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Companies Act, 1956

IMI

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Meaning and Definition of a

Company

Section 3(1)(i) of the Companies Act,

1956 defines a company as: a

company formed and registered under

this Act or an existing Company.

Existing Company means a company

formed and registered under any of

the earlier Company Laws.

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Characteristic Features

Separate Legal EntityCase: Salomonv. Salomon & Co. Ltd.

Limited Liability

However, liability of a company is neverlimited. Its liability of members only thatis limited.

Free Transferability of Shares

Other Features:Perpetual Succession: Separate propertyand Common Seal.

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Types of Companies

Private Company

Public Company

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Private Company [Section 3(1)(iii)]

A private company means a companywhich has a minimum paid up capital ofone lakh rupees or such higher paid-up

capital as may be prescribed and by itsarticles :

(a) restricts the right to transfer its

shares, if any;(b) limits the number of its members to50, not including:

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Private Company contd.

(i) persons who are in the employmentof the company, and

(ii) persons who, having been formerly in

the employment of the company, weremembers of the company while in thatemployment and have continued to bemembers after the employment ceased;

(c) prohibits invitation to the public tosubscribe for any shares in ordebentures of, the company; and

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Private Company contd.

(d) prohibits any invitation or acceptance of

deposits from persons other than its

members, directors or their relatives.

Where two or more persons hold one or

more shares in a company jointly, they

shall, for the purposes of membership,

be treated as a single member.

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Public Company [Section 3(1)(iv)]

A public company means a company which:

(a) is not a private company [In other words, itshould not have the restrictions of Section

3(1)(iii) in its articles];(b) has a minimum paid-up capital of five lakh

rupees or such higher paid-up capital, asmay be prescribed; and

(c) is a private company, which a subsidiary ofa company, which is not a private company.

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How to form a company?

The whole process of formation of a

company may be divided into four

stages, namely:(i) Promotion

(ii) Registration

(iii) Floatation/Raising of Capital(iv) Commencement of Business.

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Promotion

Who is a Promoter?

Bowen, L.J.

The term promoter is a term not of law but ofbusiness, usefully summing up, in a single

wordpromotion, a number of business

operations familiar to the commercial world by

which a company is brought into existence.However, the persons assisting the promotersby acting in a professional capacity do notthereby become promoters themselves.

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Legal Position of a Promoter

Promoter stands in a fiduciary position

towards the company.

In other words, he is not allowed to make

secret profits.

Case:Glucksteinv. Barnes

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Pre-incorporation contracts

Void-ab-initio.

However, pre-incorporation contracts

shall be valid if: The contract is made for the purpose of

the company and the contract is

warranted by the terms of incorporation.

The company adopts the transactions

after incorporation.

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Registration/Incorporation

Private Company

Minimum Number of Members

required 2.

Public Company

Minimum Number of Membersrequired 7.

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Steps

1. Application for availability of name:

Three names in order of priorityconforming to the provisions of the Act

and the Guidelines issued by Departmentof Company Affairs in this regard:

Name to end with the word(s) Limited orPrivate Limited, as the case may be,

except:(i) Section 25 Companies

(ii)Govt. Companies (need not use Pvt. Ltd.)

(iii)Producer Companies.

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Steps contd.

Name should not be identical or too

similar to the name of an already existing

company.

Should not include the name of aregistered trade mark.

2. Preparation of Memorandum and

Articles of Association Memorandum defines and limits the

scope of activities of a company.

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Steps contd.

Contents of Memorandum

1. Name clause

2. Registered office clause

3. Object clause

Doctrine ofultra-vires

4. Liability clause

5. Capital clause

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Steps contd.

3.Preparation of other documents

Power of Attorney in favour of a

professional to effect registration.

Consent of Directors (in case of aPublic Company)

Particulars of Directors, Manager,

Secretary, etc. in the prescribed form. Notice of registered address

To be supplied within 30 days of

incorporation.

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Steps contd.

Statutory Declaration To the effect that all requirements of law

with respect to incorporation have been

duly complied with.

The declaration to be signed by:

Advocate of Supreme Court or High Court; OR

C.A../C.S. practising in India and associated

with the formation of the company; OR Director, Manager, Secretary of the company

(as named in the Articles)

4.Filing of documents with ROC

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Certificate of Incorporation

Effect of Certificate of Incorporation(Section 34)

On incorporation, the association of persons

becomes a body corporate by the namecontained in the memorandum, capableforthwith of exercising all the functions of anincorporated company and having perpetual

succession and a common seal but with suchliability on the part of the members tocontribute to the assets of the company in theevent of its being wound-up as is mentioned in

the Act.

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Conclusiveness of Certificate of

Incorporation (Section 35)

Conclusive to the effect that all

requirements of law relating to

registration and matters precedent and

incidental thereto have been dulycomplied with.

Case Laws:

Moosav. Ibrahim

Jubilee Cotton Mills Ltd. v. Lewis

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Provisional Contracts

Contracts entered into by company afterincorporation but before getting thecertificate to commence business arecalled provisional contracts.

Provisional contracts are, therefore,relevant to public companies only.

Such contracts become void, if company

fails to obtain certificate to commencebusiness and automatically become valid,and binding if company obtains thecertificate.

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Raising of Capital

A company may raise capitalthrough

Private placement Issue of Prospectus

Private placementmeans raising of

capital from friends, relatives andthrough brokers.

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Commencement of Business(Section 149)

Where Company has issued a Prospectus:

a company cannot commence business or

exercise borrowing powers unless:

(a) shares up to the amount of the minimum

subscription have been allotted by the

company;

(b) every director of the company has paid tothe company, on each of the shares taken or

contracted to be taken by him and for which

he is liable to pay in cash,

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Commencement of Businesscontd.

the same proportion as is payable on

application and allotment on the shares,

offered for public subscription;

(c) no money is, or may become, liable to berepaid to the applicants for shares or

debentures offered for public subscription, for

failure to obtain permission for the shares to

be dealt in on any recognised stock

exchange;

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Commencement of Businesscontd.

(d) there has been filed with the Registrar a dulyverified declaration by one of the directors or

the secretary or, where the company has not

appointed a secretary, a secretary in wholetime practice in the prescribed form that

clauses (a), (b) and (c) (mentioned above)have been complied with.

Penalty: Every person at fault may be fined upto

Rs.5,000/- for every day of default.

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Memorandum of Association

Every company has to have a Memorandumof Association.

It contains, besides other significant

information, the objects for which thecompany is formed.

Object clause defines as well as confinesthe powers of the company.

Anything done beyond these objects is ultra-viresthe company and void.

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1. Name Clause: It contains the name withwhich company is proposed to beregistered. Companies Act requires that:

(a) The name chosen should end with theword Limited or the words PrivateLimited, as the case may be.

(b) The name should not be undesirable i.e., it

should not be identical or too similar to thename of an already existing company ORinclude the name of a registered trademark unless consent of the owner of the

trade mark is obtained.

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2. Registered Office Clause:This clause states the name of the State inwhich registered office of the company is to besituated.

3. Objects ClauseThis clause is to be divided into:

(a) Main objects and objects incidental or ancillary to

main objects(b) Other objects

A company cannot commence any businessstated under other objects unless special

resolution by the shareholders is passed.

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Doctrine ofUltra-Vires

Case Law: Ashbury Rly. Carriage

Co. v. Riche.

Effects of Ultra-vires transactions(i) void-ab-initio

(ii) Injunction

(iii) Personal liability of directors towards the company

towards the outsiders

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4. Liability Clause

5. Capital Clause

This clause states the authorised capitaland the number of shares into which

the same shall be divided.

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Alteration of Memorandum

Various clauses of memorandum of

association can be altered by following

the procedure laid down in the Act.

Different requirements are prescribed

for different clauses:

1. Name Clause: can be altered by:(a) Passing a special resolution; and

(b) Obtaining the approval of the Central

Govt.

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3. Objects Clause

Special Resolution

Only on Grounds stated in Sec.17(1).

4. Liability Clause

Cannot be increased without written

consent of each and every member. Can be reduced:

by passing special resolution

Confirmation of court

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5. Capital Clause

Authorised capital may be increased

by passing an ordinary resolution at

a meeting of the shareholders.

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Articles of Association

The articles of association of a company are its bye-laws or rules and regulations that govern the

management of its internal affairs and the conduct of

its business.

The articles regulate the internal management of thecompany. They define the powers of its officers.

They also establish a contract between the company

and the members and between the members inter

se. This contract governs the ordinary rights andobligations incidental to membership in the company

[Naresh Chandra Sanyal v. Calcutta StockExchange Association Ltd. (1971)].

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Companies which must have Articles

Unlimited Companies:

The Articles of such a company must

state:

Total number of members; and

Share capital.

Companies limited by Guarantee:Articles of such company must state

total number of members.

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Companies which must have Articles

contd.

Private Companies limited by shares:

must include requirements of

Section 3(1)(iii).

No Article Company

A publiclimited company having share

capital may be registered withoutArticles.

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Alteration of Articles

Articles may be altered by a company

by passing special resolution at a

general body meeting of shareholders.

However, where alteration has the

effect of converting a public company

into a private company (i.e., introduction

of restrictive clauses of Section 3(1)(iii),approval of Central Government must

be obtained.

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Doctrine of Constructive Notice

According to Section 610, every person

dealing with the company is deemed to

have read M/A and A/A and understood the

contents thereof in the correct perspective.

Doctrine of Indoor Management

The rule was first laid down in Royal British

Bankv. Turquand. Rule of Indoor Management is an exception

to the Doctrine of Constructive notice.

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Exceptions of Indoor Management

1. Knowledgeof irregularity: Case:Howardv. Patent Ivory Co.

2. Negligence: Case:Anand Behari Lal v.

Dinshaw & Co. (Bankers) Ltd.3. Forgery: Case:Ruben v. Great Fingal

Consolidated[Secy. Forged signatures of twodirectors]

4. No knowledge of articles: Case:RamaCorporationv. Proved Tin & GeneralInvestment Co.

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Prospectus

A prospectus, as per Section 2(36),means any document described or issued

as prospectus and includes any notice,

circular, advertisement or other documentinviting deposits from the public or inviting

offers from the public for the subscription

or purchase of any shares or debenturesof a body corporate.

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Prospectus contd.

Thus, a prospectus is not merely anadvertisement; it may be a circular oreven a notice. A document shall be

called a prospectus if it satisfies twothings:

(a) It invites subscription to shares or

debentures or invites deposits.(b) The aforesaid invitation is made to the

public.

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What constitutes Invitation to

Public

As per Section 67, Invitation to public

includes:

invitation to any section of the publichowsoever selected provided the invitation

is made to all the members of that section

of public indiscriminately.

Invitation calculated to be made availableeven to those who do not receive the

same.

Invitation to 50 or more persons.

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Mis-statement in a Prospectus and

its consequences

What is Mis-statement?

According to Section 65(1) of the Act:

(a) a statement included in a prospectus shall be

deemed to be untrue, if the statement ismisleading in the form and context in which it is

included; and

(b) where the omission from a prospectus of anymatter is calculated to mislead, the prospectus

shall be deemed in respect of such omission, to

be a prospectus in which an untrue statement is

included. Case:Rexv. Kylsant

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Kinds of Shares

The following kinds of shares may beissued by a company:

1. Equity shares carrying voting rights.

2. Equity shares carrying differential rightsas to voting or dividend (commonly called

Non-Voting Equity Shares)

3. Preference Shares4. Cumulative convertible Preferable

Shares

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Kinds of Shares contd.

