The Companies Act 1956

COMPANY: What is it? [Sec.3]

Section 3 (1) (i) of the Act defines: “A company means a company formed and registered under this Act or an existing company.”

That is, a company is an association of persons united for a common object.

It is a form of business organization where the funds of a large number of investors are managed by a few persons for the purpose of earning profits which are shared by all the investors.

Essential Features of a Company

Registration: Compulsory Separate legal entity: Distinct person Perpetual succession Artificial person: But not a Citizen Transferable shares Limited liability Common seal: Separate and independent legal

existence Separate property: Can dispose property in its name. Capacity to sue and be sued

Types of Companies

Royal Charter or Chartered Companies: Treated as foreign companies.

Statutory Companies: Formed under Special Statutory Act of Parliament or State Legislature. For e.g., RBI, SBI, IFCI, etc.

Registered Companies: Are registered under the Companies Act. These companies have MoA and AoA for internal & external regulations.

Under the Act the companies are either (i) Companies limited by shares, (ii) Companies limited by guarantee, or (iii) Unlimited Companies.

Companies limited by shares: During the existence of the company or in the event of winding up, a member can be called up to pay the amount remaining unpaid on the shares subscribed by him.

Such a company is company is called company limited by shares. A company limited by shares may be a public limited company or a private limited company.

The former has a minimum paid-up capital of Rs. 5 lac. Members minimum 7, maximum unlimited to form a company. The latter has a minimum paid-up capital of Rs. 1 lac. Members limited to 50 not including former and present employees. Minimum two.

Companies limited by guarantee: Companies may or may not have share capital.

Each member promises to pay a fixed sum of money specified in the Memorandum in the event of liquidation of the company for payment of debts and liabilities of the company.

The amount promised is called ‘guarantee’. Depend on entrance and subscription fees for their

existence. The amount guaranteed by each member is in the nature

of reserve capital. Cannot be called upon except in the event of winding up of company.

Unlimited Companies: Liability of the members is unlimited like an ordinary partnership firm.

Section 12 gives choice to promoters to form a company with or w/o limited liability.

A company not having any limit on the liability of its members is called an ‘unlimited company.’

The articles of such a company shall state the number of members with which the company is to be registered.

Memorandum of Association

It is the document which contains the rules regarding constitution and activities or objects of the company.

It is a fundamental charter of the company. The company is governed by it. The company is allowed to work within the framework of

it. By it outside world knows the state of affairs. It defines the extent and powers of the company. If the acts of the company are beyond the limits of the

MoA, such acts would be void and ultra vires. Directors are personally liable to make good the

Company’s loss if company’s money is spent on an unauthorized object.

Contents of MoA [Sec.13]

Name of company with ‘Limited’ suffixed in case of public company and ‘Private Limited’ suffixed for a private company.

Registered office of the company. Objects of the company. Liability of the members. Details of share capital of the company. Subscription or Association clause.

Articles of Association

Regulations of the company are prescribed by the Articles of Association.

It can be altered at any time according to the wishes of the members.

It is subordinate to the MoA and is under full control of the members.

Members can make their regulations through AoA subject to Companies Act.

It contains rules & regulations for the internal management of the company subject to provisions of the Companies Act.

Doctrine of Ultra Vires

It means ‘beyond powers’. That is, any act done by the company beyond its legal powers and authority.

Any act done by the company which is neither authorized by its objects nor by the Act, that act is ultra vires the powers and authority of the company.

Such an act is void and cannot bind the company. And since it is void, it cannot be ratified by shareholders either.

An act ultra vires the powers of Directors but not ultra vires the company can be ratified by the shareholders.

Similarly and act ultra vires the Articles of the company but within the powers of the Memorandum can be ratified by altering the articles.

Essentially, an act ultra vires the company is void and cannot be ratified.

Any act ultra vires but intra vires the Memorandum can be ratified, as such an act is irregular.

Membership of a Company

Members (Section 41): A company when incorporated is an artificial person. It is a constitution of natural persons called members of a company.

Who are the members of a company?(1) Subscribers to the memorandum of a company and entered as members in the Register of Members;(2) Every other person who agrees in writing to become a member of a company and whose name is entered in its Register of Members;(3) Every person holding equity share capital and whose name is entered as beneficial owner in the records of the depository.

How is membership acquired? (In any of the following ways)By subscribing to the MoA before registration.By agreeing in writing and name is entered in the register of members.By subscribing to the shares.By purchase of shares in his own name and when entered in the register of members.By succession.On insolvency of a member where official assignee or receiver is entitled to be member in his place.By allowing his name to appear in register of members.By entry as beneficial owner in the records of the depository.

