Private Limited Company Registration in Madurai
Companies Act, 2013: Section 2(68)
Section 2(68) of the 2013 Act was notified vide SO 2754 (E) and has been in effect from 12.09.2013. A clarification was issued vide General Circular no 15/2013 dated 13th September, 2013 whereby all memorandum and articles of association received by the Registrar up to 11th September, 2013, for registration of a private company, could be considered for company registration by considering the definition of a private company under the 1956 Act.
Section 2(68) of the 2013 Act corresponds to section 3(1) (iii) of the 1956 Act with certain changes. Now a private company can have 200 members compared to 50 members earlier. One Person Company has been classified as a private company. The stipulation that the articles of private companies should contain a provision to prohibit acceptance of deposits from public has been dispensed with as now the acceptance of deposits by companies is regulated by sections 73 and 76 of the 2013 Act. The restriction in the 1956 Act under section 3 (1)(iii) was with respect to shares and debentures. Section 2(68)(iii) of the 2013 Act extends this restriction to “securities”. Securities would have the meaning given to them under s. 2(h) of Securities Contracts (Regulation) Act, 1956. The Government, may by a notification grant exemptions to private companies. However such notification is awaited.
Companies Act, 1956: Sections 2(35) and 3
Section 2 (35) of the 1956 Act and Section 3 of the 1956 Act also describe a private company. A private company must have articles of its own, containing the restrictions, limitations and prohibitions as specified in this Clause. As regards restrictions, it is sufficient if the articles contain the common restrictions usually found in the articles of most companies that the directors may, in their absolute discretion and without assigning any reason therefor, decline to register the transfer of any shares whether fully paid or partly paid; but they may also contain other restrictions such as that the shareholders must be Indian citizens, or of the male sex, or adult persons, and there may be provision for determining “fair value” of the shares. But the restriction clause should apply equally to all shareholders or shareholder of the same class, and not exempt the shares held by some of them.
The object of s. 3 (1)(ii)(a) of the 1956 Act restricting the right to transfer shares is probably to enable the company registration to keep the number of its members within the limits prescribed by clause (b) of section 3(1)(iii) of the 1956 Act. It would have to be complied with by restricting the number of members to two hundred and by reserving the power to regulate membership.
Shares of private company not marketable security
Shares of a private company do not possess liquidity, because the purchaser of shares cannot be guaranteed that he will be registered as a member of the company. Such shares cannot be easily sold in the market. They cannot be said to be marketable and cannot, therefore, be said to fall within the definition of ‘securities as a marketable security’. The definition of securities in section 2(h) of the Securities Contracts (Regulation) Act, 1956 will only take in shares of a public limited company notwithstanding the use of the words “any incorporated company or other body corporate” in the definition. A contract for the purchase of shares in a private company entered into at Bombay is not governed by the provisions of the Securities Contracts (Regulations) Act, 1956 and cannot be claimed to be illegal on the ground of the contravention of the provisions of section 13 of the SCRAt.
Requirement of minimum paid-up share capital
A company to be incorporated as a private company must have a minimum paid-up capital of Rs. 1 lakh and a public company must have a minimum paid-up capital of Rs.5 lakhs. This requirement can only be complied with by the promoters or subscribers to the memorandum by subscribing for the shares of the requisite paid-up share capital through subscription clause of the memorandum of association of the company at the time of its incorporation. These provisions do not apply to a section 25 company (charitable company under the 1956 Act which corresponds to section 8 of the 2013 Act) or, by necessary implication, to a company not having any share capital.
