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Introduction to Companies Act1956
Introduction
Definition of Company.
Features of company Types of Companies
Lifting the Corporate Veil
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Short Title and extent.
INTRODUCTION:
This Act may be called the Companies
Act, 1956. It is a Business Law.
It is a commercial Law & its roots are seen
in English Company Law. Many provisions
of it are incorporated in this Indian
Companies Act of 1956.
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Applicability of Act
Being a Central Government Act it isapplicable to all the states of Indiaincluding Union Territories.
The provisions of this Act are applicable toall the class of companies in India.
The provisions are also applicable to all
the companies incorporated out of Indiabut they have established places ofbusiness in India.
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Objectives :
To conduct the business smoothly with the
help of limited liabilities & with limited
shares.
To serve the community by providing
Quality products & services at reasonable
cost.
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To earn the profit & distribute it among all
the investors & Board of Directors in
proportionate with their investments.
To grow the business with the help of
share capital & Ideas so that the part of it
is contributed towards national prosperity.
To create an employment opportunities for
qualified and eligible person towards CSR.
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Definition
General Definitions: 1)A Company is aform of business organization in which thefunds of a large number of investors are
managed by a few persons for thepurpose of earning profits which areshared by all the investors.
2)It is an association of persons formed toachieve the common goal set by theirBoard of Directors.
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As percompanies Act 1956.(Sec3(1)(i))
It means a business organization formedas per the companies Act 1956to achieve
following objectives a) To encourage the investors to do their
investments.
b) To ensure proper Administration c) To prevent Malpractices
d) To allow for investigation if required.
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Essential Characteristics/Features
of a Company.
Registration- Should be registered under
the Companies Act.
Distinct Person- Separate legal entity.
Perpetual succession- Never dies.
Easy transfer of shares.
Limited liability. Artificial person but not a citizen.
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Continued
Common Seal.
Capacity to sue and be sued.
Share holders are actual owners ofCompany
Number of persons are as per MOA
Separate Property
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Separation of ownership and Management
Rigidity of objectives
Authority to raise share capital in large scale.
To comply Statutory Requirements on
regular basis
Company is a Corporate Body
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Types of Companies
Companies limitedby guarantee.
RegisteredCompanies
StatutoryCompanies
Royal Charter/Chartered Companies
Private CompaniesPublic Companies
Companies limitedby shares.
On basis of Liability
Unlimited
companies
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Types of Companies
A) On the basis of Liability
B) On the basis of Incorporation
C) On the basis of Ownership D) Government Companies
E) On the basis of Jurisdiction
F) On the basis of Control &Shareholding G) One Man Company
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A) On the basis of Liability
1)Limited by shares
2)Limited by Guarantee
3)Unlimited Company
B) On the basis of Incorporation
1)Chartered Company
2)Statutory Company
3)Registered Company
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C) On the basis of Ownership
1)Private Limited Company
2) Public Limited Company D) Government Companies
E) On the basis of Jurisdiction
1) Foreign Company 2) MNC Company
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F) On the basis of Control &
Shareholding
1) Holding Company
2) Subsidiary Company
G) One Man Company
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A) On the basis of Liability
a ) Companies Limited by shares :companies limited by shares are the mostcommonly found companies.
Section 12 (2) (a) implies that where theliability of the shareholders of a companyis limited to the extent of the unpaidamount on the shares held by them, thecompany is known as a company limitedby shares.
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In such companies, each share has a
fixed nominal or face value which the
shareholder is required to pay either at a
time or in various installments.Whatsoever may be the liabilities of a
company, shareholders are not bound to
pay anything more than the face value ofthe shares held by them.
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Thus, the liability of each of the
shareholders of such a company is always
limited to the extent of the amount unpaid
on his shares.
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b) Companies Limited by
Guarantee:-
Words Companies limited by Guarantee
implies that the liability of members of
such company is always limited to a fixed
amount agreed by its members to
contribute towards the assets of thecompany.
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Section 12 (2) (b) states that, a company
having the liability of its members limited
by the memorandum to such amount as
the members may respectively undertakeby the memorandum to contribute to the
assets of the company in any event of its
being wound up, such company in this Actis termed as a company limited by
guarantee
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c. Unlimited companies: it is obviousthat where the liability of the members of acompany is unlimited, it is called as an
unlimited company. Section 12 providesthat any seven or more persons in thecase of a public company and 2 or morepersons in the case of a private limited
company can have such liability. Anycompany registered without limited liabilityis known as an unlimited company.