How membership ceases?By transfer of shares.By forfeiture of shares.By surrender of shares.By insolvency.By death; name of deceased member continues till shares are registered in the name of his legal representative.By rescission of the contract to take shares on the ground of misrepresentation in the prospectus.By sale of shares by company after it exercises its right of lien on the shares or in other legal way.When company redeems its redeemable preference shares.

Rights of a Member/Shareholder To receive notices of all general meetings. To attend & vote at general meetings, appoint directors & auditors. To receive copies of accounts of company. Entitled to a copy of report of a statutory meeting. To inspect the minutes of proceedings of any general meeting. To inspect the register, index of members, debenture holders. To transfer his shares. Priority to have shares offered if there is increase of capital by the company. To receive share certificate. To receive dividends in case of preference shares. To make an application to the Central Government for ordering investigation

into the affairs of the company. To apply to CG to convene the AGM when Board of Directors fail to convene

the same. To present a petition to the Court for winding up of company. Entitled to share in the surplus assets, if available, on liquidation.

Liabilities & Duties of Member

To pay calls on the shares whenever demanded by the company.

To pay the full nominal value of the shares held by him in case of a company limited by shares.

To pay all the debts of the company, in case of a company with unlimited liability.

All moneys payable by any member to the company under the Memorandum or Articles shall be a debt due from him to the company [Sec. 36(2)]

Other Concepts

Depositories: Were established to record ownership details of every person holding equity shares in the share capital of the company in the book entry form.

A depository is nothing but an agent of the beneficial owner, a link between the issuer and the beneficial owner to facilitate record of allotments and transfer of securities.

Register of Members: Every company must keep a register of members with the following particulars:i) Name, address & occupation.ii) Shares held by each member, distinguishing each share by its number, and the amount paid on those shares.iii) Date at which each member was entered in the register.iv) Date on which any person cease to be member.

Index of Members: Every company having more than 50 members shall keep an index in the form of a ‘Card-index’ of the names of the members of the company.

The index, shall at all times, be kept at the same place as the register of members.

On payment of a fee of Re. 1 for each inspection, any member may make extracts from any register or acquire a copy of any register.

Foreign Registers: A company which has a share capital or which has issued debentures may keep in any State or country outside India a branch register of members or debenture holders resident in the State or country.

Annual Returns: Every company has to file every year with the Registrar annual returns containing certain particulars. Shall give the particulars as on the date of holding the annual general meeting.

Prospectus

A public company invites public to subscribe towards its share capital through the issue of a Prospectus.

A prospective investor would naturally like to know the financial background of the company, its activities, future programmes, nature of investment, risk, etc.

Every investor would like to receive reasonable but sure returns.

Prospectus of a company provides this information.

Definition

Section 2(36): “Prospectus means 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.”

An “abridged prospectus” means a memorandum containing such salient features of a prospectus as may be prescribed [Sect. 2(1)].

Contents of the Prospectus

Dating of prospectus (Section 55) Registration of Prospectus (Section 60)

With every prospectus shall be attached the following documents when filed with the Registrar:

1. Expert’s consent. For e.g., engineer, valuer, lawyer, accountant, etc.

2. Delivery for registration.

Where any prospectus is published as a newspaper advertisement, it shall not be necessary in the advertisement to specify the contents of the memorandum or the signatories, or the number of shares subscribed for by them.

Issue of Capital

Shares: Section 2(46) defines “A Share means ‘share’ in the Share Capital of a company”.

Share capital is divided into shares of different denominations. These denominations are called ‘shares’ which are issued by the company to the public for subscription.

The holder of a share is issued a Share Certificate.

A Certificate shall be prima facie evidence of the title of the member to such shares.

Stock: Shares can be converted into Stock when they are fully paid up.

A sum total of fully paid up shares is Stock. Fully paid up shares may be converted into

stock for purposes of convenience, as stock can be divided into fractions of any amount; irrespective of the original value of the share.

If any shares are converted into stock, company shall, within 30 days after doing so, give notice thereof to the Registrar.

Allotment of SharesRule to be observed

A prospectus shall be filed with Registrar. No allotment of shares shall be made to public unless the

minimum subscription amount stated in the prospectus is raised and received by the company.

Application for shares should be made in prescribed form. No allotment shall be made until the beginning of the 5th day

after a date on which prospectus is issued. Companies intending to offer must make an application to one

or more stock exchanges for permission. The whole of the application money should have been paid

and received by company in cash. All moneys received shall be deposited in a Scheduled Bank

until the certificate to commence business is obtained.

Transfer of Shares

A share is a movable property, transferable in the manner provided by the articles.

A share holder has a statutory right, in the absence of restrictions in the articles, to transfer shares to any person without consent of anybody.

A private company with share capital may restrict the right to transfer its shares by its articles. Transfer of shares is less strict in a public company.