Preference Sharescarry preferencewith respect to two things:

1. Preference with respect to dividend at a

fixed rate or of a fixed amount.

2. Preference with respect to return of

capital in case of winding up.

Equity Sharesmeans a share which is

not a preference share.

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Allotment of Shares

Allotment is an acceptance to an offer forpurchase of shares.

Where allotment does not conform to the

statutory requirements, it is called irregularallotment. For allotment to be valid,

following requirements must be satisfied:

1. A copy of prospectus or statement in lieu of

prospectus must have been delivered to

Registrar of Companies.

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Allotment of Shares contd.

2. Application money must not be less than

5% of the nominal value.

3. Minimum subscription (i.e., at least 90% of

the issue) must have been received.

4. Application money must be kept deposited

in a Scheduled Bank till the minimum

subscription has been received.5. Shares must have been listed on the stock

exchange(s) mentioned in the Prospectus.

Ad i i t ti /M t f

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Administration/Management of

a company

A company functions through the medium of

Board of Directors. However, certain powers

have been reserved to be exercised by

shareholders in general body meetings.Section 291 of the Companies Act, 1956

confers general power on the Board of

Directors. It provides: Subject to the provisions

of the Act, the Board of Directors of a companyshall be entitled to exercise all such powers,

and to do all such acts and things, as the

company is authorised to exercise and do.

P hi h i bl

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Powers which are exerciseable

only by the shareholders.1. Sell, lease or otherwise dispose of the whole,

substantially the whole, of the undertaking of

the company, or where the company owns

more than one undertaking, of the whole orsubstantially the whole, of any such

undertaking.

2. Remit or give time for the repayment of any

debt due by a director except in the case ofrenewal or of continuance of an advance made

by a banking company to its directors in the

ordinary course of business.

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Powers contd.

3. Invest, otherwise than in trust securities, theamount of compensation received by thecompany in respect of compulsory acquisitionof any property or fixed assets of the company.

4. Borrow monies exceeding the aggregate of thepaid-up capital of the company and its freereserves. Borrowing does not includetemporary loans (i.e., loans payable on

demand or within six months but excludingloans for capital expenditure) obtained fromthe companys bankers in the ordinary courseof business.

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Disqualifications

Section 274 of the Companies Act, 1956provides that the following persons shall

not be capable of being appointed as

directors of any company :(a) a person found by a competent court to be

of unsound mind and such finding

remaining in force;

(b) an undischarged insolvent;

(c) a person who has applied to be adjudged

an insolvent;

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Disqualifications contd.

(d) a person who has been convicted by a Court ofan offence involving moral turpitude and sentenced

in respect thereof to imprisonment for not less than

six months, and a period of five years has notelapsed from the date of the expiry of the

sentence;

(e) a person who has not paid any call in respect of

shares of the company held by him, whether aloneor jointly with others and six months have elapsed

from the last date fixed for the payment of the call;

and

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Disqualifications contd.

(g) a person who is already a director of apublic company which,

(i) has not filed the annual accounts and

annual returns for any continuous threefinancial years commencing on and after the

first day of April, 1999; or

(ii) has failed to repay its deposit or interestthereon on due date or redeem its

debentures on due date or pay dividend and

such failure continues for one year or more.

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Criminal Liability (Sec. 63)Civil Liability (Sec.62 & 56)

BothFine upto

Rs.50,000

Imprisonment

upto 2 years

Compensation under

Sections 62 and 56

Damages

Liability for Mis-statements in a Prospectus

DamagesCompensationunder Sections

62 and 56

Imprisonmentupto 2 years

Fine uptoRs.50,000

Both

Rescissionof Contract

Claim for

Damages Fine upto Rs. 50,000

Against the Promoters,

Directors and Otherofficers (not available

against experts)

Against theCompany

Against the Promoters,

Directors, otherOfficers and Experts

Against the

Company

Civil Liability (Sec.62 & 56) Criminal Liability (Sec. 63)

Remedies

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