companies’ act 1956

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Companies’ Act 1956 Arun Kumar Davay

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Companies’ Act 1956. Arun Kumar Davay. Indian companies Act 1956. According to section 3(1) (i) of The Companies Act, 1956, “Company means a company formed and registered under this Act or an existing company”. - PowerPoint PPT Presentation

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Page 1: Companies’ Act 1956

Companies’ Act 1956

Arun Kumar Davay

Page 2: Companies’ Act 1956
Page 3: Companies’ Act 1956

Meaning of the Company

• According to section 3(1) (i) of The Companies Act, 1956, “Company means a company formed and registered under this Act or an existing company”.

• A "Company" may be defined as a voluntary association of persons who have come together to carry on some business and sharing the profits, there from.

• It is an artificial person created by law, formed for the purpose of business, registered under law having an independent legal entity, a distinctive name, common seal and perpetual succession

Company - “ an association of many persons who contribute money or money’s worth to a common stock and employ it in some common trade or business (for common purpose) and who share the profit or loss arising there from”

Page 4: Companies’ Act 1956

Characteristics of a Company

1. Incorporated Association2. An artificial person created by law 3. Separate Legal Entity:: 4. Perpetual Existence /Succession5. Common Seal6. Limited Liability : By Shares, By Guarantee7. Free Transferability of shares 8. One Share-One Vote 9. Capacity to sue and being sued 10. Separate Property11. Separate Management

Page 5: Companies’ Act 1956

Merits of a Company

• i. Collection of huge financial resources• ii. Limited liability• iii. Free transferability of shares• iv. Durability and stability• v. Growth and expansion• vi. Efficient management• vii. Public confidence• viii. Social benefits

– a. Democratization of management– b. Dispersal of ownership– c. Assumption of social

responsibilities

Page 6: Companies’ Act 1956

Limitations of Company Organization

• i. Lengthy and expensive legal procedures

• ii. Excessive government regulations• iii. Lack of incentive• iv. Delay in decision making• v. Conflict of interest• vi. Oligarchic management• vii. Speculation• viii. Growth of monopolistic tendencies• ix. Influence government decisions

Page 7: Companies’ Act 1956

Lifting the Corporate Veil

• Misrepresentation• Investigations• Fradulent Conduct• Protection of Revenue• Economic Offences• Improper Uses• Mere Sham or Fly by Night

Page 8: Companies’ Act 1956

Company Vs Partnership

Company Partnership

Regulated under Companies Act 1956

Partnership Act 1932

Exits after registration under Co.Act 1956

Registration not mandatory

Managed by Directors, Board of Directors

Every partner should take part in the management

Property and rights is nontransferable to shareholders

Transferable to any or all partners

Page 9: Companies’ Act 1956

Shares are transferable when the transferee becomes the member

Shares cannot be transferred without the consent of all partners

Shareholders is not the agent…has no power

Each partner is an agent…has power

Min-2Max- banking 10 others 20

Bound by law and audited annually

No statutory provisions

Only it can be dissolved (Wound by provisions of companies Act 1956)

Dissolved by death/ insolvency of partner or wound if it is for fixed period.

Members

Public Pvt

Min 7 2

Max No limit 50

Company Vs Partnership

Page 10: Companies’ Act 1956

Types of Companies

• i. Private Company• Ii. Public Company• iii. Government Company• iv. Holding and Subsidiary companies • V. Foreign Companies

Page 11: Companies’ Act 1956

Types of Companies

• 1. Basis of incorporation: – Chartered company :The royal prerogative has

power to create a corporation by the grant of a charter to persons assenting to be incorporated. E.g. Bank of England, East India Company

– Statutory Company : These are companies created by a special act of the Legislature

E.g. Reserve Bank of India, State Bank of India, Life Insurance Corporation -- Registered or Incorporated Company: These are companies which are formed and registered under the companies Act, 1956.

• Private Company • Public Company

Page 12: Companies’ Act 1956

2.Based on Liability– a company limited by shares– a company limited by guarantee– an unlimited company

3. On the basis of Number of members

1) Private Limited Company

2) Public Limited Company

Page 13: Companies’ Act 1956

• 4. Based on Control – Government Company – Foreign Company – Holding and Subsidiary Company – Multi National Company

Page 14: Companies’ Act 1956

Government Company

• Features of Government Company• i. Registered under Indian Companies

Act• ii. Government holding of majority

shares• iii. Board of Directors representing the

Government• iv. Relatively free from Government

procedures• v. Overall control of the Government

Page 15: Companies’ Act 1956

Difference Private Companies Public Companies

Min no. of members

Minimum number of members in private company is two

Minimum number of members in public company is seven

Max.no. of members

Maximum number of members in private company is 50

No maximum limit of membership in public companies

Number of directors

Minimum number of directors is two.

