COMPANY LAW FOR A COMMON MAN THE CONCEPT OF CORPORATE DEMOCRACY

The Purpose
I have been in practice of company law for the last fifteen years and have gathered the working and practical knowledge of the same over this period. I want to share it in a series of articles. I want to explain it in a way that a common man can understand. I also hope that this will help the students and business people in a similar way.

Disclaimer
I would also like to make it clear that anything explained here should not be taken as a legal advise and anybody acting upon shall be solely responsible for his actions. Therefore, I caution the readers to take appropriate legal help in specific cases.

Before knowing anything about a subject it helps if we know the history of the subject matter.

Assumptions
Before embarking upon the subject matter I need to declare the assumptions which I would be following.
1. The company or corporate entity discussed is about the Companies as they are in India at present.
2. Whenever there is reference to Democracy or parliament it is about the Indian Democracy and the Parliament of India.

History
The industrial revolution in the England set the foundation for Companies (corporate legal entity separate from its constituents). Large sums of money were needed to finance long term capital requirements of industries and businesses. This money could be contributed by the members of public at large by way of buying shares in the company.

Concept of Limited Liability
That brought in the fundamental of limited liability i.e. once a shareholder has paid fully for the shares agreed to be taken by him then he would not be required to pay anything in the case of winding of the company if the venture failed altogether. This was an improvement over the partnership form of business where the partners were personally liable to discharge the liabilities of the firm if the venture failed. The partners had to honour the debts contracted by the firm from their own resources.

Is the Liability of Directors also Limited?
The position of a Director is of a trusteeship and so long as he acts in good faith he is not personally liable for the losses of the company. However, if he acts negligently and doesn’t exercise prudence he may be personally liable. Also a Directors is personally liable to the creditors of the company if he binds himself by giving personal guarantee for the debts of the company.

Perpetual Succession
A partnership firm is dissolved when one or more partners leave the firms or die. This brings the affairs of the firm to standstill.

A Company has perpetual succession i.e. it is not affected by the death of its directors and members.

The members can elect new directors in place of demised directors and the show continues.

What happens to shares of deceased member
The shares held by a deceased member are transmitted to his legal heirs as per his will. In absence of will, however the legal heirs have to get a succession certificate from the Court of law.

There are two exception to this. One is if the deceased member held the shares jointly with others then the living members shall approach the company with the share certificates and a copy of death certificate and get the name of the deceased member removed from the register of members and share certificates.

Secondly if the deceased member has made nomination for the shares in question the shares are transmited to the nominee on production of a request letter alongwith a copy of death certificate of the deceased member.

Why partly paid shares?
Now a question arises what was the need to have partly paid up shares to start with. If a company implementing a big industrial venture takes a long gestation period of say more than three years the whole of the money is not required at the beginning. However, it would be required in a phased manner over the period of gestation. Issuing partly paid up shares ensures that the company would get the funds as and when required. If a shareholder fails to pay the money when called his shares would be liable to be forfeited. This deterrent acts in favour of the company and makes a shareholder to honour his commitment.

Alternately if a company takes full amount in the beginning it will have surplus money which it would need to deploy fruitfully. If the money invested thus is lost due to one or other reason the venture would be in jeopardy.

Organisation of a company
A company is similar to a democracy. Here the pattern is slightly different from a true democracy so far as voting rights are concerned. In a democracy each citizen has one voting right. Whereas, in a company each share has one vote. Therefore, the majority or minority is decided by not the number of members (shareholders) but the quantum of shares held by him/them.

Decision making process
The decision of a company are taken in the same manner as in a democracy. The votes in favour should be more than the votes against. Even a single vote can turn the events. You may remember that the 13 days Vajpayee Government at the centre fell due to one vote.

Normally the concept of majority vs. minority can be explained as under:

Simple Majority : 51%
A person or a group of persons holding a simple majority can pass ordinary resolutions.
Absolute majority: 76%
A person or a group of persons holding an absolute majority can pass special resolutions. Example of special resolutions is the resolutions which can change the constitution of a company like altering Articles of Association of a company.

Minority 49%
A person or group of persons holding shares between 25% and 49% cannot block any ordinary resolution. However, it can block a special resolution.

Minority 24%
A person or group of persons holding 24% or less shares cannot block any decision of a company unless the resolution required to be passed is with 100% voting.

Policy Framing
In a parliamentary democracy the citizens elect the Members of Parliament or Legislature. The house (parliament or Legislature, as the case may be) when in session makes policy decisions by enacting laws. These enactments are passed with simple majority. Amendments to the Constitution requires passing of acts with specific majority of 2/3 in favour.

Likewise a Board of Directors assembled at a meeting is called Board and collectively make policy decisions by passing resolutions. Board resolutions are required to be passed with simple majority unless specifically required to pass unanimous resolution (all Directors voting in favour of the resolution and none against it).

Conduct of Meetings
The speaker of the House is responsible for conduct the proceedings/ business of the house in an orderly manner. Likewise a Chairman of a company is responsible for the conduct of meetings of the Board and Members.

Here there are some basic differences in Company vs. Parliamentary democracy. The Chairman can also be a Managing Director in a company. Whereas, in a parliamentary democracy there is divorce between the position of a speaker and the Prime Minister. A prime minister cannot be a speaker and vice versa. This is due the fact that both are constitutional positions and require divorce of power.

Management
A member of parliament has no say in the day to day working of the Government. The Prime Minister with his cabinet colleagues and the team of bureaucrats is responsible for the running of the affairs of the Government.

An ordinary director has no say in the day to day affairs of the company. The Managing Director with the team of executive and whole time directors and the senior staff of the company implement the decision of the Board.

Source of Power
A parliament derives it law making power from the Constitution and the Company derives it power from the Memorandum of Association.

A parliament cannot pass an enactment beyond its power (not delegated to it by the Constitution). A company’s Board cannot take a decision to start a business not included in its Memorandum of Association.

A parliament is bound and shall recognise the fundamental and other rights of the citizens while enacting a law so that it is not ultra vires the constitution. Similarly, a Company’s Board has to keep in mind the laws governing the businesses it wants to embark upon. If a particular business needs a specific licence it should acquire that first and then only it can start that business.

Redressal Mechanism
If a law enacted by the parliament is ultra vires the constitution any citizen can approach the High Court of the Supreme Court to get an order for declaring it ultra vires.

Similarly if a company acts ultra vires its Memorandum and Articles of Association and the Laws applicable to it any shareholder can approach a competent court of law to restrain the company and its directors.


Ramanuj Asawa
Company Secretary