Indian Companies Act 1956

COMPANIES ACT, 1956

A company implies an association of persons for some

common object(s).
j ( ) According
g to the act :A company
p y
formed and registered under the companies act 1956 or
under any previous company law. A company is a
contractual entity created by the members.
members

CHARACTERISTICS OF A COMPANY
1.
2.
3.
4
4.
5.
6.
7.
8.
9.

Incorporated Association
Artificial
A tifi i l legal
l
l Person
P
Separate legal Entity
Perpetual Succession
Limited Liability
Transferable Shares
Common Seal
Separate Property
Capacity to Sue and Being Sued

KINDS OF COMPANIES

A) On the basis of mode of Incorporation:

Chartered
Ch t d Companies
C
i
Statutory Companies
Registered Companies
B) On the basis of Liability of Members
Limited by Shares
Limited by Guarantee
Unlimited
C) On the basis on the number of members
Private
Public
D) Others: Govt. Companies, Foreign company, Holding and
subsidiary company

DISTINCTION BETWEEN PRIVATE AND PUBLIC

COMPANY
Pvt. Company

Public Company

Minimum number of members to

form a company is 2

Minimum number of members to form a

company is 7

Max. number of members should not

Max
exceed 50

No restriction

Right to transfer share is restricted

Freely transferable

Prospectus can not be issued

Prospectus is issued

Commence business immediately

after getting the certificate of
incorporation

Can start only after receiving the

certificate to commence business from
registrar of companies

Numbers of Directors must be at least Must have at least 3

2

DISTINCTION BETWEEN PRIVATE AND PUBLIC COMPANY

Directors consent to work as a Director
with Registrar is not necessary

Necessary

Number of Directors can be increased to

any number

Not more than 12 without the approval of

the central govt.

Directors are required to retire by rotation At least 2/3rd of Directors must retire by
rotation
Managerial Remuneration No restriction Not more than 11% of net profit.( not
mere than 5% to a sgl.Director)
Can be registered with a paid up capital of Rs 5 Lakh
Rs. 1 lakh
Can not accepts deposits from public

Can accept deposits from public

Need not hold statutory meeting or file a

statutory report

Must do so

LIFTING THE CORPORATE VEIL

The circumstances under which the courts may lift the

corporate veil are:

1.

Under Statutory Provisions

Reduction of Membership
Misrepresentation of Prospectus
Fraudulent Conduct of Business
Failure to return application money
Mis description of name
Mis-description
Non-payment of tax
Liability of ultra -Vires acts

LIFTING OF THE CORPORATE VEIL

p
2)) Under Judicial Interpretations:

For determining the enemy of the company: Daimler

Company vs Continental Tyre rubber company
For the Benefit of revenue-Sir Dinshaw Maneckjee Petil,
Re
For prevention of Fraud and Improper conduct
Others

FORMATION
O
O AND INCORPORATION
CO O
O OF
O A COMPANY
CO

Promotion
Registration/Incorporation
Flotation/Raising of Capital
Commencement of Business

PROMOTION

g
Promotion refers to the entire p
process through
which a company is brought into existence.
It starts with the conceptualization
p
of the birth of the
company with an objective for which it is to be
formed.
The persons who conceive the company and invest
the initial funds, are known as promoters.

REGISTRATION/INCORPORATION OF COMPANY

The Promoters of the company will submit the following

documents with the Registrar of Companies for the
registration of company:
Memorandum of Association
The article of association
A list of persons who have consented to act as directors
of the proposed company
A statutory declaration of compliance.
compliance
Any agreement with the relevant persons of the proposed
company.

REGISTRATION/INCORPORATION
GS
O
CO O
O OF
O COMPANY
CO

The Registrar of the Companies is to allot a Corporate

Identityy Number to each company
p y registered
g
on or after
November 1, 2000.After scrutiny of all the documents a
certificate of incorporation is issued

FLOTATION AND RAISING OF CAPITAL

p y can take either of the following
g
Ap
public company
steps:
p p
to invite p
public for subscription
p
a)) Issue a prospectus
b) Deliver a statement in lieu of prospectus where
the
company has either not issued the prospectus or
through it has issued the prospectus , has not
proceeded to allot any shares offered to the public
for subscription