Minimum number of directors is three

Issue of shares to public

Not allowed to issue public invitation for investing in the company

Public invitation of prospectus and public issue of shares, debentures and deposits allowed.

Transferability of shares

Private co restricts the transfer of shares. The shares cannot be listed in stock exchanges

A public company cannot put any restriction on the transfer of shares. They’re freely transferable

Minimum Capital

The minimum paid up capital for a private company is Rs.100,000.

The minimum paid up capital of a public company is Rs.500,000

Holding director ship

Directorships held in private companies are excluded

A person cannot hold directorship in more than 20 public companies

Page 16: Companies’ Act 1956

I. Promotion

• Meaning of Promotion• Promotion is the first stage in the

formation of a company. Promotion involves identification of a business opportunity or idea, analysis of its prospects and taking steps in implement it through the formation of a Company.

• A company may have more than one promoter. The promoter may be an individual, firm, an association of persons or a body corporate.

Page 17: Companies’ Act 1956

Functions of a Promoter

1. To Conceive Business Idea2. To make Detailed Investigation 3. To Organize the Resources 4. To Obtain the Consent of Persons

Willing to Act as First Directors 5. To Decide about the Name of the

Company 6. To Get the Necessary Documents

Prepared 7. To Arrange for Filling of the Necessary

Documents with the Registrar

Page 18: Companies’ Act 1956

II. Incorporation by Registration 1) Memorandum of Association: Document that governs the

relationship between the company and the outside world a) Name clause: Governed by “ Emblems and Names Act

1950”Seal to be present on all business letters, notices etc

b) Domicile clause: Ascertains domicile and nationality of a company

c) Objects clause: Explains the utilization of shareholders funds

Enables the person dealing with the company to ascertain its powers

d) Liability clause: It states the liability of the members of the

company is limited e) Capital clause: It must state the authorized of nominal

share capital f) Association or Subscription Clause: It specifies the

willingness of the subscribers to associate and form a company

Violation of MoA: “Doctrine of the ultra-vires”

Page 19: Companies’ Act 1956

Alteration of the Memorandum• Change of name• Change of registered office• Change of the Objects clause To carry on its business more economically To attain its main object by new or improved

means To enlarge or change the local area of its operation To restrict or to abandon any of the objects specified

in the memorandumTo sell or dispose of the whole or any part of the

undertaking of the company To amalgamate with any other company or body of

persons

Page 20: Companies’ Act 1956

2) Articles of Association • The Articles of Association (AA) contain

the rules and regulations of the internal management of the company.

• 1.       Powers, duties, rights and liabilities of Directors and Members

• 2.       Rules for Meetings of the Company • 3.       Dividends • 4.       Borrowing powers of the company • 5.       Calls on shares • 6.       Transfer & transmission of shares • 7.       Forfeiture of shares • 8.       Voting powers of members, etc

Page 21: Companies’ Act 1956

Contents of Articles1. The business of the company;2. The amount of capital issued and the

classes of shares into which the capital is divided, the increase and reduction of share capital;

3. The rights of each class of shareholders and the procedure for variation of their rights;

4. The execution or adoption of a preliminary agreement, if any;

5. The allotment of shares; calls and forfeiture of shares for non-payment of calls;

6. Transfer and transmission of shares;

Page 22: Companies’ Act 1956

Contents of Articles

7. Company’s lien on shares;8. Exercise of borrowing powers including

issue of debentures;9. General meetings, notices, quorum,

proxy, poll, voting, resolution, minutes;10.Number, appointment and powers of

directors;11.Dividends – interim and final – and

general reserves;12.Accounts and audit;13.Keeping of books – both statutory and

others.

Page 23: Companies’ Act 1956

Articles of AssociationMeaning and purpose:

• Articles of Association of a company and its bye laws are regulations which govern the management of its internal affairs and the conduct of its business.

• They define the duties, rights, powers and authority of the shareholders and the directors in their respective capacities and of the company is to be carried out.

• They are framed with the object of carrying out the aims & objects as set out in the memorandum of association.

Page 24: Companies’ Act 1956

Articles of Association• The articles of association of a company

have a contractual force between the members inter se in relation to their rights as such members.

• Articles cannot supersede the objects as setout in the memorandum of association.

• The articles must be: (i) printed, (ii) divided into paragraphs, numbered consecutively,(iii) signed by subscribers to the memorandum in the presence of at least one witness who shall attest the signatures. Also, articles are to be stamped with requisite stamp and filed along with the memorandum.

