COMPANIES ACT 1956

Companies Act 1956 1

Legal meaning
 Sec 3(1) (i); “Company means a
company formed and registered under
this Act or an existing company. An
existing company means a company
formed and registered under any of the
previous companies laws”

Companies Act 1956 2

Nature and definition of a
company
 ‘Literal meaning - Company’ in common
parlance means a group of persons
associated together for the attainment
of a common end, social or economic.
 Represents different kinds of
associations, both business and
otherwise

Companies Act 1956 3

Contd -
 Lindley – An association of many persons who
contribute money or money’s worth to a common
stock and employ it in some common trade or
business (i.e.) for a common purpose and who share
the profit or loss (as the case may be) arising
therefrom. The common stock so contributed is
denoted in money and is the capital of the company.
The persons who contribute it, or to whom it belongs
are members. The proportion of capital to which
each member is entitled is his share. Shares are
always transferable although the right to transfer
them is often more or less restricted

Companies Act 1956 4

Characteristics of the company
 An artificial person created by the law.
 A separate Legal entity
 Case: Saloman and Saloman &Co ltd
 (1897) (AC) (22)
 Corporate personality is distinct and
different from that of its members
individually and collectively

Companies Act 1956 5

Characteristics of a company
 Perpetual existence
 Continued existence
 Death, insolvency or unsoundness of mind
of its members does not in any way affect
the existence of the company.
 Comes into existence by law and comes to
an end by law.

Companies Act 1956 6

Lifting of corporate veil
 Veil of corporate personality used as a
cloak for fraud and improper conduct.
 Exceptions
 For the protection of revenue.
 Where a company is acting as the agent of
the shareholders
 Where a company has been formed for a
fraudulent purpose.
Companies Act 1956 7
Contd-
 Where the device is used for some illegal
purpose
 Where the number of members fall below
the statutory minimum
 Where the prospectus includes a fraudulent
misrepresentation

Companies Act 1956 8

Registration and incorporation

 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.

Companies Act 1956 9

Contd -
 Before a company is registered, it is
essential to ascertain from the registrar
of companies if the proposed name of
the company is approved
 Then the following documents duly
stamped along with the necessary fees
are to be filed with the registrar.
 Memorandum of association duly signed by
the subscribers
Companies Act 1956 10
Contd-
 Articles of association duly signed by the
subscribers
 Agreement which the company proposes to enter
into with any individual for appointment as its
managing or whole time director or manager.
 A list of directors who have agreed to become the
first directors of the company.
 A declaration stating that all the requirements of
the companies act and other formalities relating to
registration have been complied with

Companies Act 1956 11

Contd-
 Certificate of incorporation is issued by
the registrar after due examination of
the documents. From the date of issue
of the certificate the company becomes
a separate legal entity
 Certificate of commencement of
business. –A conclusive evidence that
the company is entitled to do business
Companies Act 1956 12
Classification of Companies
Companies may be classified as :
Incorporated Companies
A company formed for the purpose of carrying on a
business and is incorporated under the Company’s
Act,1956.
Unincorporated Companies
These companies are large partnerships, not regarded
as distinct entities separate from the members
constituting them. In such companies the liability of
members is unlimited.

Companies Act 1956 13

Classification of Companies
Companies on the basis of Incorporation
1. Chartered Companies: If a company is incorporated by a
charter granted by a monarch, it is called a chartered
company. Ex: East India Company.

2.Statutory Companies : These are companies which are

created by a special Act of the Legislature, e.g.
LIC,SBI,UTI. The provisions of the Company’s Act ,1956
apply to them , if they are not inconsistent with the
provisions of the special Act under which they are formed.
Companies Act 1956 14
Classification of
Companies
2. Registered companies : These are the
companies which are formed and registered
under the Companies Act, 1956, or were
registered under any of the earlier Companies
Acts.

Companies Act 1956 15

Classification of
Companies
Companies on the basis of Number of Members

1. Private Company :
1. Company which has a minimum paid up capital of
Rs 1,00,000.
2. Minimum members: 2 - 50
2. Public company:
1. Minimum paid up capital: 5 lakhs
2. Minimum no of members: 7
Companies Act 1956 16
Classification of
Companies
Companies on the basis of Liability
Companies with limited liability
(a) Companies limited by shares: It is a registered company
with the liability of members limited by the memorandum
of association to the amount, if any, unpaid on the shares
respectively held by them.

