The Company's Act 1956,Company Law 1

7/27/2019 The Company's Act 1956,Company Law 1

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THE

COMPANYACT 1956



INDEX OF PRESENTATION

COMPANY

NATURE OF COMPANY

TYPES OF COMPANIES

PRIVATE Vs PUBLIC COMPANY

PRIVILEGES OF PRIVATE COMPANY

DOCTRINE OF CONSTRUCTIVE NOTICE

PROSPECTUS

MEMORANDAM OF ASSOCIATON.

ARTICLE OF ASSOCIATION.

CASES



COMPANY In a simple words a Company may be defined as “an

Association of Persons who contribute Money or money’s

worth to a Common Stock and employ it in some Trade orBusiness, and who shares the profit or loss there from.

Section 3(1)(i) of the Companies Act, 1956 defines a company

as: “a Company formed and Registered under this Act or anexisting Company”. ‘Existing Company’ means a companyformed and registered under any of the earlier CompanyLaws.

Legal definition “ Incorporated Association, which is anArtificial Legal Person, having a separate Legal Entity, with aPerpetual Succession, a Common Seal, a Common Capitalcomprised of Transferable Shares and carrying LimitedLiability.”



1 SEPERATE LEGAL ENTITY

2.ARTIFICIAL PERSON

3.PERPETUAL EXISTENCE

4.COMMON SEAL

5.LIMITED LIABILITY

6.CAPACITY TO SUE OR TO BE SUED7.TRANSFERABILITY OF SHARE

NATURE OF COMPANY



Separate legal entity

A Company is an Separate Legal Entity means it is differentfrom its members. It works as an Individual Body.

It can make Contracts, open a Bank Account, can sue and besued by others.

The Law has recognized that even if a person holds virtually all

the Shares, the Right and Obligations of the Company shall bedifferent from its members.

Artificial Person A Company is a purely a Creation of Law. It is Invisible,

Intangible and Exists only in the Eyes of Law.

It has No Soul, No Body, but has a position to Enter or Exit

into a Contract, to appoint a people as its employees

In short it can do every thing just like a natural person.



Perpetual Existence [Sec 34(2)]

Section 34(2) of the Act states that an Incorporated Companyhas Perpetual Life.

The Life of the Company is not related to the life of the

members. Law creates the company and law alone can

dissolve it.

The existence of the company is not affected by Death,

Insolvency, Retirement or Transfer of Share of Members.

Limited Liability

It means that the Liability of a Member shall be limited to

the Value of the Share held by him, he cannot be called upon

to bear the loss from his Personal Property.



Common Seal A Company, being an Artificial Person, can not work as a

Natural Being.

Therefore, it has to work through its Directors, Officers and

other Employees. Common seal used as an Official Signature

of a Company.

Transferability of Share Sec(82)

The Shares of a Company are Freely Transferable. TheShareholder can transfer his/her Share to any person without

the consent of other members.

A company cannot impose Absolute Restrictions on the Rights

of a Member to Transfer his/her shares.



Capacity to Sue and be Sued

When a Company is incorporated it acquires a Separateand Independent Legal Personality.

As a Legal Person it can be sued and be sued in its ownname.



TYPES OF COMPANIES

(Registered under Company Act 1956)



Definition : Private & Public Company

A Private Company is one which, by its Article of Association, restricts the Right to Transfer itsShare, Limits the Maximum number of itsMembers to fifty, Prohibits any Invitation to the

Public to Subscribe for any share or debenture of the company.

A Public Company means a Company which is nota Private Company . In other words, a Public

Company, means a Company, which by its Articles of Association, does not limit the number of itsmember & does not prohibit any invitation to thepublic to subscribe for any share or debentures,

of the company.



Private Vs Public Company

Private Company Public Company

Minimum Paid up

Capital1 Lac 5 Lacs

Minimum No. of

Members 2 7

Maximum No of

Members50 No limit

Minimum no of

Directors 2 3

Transfer of Shares

Restricted AOA &

requires the Prior

Permission of Board

of Directors

Shareholders can

transfer shares freely



Private Vs Public Company ..Contd..


Public Subscription

AOA prohibits any

invitation to Public to

subscribe to its Shares &

Debentures

Can invite public to

subscribe to its shares &

debentures

Acceptance of public

Deposits

AOA prohibits acceptance

of Deposits from Public

Can acceptance of

deposits from public

Commencement of

Business

Immediately after

Certificate of

Incorporation

Only after getting the

Certificate of

Commencement of Business

Issue of Prospectus

Need not prepare or file

'Prospectus' or

‘Statement in lieu of

Prospectus' with Registrar

Must prepare or file

Prospectus with Registrar



Private Vs Public Company…Contd..


