The Companies Act, 1956
The Companies Act, 1956
The Companies Act, 1956
Definition of a Company
Sec. 3 defines company as
a company formed and registered under
the Act or an existing company formed
and registered under any of the previous
company laws.
Company - Definition
Lord Lindley has described the company
as
an association of many persons who
contribute money or moneys worth to
a common stock and employ it in some
trade or business, and who share the
profit and loss (as the case may be)
arising therefrom.
Judgment:
Supreme court held, that the income in the
hands of the company was partly
agricultural, yet the same income when
received by Mrs. Guzder as dividend could
not be regarded as agricultural income.
Exceptions to limited
liability:
Exceptions to limited
liability:
Reference case:
Macaure Vs. Northern Assurance Co.Ltd
(Separate property shareholders not part-owners)
Also
insurable
interest.
Macaure held
allforexcept
one
share of a
Judgment:
The court applying the principle of separate
legal entity held that Macaure being only
a shareholder, was not the owner of
property of the company. Hence, he has
no insurable interest. The insurance
company was, therefore, not liable to pay
the claim.
purpose or is a sham
Delhi Development Authority Vs.
Skipper Construction Co, Private
Skipper construction company failed to pay the full
purchase price of theLtd.
plot to DDA. The company
started construction and sold flats to various
persons. The two sons of the directors who had
business in their own names claimed that they
had separated from the father and the
companies they were running had nothing to do
with the properties of the parents. But no
satisfactory proof could be produced to
substantiate this.
Judgment:
Held: that the transfer of shareholding
between father and the sons must also be
treated as a sham. The fact that the
director and members of his family had
created several corporate bodies, did not
prevent the court from treating all of them
as one entity belonging to and controlled
by the director and his family.
Illegal Association:
Sec.11 of the Companies Act provides that no company,
association or partnership consisting of more than 10
persons for the purpose of carrying on the business of
banking and more than 20 persons for the purpose of
carrying on any other business can be formed unless it is
registered under the companies Act or is formed in
pursuance of some other Indian Law.
If such an association is formed and not registered under
the Companies Act, it will be regarded as an illegal
association although none of the objects for which it
may have been formed is illegal.
Classification of Companies:
1. If a company is incorporated by a
charter granted by the monarch, it is called
a Chartered Company.
Classification of Companies:
Classification of Companies:
Classification of Companies:
4. A company limited by shares or
Share Company is a registered
company having the liability of its
members limited to the amount if any,
unpaid on the shares respectively held by
them
Classification of Companies:
Classification of Companies:
6. A company limited by shares as well as by
guarantee is a hybrid form of company which
combines the elements of a guarantee and a share
company. Initial capital of such a company is raised
from its shareholders, while the normal working
funds are provided from other sources, such as
fees, charges, subscription etc. Every member has
a twofold liability the guarantee amount payable
on winding up and the nominal amount unpaid on
the shares which is payable either during the
lifetime of the company or on winding up.
Classification of Companies:
7. An unlimited company is a company
not having any limit on the liability of its
members. The members are liable, in the
event of its being wound up, to the full
extent of their fortunes to meet the
obligations of the company.
Classification of Companies:
Private Company:
Public Company:
Companies Act 1956 defines a public company to mean
a company which
(a) is not a private company
(b) has a minimum paid up capital of five lakh rupees or
such higher paid up capital, as may be prescribed;
(c) is a private company, which is a subsidiary of a
company, which is not a private company.
(d) where a private company accepts deposits from the
public and/or whose number of members exceed 50.
(e) Minimum paid up capital requirement is not
applicable to Sec. 25 companies.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Minimum members 2.
Minimum capital is Rs.1 lakh
Maximum number is 50.
Restriction on transfer of shares.
Cannot invite general public to
subscribe to shares and debentures.
Cannot accept deposits from public
Can commence business immediately
on incorporation.
Need not hold statutory meeting.
Written consent to act as director, sign
memorandum or contract for
qualification shares.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Public Company
Minimum members is 7.
Minimum capital is Rs.5 lakhs.
No maximum limit to number of
members.
No restriction on transfer of shares.
Through prospectus, can invite general
public to subscribe to its shares and
debentures.
Can accept deposits from public
subject to the provisions of the Act.
Can commence business only after
receipt of certificate of commencement
of business.
Must hold statutory meeting & file
statutory report.
Directors must file written consent to
act as Directors, must sign
Memorandum, and must contract for
qualification shares.
PRIVATE COMPANY
Directors may be appointed
by a single resolution.
Directors need not retire by
rotation.
Number of directors can be
increased to any extent
without permission.
Quorum is two members
present.
No restrictions on managerial
remuneration.
Special privileges are
enjoyed.
Cannot issue share warrants.
Formation of a Company:
Broadly three steps are involved :
1. Promotion
2. Registration
3. Floatation.
Formation of a Company:
1. Promotion: Promotion denotes
preliminary steps taken for the purpose of
registration and floatation of the company.