Page 25: Companies’ Act 1956

Distinction between Memorandum of Association & Articles of Association

Memorandum of Association

Articles of Association

1.It is the charter of the company

indicating the nature of its capital. It also

defines the company’s

relationship with outside world.

1.They are the regulations for the

internal management of the company & are

subsidiary to the memorandum

2.It defines the scope of the activities of

the company, or the area beyond which the actions of the

company cannot go.

2.They are the rules for carrying out the

objects of the company as set out in

the memorandum

Page 26: Companies’ Act 1956

Distinction between Memorandum of Association & Articles of Association

3.It, being the charter of the company, is the supreme document

3.They are subordinate to the memorandum. If there is a conflict between the articles & the memorandum, the latter prevails.

4.Every company must have its own memorandum

4.A company limited by shares need not have articles of its own. In such a case, Table A applies of sch I, sec 26.

5.Any act of the company which is ultra vires the memorandum is wholly void & cannot be ratified even by the whole body of shareholders

5.Any act of the company which is ultra vires the articles (but in intra vires the memorandum) can be confirmed by the shareholders

Page 27: Companies’ Act 1956

Inspection and copies of the Articles

• A company shall, on being so required by a member, send to him within seven days of the requirement, on payment of five rupees, a copy of the articles.

• if a company makes default, the company and every officer of the company, who is in default, shall be punishable with fine up to Rs 5000 (s.39).

Page 28: Companies’ Act 1956

Alteration of Articles.• Section 31 provides that subject to

the provisions of the Act and to the conditions contained in its memorandum, a company may, by special resolution alter or add to its articles must be filed with the Registrar within 30 days of the passing of the special resolution.

Page 29: Companies’ Act 1956

Limitation on power to alter Articles

1. Must not exceed the powers given by the memorandum or conflict with the other provisions of the memorandum.

2. Must not be inconsistent with any provision of the companies Act or any other statue.

3. Must not include anything which is illegal, or opposed to public policy or unlawful.

4. The alteration must be bona fide for the benefit of the company as a whole. The alteration will not be bad merely because it inflicts hardship on an individual shareholder.

Page 30: Companies’ Act 1956

Limitation on power to alter Articles

5. There cannot be alteration of the articles so as to compel the existing members to take or subscribe for more shares or in any way to contribute to the share capital, unless they given their consent in writing

6. The amended regulation in the Articles of Association cannot operate retrospectively, but only from the date of amendment.

Page 31: Companies’ Act 1956

Doctrine of Constructive Notice

• Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum & the Articles of Association.

• These documents, on registration with the Registrar, assume the character of public documents. This is known as constructive notice of Memorandum and Articles

Page 32: Companies’ Act 1956

Doctrine of Indoor Management

There is one limitation to the doctrine of constructive notice of the Memorandum & the Articles of company.

The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned, everything has been regularly done.

They are presumed to have read these documents & to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum & the Articles.

They can presume that all in being done regularly. This limitation of the doctrine of constructive notice is known as the “doctrine of indoor management”.

Page 33: Companies’ Act 1956

• III. Registration of the Company

IV. Certificate of Incorporation • V. Commencement of Business

Prospectus• Statement In Lieu of Prospectus

Page 34: Companies’ Act 1956

Types of shares

• 1.Equity shares• 2.Preference Shares

• Types of Preference Shares

1.Cumulative or Non-cumulative • 2.Redeemable and Non-

Redeemable • 3.Participating Preference Share or

non-participating preference shares

Page 35: Companies’ Act 1956

S.No

Basis of distinction 

Preference share Equity Share

1. Voting rights

The holder of these shares do not enjoy any voting right except at their class meeting

Generally equity share holders enjoy voting rights.

2. Payment of dividend

The holders of these shares have the preference right as to the payment of dividend

Equity share holders get the dividend, after the payment to preference share holders.

3. Repayment of capital

The holders of these shares have the preference right as to the repayment of preference share capital 

Repayment of equity share capital is made after making repayment to profaner share holder.

4. Rate of dividend 

The rate of dividend is fixed

The rate of dividend may vary year to year

5. Convertibility

Preference shares can be converted into equity shares

The equity shares are non convertible

6. Redemption 

The preference are redeemable during the life time of the company

The equity shares are not redeemable during the life time of the company

Page 36: Companies’ Act 1956

• Prospectus – Red Herring Prospectus

• Buy-back of shares • Rights Issue • Issue of Bonus shares • Sweat Equity and Employee

Stock Options • Share certificate

Page 37: Companies’ Act 1956

• Forfeiture of Shares• Demat Accounts• Listing and Delisting• Shareholder and Stakeholder• Quorum• Proxy• NBFCs

Page 38: Companies’ Act 1956

Kinds of Meetings

• Statutory Meeting• Annual General Body Meeting• Extraordinary General Body Meeting• Board Meetings• Meetings of Creditors• Meetings of Debenture Holders• Meetings of the Committees of the

Board

Page 39: Companies’ Act 1956
Page 40: Companies’ Act 1956

Meetings of Shareholders.