COMMENCEMENT OF BUSINESS
Every private company and a company not limited by shares
can
commence business immediately on receipt of
certificate of
incorporation. But a public company limited
by shares is debarred
from commencing business on
borrowing money without the
certificate of commencement
of business
Where a company has issued Prospectus

The minimum subscription in cash has been raised

Every director of the company has paid in cash his qualification
shares , a proportion payable on application and allotment on
the
shares offered for p
public subscription.
p
No money is liable to be repaid to applicants for any shares or
debentures which have been offered for public subscription by
reason for any failure to apply for, or to obtain permission for the
shares of debentures to be dealt in any recognized stock
exchange

COMMENCEMENT OF BUSINESS

A statutory declaration duly verified by one of the directors or the

secretary
above
have
secretar in the prescribed form that the abo
e conditions ha
e
been complied with, is filed with the registrar
Where the company has not issued prospectus it has to satisfy the
following conditions:
A statement in lieu of the prospectus if filed with the Registrar
Every director of the company has paid in cash his qualification
shares , a proportion payable on application and allotment on the
shares.
A statutory declaration duly verified by one of the directors or the
secretary in the prescribed form that the above conditions have been
complied with,
with is filed with the registrar
registrar.
When the company has compiled with the above conditions the
Registrar will issue a certificate to commence business.

MEMORANDUM OF ASSOCIATION

Meaning and Importance

MOA of a company is its charter and defines the limitations of the

powers of the company
It is not unalterable
Content:
i) Name of the Company: with limited and private limited as
the last word(s) of the name
ii) Registered Office
iii) Objects of the company : main objects , Incidental and
ancillary
objects, other objects not included in first two.

MEMORANDUM OF ASSOCIATION

iv) Liability: A declaration is made that the liability of

the members is limited.
v) Capital-The amount of authorized share capital divided into shares if
fixed amount
vi) Association or Subscription: The initial members are
called subscribers, who sign the memorandum in the
presence of one witness

ARTICLES OF ASSOCIATION

Article of Association of a company are its bye laws.

It controls the internal management of the company
and defines the powers of its offices.

DIFFERENCE OF MOA AND AOA

p y
Charter of Company
Defines the scope of
activities
Supreme Document
Must for every company
Strict restrictions
restrictions, some
alterations may require
sanction of central govt.
Act ultra-vires is wholly
void and cant be ratified

Regulations for internal

Mgt
Rules for carrying out
th objects
the
bj t off C
Co.
Subordinate to the
memorandum
Company limited by
shares need to have it.
Act ultra-vires but intravires the memorandum
can be ratified

DOCTRINE OF ULTRA -VIRES

Ultra Vires means beyond the powers.

Ashbury Railway Cairrageand Iron Company Ltd vs
Riche
Doctrine of Constructive Notice
The memorandum and articles when registered with the
Registrar becomes public document and accessible to all.
Therefore there is a presumption that any outsider
dealing with the company has read and understood these
documents.
y
Kotla Venkatswamyy vs C Ramamurthy.

DOCTRINE OF INDOOR MANAGEMENT

Persons dealing with the company in good faith have
a right to assume that the internal requirements prescribed
in public documents (memorandum and articles have been
observed.
Exceptions:
E
ti
Where the outsider had knowledge of irregularity.
In case of forgery
g y
Negligence on the part of the outsider
Acts outside the scope of apparent authority
Rayal British Bank v
v.Turquand
Turquand

PROSPECTUS

y document described or
Prospectus means any
issued as a prospectus and includes any notice, circular,
advertisement or other document inviting offers from the
public for the subscription and purchase of shares in
in, or
debentures of a body corporate.

PROSPECTUS

Pre-Requisites
P R
i it off Prospectus
P
t

Prospectus must be dated

Prospectus must be signed
Prospectus must be registered

Golden rule of the Prospectus

There should be an honest disclosure of all facts. The
true nature of the companys
company s venture to be disclosed.

