Monday, November 18, 2013

Holding of Property by Company

Company is an artificial person created under the Companies Act 1956 with perpetual succession and common seal. It is a legal person different from its members / shareholders. It possesses all the powers to enter into valid contracts, sell, purchase, hold, and lease and mortgage the immovable property. It has a legal entity.

There are two important types of companies. They are private limited company and public limited company. Any two persons can form a private company and its membership / shareholders are limited to 50. A minimum number of seven persons can form a public limited company.

Under the Companies Act, the registration of both private limited company and public limited company is compulsory. The certificate of incorporation is issued on registration. The registrar of Joint Stock Companies issues the certificate of commencement of business to the public limited companies. This is not applicable to private limited companies.

The Memorandum and Articles of Association is an important document of a company. The memorandum refers to the objectives and powers of the company and articles of association deals with the powers, duties, liabilities of the Board of Directors, share holders/members and rules and regulations governing the management of the company.

Common Seal: Companies are not physical persons who can sign. Common seal is the physical form of the company. The common seal is used as a physical impression made upon the documents executed by the companies. This is special seal engraved on steel block. This is to supplement the signature of the corporate officers and to authenticate company documents.
Authorization by a resolution of the Board of Directors of the company or by an authorized committee of the Board is necessary to affix the common seal. In case of some companies the articles of association deal with affixing of the common seal.

Immovable Property Transaction: The Transfer of Property Act mentions that a living person includes company. It is taken for granted that all outsiders are aware of the contents of the Memorandum and Articles of Association of a company. The Memo random and Articles of Association deals with the objectives of the company. The powers and rules regarding governance of the company must be verified to ascertain that the transactions are as per the objectives and are within the powers of the company.
The Articles of Association specifically deal with powers of the directors regarding sale, purchase and mortgage of immovable property.
The company may also execute Power of Attorney under its common seal empowering any person to execute deeds on its behalf. Director, Managing agent, Secretary, Treasurer, Manager or any authorized official may also authenticate the documents on behalf of the company, and it need not be under the common seal.

Any charge created by the company on its property needs to be registered with the Registrar of Companies within 30 days of such creation of charge by filing Form No.8. Charges not registered within the stipulated time are not taken into account against the liquidator of the company on liquidation, or against any creditor. Such registered charge will serve as notice to all persons dealing with the property.

The Registrar of Companies maintains the Register of Charges and it is open to the public for inspection. This is different from the details maintained at sub-registrar office and mentioned in the Encumbrance Certificate. It is necessary to inspect the Register of Charges while transacting with the company Apart from the Register of Charges maintained by the registrar, the company is also bound to maintain a Register of Charges on its properties. This is open for inspection by the members of the company or creditors.
The Companies Act has restricted the powers of the Board of Directors on conveyancing in some cases. Section 293 of the Companies Act deals with these restrictions.

Consent of the general body of the company is mandatory to sell, lease or otherwise dispose of the whole or substantially the whole undertaking of the company. Like wise the consent of the general body of the company is necessary to borrow in excess of the aggregate of the paid up capital and free reserves. The Board of Directors cannot authorize this type of transaction without the prior consent of the general body. The only exception is temporary loans taken by the company from its bankers in the ordinary course of business.

So, while transacting with the company it is necessary to ascertain that the property is not whole or substantially whole part of the undertaking of the company and if the transactions involve whole or substantially whole part of the undertaking, the consent of the general body is obtained. However, where the ordinary business of the company is selling / leasing this restriction will not apply.

Similar caution needs to be exercised when the company borrows on mortgage of its properties in excess of its paid up capital and free reserves. If the company is in liquidation, only the liquidator, with the sanction of the court, can sell its property in the name of the company.

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