INTRODUCTION TO COMPANIES ACT 1956

What is a company

• A company is an artificial person created by law.

• A company means a group of persons associated together for the attainment of a common end, social or economic.

Definition of a company• According to Sec (1), “A company formed and registered

under the act”.• According to Sec (3) of the act, “on incorporation a company

becomes a body corporate or a corporation with a perpetual succession and a common seal.”

• According to N.D.Kapoor,” It is a voluntary association of persons formed for some common purpose, with capital divisible into parts, known as shares, and with a limited liability. It is a creation of the law and is sometimes known as an artificial person with a perpetual succession and a common seal. It exists only in the eyes of the law, I.e., it is regarded by the law as person, just as a human being. But it has no physical existence.”

CHARACTERSTICS OF A COMPNAY

• Separate legal entity• Limited liability• Perpetual succession• Common seal• Transferability of shares• Separate property• Capacity to sue

Separate Legal entity

• Company is in law regarded as an entity separate from its members

• It has an independent corporate existence• Any of its members can enter into contracts

with it in the same manner as other individual can and he cannot be held liable for the acts of company even if he holds virtually the entire share capital

Limited liability

• The priniciple of limited liability is a feature as well as a priviliege of the corporate form of enterprise.

• The liability of the members is limited • A shareholder cannot be called upon to pay

anything more than the unpaid value of the share.• Creditor cannot demand a shareholder to settle

his claim from the company out of the private funds of the shareholder

Perpetual succession

• A company never Dies

• “Members may come and go but the company can go on forever”.

• If all the members die, it shall not affect the privileges and possessions of the company

Common seal

• Being an artificial person, a company cannot sign in the documents and issue certificates.

• It can act only through an agent or representative known as director.

• The common seal is considered as the official signature of the company

• All the acts must be authenticated by its common seal

Transferability of shares

• The capital of the company is divided into several small parts known as shares.

• The law also considers the share of a company as movable property and hence like any other movable asset.

• The shareholder can transfer his share to some other person.

• The transfer can be effected only in the manner specified in the Articles of the company and in the Companies Act.

Separate Property

• A company, being a legal person to acquire, possess and dispose of property in its own name.

• The property of the company will not be considered as the joint property of the members constituting the company, although the capital and assets of the company are contributed by members

Capacity to sue and be sued

• A company being a legal person, can sue other persons in its corporate name.

• Similarly , others can also sue the company in their own name.

Advantages of Companies

• Limited liability• Easy Mobilisation of resources• Possibilities for Expansion• Easy transferability of shares• Democractic Management• Capital formation

Limitation of Companies

• Long drawn process• Expensive• Separation of ownership and control• Rigid government control• Erosion of limited liability• Administrative Delays

TYPES OF COMPANIES

• I . Unincorporated companies

• II. Incorporated Companies

I. Unincorporated Companies

• The companies which are not incorporated under the companies Act, Special Act or Charter are called “Unincorporated Companies”

• Sec. 11 of the companies Act, 1956 if the number of members exceeds 10 in the case of banking companies and 20 in case of other business companies

II. Incorporated Companies

• Classification of Companies

• 1. From the point of view of incorporation • 2. From the point of view of liability• 3. From the point of view of public interest

and functions

A. Classification on the basis of incorporation

• 1. chartered companies– Companies which are established by the special Royal charters are called chartered

companies– Ex.East India, The Bank of England, Chartered bank of china, Australia and Hongkong

• 2. Statutory companies– Companies which are established by a special Act of the central legislature or any

state legislature.– Companies are established not for profit but for service– Ex. The life insurance corporation of India, The Unit Trust of India etc.,

• 3. Registered Companies– Companies which are established under the companies Act, 1956 – Companies established before the commencement of the companies Act, 1956 are also called Registered companies– Indian companies Act, 1866, or 1882 or 1913 etc

Classification on the Basis of Liablity

• Companies limited by shares– The liability of the members is limited by the memorandum

to the unpaid amount of the shares held by them• Companies limited by Guarantee

– The liability of members is limited by the memorandum to such an amount as the members undertake to pay are called .• Companies limited by guarantee having a share capital• Companies limited by guarantee having no share capital

• Unlimited companies– The liability of the members is unlimited are known as

unlimited companies. Rarely established

Classification on the Basis of Members

• 1. Private Companies– A private company should have minimum 2 members and maximum 50

members– Restricts the right of the members to transfer shares– Limits the number of members to 50 (excluding past and present employees

of the companies who are the members of the company)– Prohibits any invitation or acceptance of deposits from person other than its

members, directors or their relatives

• 2. Public Companies– A public company which means a company which

• Is not a private company• The articles does not restrict the right of the members to transfer their shares, does

not limit the number of its members and does not prohibit any invitation to the public for its shares and debentures

Special privileges of a private company

• Minimum number of members• Commencement of business• Allotment of shares• Kinds of shares – any kind of shares with

voting rights• Minimum number of Directors – Two • Qualification of shares – need not require for

director

• Consent of the Directors – Directors elect need not file with registrar

• Resolution for appointment of the Directors – single resolution for appointment of 2 Direct.