Companies Act 1956 17

Classification of
companies
 Company limited by guarantee: A
company having the liability of its
members limited by the memorandum
to such an amount as the members
may respectively undertake by the
memorandum to contribute to the
assets of the company.

Companies Act 1956 18

Classification of Companies

 Unlimited company:
 It is a company in which the liability of the members is
not limited by its memorandum.
 The members of such companies may be required to
pay the losses from their personal property.
 Because such companies have separate legal entity, its
creditors cannot file a suit against the members
directly.

Companies Act 1956 19

Classification of
Companies
 Classification based on control
 1. Government company: 51% of the paid up shares held
by the government.
 2. Non-government Company:
 3. Foreign Company: Company which is incorporated in a
country outside India under the law of that country.
 4. Domestic company: Company which cannot be termed
as a foreign company
 5. Holding and subsidiary company: If one company
controls another company

Companies Act 1956 20

Classification of
Companies
 The controlling company is called the
holding company and the company so
controlled may be called the subsidiary
company.
 5. Public financial Institutions: LIC, UTI etc
 6. One-man company: A member may
hold virtually the entire share capital of a
company.

Companies Act 1956 21

Classification of
Companies
 Non-trading company or association not
for profit – company formed for
promoting the objects of art, science ,
religion –a license is granted by the
central government.
 Investment company –A company whose
principal business is the acquisition of
shares, stock, debentures etc.
Companies Act 1956 22
Classification of
Companies
 Producer Company – Cooperative
societies can be made companies under
the Companies Act. a company formed
and registered under theses provisions
shall be known as producer companies.
 Multinational Companies –
companies operating in more than one
country – ex: Coca Cola, LG
Companies Act 1956 23
Classification of
Companies
 Illegal Association: According to sec 11 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
another business shall be formed unless it is a
registered as a company under this Act or is
formed in pursuance of some other Indian
Law.

Companies Act 1956 24

Promoter
Who is a promoter?

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.

Companies Act 1956 25

PRE-INCORPORATION
CONTRACT
 A contract made by promoters on behalf of
the company before its incorporation is
termed as pre-incorporation contract.It is
correct to say that a company can’t retify
PIC.A company gets its legal status only after
incorporation.Therefore,the only remedy open
to the company after incorporation is to enter
into a fresh contract.

Companies Act 1956 26

Legal position of pre-
incorporation contracts

The promoters while entering into preliminary

contracts are treated as agents of the company
that is about to be formed.
The legal position is that for a valid contract two
consenting parties are necessary and a company
before incorporation is a non-entity.
A pre-incorporation contract which is purported
to be made by the company which does not
exist, is a nullity .
Thus when the company comes into existence it
can neither sue nor be sued on that contract

Companies Act 1956 27

Provisional contracts
Provisional Contracts
Provisional contracts refer to the contracts entered into
by the public company after its incorporation but
before it is issued certificate to commence business.

According to sec 149(4), any contract made by a

company before the date at which it is entitled to
commence business shall be provisional only, and shall
not be binding on the company until that date, and on
that date it shall become binding

Companies Act 1956 28

Memorandum of association
 Sec 2(28) – Memorandum means the
memorandum of association of a
company as originally framed or as
altered fro time to time in pursuance of
any previous company law or of this act
 It is the constitution of the company
which lays down the fundamental
conditions upon which alone the
company is allowed to be formed
Companies Act 1956 29
Contd-
 Defines as well as confines the powers of the
company
 Public document which is open to inspection
 Not only shows the objects of formation but also
determine the utmost possible scope of its operation
beyond which its action cannot go.
 Purpose
 To enable persons intending to deal with the company to
know with certainty as to whether the contractual
relationship which they intend to enter into with the
company is within its corporate object or not.

Companies Act 1956 30

Purpose
 Public document which is open for inspection
by any members of the public on payment of
prescribed fees
 To enable the intending shareholders to know
the purpose for which the money is going to
be invested.

 The MOA cannot be easily altered. Strict

procedure has to be followed.

Companies Act 1956 31

Contents
 The name clause
 The registered office clause
 The objects clause
 The territorial limit clause
 The liability clause
 The capital clause
 The subscription clause
Companies Act 1956 32
Articles of association
 Sec 2(2) – AOA of a company as originally framed or
as altered from time to time in pursuance of any
previous companies law or act.
 They are the bye-laws of the company according to
which director and other officers are required to
perform their functions as regards the management
of the company, its accounts and audit.
 Subordinate to the memorandum
 They can be easily altered by passing a special
resolution.

Companies Act 1956 33

Directors
 Brains of the company
 A person having control over the direction,
conduct and management or
superintendence over the affairs of the
company
 Only individuals can be directors.
 Public company – three directors
 Private company – two directors
Companies Act 1956 34
Directors

Director is a person who has control over the

direction , conduct and management of the
affairs of the company.
According to Lord Cairns
A company cannot act on its own . It can only
act through directors, and the relation
between the company and directors is that
of Principal and agent.

Companies Act 1956 35

Management and Administration

According to Companies Act 1956, Sec 2(13)

A Director is defined as “ any person occupying
the position of the director, by whatsoever
name called.
 Only Individuals can be Directors

 No Body corporate or Association or firm can

be appointed as director of the company,

Companies Act 1956 36

Management and Administration

Qualification of a Director
The Act prescribes no academic or professional
qualification for a director. The Articles may
provide what qualifications the company’s directors
must possess.
Disqualification of Directors
Following persons are not eligible to be
directors
 Persons of unsound mind
 An Undischarged insolvent

Companies Act 1956 37

Powers
 General powers of the Board
 Powers to be exercised at board meetings
 To issue debentures
 To invest the funds of the company
 To make calls on shareholders in respect of
money unpaid on their shares
 Powers to be exercised with the approval
of company in general meeting

Companies Act 1956 38

Contd -
 To borrow money
 To contribute to charitable trusts
 To remit or give time for repayment of any
debt due to the company by a director
 Duties
 Fiduciary duties
 Duties of skill, care and diligence
 Attend board meetings
 Not to delegate his functions
Companies Act 1956 39
Meetings
 General meetings
 Statutory meeting
 Annual General meeting
 Extraordinary meeting
 Class meeting
 Meeting of creditors and debenture holders
 Meeting of directors

Companies Act 1956 40

Requisites of a valid meeting
 Proper authority
 Notice of meeting
 Quorum of meting
 Chairman of meeting
 Minutes of meeting

Companies Act 1956 41

 Statutory Meetings (Sec
165)
Definition The 1st General Meeting of the members of the company after
the incorporation of the company to acquaint members with
matters arising out of the promotion and formation of the
company
 Company limited by shares
Applicability
 Company limited by guarantee and having a share capital
 Not applicable to Private Limited Company

Periodicity Should be held between 1 months ≥ 6 months from the date

at which the company is entitled to commence business

Statutory Report Report has to be forwarded to every member at-least 21

days before the date of meeting

Companies Act 1956 42

 Annual General Meetings
(Sec 166)
Definition AGM is the regular meeting of the members of a company held
annually for the purpose of transacting Company’s ordinary
business.

Frequency of  Once every year

Meeting  The gap between 2 AGM should not be more than 15 months
 Company may hold its 1st AGM within a period of not more
than 18months from the date of incorporation
 The registrar may for special reason extend the period of
AGM by a period not more than 3 months (except in case of
1st AGM).

Ordinary  To Consider and adopt Audited Balance Sheet

Business  To declare dividend on shares
 To appoint Directors in place of those retiring by rotation
 To appoint Auditors and to fix their remuneration.
Companies Act 1956 43
 Annual General Meetings
(Sec 166)
Power of the Central Government (section 167)

The Central Government on an application from any member of

the company may call or give direction to call a AGM if the
same has not been held as per the provision of section 166

Penalty for default in complying with section 166 & 167 (section 168)

The company and every officer of the company who is in default

shall be punishable with a fine which may extend upto Rs 50,000
In case of continuing default a further fine of Rs 2,500 for each
day of default
Companies Act 1956 44
 Annual General Meetings
(Sec 166)
Every AGM shall be called for :
 At a time during business hours
 On a day that is not a public holiday
 Shall be held either at the registered office of the company or some other place within the city,
town or village in which the registered office of the company is situated

Exceptions
 The central government may exempt any class of company from the requirements mentioned
above subject to conditions as it may impose
 A public company or a private company which is a subsidiary of a public company may by its
article fix the time for its AGM and may also in one AGM fix the time for the subsequent
AGM
 A private company which is not a subsidiary of a public company may in a like manner and
also by a resolution agreed to by all the members thereof, fix the time and place for its AGM
Companies Act 1956 45
 Extra Ordinary General Meetings
(Sec 169)
Every general meeting other than the statutory meeting and the annual general
meeting or any adjournment thereof, is an extraordinary general meeting
 Such meeting is usually called by the Board of Directors for some urgent
business which cannot wait to be decided till the next AGM.
 Every business transacted at such a meeting is special business.

BOD can call EGM if it has received a requisition from such

number of members of the company as mentioned below:
 Company having share capital – members holding ≥ 1/10th of the paid up capital of the
company ( voting rights) at the date of the deposit of the requisition
 Company not having share capital – members having ≥ 1/10th of the total voting power
of all members as at the date of the deposit of the requisition
Companies Act 1956 46
 Notice of Meetings
Contents and manner of service of notice – Section 172
 Meeting can be called by giving not less than 21 days notice
 Meeting can be called with shorter notice, if consent is accorded there to

* AGM By all members entitled to vote thereto

Company having share capital

Members holding ≥ 95% of the paid up share capital
* Other meeting
Company not having share capital
Members having ≥ 95% of the total voting rights
 An explanatory statement of the special business must also accompany the notice calling the
meeting.
 Notice should also give the nature and extent of the interest of the directors or manager in the
special business, as also the extent of shareholding interest
Companies in the company of every such person
Act 1956 47
 Quorum of Shareholders’ Meetings
Quorum for meeting - section 174
 Unless the article provides for a larger number, the Quorum for the meeting :
* Public ltd. Company 5 members personally present
* Private Ltd. Company 2 members personally present

 If Quorum not present within 30 minutes of the time fixed for the meeting :

* Meeting called on requisition meeting stands dissolved

from members

* Other meetings shall stand adjourned to the same day in the

next week, at the same time & place or such
other day at such other time & place as
Board may decide

* In case of adjourned meeting members present shall form the quorum

Companies Act 1956 48

 Board Meetings
Frequency of Meeting (section 285)
 At least once in every 3 calendar months and 4 meetings in every year
 If 4 BMs are held in a calendar year, one in each quarter, the interval between 2 meetings may
be more than 3 months
 Section 25 company (An association not for profit) needs to hold only one meeting in 6 months
Notice of the Meeting (section 286)

 Notice must be given in writing to every director for the time being in India and at the usual
address in India to every other director

Agenda of the Meeting

 Unless otherwise required by the article, no agenda required
 In some matters prior intimation of the business to be transacted is required i.e. appointment
of managing director (Sec 316), inter - company loans & investment (sec 372A) appointment
of a person as a manager who is already a MD in some other company (sec 386)
Companies Act 1956 49
 Board Meetings
Quorum for Board Meetings
 1/3 rd of the Board’s total strength or 2 directors which ever is higher
 Total strength for the purpose means total strength of the Board as reduced by
the number
of positions vacant at that time
 Article of association can always fix a higher quorum but not lower number
 The quorum shall consist of fully qualified and disinterested directors only.
 Number of the interested directors ≥ to 2/3rd of the total strength, quorum shall
be the
remaining directors present at the meeting being not less than 2.
Chairman of the Board Meeting
 The Board shall elect one of the directors as its chairman

Voting at Board Meeting

 Question decided by majority of votes

 Chairman will have the right exercise casting vote
Companies Act 1956 50
Winding up
 Winding up or liquidation of a company
represents the last stage in its life.
 A proceeding by which a company is
dissolved.
 Assets of the company are disposed of,
debts are paid out

Companies Act 1956 51

Modes of winding up
 Winding up by the court – compulsory
winding up
 Voluntary winding up
 (a) members voluntary winding up
 (b) creditors voluntary winding up
 Winding up subject to the supervision
of the court

Companies Act 1956 52

Grounds for compulsory
winding up
 By special resolution
 Default in holding statutory meeting
 Failure to commence business
 Reduction in membership
 Inability to pay debts
 Just and equitable

Companies Act 1956 53

Voluntary winding up
 Winding up by the creditors or members
without the intervention of the court.
 Grounds
 If the company in the general meeting passes
an ordinary resolution for voluntary winding
up where the period fixed by the Articles of
Association for the duration of the company
has expired or the event has occurred on
which under the articles the company is to be
dissolved.
Companies Act 1956 54
Contd-
 If the company resolves by special
resolution that it shall be wound up
voluntarily

Companies Act 1956 55

Members winding up
 Members winding up is possible only
when the company is solvent and is
able to pay the liabilities in full.

Companies Act 1956 56

Creditors voluntary winding up
 Based upon the assumption that the company
is insolvent
 From the beginning the meeting of creditors
is held along with the members.
 The chief power to appoint the liquidator is in
the hands of the creditors and there is a
provision for appointing a committee for
inspection

Companies Act 1956 57