Transmission of Shares

Where shares pass by operation of law from one person to another.

For example, by holder’s insolvency, or lunacy or by death and inheritance.

The person to whom shares are transmitted shall make an application to the company for transmission of shares in his name.

In case if the company refuses to register transmission, right of appeal arises in the same manner as in case of transfer.

No instrument of transfer is required.

Blank and Forged Transfer

Blank Transfer: Where the transferor only signs the instrument of transfer and the rest of the instrument is left blank. Transferee has an implied authority to complete the instrument either by entering his own name or anyone else’s for registering as a shareholder.

Forged Transfer: Where signature of transferor is forged on the instrument of transfer. A forged transfer gives no title to the transferee, as it is void.

Forfeiture of Shares

The articles generally give powers to Board of Directors to forfeit shares as under:i) If a member fails to pay any call or installment of a call, and

ii) Any other circumstance which the articles may provide.

The articles may also provide that the failure by a member to fulfill any engagement with any other member would forfeit his share.

Power of forfeiture is not inherent in a company and therefore this power exists only when it is given by the articles.

Share Warrants (Sec. 114 & 115)

It is a document which shows that the bearer of the warrant is entitled to shares specified therein.

It is a substitute to the share certificate. A public company limited by shares may issue it

under its common seal in the following circumstances:i) if it is authorized by its articles;ii) shares are fully paid up;iii) previous approval of Central Government is obtained.

Issue of Sweat Equity Shares(Sect. 79 A)

The Companies (Amendment) Act, 1999 has introduced this concept of issuing shares. It means equity shares issued by the Company to employees or directors at a discount or for consideration other than cash.

Issued for providing know-how or making available rights in the nature of IPRs or value additions, by whatever named called, by the employees or directors.

Meetings

GENERAL MEETINGS: Such meetings are the meetings of the share holders.

i) Statutory meeting (Sec. 165): Every company within a period not less than 1 month nor more than 6 months from the date at which the company is entitled to commence business, will hold a general meeting of the members of the company.

ii) Annual general meeting (Sec. 166, 167 & 171): Every company shall in each year hold in addition to any other meeting an annual general meeting.

Such meeting shall be specified in the notice calling it.

Not more than 15 months shall elapse between the date of one general meeting and that of the next.

The directors are responsible for calling a general meeting.

A company may hold its first annual general meeting within 18 months from the date of its incorporation.

If default is made in holding an AGM, the Company Law Board may, on the application of any member of the company, call or direct the calling of the meeting.

Such a meeting shall be deemed to be an annual general meeting of the company.

By Companies (Amendment) Act, 2002, this power is conferred on Central Government instead of Company Law Board.

The same power is vested with a ‘Tribunal’ in case of revival and rehabilitation of sick industrial companies.

Proceedings at AGM (Sec. 173): Following business is transacted in the AGM by passing ordinary resolutions:i) Considerations of accounts, and the reports of the Board of Directors and the auditors;ii) Appointment of auditors and fixing their remuneration;iii) Declaration of a dividend;iv) Appointment of directors in place of those retiring;v) Any other business can be transacted in the AGM as a special business, by passing a special resolution.

iii) Extraordinary general meeting (Sec. 169): This type of meeting is convened to transact any urgent or special business.

All business transacted at an EGM shall be deemed special.

The EGM may be called by the Board of Directors; or by the same on the requisition of not less than 1/10th of members holding paid-up capital and having voting rights; or by the requisitionists themselves.

CLASS MEETINGS: The company may vary the rights attached to the shares of any class.

Such rights can be varied by convening separate meeting of holders of different classes of shares, whose rights are so proposed to be varied, and obtaining their consent.

Class meetings are held in cases where their rights are sought to be affected.

MEETINGS OF CREDITORS & DEBENTURE HOLDERS: Such meetings are generally held in case of winding up of the company; orIn case of proposed scheme of arrangement and compromise to obtain their consent; orBy the Court where company desires to reduce its share capital.

BOARD MEETINGS (Sec. 285 & 286):A meeting of the BoDs of every company shall be held atleast once in every 3 months and atleast 4 such meetings shall be held in every year.

It is a right and duty of a director to attend every Board meeting.

Though he may not attend all meetings, it would amount to negligence, if w/o sufficient cause, he fails to attend the Board meeting.

A Board meeting can be held on a public holiday or outside business hours for the convenience of the directors. Normally should be held on working days.

Board meeting may be held at the registered office or at any place convenient to the directors.

Essentials of a Valid Meeting

To be convened by Board. Notice: Contents of notice; Service of notice. Explanatory Statement. Ordinary business and/or Special business. Quorum: 5 members from public company

and 2 members from any other company. Chairman of the meeting.