PROSPECTUS
Deemed Prospectus- When a company allots shares or
debentures
to
off Issue
Houses,
d b t
t the
th public
bli through
th
h the
th medium
di
I
H
then the issue houses invite subscription from the public
through their own offer document. This is also called
prospectus
t by
b implication.
i li ti
Statement in Lieu of Prospectus- Where a public
company
does not invite public to subscribe for its shares
shares, but arranges
to get money from private sources>The promoters here need
not issue a prospectus but are required to draft prospectus
Red Herring Prospectus
Prospectus- is a prospectus ,which
which does not
have complete particulars on Price of securities offered and
quantum of securities offered. E.g.-Jet Airways, Suzlon

MEMBERSHIP

y constitute the company

y as a
Persons who collectively
corporate entity are members or shareholders

a)) The
Th subscribers
b ib
tto th
the memorandum
d
b) Who agrees in writing to become member and whose
name appears in the register of members
c) Who holds equity share capital and whose name is
entered as beneficial owner in the records of the depository
The agreement in writing to take shares of the company
The registration of name in the register of members

MEMBER/SHAREHOLDER
/
S.no

Shareholder

Member

Is a member

May not be a
shareholder because
the
h company may not
have a share capital

Person who owns a bearer share

warrant is a shareholder

Struck off from the

list

A legal
g representative
p
of a member

Applies
pp
for
registration

No share are allotted to a subscriber

to the memorandum

Subscriber to a
memorandum

WHO CAN BE A MEMBER

Minor
Insolvent
Partnership
P t
hi Fi
Firm
Foreigner
Company
Trade Union or Society
President of India

MODES OF ACQUIRING MEMBERSHIP/INDEX OF A MEMBER

Membership by subscription
Membership
p by
y application
pp
and registration
g

A company with more than fifty members shall keep an

index of members

RIGHTS OF MEMBER / REGISTER OF MEMBER

y Rights
g
Statutory
Contractual/otherwise

Name address and occupation

Sh
Share
h
held
ld b
by each
h member
b and
d th
the amountt paid
id up on
those shares
Date
ate at which
c eac
each pe
person
so was
as e
entered
te ed in tthe
e register
eg ste as a
member
Date at which any person ceased to be a member

TERMINATION OF MEMBERSHIP

Transfers his shares

Shares are forfeited by the company
Surrenders his shares
Shares are sold by the company to enforce its lien
Dies
I adjudged
Is
dj d d iinsolvent
l
t
Shares have been redeemed by the company
Rescind the contract of membership on fraud or
misrepresentation

DIRECTOR

y is an artificial legal
g person and the directors as a
A company
body endow the artificial legal person with human face than
can act and react.
The person through whom a company acts and does its
business, and termed as director.
An individual can be appointed
pp
as director,, no corporate
p
body corporate, association or firm
C
Cannot
hold a office
ff
off more than ffifteen
f
companies

QUALIFICATIONS OF A DIRECTOR

No academic, professional or share qualification

Articles may provide for any qualifications
Where share qualification is fixed by articles then the
actt provides
id
a) Qualification shares must be taken within 2 months after
appointment
Nominal value of qualification shares must not exceed Rs.
5000 or one share where its value exceeds Rs. 5000
Share warrants will not count for this purpose

APPOINTMENT OF DIRECTORS
First director
Appointment of directors by company
Appointment of directors by the board
Appointment of directors by third parties (nominee director)
Appointment of directors by proportional representation
Appointment
A
i t
t by
b central
t l governmentt
Appointment by small shareholders
Consent for appointment
Written consent is required to be signed and files with the
registrar and the company

REMOVAL OF DIRECTORS

Byy shareholders
By Central Government
By Tribunal

POWERS OF BOARD OF DIRECTORS

The board of directors of a company shall be entitled to

exercise all such powers and to do all such acts and things,
as the company is authorized to exercise and do
do.
The following powers are:
The power to make calls
The power to issue debentures
The power to borrow money otherwise than on debentures
The power to invest funds
The power to make loans
The p
power to buy
y back of shares

POWER TO BE EXERCISED IN THE GENERAL MEETINGS

Sale, lease or disposal of the undertaking

Showing any concession regarding payment of debts
Make investment of the amount of compensation received
Contribution to charitable
Borrowing monies exceeding the aggregate of the paid up
capital and free reserves of the company

DUTIES /LIMITATIONS

Good faith
Reasonable care
Disclose interest
Participate in the communities
Attend board meetings
Actions malafide
Incompetent to act
Deadlock in the board

COMPANY MEETING

General meeting
Requisites of valid meeting
Notice of meting must be proper and adequate
Chairman of the meeting
Quorum
Voting
Agenda
Minutes