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The liability of members of such company is
unlimited like an ordinary partnership firm
and every member of such company is
liable for debts of the company inproportion to his interest in the company.
An unlimited company may have or may
not have a share capital. But if it has ashare capital, it may be a public company
or a private company
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B) Mode of Incorporation
a) chartered companies : chartered
companies are also known as Royal
charter companies. Such companies are
incorporated under the Royal (special)
charter granted by the King or the Queen.
Such companies as given exclusivepowers rights and privileges under the
Royal charter.
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They have to function in accordance withthe terms and conditions of the Royal
charter. The East India company, /bankof England, The chartered bank ofAustralia are some of the examples ofchartered or Royal companies. However,
such companies find no place in Indiaafter independence, since there nomonarchy in India now.
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b) Statutory companies :- Companies
which are created by special Acts of
Legislature are known as statutory
companies. A statutory company can bedefined as a company which is
incorporated by a special Act passed by
whether the Central Legislature or stateLegislature and such a company enjoys
certain powers,
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rights, privileges as laid down in the Act.
Therefore such companies do not require
to have a Memorandum of Association.
Companies Act 1956 is applicable to thestatutory companies. Eg.Reserve Bank of
India.
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c) Registered companies Under the Act :
Registered companies are those
companies which are registered or
incorporated with the Registrar ofcompanies as per the provisions of the
companies act. At present, in India, almost
all companies are registered under thecompanies Act of 1956.
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C) On the Basis of ownership
A) Private company : Section 3 (i) (iii) definesa private company as follows-
Private company means a company which byits Articles
a) Restricts the rights to transfer its shares, ifany,
b) Limits the number of its members to fifty andc) Not includes the persons who are inemployment of the company;
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d) Persons, who having been formerly in theemployment of the company, were members of thecompany while in that employment and have continuedto be members after the employment ceased; and
e) prohibits any invitation to the public to subscribe forany shares in or debentures of the company.
Thus, the three features i.e. restriction on right totransfer, limit on the number of members and invitationto the public to subscribe as mentioned above are the
mandatory provisions of a private limited company wordsPrivate Limited are required to be used at the end ofthe name of every company.
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Public company ; section 3 (1)(iv) lays
down that. Public company means a
company which is not a private company.
Thus it can be said that a public companyis a company which by its Articles, does
not restricts the right to transfer its shares,
if any, does not limit the number of itsmembers and further does not
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prohibit any invitation to the public to
subscribe for any shares in or debentures
of the company. Any seven or more
persons can come together and join handsto form a public company. However, there
is no restriction on the maximum number
of members
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Private company& Public company Differences:-
1.) A private company cannot have less than twomembers and more than fifty members
The minimum number of persons required to form a
public company is seven. There is no restriction onthe maximum numbers of members in a publiccompany.
2.) A private company cannot invite public tosubscribe its share capital neither it can invite thepeople to buy its debentures
A public company invites the public to subscribeto share capital or to purchase the debentures.
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3).In a private company, the right to transfer itsshares is restricted by its Articles. Thus, if aprivate company has a share capital, it imposescertain restrictions on the right of its members to
transfer the shares of the company they hold In a public company, its shares are freelytransferable.
4). A private company has to add the words
Private Limited at the end of its name. A Public company has to use the wordLimited at the end of its name.
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5). A private company enjoys certain privilegesi.e. exemption from certain provisions of thecompanies Act. Of 1956.
A Public company does not enjoy any suchprivileges.
6).Directors of a private company need not file
their consent with the Registrar to Act as directoror sign an undertaking the take up qualificationshares.
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Directors of a Public company have to file theirconsent with the Registrar to Act as director or signan undertaking to take up qualification shares.
7). Legal controls on private companies are less.
Legal controls, restrictions on public companiesare more and strict.
8) In private companies, restrictions on theremuneration of Director's are far less.
In public companies, there are restrictions on theremuneration of Directors. The remuneration ofDirectors cannot be more than 11 %of net profits ofthe company.
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9). Directors are allowed to borrow fromthe private companies
Directors cannot borrow from the public
companies10).In the case of a private company,unless the articles of the company provide
for a large number, two memberspersonally present are quorum for ameeting of the company.
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In the case of a public company, unless theArticles of the company provide for a largenumber, five members personally present arequorum for a meeting of the company. (section
174 (1)). 11) A private company is not required to file a
prospectus or a statement in lieu of prospectuswith the registrar [section 70 (3)].