• statutory meeting – need not conduct and file with registrar

• Rights Issue – need not issue right shares to the existing shareholders

• Multiple Directorship : Director of a private company can be director of more than 15 companies at the same time

• No limit for managerial remuneration• The directors need not retire every year• Private company can lend loan to its directors• Quorum: Two members personally present is enough • There is no restriction for the duration of Directoship

CLASSIFICATION ON THE BASIS OF CONTROL AND OWNERSHIP

• A. Holding company• B. subsidiary company• C. Government company• D. Foreign Company• E. an Association not for profit

A. Holding company

• When one company has control over another, it is called holding company

• A company has control over another company– If it controls the composition of the Board of

Directors of another– If the company holds majority of the equity share

capital of another company– If another company is subsidiary of the company’s

subsidiary

B. Subsidiary company

• The company which is controlled by another company

• A company has control led by another company– If another company controls the composition of the

Board of Directors.– If another company holds majority of the equity

share capital – If another company is a holding company of the

holding company

C. Government company

• A Company in which not less than 51% of the paid-up share capital is held by the central Government or by any state Government and partly by one or more state Governments is called Government company

• Special provisions– Exempted from using the words private ltd– Provisions of the companies Act applicable– Auditor appointed by the Government– If central Government is a member of the company

D. Foreign Company

• A company which is incorporated outside India and has a place of business in India

• Not less than 50% of the paid –up share capital of a foreign company is held by citizens of India or Indian companies or by both

MEMORANDUM AND ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION

• Preparation of the Memorandum is the first step in the formation of company.

• Every company must have its own memorandum of Association

• According to Sec. 2(28)– The memorandum means, the memorandum of

association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act”

Purpose of the Memorandum

• Shareholders know their position of their funds utilisation and risk involved

• One who is dealing with the company can understand the permitted range of the company, its powers and object.

Requisites of the Memorandum

• It must be printed and should be divided into paragraphs. Each paragraph should be consecutively numbered

• In case of private company, it must be signed by atleast two persons. In public, atleast 7

• The address and occupation of each signatory together with the signatures, address and occupation of the witnesses must be added

CONTENTS OF THE MEMORANDUM

• Name clause• Situation clause• Objects clause• Liability clause• Capital clause• Association clause

1. Name clause

• Name clause contains the name of the company• It must have a name to establish its corporate

existence• Principles for selecting the Name– The selected Name should not be identical– The company should not also adopt name in the

opinion of the Central Government is undesirable– Objectionable Names

• The Names and emblems of W.H.O and U.N.O

• Official seal and emblems of the central and state Governments

• The name of Mahatma Gandhi and Prime Minister of India

• . Last word of the Name : ltd in case of public companies and in case of private companies it should be private limited

2. Situation clause

• Name of the state in which the company’s Registered office is to be situated.

• It is also important for determining the jurisdiction of the court

3. Objects clause

• 1. Main objects– The main objects to be pursued by the company

and objects incidental or ancillary to the attainment of the main object

• 2. other objects– The objects which are not included in the above

clause

4. Liability Clause

• The liability of the members shall be limited to the face value of the shares held by them

• If the liability of the company is unlimited, this clause need not be included in the Memorandum

• If it is ltd by guarantee, it should specify the amount

• It should specify the liability of the Directors, the Manager or the Managing Director

5. Capital Clause

• It should specify the nominal capital and its divisions.– Pref. share capital– Equity share capital– Total value of shares

6. Association Clause

• It states that the persons subscribing their signatures to the Memorandum are desirous of forming themselves and agree to take the number of shares in the capital.

ALTERATION OF THE MEMORANDUM

• 1.Alteration of the Name clause• 2. Alteration of the situation clause• 3. Alteration of the objects clause• 4. Alteration of the Liability clause• 5. Alteration of the Capital clause

1. Alteration of the Name clause

• A. General change of the Name– Special resolution has to be passed and a written approval of the

Central Government is to be obtained• B Change of Name under the Direction of the Central

Government– If the name resembles to another company government may

direct to change the name • C. Addition or Deletion

– Conversion of private into public and vice versa the addition or deletion of the word private is to be made