Restriction on the right to transfer shares [Section 3 (1)(iii)(a) of Companies Act, 1956]
One of the requirements envisaged by the definition of a private company is that there must be some restriction upon transferability of the company’s shares. It has all along been held by the courts that the restriction upon transfer means any restriction which will give some control to the company over transferability. It does not mean prohibitory restrictions. The Privy Council in Ontario Jockey Club Ltd versus Samuel McBride, AIR 1928 PC 291 observed at paragraph 293 as follows: “That restrictions may be placed upon a shareholder’s right of transfer of shares cannot be questioned. The cases are numerous in which such restrictions have been upheld. Shares are prima facie transferable. A restriction which precludes a shareholder altogether from transferring may be invalid but a restriction which does no more than give a right of pre-emption is valid”. Following this ruling in Chiranji Lal Jasrasaria v. Mahabir Dhelia, AIR 1966 Assam 48 it was held that right of pre-emption does not amount to a prohibition upon transferability. The restriction must apply to all shares and classes of shares, and not to some shares or classes of shares only. No share can be free from the restriction. But it has been suggested that such restrictions may not possibly apply in two cases. In the first place, the restriction on the right of a member to transfer his shares may not apply to his personal representatives on whom his shares have devolved and who are seeking the registration of the shares in their favour. The representative in interest would be bound only if the articles clearly restrict the transfer rights in such cases also. Such a provision exists in Articles 26(2) of Table A of Schedule 1 to the 1956 Act (Articles 24(ii) of Table F of Schedule 1 to the 2013 Act). In the second place, the restrictions on transfers would apparently be applicable to shares figuring in the company’s register of members and which are being sought to be transferred. The restriction may not apply to shares which are proposed to be issued on rights basis conferring upon the members the right to renounce in favor of their nominees. This is so because renounced shares will be allotted to the renounce for the first time and not transferred to him. In practical reality, however, such a right cannot be enjoyed by the members of a private company. The members of such a company would be under a restriction as to their rights options because otherwise the company registration would find it very difficult to resist the renounces so as to maintain the restriction on membership. This is the rationale behind the decision in Needle Industries (India) Ltd versus Needle Industries Newey (India) Holding Ltd., where the Supreme Court held that right to renounce shares in favor of any person as provided by section 81(1)(c) of the 1956 Act cannot apply to deemed public companies, as an exercise of this power in favor of a non-member would result in violation of the restrictions contained in section 3(1)(iii) of the 1956 Act. This restriction must also apply to a private limited company. Where under the articles of a private company no transfer was possible without previous sanction of the Board of directors, the Supreme Court held that this would require written resolution of the Board of directors sanctioning the proposed transfer.
‘Restriction’ not to include prohibition’
By section 82 of the 1956 Act (section 4 of the 2013 Act), shares are expressed to be transferable in the manner provided by the articles of the company registration. There cannot be an absolute prohibition on the right to transfer shares. The right to transfer may be subjected to restrictions contained in the articles and though such restrictions may be either very stringent or very slight, it would be alright so long as it does not amount to a total ban on transferability. The framers of the articles should be very clear in the choice of their words because such provisions are generally construed very strictly and the narrowest possible meaning is put on them. Where the restriction in question is capable of having two meanings, the less restrictive meaning would be adopted by the court. “In the absence of restrictions in the articles, the shareholder has by virtue of the statute the right to transfer his shares without the consent of anybody to any transferee, even though he be a man of straw, provided it is a bona fide transaction in the sense that it is an out and out disposal of the property without retaining any interests in the shares.”
Private agreement between members as to right to transfer
The only permissible restrictions on transferability are those contained in the company’s articles of association. An additional restriction not contained in the articles but in a private agreement between two shareholders which places further obstacles in the way of transferability is not binding either on the company or on the shareholders. In order to substantiate this point the Supreme Court, where it is held that it is well-established that a share in a company is an item of property alienable in the absence of express restrictions under the articles. In chapter 16 of GORE-BROWNE ON COMPANIES, in determining the extent of any restriction on transfer contained in the articles, a strict construction is adopted. The restriction must be set out expressly or must arise by necessary implication and any ambiguous provision is construed in favor of the shareholder wishing to transfer.
Transfer in family arrangement, compromise
Under a family arrangement which took the shape of a compromise, a portion of the assets of the private company was allotted to a group in lies of their shareholding. The court refused to interfere in the matter only on the ground that it was inconvenient for implementation. The court said that it had no power to modify the settlement. The court also gave directions on the matter of capital gains tax.
Usual forms of restriction
Restrictions on right of a shareholder to transfer his shares generally take two common forms (1) Right of pre-emption in favor of the other members, (2) powers for the directors to refuse to register transfer.
Right of pre-emption
The articles generally provide that when a member wishes to sell some or all of his shares, he shall first offer them to the other members at a price to be determined is the manner in formula set out in the articles, or at a fair price at which the shares are valued by the directors or by the company’s auditors, and that the member may their right of pre-emption. If it is desired by the members of the company registration that they should maintain the proportionality of shareholdings as between themselves, it is desirable to extend the right of pre-emption further still and to make it applicable to transfer to a fellow member also and to the transfer of shares on the death or insolvency of a member as also to transfer of a director’s shareholding when he ceases to be a director. The types of pre-emptive clauses stated above have a binding effect even though the price payable by the other members is considerably less than their market value of the shares and even though the exercise of the right will result in the company only having one member. A pre-emption provision in the articles also binds a mortgagee of a member’s shares, and also the company itself if it claims a lien on the shares under its articles. Before exercising the power to sell the shares to realize the mortgage or to enforce the lien, the mortgagee or the company must offer the shares to the other members of the company in accordance with the pre-emption clauses. Where the requirement of the articles that a proposed transfer should be notified to the directors and the latter should give an opportunity to the existing members to purchase the shares was found on facts to have been complied with.
A transfer in violation of a pre-emptive clause is defeasible. The court said in Hurst versus Crampton Bros (Cooper) Ltd., that the deceased was in breach of the articles when she, by executing the transfer form, transferred the shares to the transferee. It followed that the transfer was defeasible at the suit of a member. The claimant was a member and, unless he or his predecessor in title waived his rights of pre-emption, what the transferee got was not an entitlement to the shares but only to the price paid if a right of pre-emption were exercised. That price would be, as the article provided, the ‘fair value’ of the shares. In the instant case there was no waiver of the pre-emption rights.
Notice of transfer in accordance with articles not given
The articles of the company prescribed that notice to existing members of intention to sell shares should be given. The Board of directors failed to issue notice of such intention. Apart from any such provision, the shareholders have no vested right to purchase shares. The CLB (in the context of the 2013 Act, Tribunal) has no specific power to direct any member to transfer his shares. The CLB can only direct company registration of transfer where a transaction has been effected. Where the pre-emption provision was that a member wishing to transfer legal or beneficial ownership in shares was required to give prior notice to the company, it was held that this clause was not attracted where the shares were held by a nominee on behalf of limited partnerships and, though there had been a change in the partners, the legal interest remained vested in the same nominee. This decision was reversed by the Court of Appeal in Rose versus Lynx Express Ltd. Their Lordships said that the true meaning and application of the articles was not clear-cut. If the interpretation adopted by the Judge were accepted, it would apparently enable a member to circumvent the pre-emption provisions by simply transferring his shares to a nominee and then assigning his beneficial interest to an outsider without the need to give a transfer notice. On the other hand, if a nominee shareholder was required to submit a transfer notice in respect of a transfer of an equitable interest in shares held by him, that might require him to give a transfer notice in respect of the entire shareholding in circumstances in which there was no proposed transfer and no proposed sale price in respect of that entire shareholding. In such circumstances it was not right at the pre-action stage to decide the substantive issue of whether the notice requirement of the articles applied to transfer by a non-member of equitable interests in shares held by a nominee. The appropriate course would have been to examine at the first instance the details of the transaction.
Time for exercising right of pre-emption
Under the articles of a private company, the founder and his wife or their nominee were to have the first right of pre-emption. The founder died. The executors held the shares as joint shareholders. The widow exercised the right of pre-emption. She did not dispute the value fixed for the shares in question. There was no time-limit prescribed in the articles. It was held that the directors had no right unilaterally to fix time and treat the right as lapsed because of the expiry of time. The directors had no right to deny the pre-emptive rights and also no right to transfer the shares to outsiders. The transfer to outsiders was declared to be not valid.
Procedure for implementation of pre-emption rights
Where the articles prescribe a procedure it would have to be followed. The usual procedure laid down in the articles is to require the transferor to give to the company a notice of his intention to transfer his holding and asking the company to notify the other members of the availability of the shares and the price at which they will be available to them for acquisition and the time within which they should communicate to the company their desire to purchase the proffered shares. The Supreme Court observed: “It is now well-settled that only one pre-emptive offer is to be made which is otherwise to be accepted or not at all. The existing shareholders are not entitled to be given further pre-emptive rights in respect of those unaccepted shares. Even such a right can be waived or modified”. The articles may also provide a formula for price fixation. If there is no agreement as to price, the directors or, more usually, the auditors of the company, work out a fair price and then a final contract is concluded on that basis. Where the articles do not provide any machinery for implementation of pre-emption rights, the member who wants to transfer his shares must notify all the other members of his intention to do so. He or she should then allow them a reasonable time to inform him of their decision. In both the above situations if the company fails to find any purchasers of its choice within a reasonable time or if no member comes forward to purchase the shares, the shares can be transferred an outsider and the company will be compellable to accept the transfer. Any transfer to an outsider without complying with the above requirements will not be effective against the company registration irrespective of the fact that it may not be a total nullity as between the transferor and the transference. Where the procedure prescribed by the articles was not observed and though it was without the fault of the selling shareholder, the transfer to outsiders was restrained.
A private company’s articles provided for transfer of shares to an outsider only if the insiders would refuse to take them. The company had only three shareholders between whom two held 45% shares each and the third was holding the remaining ten per cent. This last-mentioned shareholder transferred his shareholding to an outsider. The petitioner-director made noise about its validity. The CLB found on facts that in accordance with the articles, the offer of shares was intimated to the petitioner and the same was discussed at the board meeting also. In view of the negative response from the shareholders, the shares were transferred to non-member belonging to the petitioner’s opposite group. Thus there was nothing irregular or in violation of articles. For more clarification about Company Registration in Madurai, kindly visit our site and feel free to contact us.. We are here to help you.. Thanks for reading!!!