A public company has to file a prospectus ora statement in lieu of prospectus with theRegistrar.
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D) Government Company
Section 617 of the companies Act of 1956
defines government company as follows
i) For the purpose of this Act Government
company means any company in which
more than fifty one percent of the paid up
share capital is held by the central
government, or by any State Government,or Governments or partly by others.
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The Central Government and partly by one
or more state governments and includes a
company which is a subsidiary of a
Government company as thus defined InIndia, there are many companies in which
100% paid-up share capital or more than
51% of the paid up share capital isprovided by the Central or State
Government.
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E) Based on the Jurisdiction of
functioning
The boundaries of the country wherein it
is registered, such a company is called a
multinational or transnational company
Foreign company :- , It can be said that
a foreign company is one which is
incorporated outside India but has a
place of business in India.
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(b) MNC:Companies incorporated outside
India before/after the commencement of
this act at many places, established a
place of business within India andcontinue their business at established
places within India at the commencement
of this Act and after.
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F) On the basis of control and/or
share holding
a) Holding company :- section 4 (4) of thecompanies Act of 1956 implies that acompany is deemed to be holding
company of another if that other is itssubsidiary. Thus, a holding company canbe defined as a company which has acontrol over a subsidiary company through
anyone of the several methods asexplainedinsection4(1).
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b) Subsidiary company :- A company is a
subsidiary of a holding company if a holding
company controls the majority composition of its
board of directors, having an object to controlthe management of the subsidiary or that other
company i.e. holding company holds the
majority of its shares or the holding companys
subsidiary has its own subsidiary, it becomes thesubsidiary of the first mentioned company
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G) Other types of companies:
One Man company :- One man company can
be a public or a private company, but it is usually
a private company wherein one man holds
practically the whole of the share capital of thecompany. In other words, it can be said that
where a single man holds almost all the shares
of a company such a company is called as one
man company. If one man company satisfies allthe conditions and requirements of incorporation
as laid down in the companies Act, it becomes a
legal personality.
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Generally for formation of one man company inorder to meet the statutory requirements, certain
persons are invited to become members who
may hold a few shares. Such dummy members
are usually nominees of the main shareholder
who is the de-facto owner of the company and
carries on the business with Limited Liability e.g.
X and Y register their company as a privatecompany with a share capital of Rs 7,00,000
divided into 70000 shares of Rs. 10/- each. X
holds 69,999 shares whileY holds only 1 share.
This is nothing but an example of one man Co.
Lifti OR Pi i th
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Lifting OR Piercing the
Corporate Veil:
A company is distinct from its members. Itis a separate legal entity (Salomon v.Salomon and Co. Ltd- (1897) A.C. 22).
There is thus a veil between a companyand its members keeping them bothseparate from each other. However,sometimes it becomes necessary to lift
this veil, disregard the distinct corporateentity of the company and find out therealities of the company.
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The Court may investigate the real affairs,ownership etc., of the company. This is
called Lifting or piercing the corporate veil
In other words the Court investigates into
the true state of affairs of the company.
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It has been observed that though acorporation is a distinct entity, yet in
reality it is an association of persons whoare in fact the beneficial owners of allthe corporate property.
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The corporate veil is, therefore, lifted by
the Court when it ignores the company
and concerns itself directly with the
members or managers. It is largely in thediscretion of the Courts and will depend
upon the underlying social, economic and
moral factors as they operate in andthrough the corporation.
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Situations when Corporate Veil is lifted
A) To investigate the relationship betweenthe holding company and subsidiary
company.B) To investigate the number and names of
members of the company.
C) To investigate the true ownership ofshares and controlling power over thecompany.
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continue
D) To investigate lawful objects of the company.
E) To investigate mismanagement and oppressionby the majority.
F) To investigate the character of a companywhere it is trading with an alien enemy orpersons managing the affairs of the companyare under the control of enemies or areresiding in enemy country.
G) To investigate into the affairs where thereexists a tendency to create monopoly.
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continue
H) To investigate the company affairs whereit is used for tax evasion or to circumventtax obligation.
I) To investigate if the company is acting asan agent for its shareholders.
J) To investigate the affairs, where it isformed for fraudulent purpose, to defectand circumvent the law or to defraud itscreditors or to avoid valid obligation.
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END OF CHAPTER
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