Other Concepts

Proxies: Rules as applicable – shall have no right to speak at the meeting; a member of a private company shall not be entitled to appoint more than one proxy to attend on same occasion; not entitled to vote except on a poll.

Voting: Every equity shareholder has a right to vote, while preference shareholder has a right to vote only on resolutions directly affecting rights attached to his preference shares. A resolution proposed is decided by voting (i) by show of hands, or (ii) by poll.

Resolutions: Matters in a company are decided by resolutions in the meetings. Items listed in the agenda to the notice of the meetings are decided by resolutions.

Kinds of Resolutions: i) Ordinary resolutions; ii) Special resolutions; iii) Resolutions requiring special notice; iv) Board resolutions.

Minutes of the Meeting: Every company shall keep the following books at the registered office of the company for purposes of recording the minutes:i) General meetings minute book; ii) Board meetings minute book; iii) Minutes of proceedings of Committee of Directors.

Appointment of DirectorsThrough Board Meetings

Casual vacancies: A casual vacancy arises when the office of any director appointed by the company in a general meeting is vacated before his term of office expires in the normal course.

Additional directors: BoDs may appoint the same to hold office only upto the date of the next AGM. However, the number of the directors and additional directors shall not exceed maximum strength fixed for the Board by the articles.

Alternative directors: BoDs may, if authorized by the articles, or by a resolution passed in a general meeting, appoint the same to act for the original director during his absence for a period not less than 3 months.

An alternative director is in the same position as any other director as regards his rights, duties and liabilities as a director. He acts on his own.

Share Qualification of a Director

It means the shares to be taken by a director to qualify him as a director of the company.

It shall be the duty of every director to hold a specified share qualification within two months after his appointment as director.

The nominal value of the qualification shares shall not exceed Rs.5000.

A failure to acquire the specified share qualification will result in the vacation of the office of the director.

Removal of Directors

By Shareholders (Sec.284): A company may by ordinary resolution remove a director before the expiry of his period of office by:i) special notice of any resolution;ii) on receipt of notice of a resolution, the company shall forthwith send a copy thereof to the director concerned.

Exceptions: Directors cannot be removed – if appointed by Central Government; if director holding office for life in case of private company; or if appointed by company in general meeting [Sec. 255(1)].

By Central Government (Sec. 388B-388E): The CG may state a case against the director and refer the same to the Company Law Board with a request to enquire into the case and record a decision as to whether or not the director is fit or proper to hold office connected with the conduct and management of any company.

The case against the director may be initiated by the CG under the circumstances of fraud, persistent negligence, defaulting on obligations and functions, lack of sound business/commercial practices, causing damage to the interest of trade, industry or business by the director.

If found guilty by CLB, the CG shall remove from office the director.

By Company Law Board (Secs. 402 & 407): On application by any member in cases of oppression, or mismanagement, the CLB may terminate, set aside or modify any agreement between the company and a director, MD, and the manager.

The same whose agreement is so terminated shall, for a period of 5 years be appointed as director or MD or manager of the company.

Such a director/manager shall not be entitled to any claim for damages or for compensation for loss of office.

As per the amendment made in the Act in 2002, the powers of CLB are conferred upon the Tribunal.

Reconstruction & Amalgamation (Section 394)

Where it is shown to the Court that the compromise or arrangement has been proposed in connection with a scheme for the reconstruction or the amalgamation of any two or more companies, the Court may by order, sanctioning the compromise or arrangement, make provision for all or any of the following matters.

The transfer to transferee of the whole or any part of the undertaking, property or liabilities of any transferor company;

The allotment or appropriation by the transferee company of any shares, debentures, or policies;

The continuation by or against the transferee company of any legal proceedings pending or against any transferor company;

The dissolution, without winding-up, of any transferor company; and

The provision to be made for any persons who, within such time and in such a manner as the Court directs, dissent from the compromise or arrangement;

Reconstruction or Amalgamation Condition Prohibiting it

Companies (Amendment) Act, 2000, by substitution of Section 376 provides that where any provision:

i) In the MoA or AoA of a company; or

ii) In any resolution passed in general meeting by, or by the BoDs of the company; or

iii) In an agreement between the company and any other person,

Prohibits the reconstruction or amalgamation of company with any body corporate or bodies corporate shall be void.

Power of Central GovernmentTo Provide for Amalgamation in National Interest

Where the CG is satisfied that it is essential in the public interest that 2 or more companies should amalgamate, it may, by order provide for the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.

The order may provide for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company and may also contain such consequential, incidental and supplemental provisions as in the opinion of the CG may be necessary to give effect to the amalgamation.

Every member or creditor of each of the companies before the amalgamation shall have, as nearly as may be, the same interest in or rights against the company resulting from the amalgamation as he had in the company of which he was originally a member or creditor of a company.