KINDS OF MEETINGS
Meetings
of a Company

Shareholders

General Meetings

Statutory Meetings

Extra Ordinary
Meetings

Class meetings

Annual General
Meetings

Directors

Creditors/
Debenture holders

STATUTORY MEETINGS

Object
When held
Not required to be held
Notice
St t t
Statutory
reportt
In case of default

ANNUAL GENERAL MEETING

y to hold
Which company
When to be held
Gap between two AGM
First AGM
Subsequent AGM
E t
Extension
i off time
ti
maximum
i
3 months
th
Business to be transacted
Notice 21 days
Default

BOARD MEETINGS

y three calendar months

When to hold:Atleast once in every
and 4 meetings every year
Notice: To be given to every director in writing. No form or
period of notice is laid down
down. Usually a weeks
week s notice is
sufficient. The notice must state the date, time and place of
meetings.
Quorum:1/3 of the total strength or two, whichever is higher.
Passing of resolution by circulation is permissible

MOTION

A proposal under consideration by members in a meeting

before it is voted upon

Rules
Should be positive in terms and should always be in writing
Within power, scope and relevant to business
Comply with the provisions of the Act, memorandum and
articles
Duly proposed by any member in a meeting
Should not be withdrawn before consent

RESOLUTION
y motion voted upon and agreed
g
g and
Any
to in a meeting
entered in minutes. A motion passed with or without
amendment is called resolution
Types of Resolution
Ordinary resolution: Simple majority of the members voting
at a g
general meeting.
g
Special resolution: Members present should not be less than
three times the votes cast against the resolution.
Resolutions requiring special notice: Resolution should be
given to the company not less than 14 clear days before the
g at which it is to be moved.
meeting

WINDING UP OF A COMPANY

Company dissolved

Winding
g up
p a company
p y is a p
process whereby
y its life
is ended and its property administered for the
benefit of its creditors and members. An
administrator called liquidator,
liquidator is appointed and he
takes control of the company, collects its assets,
pays its debts and finally distributes any surplus
among the
th members
b
iin accordance
d
with
ith th
their
i rights
i ht

WINDING UP OF A COMPANY

Winding up of a company differs from insolvency of an

i di id l iin as much
individual
h as a company cannott b
be made
d
insolvent under the insolvency law. Even a solvent company
can be wound up.
p

MODES OF WINDING UP

Compulsory winding up under orders of the National

company law Tribunal NCLT

Voluntary Winding up
The power of the court are transferred to the National
Company Law Tribunal by the company (Amendment)Act
2002. The central g
government is in the p
process of formation
of this Tribunal

GROUNDS FOR WINDING UP BY THE TRIBUNAL (NCLT)

By the company passing a special resolution.

Default in holding statutory meeting or in delivering statutory
report to the registrar
Failure to commence business within a year from the date of
incorporation or suspension of business for a whole year
Reduction in membership below the minimum required
I bilit tto pay itits d
Inability
debts
bt off R
Rs 1 llakh
kh
Tribunal is of the opinion that it is just and equitable
D f lt off companys
Default
fili
filing it
its b
balance
l
sheet
h t and
d profit
fit and
d
loss account on annual return for any five consecutive
financial years

G O
GROUNDS
S FOR
O WINDING
G UP BY THE TRIBUNAL (NCLT)
C

If the company has acted against the interests of

sovereignty and integrity of India, the security of the state,
friendly relations with foreign states public order
order, decency or
morality.
If the Tribunal is of the opinion
p
that the company
p y should be
wound up as it had become sick and is unlikely to become
viable in future

WHO MAY PETITION FOR WINDING UP

The company
Any Creditor
Any Contributor
Any combination of creditor
creditor, contributory acting jointly or
separately
The registrar
Any person authorized by the central government
The official liquidator
The central government and the state government
Workers of a company cannot prefer a winding up petition
against the company

LIQUIDATOR

To conduct proceeding in winding up

To make a report
To take custody of companys property
To comply with directions of the creditors or contributories or
the committee of inspection
To summon meeting of creditors and contributories
To obtain directions from the tribunal
To keep statutory books
To get accounts audited
Central governments control of liquidator
Information as to a pending winding up