MBA Notes

Monday, 25 February 2013

Company law

Module  4
COMPANY LAW
The word company is derived from a Latin word `companies`
it means a group of persons who took their need together.
 In India law relating to companies are contained in The companies Act 1956.
Meaning and definition
 A company is a voluntary association of persons formed for some common purpose
with capital divisible into  parts known as shares .
Justice Lindlay defines company “as an association of many persons who contribute
money or money’s worth to a common stock and employ it in some trade or business
and who share the profits arising there from”
According to companies act a company means a company formed and registered under
companies act.
Features of a Registered comapny
      Voluntary Association

A company is voluntary association of persons who have come together for a common
object which generally is to earn profit.
The activities of this association are governed by the law and are limited by its
memorandum of association
      Incorporated association

A company comes into existence on incorporation or registration under the companies

act. Minimum number of persons required for the purpose of incorporation is seven in
case of a public company and two in case of a private company.
      Separate legal entity

 On incorporation company gets personality which is separate and distinct from those
of its members. Company is an artificial person created by law. 
      Separate property

The company can own , enjoy  and dispose off its property in its own name.

      Legal restrictions

The formation, working and winding up of a company are strictly governed by laws,
rules and regulations
      Perpetual succession

 unlike a person a company never dies. Its existence is not affected in any way by    the
death or insolvency of any shareholder. Members may come and members may go ,
but the company continues its operations until it is wound up.
      Common seal
 As a company is an artificial person it cannot sign its name on a contract. So it function
with the help of seal. All contract entered into by the members will be under the
common seal of the company.
      Share capital

A company mobilizes its capital by selling its shares. Those persons who buy these
shares become its share holders and thereby become members in it
      Limited Liability

In case of limited companies liability of members will be limited to the amount unpaid
on the shares.
0. Transferability of shares.
Members can freely transfer and sell their shares .The right to transfer share is a
statutory right of members.
 Ownership and management
The owners of a company are its share holders.
The affairs of the company are managed by their representatives known as Directors
Type of companies
Companies can be classified on the basis of ;
A.    Incorporation
B.     Liability of members
C.     Number of members
D.    Ownership
A.   Incorporation
1.       Chartered company
2.       Statutory company
3.       Registered company

1. Chartered company
 The company which have formed and incorporated under a special charter granted by
the king or queen.
Eg East India company.
Bank of England.
2. Statutory company
These are companies which are created by means of a special Act of Parliament or any
state legislature.
Eg RBI, Railway
3. Registered company
Company formed and registered under companies Act 1956 is called Registered
companies.
.   Liability of members

      Limited company

      Company limited by guarantee

      Unlimited company

      Limited company or company limited by share

Majority of registered companies will be company limited by shares. In case of limited

companies liability of members will be limited to the amount unpaid on the shares.
     2. Company limited by guarantee
 Here liability of each member is limited by the memorandum to such amount as he
may guarantee by the memorandum to contribute to the assets of the company in the
event of its winding up.
Such  companies are formed for the promotion of art science, culture, sports etc.
3. Unlimited company
A company not having any limit on the liability of its members is termed as unlimited
company.
The members are liable for the debts of the company at the time of winding up.
      C. Number of members
     Private company
     Public company
1. Private company
A private company is a company
            -which restricts the right to transfer its shares.
            -limits the number of its members to 50.
           -prohibits any invitation to public to subscribe its shares.
2. Public company
A public company means a company which is not a private company
E.   Ownership

      Government Company

      Foreign company

      Holding and subsidiary company

1. Government company
A company is said to be government company when 51% of the paid up capital is held
by the central government or by any state government or partly by central govt or
partly by one or more state govt.
2. Foreign company
A foreign company is a company incorporated outside  India and having a place of
business in India.
3. Holding and subsidiary company
            À company which controls another company is known as the holding company
and the so controlled company is known as subsidiary company.
One Man Company
This is a company in which one man holds practically the whole of the share capital of
the company, and in order to meet the statutory requirement of minimum number of
members some dummy members like his wife and son holds one or two shares each.
Distinction between public company & private company.
No. Private Co. Public Co.
1. Minimum no of members is 2 Minimum no of members is 7

2. Maximum no members is 50 No maximum limit

3. Minimum paid up capital is Rs 1 Minimum paid up capital is 5

lakh lakh

4. Name must end with the word ‘Pvt Name must end with the word
 Ltd’ ‘Ltd’

5. Can commence business It shall have to wait until it

immediately after incorporation receive the certificate for
commencement of business.