• Statutory Meeting (Section 165)• Statutory meeting is the first meeting of the

shareholders of a company. This meeting is held only once in the life time of the company.

• Objectives: • To approve the preliminary contracts specified in the

prospectus of the company with modification if any.• To discuss the success of floating the project of the

company.• Provisions:• 1. Time: Every company , shall , within a period of

not less than ONE month and not more than SIX months from the date on which the company is entitled to commence the business, hold the Statutory meeting

Page 41: Companies’ Act 1956

2. Notice: The company must give notice to its member at least 21 clear days before holding the statutory meeting stating time, date and place of meeting.

3. Statutory Report: The Directors of the co., are required to send a report called statutory report to every member of the company along with the notice of the meeting at least 21 days before the date of the meeting.

CONTENTS: 1. Allotment of Shares: The total number of share allotted,

distinguishing fully paid or partly paid up and the extent to which they are so paid up, shares issued otherwise than for cash.

2. Cash Received: Total amount of cash received by the company in respect of all the shares allotted.

3. Abstract of Receipt and Payment Account4. Names, addresses and occupations of the company’s

Directors, Auditors and all other managerial personnel.5. To approve the preliminary contracts specified in the

prospectus of the company with modification if any.6. The extent to which the Underwriting Contracts has been

carried out and the reasons thereof.7. The calls in arrears, if any, due from any Director and the

Managers of the co.8. Commission and brokerage paid to any Director or Manager

on the issue of shares or debentures of the company.

Page 42: Companies’ Act 1956

4) Certification of Statutory report: By not less than two directors , one of whom shall be the Managing Director. The Auditor of the co shall certify the particulars regarding the issue of shares, receipts and payment etc. And a copy of certified statutory report must be sent to the Registrar of company immediately after it is sent to the members of the company.

5. Penalty: Maximum of Rs. 5000/-

Page 43: Companies’ Act 1956

Quorum For A Meeting

• Dictionary – least number of members required to carry on a meeting or for doing business.

• Minimum number of members required in order to consider a meeting valid.

• Generally, Articles provide for larger quorum. But not smaller than statutory minimum ,i.e., Five members personally present in case of Public Limited and two for a Private limited.

Page 44: Companies’ Act 1956

Resolutions Questions which generally come for

consideration at the general meeting of a company are presented in the form of proposals called Motions.

A motion proposed by the chairman of the meeting/any other member . After discussions put to vote, final result accepted becomes Resolutions.

Kinds of resolutions: a)Ordinary resolution[sec.189(1)].., b)Special resolution[sec189(2)].., c)Resolutions requiring special notice[sec190].

Page 45: Companies’ Act 1956

When is an Ordinary resolution required?

Is passed in a general meeting by a simple majority of votes. Votes cast in person/by proxy , and required notice of resolution duly given.

It is required for.., matters concerning with Name Clause…, Capital Clause.., for appointing auditors and fixation of their remuneration…., appointing of first directors who are liable to retire by rotation….., for increasing/decreasing in number of directors….., appointment of managing director, removal of a director …, for winding up of a company voluntarily in certain events…, appointing and fixing of remuneration of liquidators

Page 46: Companies’ Act 1956

Special resolutions

• Is required for changing the place of registered office from one state to another.., for alterations of ‘Objects clause’…,omission/addition of ‘private’ from name.., alteration of Articles.., conversion of any portion uncalled capital into reserved capital..,

• for payment of interest out of capital.., applying to Central Govt for an inspector to investigate in company affairs.., for applying in court to wind up.,

• for authorizing a liquidator to accept shares as consideration for transfer of its assets.., and for disposal of books and papers of a company in voluntary winding up after completion of the process.

Page 47: Companies’ Act 1956

Resolutions requiring Special Notice

• Its only a different kind of ordinary resolutions of which notice of the intention to move a resolution has to be given.

• Notice shall be given not less than 14days before the meeting

• to the members as notice of meeting is given/by advertisement.

• Is required for appointment of an auditor other than retiring ones.., to re-appoint the retiring auditor…, for removal of a director before expiry of his period.., for appointment of a director in place of who is removed.