Statutory Meeting Not required to hold

Must hold after one month

and before 6 months from

date of obtaining the

Certificate of

Commencement of Business

Provisions regarding

Directors

No Central Govt approval

for appointing and

reappointing of MD or

Whole Time director

Central Govt approval is must

for appointing and re-

appointing of MD or Whole

Time Director

Managerial

Remuneration

No restriction on

payement of

remuneration to Directors

& MD's

Remuneration is fixed at 11 %

of Net Profits

Index of Members Need not maintain Indexof Members

Must maintain Index of

Members if no. of Members



PRIVILEGES OF A PRIVATE COMPANY

Section Privileges58A Amount received from its Shareholders by a private company is not

included in the Meaning of Deposit. If the Depositor ceases to be a

Shareholder, the deposits made by him cease to qualify for

exemption from the date of such cessation

77(2 & 3) There is no prohibition on a Pvt. Co., which is not a subsidiary of a

Public Company, to provide Financial Assistance to anyone for

purchasing or subscribing for its own shares or of its Holding

Company.

81 A Pvt. Co. can issue further shares in any manner; i.e. Rights

Shares to the existing shareholders need not be offered.

85 to 90 The provisions of these Sections requiring that there should be only

two kinds of Share Capital and that Voting Rights should be

proportional to the Capital paid up and prohibiting and terminating

disproportionately excessive voting rights are not made applicable

to a Private Company which is not Subsidiary of a Public Company



PRIVILEGES …..Contd

Sec. Privileges111 (13) The Right of Appeal to the Company Law Board against rejection of

a Transfer of Shares is not available as long as the Private Company

is only enforcing the provisions of its Articles in rejecting a

Particular Transfer

170 to

186

The provisions of these sections relating to General Meetings do not

apply to such a Private Company to the extent to which theCompany makes its own Provisions by its Articles

192A Passing of Resolution by Postal Ballot not relevant for Pvt. Co.

220 P & L A/c. of a Pvt. Co. is not open for Inspection by Public.

224(1B) The Ceiling, on number of companies an Auditor can Audit, does

not include Audit of Pvt. Cos.252 &

252A

Minimum Directors for Pvt. Co. is 2 (two) against 3 (three) in case

of Public Co. Requirement of Independent Directors or Small

Shareholders’ Directors not applicable to Pvt. Co.

255 Retirement of Directors by Rotation not Mandatory.



PRIVILEGES …..Contd Sec. Privileges

256 A Pvt. Co. need not adopt the procedure relating to Appointment,

Retirement, Re-appointment of Directors etc. applicable to a Public

Company.

257 The provision requiring the giving of 14 days notice by New

Candidates seeking Election as Directors and Deposit of certain

amount (Rs. 500) are not mandatory for Pvt. Cos.259 Central Government approval for increasing number of Directors

beyond the permissible maximum (presently 12) not required.

262 The provision relating to manner of filling casual vacancy among

Directors and the Duration of the Period of office of those so

appointed do not apply to Pvt. Co.

263(1) Appointment of two or more persons as Directors by a Single

Resolution can be done by Pvt. Co.

264 No requirement of filing consent by the Directors to be filed with

the Registrar to act as a Director.

266(5) Restrictions on appointment of Director and subscription to

qualification shares not applicable to Pvt. Co.




268, 269 Central Government approval for amendment relating to

appointment/reappointment of a whole-time director/ director not

liable to retire by rotation.

270-273 Requirements of qualification shares holding by directors the time

within which the qualification shares to be acquired and filing of a

declaration by each director of the qualification shares held, is notapplicable to Pvt. Co.

274(1)(g) The disqualification u/s. 274(1) clause (g) does not include

directorships of Pvt. Co..

275 to 279 The Directorships of Pvt. Cos. not to be considered for the limit on

no. of companies a person can be director.

292A Provisions relating to formation of Audit Committee not applicable.

293 Restrictions on certain powers of Board of directors regarding

selling, leasing, remitting or giving time for payments of debts,

investing or borrowing moneys, or contributing to charities other

than for political purpose are not applicable to Pvt. Co.




295 Restriction on loans to directors/relatives etc. does not apply to Pvt.

Co.

300 No restriction on interested directors from participating in the

proceedings of the Board and exercising their votes.

316, 317 No restriction on period of appointment of managing

director/manager for more than 5 years at a time.349, 350 Provision relating to the determination of net profits and

ascertainment of depreciation shall not apply.

372A No restrictions on giving loans or guarantees to other companies or

on making investment in the shares of the other companies.

386, 388 No. of companies on which a person may be appointed manager,

the remuneration of a manager and the application of sections 269,

310 to 312 and 317 in relation to managers do not apply.

409(3) Powers given to the Central Government to prevent change in the

Board of directors not applicable to Pvt. Co.

416(1) Restrictions on Contract by agents of the company in which the

company is the undisclosed principal shall not apply.



DOCTRINE OF CONSTRUCTIVE NOTICE

Every person dealing with the company was treated as havingthe knowledge of the contents of the memorandum. (Public

documents of the company).

It seeks to protect the company against the outsider.

Imputation of knowledge –whether the party concerned hasactual knowledge or not.

A member of the company can sue for an injunction to

restrain the company or its directors from doing an ultra vires

act. All contracts made by the company for an ultra vires purpose

are void and can not be ratified and validated by any kind of

resolution passed by the general meeting of the company or

even with the unanimous consent of its members.



PROSPECTUS

‘Prospectus’ is the basic document for raising funds from the

public.

‘Prospectus’ means any document described or issued asprospectus and includes any Notice, Circular, Advertisement

inviting deposits or offers from the public for the

subscription or purchasing any shares in , or debentures of

the company.

Thus prospectus is a general invitation to the public to

subscribe to the capital of the company on the conditions

specified in the application from



MEMORENDUM OF ASSOCIATION (MOA)

The first step in the formation of the company is to

prepare memorandum of association. it is one of the

documents which has to be filed with registrar of the

companies at the time of incorporation of a company.

MOA of a company is its character and defines the

limitation of the power of the company . MOA contains

the fundamental condition upon which the company is

allowed to incorporated.

The purpose of MOA is to enable the Shareholders,

creditors and those who deal with the company to know

what is permitted range of enterprise.



IMPORTANCE OF MOA

It defines the rights and liabilities of the members.

It shows the capital structure of the company

It shows the object of the company It specifies the state in which the registered office of the

company is situated.

It shows the constitution of the company

It specify the conditions under which the company hasbeen incorporated.



ARTICLES OF ASSOCIATION (AOA)



CONTENTS OF AOA

Rights of different classes of shareholder.

Use of common seal of the company.

Different classes of shares and their right.

Appointment , powers, duties, salary of MD, manager,and secretary.

Borrowing power of directors.

Voting rights of member .

Board meetings and proceedings.

Winding up company.



Case – 1 ABDUL AZIZ BIN ATAN & 87 ORS V LADANG RENGO MALAY ESTATE SDN BHD (1985) 2 MLJ 165.

Facts

All the shareholders of the company sold and transferred their entire

share holdings to a certain buyer Issue

The court had to determine whether a change of employer took place

Held

An incorporated company is a legal person separate and distinct fromits shareholders. The company, from the date of incorporation, hasperpetual succession and did not change its identity or personality even though the entire share holding of the company changed hands.



Case – 2LEE V LEE’S AIR FARMING LTD (1961) AC 12

Fact

Lee who was a pilot who conducted an aerial top-dressing business, formed acompany to conduct the business. Lee hold 2999 shares of the 3000 shares inthe company. The remaining one share was taken by his solicitor as nomineefor Lee. Under the articles of association, Lee was governing director with very

wide powers. Workers’ compensation insurance was taken out, naming Lee asan employee. Lee was killed when his aeroplane crashed while engaged inaerial top-dressing.

Issue

His widow made a claim for payment under the Workers’ Compensation Act 1922. Her claim was initially rejected on the ground that as Lee had full controlof his company he could not be a "worker" within the meaning of the Act."Worker’ was defined under the Act as a person "who has entered onto or works under a contract of service ... with an employer."

Held By Privy Council

The company was a separate legal entity distinct from its founder, Lee

Lee could enter into a contract of employment with him



Case – 3

MACAURA v NORTHERN ASSURANCE CO LTD (1925) AC 619 Fact

Macaura own land on which stood timber. He sold the land and timber to acompany he formed and received as consideration all the fully paid shares.The company carried the business of felling and milling timber. A firedestroyed all timber which had been felled. Macaura had earlier insured the

timber against loss of by fire in his own name. He had not transferred theinsurance policy to the company.

Issue

When Macaura made a claim his insurers refused to pay arguing that he hadno insurable interest in the timber. Only persons with a legal or equitable

interest in property are regarded as having interest in it. Held By House Of Lords

The insurers were not liable. Only Macaura’s company, as owner of thetimber, which had the requisite insurable interest in it. Only the company,and not Macaura, could insure its property against loss or damage.Shareholders have no legal or equitable interest in their company’s property.



Case 4

Ackruti v/s MoF (GOI)

Fact

The Government is likely to initiate prosecution against Mumbai-based realty

firm Ackruti City Ltd in a case involving loans given to other companies

Issue

Section 295 deals with loans given to directors and other companies. It is

alleged that Ackruti City gave loans to other companies in which its directors

were interested, without seeking the required approvals from the central

government.

The allegations follow an inspection report of the Registrar of Companies(RoC), an arm of the corporate affairs ministry that oversees registered

companies in India. The ministry had ordered an inspection into Ackruti’s

books of accounts in February. The inspection was based on the RoC’s

preliminary findings that there were prima facie violations in Ackruti’s balance

sheets till the period to March 2008.

Ackruti to face action for company law violations



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The Company's Act 1956,Company Law 1

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