6. It cannot invite public to subscribe It can invite public to subscribe

its shares and debentures its shares and debentures

7. Minimum subscription is not Minimum subscription is

required for allotment of shares. required for allotment of
9 shares.

8. Need not hold statutory meeting of It has to hold a statutory

the members. meeting and file a stat: report.

9. Quorum required for a meeting is 2. Quorum required for a meeting

is 5

10. There is restriction of transfer of  Shares can be freely

shares transferred.

11. Not required to issue prospectus. Must issue prospectus.

13. Two directors Three directors

Formation of a company
The procedure or formation of a company may be divided into four stages;
1. Promotion
2. Incorporation
3. Raising of capital
4. Commencement of business
I. Promotion
 It is the first stage in the formation of a company.
In this stage the idea of carrying on a business is conceived by a person or a group of
persons called promoters. They make detailed investigation about the workability of
the idea, amt of capital required, operating expense etc etc..
Before a company an be formed, there must be some persons who have an intention to
form a company and who take the necessary steps to carry that intention into
operation. Such persons are called promoters.
The promoter is the person who brings a company into existence.
II. Incorporation
A company is said to be incorporated  when it is registered with the registrar under the
companies act. The certificate of incorporation is the birth certificate of the company. A
company comes into existence from the date mentioned in the certificate.
 Procedure for registration
The promoter has to first decide the proposed form of company as whether it is to be a
public company or a private company.
They may form the company with limited liability , unlimited liability  or limited by
guarantee.
 They have to decide the name of the company agreeable and desirable to all. For eg if
the name proposed is identical with or closely resembles the name of an existing
company , it is undesirable.
For getting registration an application has to be made to the registrar. The application
shall be accompanied by the following documents:
      Memorandum of association

      Articles of association

      A statement of nominal capital

      A notice of address of the registered office of the company.

