THE COMPANIES ACT - 1956

LEGISLATIVE BACKDROP OF COMPANIES ACT

The law relating to companies in INDIA is based on British model.

The first piece of legislation relating to INDIAN companies in 1850 is based on Joint Stock Companies Act, 1844 of England.

Companies Amendment Act 1857 provided for registration of companies with or without liability.

Companies Act,1866 replaced the Amendment Act 1857

After a series of Amendments Companies Act 1956 was passed

Since 1956 -1988 13 amendments have been made

MEANING AND DEFINITION OF A COMPANY

Sec 3 (1) of the companies act 1956 defines that “ a company means a company formed and registered under this act or an existing company ”

A company refers to an “ association of many persons who contribute money or moneys worth to a common stock and employ it in some trade or business and who share the profit and loss arising there from ”

- Lord Justice Lindlay

Company is “ an incorporated association which is an artificial person created by law, having separate legal entity with a perpetual succession and common seal ”

- Henry

Features of a Company

1. Registration / Incorporated association2. Separate legal entity3. Common Seal4. Perpetuity5. Limited Liability6. Separation of ownership and mgt7. Transferability of shares8. Separate property9. Capacity to sue and to be sued

LIFTING THE CORPORATE VEIL

Circumstances under which the courts may lift the corporate veil

A. Common law exceptions

1. Determination of character2. Where company is a sham3. Prevention of fraud or improper conduct4. Where the company is acting as the agent of the

s.holders5. Protection of revenue6. Avoidance of welfare legislation

B. Statutory exceptions

1. Number of members fall below statutory minimum2. Failure to refund application money3. Company not mentioned on a bill of exchange4. Group accounts5. Investigation into related activities6. Fraudulent trading

Company & Partnership distinguished

On the basis of ……….

1. Registration2. Separate legal entity3. Right on property4. Liability5. Shares transferability6. Perpetuity7. Agent 8. Interference in affairs9. Entering into contract10. Powers 11. Members12. Dissolution

Company & HUF distinguished

On the basis of ……….

1. Authority2. Number of members3. Basis of membership4. Position of females5. Homogeneous / Heterogeneous

Kinds of companies

conti……

Company

Statutory co.Registered co. Chartered co.

Companies ltd by sharesCompanies ltd by guaranteeUnlimited ltd companies

Public&

Private

Classification of Registered companies

On the Basis of the Number of Members

a) Private Companies

b) Public Companies

On the Basis of ownership

a) Government Companies

b) Non Government Companies

On the Basis of Nationality

a) Domestic Company and

b) Foreign Company

On the Basis of Control

a) Holding Companies

b) Subsidiary Companies

PUBLIC AND PVT. CO. DISTINGUISHED

On the basis of ……..1. Formation2. End words of the name3. Membership4. Prospectus5. Allotment of shares6. MOA and AOA7. Preparation of Articles8. Public issue of capital9. Transfer of shares10. Statutory meeting11. Share warrant

Formation of a Company

Incorporation

Documents to be filed with the Registrar

1. Memorandum of Association2. Articles of Association3. Agreement if any for appointment of M.D4. Statement of nominal capital5. Address of the Registered Office6. List of directors and sign7. Undertaking in writing to take and pay for his qualification

shares8. Declaration

Memorandum of Association-MOA

It is document which sets out the constitution of the company and is the foundation of the company. It contains the fundamental conditions upon which the company is allowed to be incorporated

Various Clauses in MOA-

1. Name clause2. Registered office clause3. Objects clause4. Liability clause5. Capital clause

Alteration of MOA

1. Change of name2. Change of Registered office3. Change of Liability clause4. Change in Capital clause5. Change in Objects clause substantive limits

procedural limits

DOCTRINE OF ULTRA VIRES

Articles of Association-AOA

AOA refers to the rules and regulations of a company framed for the purpose of internal management of its affairs.The AOA of a company are sub-ordinate to and are controlled by the MOA.

Companies which must have their own articles-

1. Private companies limited by shares2. Companies limited by guarantee3. Unlimited companies

Contents of AOA

1. Number and value of shares

2. Allotment of shares3. Calls on shares4. Lien on shares5. Transfer and

transmission of shares

6. Forfeiture of shares7. Alteration of capital 8. Share certificates

9. Conversion of shares into stock

10. Voting rights and proxies

11. Meetings12. Directors and their

appointment13. Borrowing powers14. Dividends and

reserves15. Accounts and audit16. Winding up

MOA & AOA distinguished1. MOA is a charter of the company defines scope and

activitiesAOA regulates internal mgt

2. MOA defines relation to the outside worldAOA deals with rights of the members

3. MOA is the supreme document of the companyAOA is the subordinate to the memorandum

4. MOA is necessary for all the companiesAOA is not required for the company limited by shares

5. MOA cannot be altered except in the manner and extent provided by the ActAOA can be altered through a special resolution

PROSPECTUSDefinition –

Sec 2(36) defines prospectus as “ any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate ”

Ingredients to be called prospectus -

1. There must be an invitation offering to the public2. The invitation must be made by or on behalf of the

company3. The invitation must be to subscribe or purchase4. The invitation must relate to shares or debentures

Objective of Prospectus –

• To inform the public about the formation of the company

• To induce the investors to invest in its shares and debentures

• To preserve the authentic record of the terms on which the investors have been invited and to make the directors responsible for the statements in the prospectus

Statement in Lieu of PROSPECTUS

SHARE CAPITALThe term share capital refers to the amount of capital raised by a company through the issue of shares

Features of Share capital:

1. Share capital can be raised only by companies limited by shares and registered with share capital.

2. Share capital can be raised by a company either at the time of its formation for starting its operations or later on for further expansion

3. Share Capital (Except in the case of redeemable preference shares), once raised , cannot be returned by the company to the shareholders as long as it continues to exist.It can be returned only at the time of the winding up of the company.

Classes of Capital

1. Nominal,Registered or Authorized Capital2. Issued capital3. Subscribed capital4. Called up capital5. Paid up capital6. Uncalled capital7. Reserve capital

SHARES

Section 2(46) of the companies Act of 1956 defines a share as “ a share in the share capital of a company and includes stock except where a distinction between stock and share is expressed or implied ”

According to this definition a share is a fractional part or unit of the capital of a company.

Capital Structure of Shares

Equity Deferred/FoundersPreference

Non-CumulativeCumulative

ParticipatingNon-participatingRedeemableNon-redeemable

Preference & Equity shares distinguished

On the basis of………

1. Right of receiving dividend2. Right of receiving back their capital3. Return4. Voting rights5. Control of management6. Face value7. Redeemability8. Period of finance9. Capital appreciation10. Nature of capital11. Interest in company

DebenturesThe term debenture is derived from Latin term ‘deber’ meaning ‘to owe’ So literally, debenture means a document acknowledging a debt.

Debenture is an instrument issued by a company under seal, acknowledging a debt to some person, and containing an undertaking to repay the debt after a specified date or on a particular date or at the option of the company, and in the meantime , to pay interest at a fixed rate and at regular intervals.

In short, a debenture is an instrument of credit, a bond of indebtedness, a certificate of loan or an acknowledgement of debts issued by a company.

Kinds of Debentures

Transferability Security Redemption Convertibility Priority

•Registered

•Bearer or Unregistered

•Simple or unsecured

•Mortgage or Secured

•Redeemable

•Irredeemable

Convertible

Non-Convertible

First

Second

Stock and SharesRights sharesBonus sharesShare CertificateShare WarrantForfeiture of sharesLien of sharesTransfer of sharesTransmission of shares

MEETINGS

General Meetings Board Meetings Creditors’ Meetings

•Statutory meeting

•Annual general

•Extraordinary

general

•Class meeting

• Board meetings

• Committee

meetings

•Debenture holders’

•Creditors [during

winding up]

Provisions of a valid meeting

Proper authority to convene a meeting.

Proper notice of the meeting

Quoram for the meeting

For General meeting U\S 174

2 members personally present in the case of a private Co,& 5 members personally present in the case of public co.

For Board meeting

In the absence of specific provisions in the articles regarding the

quoram. 1\3rd of the total strength of the directors or at least 2 directors whichever is higher.

Proxy – It refers to a person who is authorized by a member of a co to attend and vote at a meeting of the co on his behalf.

In other words, a proxy is an agent of a share holder authorized to attend & vote at a meeting of the co.

• Proper person in the Chair

• Agenda of the meeting

• Motion :-

A proposition or proposal put before a meeting for consideration & decision.

Method of Voting:-

a) By show of hands

b) by poll

Resolutions

When motion is passed in a meeting, it becomes a resolution.