• D. Minor Mistakes– Spelling mistakes altered by an ordinary resolution

2. Alteration of the Situation

• Change of Registered office in the same Town or village

• Change of registered office from one place to another within a state

• change of registered office from one state to another

• A special resolution must be passed• It should be filed with the registrar• A certified copy of the central Government’s order and a copy

of the altered Memorandum should be filed with the Registrar within 3 months

3. Alteration of the objects clause

• A special resolution should be passed• The alteration must be confirmed by the Central

Government• The central government will confirm the alteration if it is

– To carry on its business more economically and efficiently– To attain its main purpose by new or improved– To enlarge or change the local area of its operations– To carry on some business conveniently– To sell or dispose– To restrict or abandon any of the objects

4. Alteration of the liability clause

• It it is unlimited , the liability of the members unlimited

• If the articles permit the liability of all the directors or any of the directors can be altered

• A special resolution must be passed

5. Alteration of the capital clause

• If articles permit– Increase its share capital by new issue– Consolidate or sub- divide all or any of its share

capital– Cancel the unissued shares– Reduction of capital– Increase in share capital– Variation of shareholders Rights

ARTICLES OF ASSOCIATION

• It contains the rules and regulations regarding the internal management of the company.

• It is to be filed with the registrar of companies• The articles enable the management to

achieve the objects given in the memorandum

CONTENTS OF THE ARTICLES

• Adoption of preliminary contracts• Number and value of shares• Allotment of shares• Calls on shares • Share certificates and rights of different types

of shareholders• Transfer of shares• Forfeitures of shares

• Lien on shares• Alteration of capital• Borrowing powers• Alteration of the Memorandum• General Meetings, voting rights of the

members• Number of Directors, their qualifications and

remuneration

• Dividend• Accounts and audit• Issue of Bonus shares• Appropriation to various reserves• Winding up

ALTERATION OF ARTICLES

• A special resolution must be passed• Certified copy of the resolution must be filed• Alteration is for converting a public company

into private company, the approval of the central Government is also necessary

• The alteration must not be against the provsions of the Memorandum

• The alteration should not affect the rights of an outsider

• The alteration should not cause for breach of contract

• The alteration should not increase the liability of the members

Formation of a Company

• Stages1. Promotion2. Registration3. Commencement of Business

1. Promotion

• Promotion is the first stage in which an idea is conceived by an individual or by a few persons and their own resources, influence and skill

• A promoter is a person who undertakes to form a company with reference to a given object and to set it going and who takes necessary steps to accomplish that purpose

Functions of a promoter

• Promotion of an Idea• Detailed Investigation• Verification• Assembling• Financing the proposition• Presentation of the proposition

Duties of a promoter

• Duty to close• Not to make any secret profit• Duty to Give Benefits of Negotiations to the

company• Not to Make unfair use of his position

II. INCORPORATION• Approval of the proposed Name• Documents to be filed with the Registrar

– Memorandum of association– Articles of association– List of Directors– Consent of the Directors– Statutory Declaration– Address of the Registered Office– A letter of Authority for Making Necessary Corrections in Memorandum

and Articles– Letter of Registrar of Companies about the availability of Name

• Payment of necessary fees• Registration of the company

Certificate of Incorporation

• The registrar satisfied with all the requirements of the Act , he issue a certificate known as “Certificate of Incorporation”

• Neither court nor the registrar can cancel the certificate

• When a certificate is issued , the new company is born

• The date mentioned in the certificate is the date of incorporation of the company.

III. Commencement of Business

• A private company can commence business right from the date of certificate of incorporation.

• A public company cannot commence business immediately upon incorporation.

• A further certificate known as certificate of commencement of Business

PROSPECTUS

• The promoters of a public company have to issue a prospectus to arouse public interest in the proposed company.

• “any document described or issued as a prospectus and includes any notice, circular,advertisement or other document inviting deposit from the public, inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate”

CONDITIONS FOR A PROSPECTUS

• Invitation to the public– The invitation to offer to the public to subscribe

for the shares and debentures of the company• Issued to the public– Private circulation or confidential shall not

considered as a prospectus• Issued as a prospectus– The prospectus should be issued or described as a

prospectus

Objectives of prospectus

• To attract the investors• To make enough disclosure to the investors to

enable them to decide whether or not to purchase shares or Debentures

• To secure that the Directors of the company accepted responsibility for the statement in the prospectus

Contents of prospectus

• General information• Capital structure of the company• Terms of the present issue• Particulars of the issue• Company, management and prospect• Particulars in regard to the company and other

listed companies under the same management

• Outstanding litigation • Management perception of risk factors• Financial information – Reports by the auditors – Reports by the accountants– Principal terms of loans and assets charged as

securityStatutory and other information

Misstatements in prospectus and consequences

• False or untrue statement in the prospectus, or information which ought to have been disclosed is concealed, or omission of any material fact. Statements which produce wrong impression of actual facts would also be construed as misstatements.– Untrue statements– Statements which produce wrong impression– Statements which are misleading– Concealment of material facts– Omission of facts

Liability for misstatements in the prospectus

• Civil liability– Compensation– Damages– Recession of the contract for misrepresent– Liability for non compliance– Penalty for issuing the prospectus without

delivering for registration• Criminal liability

Meeting

• Any gathering, assembly or coming together of two or more persons for the transaction of some lawful business of common concern

• A concurrence or coming together of atleast a quorum of members by previous notice or mutual agreement for transacting business for common interest is a meeting

Types of meeting

• Meeting of shareholders– Statutory meeting – Annual General meetings– Extraordinary meeting– Class meetings

• Meeting of Creditors

• Meeting of Directors

Statutory Meeting

• First meeting of the shareholders of a public company

• It is held only once lifetime of a company• 21 days before forward a report called

statutory report• All necessary information relating to

formational aspects of the company

Annual General Meeting

• Every year to be conducted • Directors are obliged to submit their annual

report and accounts every year to the annual general meeting for approval

Extraordinary General Meeting

• Any general meeting other than an annual general meeting

• Transacting some urgent or special business which cannot be postponed till next gen. meeting

4. Class Meeting

• For altering their rights and privileges or for conversion of one into another

Meetings of creditors

• All the questions of policy are discussed at board meetings, which are held at regular intervals either once in a fortnight or once in a month

DIRECTOR

• Directors have to act as agents of the company which delegates to them most of its powers through memorandum and articles

• “any person occupying the position of Director, by whatever name called”

Powers

• The power to make calls on shares• The power to issue debenures• The power to borrow money other than

debentures• The power to invest the funds of the company• The power to make loans

Duties of Directors

• To file return of allotments• Not to Issue Irredeemable preference shares• To disclose Interest (transaction)• To disclose the receipt from transferee of

property• To Disclose Receipt of Compensation from

Transferee of shares

• Duty of good faith• Duty of care• Duty to attend Board Meetings• Duty not to delegate

Liability of Directors

• Liability to outsiders

• Liability to Company

• Liability for breach of statutory Duties• Liability for Acts of his Co-Directors

Liability to outsiders

• So long as they act on bahalf of the company, they are not personally liable to outsiders

• They act in their own name personally liable• Any party suffer a loss on account of fraud • Misrepresentation in prospectus• Irregular allotment of shares• Where they fail to repay application money to

be dealt in stock exchange

Liability to company

• Breach of Fiduciary Duty (trustee duty fails)• Ultra vires Acts• Negligence• Misfeasance (misconduct )

Liability for Breach of statutory Duties

• Improper accounts• Filing of returnss• Failure to fulfill formalities

Liability for Acts of his Co- Directors

• Director is not liable for the act of his Co -Directors

• Co Directors are not his servants or agents who can be their acts impose liability on him

Winding Up of a company

• Winding up of a company is the process whereby its life is ended and its property administered of its creditors and members

• Liquidator collect its assets, pay its debts and finally distributes any surplus among the members.

Modes of winding up

• Winding up by the court

• Voluntary winding up

• Winding up subject to the supervision of the court

Winding up by the court

• Special resolution passed by the members in a general meeting

• Default in stautory meeting• Failure in commencement of business• Membership below minimum limit• Inability to pay its debts• Just and Equitable opinion by the court

Who can apply

• The company• Any creditor of the company• Registrar of companies• Any person authorised by the central govt to

the basis of a report Inspectors• Share holder

2. Voluntary winding up

• Voluntary winding up of a company means winding-up by the members or creditors without the interference by the court

• A company wound – up voluntarily– Expiry of the duration– Special resolution that the company wound-up

voluntarily passed at a general meeting.

Types of Voluntary winding up

• Members Voluntary winding up

• Creditors voluntary winding up

a. Member’s Voluntary winding up

• Appointment of Liquidators• Board's power to cease on Appointment of

liquidator• Power to fill Vacancy of Liquidator• Notice of appointment to be given to registrar• Duty of liquidator to call General Meeting in case

Insolvency• Duty to call General meeting at the end of every year• Final meeting and Dissolution

b.Creditor’s Voluntary winding up

• Meeting of Creditors

• Notice of Resolution to be given• Appointment of liquidator• Committee of Inspection• liquidator’s Remuneration• Board’s power to cease on Appointment of liquidator• Duty of liquidates to call Meeting of Company and of

Creditors at the end of each year• Final Meeting and Dissolution

Winding up under the supervision of the Court

• After a special resolution for voluntary winding up, the court shall continue to wind up the company as per the terms and conditions specified by the court

• The application may be made by creditor or contributor or voluntary liquidator