      A list of directors and their consent to a act signed by them

      A declaration that all the requirements of the act have been complied with. Such

declaration shall be signed by an advocate of high court or supreme court or a

chartered accountant who is engaged in the formation of company
Certificate of incorporation
If the registrar is satisfied that all the requirements of the act have been complied with
he shall register the company and issue a certificate of incorporation.
Conclusive proof
Once a company is registered incorporation cannot be challenged subsequently. The
certificate of incorporation is a conclusive evidence of the fact that-
1. all the requirements of the act have been complied with.
2. company is duly registered.
3. company came into existence on the date of certificate.
Advantages of incorporation
1.      Transferability of shares
2.      Separate legal entity
3.      Perpetual succession
4.      Common seal
5.      Separate property
6.      Capacity to sue
III. Raising of capital
After incorporation a company can raise capital by issuing shares. A private company
cannot issue shares to public.
In case of public company a copy of prospectus is filed with the registrar and it will be
issued to the public. Those who are intended in purchasing share are required to send
their application money to company's  banker.
 On the last date fixed for the receipt of application if the company has received
application equal to minimum subscription the directors will start with allotment of
shares.
IV. Commencement of business
A private company may commence its business immediately after incorporation.
But a public company cannot commence business immediately after incorporation but
it has to obtain a certificate of commencement from the registrar.
MEMORANDUM OF ASSOCIATION
Memorandum of association for a company is like the constitutional law for a country.
It is the document which contains  the rules regarding constitution and activities of the
company. It is a fundamental charter of the company.
It defines the extent of powers of the company, beyond that it cannot go. It is a
document filed at the time of incorporation.
It is a public document ie any interested public can get a copy on payment of
prescribed fees.
Contents of memorandum
1. Name clause
2. Registered office clause
3. Object clause
4. Liability clause
5. Capital clause
6. Association clause or subscription clause.
1. Name clause
The first clause of memorandum requires a company to state its name
Rules:-Should not adopt identical with or resembles that of an existing company.   Ltd
for public company and Pvt Ltd for private company. Should not use a name
prohibited by the Name and Emblems Act. 
2. Registered office clause
The memorandum must specify the state in which the registered office of the company
is to be situated.
3. Object clause
This is the most important clause of the memorandum of association. It defines the
object of the company and the extent of its powers. The object of the company must be
state very clearly and a company cannot do anything beyond object clause. The objects
of the company shall not be illegal or against public policy. 
4. Liability clause
This  clause state the nature of liability of members.
5. Capital clause
This clause contains the  total amount of capital with which the company is registered.
This capital is known as authorized capital or nominal capital or registered capital.
6. Association clause or subscription clause
The memorandum concludes with subscription clause. The memorandum must be
subscribed by at least  7 persons in case of public company and 2 in case of private
company. Each subscriber must sign the document and write the number of shares
taken by him.
ALTERATION OF MEMORANDUM
The alteration of the memorandum is possible only by strictly following the procedure
laid down in the Act
1. Alteration of a name clause
The name of a company can be changed by passing a special resolution and with
approval of central govt. If a company is registered with a name which is in the
opinion of central govt is identical with or too closely resemble to the name of an
existing company, it can be changed by passing an ordinary resolution but with the
approval of central govt .
2. Alteration of registered office clause
If the shift of office is within local limits, ie from one place to another place in the same
city , town or village that can be done by giving a notice of change to registrar.
If the shift is outside local limits, a special resolution has to be passed.
If the shift is from the jurisdiction of one registrar to another's the special resolution
should be confirmed by the regional director of the state. (new sec 17 A Amendment
Act 2000)
3. Alteration of object clause
•The alteration of object clause is subject to so many restrictions. A company may
change its objects for the following purposes;
1. To carry business more economically or more efficiently.
2.To attain its main purposes by new or improved means.
3. To enlarge or change local area of operation
4. To restrict or abandon any of its objects specified in the memorandum.
5. To amalgamate the company with any other company.
6. To sell or dispose of the whole or any part of the undertaking of the company.
–A special resolution and approval of company law board is necessary for alteration.
4. Alteration of liability clause
Liability clause cannot be altered so as to make the liability of members unlimited.
5. Alteration of capital clause
Alteration can be made to
1.To increase share capital
2.To convert fully paid share to stock
3.Cancellation of shares  etc
Doctrine of ultra vires
  Memorandum contains  the rules regarding constitution and activities of the
company. It is a fundamental charter of the company. It defines the extent of powers of
the company, beyond that it cannot go.
A co can act and function within the limits of memorandum. Any act which is beyond
the memorandum is ultra vires the company. Such acts are void .
Ultra means beyond and vires means powers. So ultra vires means ‘beyond powers’.
The purpose of this doctrine is to helps the shareholders , creditors and every third
person dealing with the company to ensure that their investment are not diverted to
unauthorized objects.
ARTICLES OF ASSOCIATION
Articles of association are the internal regulations of the company and are for the
benefit of shareholders. These are the rules and regulation relating to the internal
management of a company. The article define the mode and form on which the
business of the company is to be carried on.

Unknown at 23:06

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8 comments:

Unknown 1 November 2013 at 01:04

Hey, nice site you have here! Keep up the excellent work!

Incorporation of Company in India

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Unknown 17 February 2014 at 00:24

excellent, very easy to understand.
Reply

Unknown 24 June 2016 at 23:07

Nice post.. You have explained it very well in step by step guide..! Thank you for sharing the information
with us...

Private Limited Company

Kevin
Reply

O'Brien Mungofa 13 April 2017 at 02:57

GREAT INFORMATION......GOD BLESS YOU!!!!!!!!!
Reply

Unknown 7 November 2017 at 11:23

great notes, absolutely unbelievable
Reply

Unknown 9 November 2018 at 23:34

Well detailed.
Kudos.
Reply

Sunil 8 December 2018 at 09:17

It's very useful for my mba exams..tq
Reply
 Unknown 13 October 2019 at 11:17
Thanku for this easy notes...
Easy to Learn..
Easy to explain..
Reply

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