The persons who assume the task of
promotion are called promoters. The
promoter may be an individual, syndicate,
association, partnership or company.
Formation of a Company:
Judge Cockburns, attempted to define
exactly what a promoter is :
A promoter is one who undertakes to
form a company with reference to a
given project, and to set it going, and
who takes the necessary steps to
accomplish that purpose.
Formation of a Company:
2. Registration:
Sec. 12 Any seven or more persons or where the company to be
formed will be a private company, two or more persons, associated
for any lawful purpose may, by subscribing their names to a
memorandum of association and otherwise complying with the
requirements of this Act in respect of registration, form an
incorporated company, with or without limited liability.
Sec.33 : The following three documents are required to be
presented to the Registrar of Companies of the State in which the
registered office of the company is to situate, for the purpose of
registration of a company:
(i) the memorandum of the company;
(ii)the articles, if any;
(iii)the agreement, if any, which the company proposes to enter
into with any individual for appointment as its Managing Director or
Wholetime Director or Manager.
Certificate of Incorporation:
On Registration, the Registrar will issue a
Certificate of Incorporation, certifying that the
Company is incorporated. From the date of
incorporation mentioned in the certificate, the
company becomes a legal person separate from
its shareholders and secures perpetual
succession. Hence it is the Birth Certificate of
the Company.
The certificate of incorporation prevents the
reopening of matter prior to registration and
places the existence of the Company as a legal
person beyond doubt.
Memorandum of Association
Contents of Memorandum
Name Clause:
The last word in the name of a public company
shall be limited and of a private company
private limited.
The name chosen should not be undesirable or
identical to the name of an existing company.
A company cannot have a name which violates
the provisions of the Emblems and Names
(Prevention of Improper Use) Act, 1950.
Contents of Memorandum
(Name Clause)
Kothari Product Ltd. v. Registrar of
Companies
Parag International (KNP) Ltd. was
registered infringing on the name Parag
which was a registered trade mark of
Kothari.
Parag International name was held to be
undesirable.
Contents of Memorandum
Registered Office Clause:
This clause states the name of the State in
which the Registered Office will be situated.
The exact address should be communicated
within 30 days of incorporation.
Every company must have its Registered Office
which establishes its domicile. This is the
address to which notices and all other
communications can be sent.
Contents of Memorandum
The Objects Clause:
This is divided into 3 parts:
(a) Main Objects
(b) Anciliary Objects (Objects incidental or
anciliary to the attainments of the main
objects)
(c) Other objects.
Contents of Memorandum
Liability Clause:
The liability of the members is limited
If limited by shares to the extent of the amount unpaid on
the shares,
If limited by guarantee, to the extent of the amount
undertaken to be guaranteed.
In case of an unlimited company, this clause need not be
given.
Absence of this clause means that the liability of its
members is unlimited.
Contents of Memorandum
Capital Clause:
Authorised Capital
Different kinds of shares and
The face value of each share.
Contents of Memorandum
The Association Clause :
The Memorandum ends with the Association Clause
which reads :
We, the several persons whose names and
addresses and occupations are subscribed, are
desirous of being formed into a company in
pursuance of this memorandum of association, and
we respectively agree to take the number of shares
in the capital of the company set opposite our
respective names.
Then follow the names, addresses and occupations and
signatures attested by at least one witness for each.
The total number will be at least 7 for public companies
and at least 2 for private companies.
Articles of Association
The Articles of Association are rules and
regulations of a company framed for the purpose
of internal management of its affairs.
It deals with the rights of the members of the
company inter-se.
The articles are framed for carrying out the aims
and objects of the Memorandum.
The articles of association are subordinate to
and are controlled by the Memorandum of
Association.
DOCTRINE OF ULTRA-VIRES
A Company has the power to carry out the
objects set out in the memorandum and also
everything which is reasonably necessary to
enable it to carry out those objects. Any
activities not expressly or impliedly authorised by
the memorandum are ultra-vires to the company.
An act is said to be ultra-vires (beyond the
powers) when it is performed which, though
legal in itself, is not authorised by the objects
clause in the memorandum of association or the
statute. Such an act is void ab-initio and cannot
be ratified even by an unanimous resolution of
all the shareholders.
DOCTRINE OF ULTRA-VIRES
The doctrine of ultra vires was put in its modern
form in the famous case of Ashbury Railway
Carriage & Iron Co. Ltd. v. Riche. There may
be certain acts which are ultra-vires the directors
or ultravires the articles but which are intra-vires
the company. If an act is ultra-vires the directors
only and the shareholders have ratified it, the
company would be bound by it. Where an act is
ultra-vires the articles, it can be ratified by
altering the articles by a special resolution.
Further, if an act is within the powers of the
company, any irregularities can be cured by the
consent of all the shareholders.
PROSPECTUS
A Prospectus means any document
described or issued as 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.
A document shall be called a prospectus if it
invites public subscriptions to shares or
debentures or invites deposits from the public.
Formalities to be completed
before issue of Prospectus: