneys, which at the
time of forfeiture, were payable by him to the company in respect of shares forfeited.
3. The former shareholder shall remain liable as a past member to pay calls, if liquidation
takes place within 1 year of the forfeiture.
4. On forfeiture, the forfeited shares become the property of the company and they are
either re-issued or disposed of.
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(B) “SURRENDER OF SHARES IS THE SAME THING AS FORFEITURE OF
SHARES”. COMMENT.
Surrendering shares and forfeiture may seem similar on the surface, both involving the
relinquishment of ownership interests in a company, but they are fundamentally distinct
processes with different implications.
Surrender of shares is a voluntary act undertaken by a shareholder, typically in exchange for
compensation or under agreed-upon terms. This can occur for various reasons, such as a desire
to exit the company, diversify investments, or settle disputes amicably. Surrendering shares is
often a deliberate and planned decision, reflecting the shareholder's intentions and interests.
On the other hand, forfeiture of shares is an involuntary process initiated by the company due to a
shareholder's failure to meet certain obligations, such as non-payment of calls on shares or
breaches of company regulations. In such cases, the company has the authority, usually outlined
in its articles of association, to forfeit the shares, resulting in the loss of ownership for the
shareholder without compensation.
The key distinction lies in the voluntary nature of surrender versus the involuntary nature of
forfeiture. Surrender implies a conscious decision by the shareholder, while forfeiture is a
consequence of non-compliance or default. Consequently, the outcomes and implications for
shareholders and the company differ significantly between surrender and forfeiture, making them
distinct mechanisms in corporate governance and shareholder relations.
(C) DISTINGUISH BETWEEN LIEN ON SHARES AND FORFEITURE
OF SHARES.
A lien means entitlement or legal right acquired in one’s property by a creditor for failure to pay debt by the
debtor. A lien is active until all the duties and obligations are executed as expected to the creditor and he is
contented. If the underlying burden is not satisfied, the creditor may be able to take possession of the
property involved and sell it if he wishes.
Whereas forfeiture means the shareholder ceases to be a member of the company. He loses all his rights
and interests that a shareholder might enjoy because he no longer owes any remaining balance and
surrenders any potential capital gain on the shares, which automatically revert back to the ownership of the
issuing company.
Difference between lien on shares and forfeiture of shares include but are not limited to:
• A lien on shares prevents the shareholder from transferring his shares unless he pays the debt
that the Company owes him. Whereas a forfeiture of shares means to expropriate/ take away
shares from a shareholder by penalising him for default of payment in calls.
• A lien is exercised on non-payment of debt and other liabilities while a forfeiture is exercised on
failure to make payments on calls. This means that liens are general while forfeitures are more
specific.
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• If the shares held under lien are sold and a surplus is acquired, the surplus is given to the
shareholder after deducting the amount due to the Company, but for re-issued forfeited shares, the
Company retains the surplus.
• Lien on shares does not re-structure the share capital by increasing nor reducing it, whereas a
forfeiture results to reduction in share capital if the shares are not re-issued.
• Shares acquired through lien can only be sold, whereas forfeited shares can either be re-issued or
cancelled.
3.WHAT ARE THE STATUTORY PROVISIONS OF COMPANIES ACT
2013 REGARDING ALLOTMENT OF SHARES?
The statutory provisions of Companies Act 2013 regarding allotment of shares are:
(i) Registration of prospectus. A copy of prospectus must be duly filed with the Registrar of Companies.
[Section 26(4)]
(il) Application money. The amount payable on application on every security (share) should not be less than
5% of the nominal amount of the security (share) or such other percentage or amount as may be specified
by SEBI. [Section 39(2)]
(iii) Minimum subscription. As per Section 39(1)(a), a company shall not proceed to allot securities (shares)
unless the amount stated in the prospectus as the minimum subscription amount has been subscribed for,
and the sums payable on application for such amount have been paid to and received by the company.
(iv) Money to be kept in a scheduled bank [Section 40(3)]. All application money received from the public for
subscription to the securities (shares) shall be kept in a separate bank account in a scheduled bank and
utilised only for:
o adjustment against allotment of securities (shares) where the securities (shares) have been
permitted to be dealt with in the stock exchanges specified in the prospectus; or
o the repayment of monies received from applicants within the time specified by the Securities and
Exchange Board, where the company is, for any other reason, unable to allot securities (shares).
(v) Securities (shares) to be dealt with in stock exchange [Section 40):
o Every company making public offer shall, before making such offer, make an application to one or
more recognised stock exchange or exchanges and obtain permission for the securities (shares) to
be dealt with in such stock exchange or exchanges.
o Where a prospectus states that an application under sub-section (1) has been made, such
prospectus shall also state the names of the stock exchanges in which the securities (shares) shall
be dealt with.
(vi) Issue of securities (shares) in dematerialised form [Section 29(1))-Every company making public offer of
any securities (shares) shall issue the securities (shares) only in dematerialised form by complying with the
requisite provisions of the Depositories Act, 1996.
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