In other words it is the recorded decision of a meeting.

In short, it is the decision of a meeting on a motion.

Ordinary Resolution:- As per Sec 189(1) of co Act an ordinary ordinary resolution is one which is passed by a simple majority of votes of members present in person or by proxy at a properly constituted & convened general meeting.

Special Resolution:- Sec 189 (2) of the Co. Act, a special Resolution is one which is passed by at least 3/4th majority of votes of members present in person or proxy at a properly constituted & convened G.M.

Minutes of Meetings

Literally, minutes refer to a note to preserve the memory of anything.

The minutes of a meeting are the written record of the business transacted and decisions arrived at a meeting.

U/S 193 of Co Act provides that every company must keep minutes containing a fair and correct summary of the proceedings.

Objectives ,Uses or Value of Minutes

1. Clear, concise and accurate record

2. Permanent record of the proceedings and the decisions reached at a meeting.

3. Reminder of The subjects previously dealt with and the conclusion reached.

4. They are accepted in a court of law as a evidence of the proceedings of a meeting.

5. Information to the absentee members.

Statutory Meeting

Statutory meeting is the first official general Meeting of the shareholders of public co ltd by shares or a public co ltd by guarantee & having share capital.

Provisions

1. Notice.

2. Statutory Report.

3. A certified copy of the Statutory report must be filed with the registrar of companies.

4. At the meeting , a list showing the names, addresses & occupations of the members & the number of share held by them must be placed by the board of directors.

5. Default.

Statutory Report

This is a report drafted by directors and certified as correct by at least 2 of them including the managing director.

U/S 165 (3) of the Companies Act of 1956, the statutory report must contain the following matters:

1. Total no of shares allotted.

2. An abstract of Receipts and payments.

3. Particulars of directors, managing directors etc.

4. Underwriting contracts.

5. Calls in arrears.

6. Commission or brokerage.

Objects of Statutory meeting.

1. To know the progress of the Co.

2. To discuss the finances of the Co.

3. To help the members to know one another.

Annual General MeetingAnnual General meeting is a meeting of the share holders which is held every year.

Provisions

1. U/S 166 every co public or private , must hold an annual G.M of shareholders every year.

2. The first A.G.M. of a co. must be held within 18 months from the date of its incorporation.

3. Every subsequent A.G.M must be held each year within 6 months after the closing of the financial year. Of the co & within 15 months from the date of the previous A.G.M.

4. The meeting must be held on a working day during the business hours at the Registered office of the co.

5. Notice.

WINDING UP OF COMPANIES

Modes of Winding Up

1. By the Court – Compulsory winding up

i. Special resolutionii. Default in filing statutory report or holding

statutory meetingiii. Failure to commence business with in timeiv. Reduction of membershipv. Inability to pay debtsvi. Just and equitable clause of the court

2. Voluntary winding up –

i. Members voluntary w. up (declaration of solvency)

ii. Creditors voluntary winding up

3. Winding up under the supervision of the court

Petition for Winding Up

1. The company2. Any creditor or creditors including any

contingent or prospective creditor or creditors3. Any contributor or contributories4. The Registrar5. Any person authorized by the central

government

The Largest Public Company

Bankruptcies - 2002  Company

Bankruptcy Date Assets

WorldCom,Inc. 7/21/2002 $103,900,000,000

Conseco, Inc. 12/18/2002 $61,392,300,000

Global Crossing, Ltd. 1/28/2002 $30,185,000,000

UAL Corp. (United Airlines, Inc. parent) 12/9/2002 $25,197,000,000

Adelphia Communications Corp. 6/25/2002 $21,499,480,000

Kmart Corp. 1/22/2002 $14,630,000,000

NTL, Inc. 5/8/2002 $13,026,100,000

U.S. Airways, Inc. 8/11/2002 $7,941,000,000

XO Communications, Inc. 6/17/2002 $7,930,470,000

Williams Communications Group, Inc. 4/22/2002 $5,992,030,000

McLeodUSA, Inc. 1/30/2002 $4,755,100,000

Budget Group, Inc. 7/29/2002 $4,469,500,000

National Century Financial Enterprises, Inc. 11/18/2002 $3,800,000,000

Asia Global Crossing, Ltd. 11/18/2002 $3,632,540,000

Kaiser Aluminum Corp. 2/12/2002 $3,364,300,000

Source: www.bankruptcydata.com

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