• Passing of Resolutions by Postal Ballot[sec.192-A]a listed company may conduct it by postal ballot. It has send a notice along with a draft resolution explaining the reasons, which should be returned within a period of 30days from the date of posting of the ballot.

Page 48: Companies’ Act 1956

•CLB – Company Law Board•RoC – Registrar of Companies•SEBI – Securities and Exchange

Board of India•Sensex, Nifty, BSE, NSE•Price Band•Minimum Subscription•Over Subscription

Page 49: Companies’ Act 1956

Features of Debentures

• The rates of interest payable on debentures is fixed.

• The rates of interest payable on the face value of the debentures.

• The debenture holders do not have any voting right to participate in management.

• The holder of debentures are paid interest before the payment of profit to preference share holder.

• Debentures may be convertible

Page 50: Companies’ Act 1956

Types of Debentures

• Bearer Debentures• Registered Debentures • Redeemable Debentures• Non-redeemable Debentures • Secured Debentures• Unsecured Debentures (Naked

Debentures)• Convertible Debentures• Non- convertible Debentures

Page 51: Companies’ Act 1956

S.No

Basis of distinction

Shares Debentures

1. Capital Vs Loan

A share is a part of owner' fund

A Debenture constitutes a loan

2. Status of holder

Shareholder are owners

Debenture holders are creditors

3. Right to vote Shares carry the right to vote

Debentures did not carry the right to vote

4. Charge on Assets

Shares are not secured against any charge

Non convertible debenture issued for a period exceeding 18 months are always have a charge

5. Return No fixed dividend payable despite profits

Fixed rate of interest payable even in the absence of profit

6. Repayment of capital

Principal amount is repayable after debenture holder

Principal amount is repayable before Preference share 

7. Reward for Investment 

Reward is the payment of dividend 

Reward is the payment of interest

8. Convertibility

Equity shares can not be convertible

Debentures can be convertible

9. Restriction on issue at discount 

Section 79, of the companies Act 1956, imposes certain restriction on issue of shares at discount

The is no restriction imposed on issue of debentures at discount.

10

Trust deed  Share Trust Deed is not required to be executed 

Debentures Trust Deed is required to be executed.

Page 52: Companies’ Act 1956

Kinds of Directors

• Appointment by First Directors• Appointment at General Body

Meetings• Appointment by Board Of Directors• Appointment by Financial Institutions• Appointment by Government

– Whole Time Directors and Independent Directors

Page 53: Companies’ Act 1956

Winding Up of Companies

Meaning of Winding Up: Process of putting an end to the life of a company.

In the course of such a dissolution, its assets are collected and debts are paid off.

Winding up is the prior stage and dissolution is the next.

Types of Winding Up:CompulsoryVoluntary (Members or Creditors)

Page 54: Companies’ Act 1956

Circumstances for Winding Up

• On passing of a special resolution.

• Failure to hold statutory meeting.

• Failure of the company to commence business.

• Reduction in number of members below minimum.

• Company acting against the interest of sovereignty and integrity of India.

• When sick industrial company is unable to make its networth exceed its accumulated losses within a reasonable time.

Page 55: Companies’ Act 1956

Winding Up of the Company

• Special Resolutions• Default in holding statutory

meeting• Failure to Commence Business• Reduction in Membership• Inability to Pay Debts• Just and Equitable

Page 56: Companies’ Act 1956

Petition(439)

• “It’s an application to wind up the company.”

Who Can File Winding Up Petition?• Company• Creditors• Contributory• Registrar of Companies• Central Government

Page 57: Companies’ Act 1956

Official Liquidator

• A member from the panel of the professional firms of chartered accountants, advocates, company secretaries, cost and work accountants which the central government may constitute.

• Body corporate approved by central government.

• Whole-time or part-time officer appointed by the central government.

Page 58: Companies’ Act 1956

Duties of Liquidator

• To submit preliminary report• To takeover company’s assets• To convene meetings of creditors

and contributories• To keep proper books• To submit accounts• To submit information in pending

liquidation

Page 59: Companies’ Act 1956

Powers Of Liquidator

• To be exercised by sanction of court ( 457.1)

• Institute and defend suits, prosecutions in the name and on behalf of the company

• Carry on business for the beneficial winding up

• Sell movable & immovable property by public action or private contract

• Raise money on the security of any asset of the company

• Do all other acts necessary to wind up & to distribute assets

Page 60: Companies’ Act 1956

Powers Of Liquidator

• To be exercised without the sanction of the court(457.2)

• Do all acts & execute in the name of the company all deeds, receipts and documents

• Inspect records & returns on the files of the Registrar

• Draw, accept, make & endorse bill of exchange

• To appoint agents where necessary