A NOTE ON THE COMPANIES ACT, 1956

INTRODUCTION

A Company is defined as a voluntary association of persons formed for the

purpose of doing business, having a distinct name and limited liability.
Companies, whether public or private, are an indispensable part of an
economy. They are the modes through which a country grows and expands
world wide. Their performance is an important parameter of a countries
economic position.

In India, the Companies Act, 1956, is the most important piece of legislation
that empowers the Central Government to regulate the formation, financing,
functioning and winding up of companies. The Act contains the mechanism
regarding organisational, financial, managerial and all the relevant aspects
of a company. It provides for the powers and responsibilities of the directors
and managers, raising of capital, holding of company meetings,
maintenance and audit of company accounts, powers of inspection, etc. The
Act applies to whole of India and to all types of companies, whether
registered under this Act or an earlier Act. But it does not apply to
universities, co-operative societies, unincorporated trading, scientific and
other societies.

The Act empowers the Central Government to inspect the books of

accounts of a company, to direct special audit, to order investigation into the
affairs of a company and to launch prosecution for violation of the Act.
These inspections are designed to find out whether the companies conduct
their affairs in accordance with the provisions of the Act, whether any unfair
practices prejudicial to the public interest are being resorted to by any
company or a group of companies and to examine whether there is any
mismanagement which may adversely affect any interest of the
shareholders, creditors, employees and others. If an inspection discloses a
prima facie case of fraud or cheating, action is initiated under provisions of
the Companies Act or the same is referred to the Central Bureau of
Investigation.

The Companies Act is administered by the Central Government through the

Ministry of Corporate Affairs and the Offices of Registrar of
Companies, Official Liquidators, Public Trustee, Company Law Board,
Director of Inspection, etc. The Registrar of Companies (ROC) controls
the task of incorporation of new companies and the administration of
running companies.

The Ministry of Corporate Affairs, earlier known as Department of

Corporate Affairs under Ministry of Finance, is primarily concerned with
administration of the Companies Act, 1956, other allied Acts and rules &
regulations framed there-under mainly for regulating the functioning of the
corporate sector in accordance with law. The Ministry has a three-tier
organisational set-up:-

 The Headquarters at New Delhi,

 The Regional Directorates at Mumbai, Kolkata, Chennai and Noida,

and

 Tthe Registrars of Companies (ROCs) in States and Union

Territories.
The Official Liquidators who are attached to the various High Courts
functioning in the country are also under the overall administrative control of
the Ministry. The set-up at the Headquarters includes the Company Law
Board, a quasi-judicial body, having the principal Bench at New Delhi, an
additional principal bench for Southern Region at Chennai and four
Regional Benches located at New Delhi, Mumbai, Kolkata and Chennai.
The organisation at the Headquarters also includes two Directors of
Inspection and Investigation with a complement of staff, an Economic
Adviser for Research and Statistics and other Officials providing expertise
on legal, accounting, economic and statistical matters.

The four Regional Directors, who are in charge of the respective regions,
comprising a number of States and Union Territories, interalia, supervise the
working of the Offices of Registrars of Companies and the Official
Liquidators working in their regions. They also maintain liaison with the
respective State Governments and the Central Government in matters
relating to the administration of the Companies Act, 1956.

Registrar of Companies (ROCs) appointed under Section 609 of the

Companies Act, covering various States and Union Territories, are vested
with the primary duty of registering companies floated in the respective
States and the Union Territories and ensuring that such companies comply
with the statutory requirements under the Act. Their offices function as
registry of records relating to the companies registered with them. The
powers vested with the ROCs are:-

 Registration of memorandum and articles.

 Registration of prospectus.
  Registration of reduction of capital.

 Call information or explanation.

 Seizure of documents.

 Investigation into affairs of a company.

 Inspection of books of accounts, etc of companies.

 To strike off defunct companies from register.

 Enforcement of duty of company to make returns, etc to Registrar.

 Non-disclosure of information in certain cases.

 Winding up petition by the Registrar.

Official Liquidators are the officers appointed by the Central Government

under Section 448 of the Companies Act and are attached to the various
High Courts. They are under the administrative charge of the respective
Regional Directors who supervise their functioning on behalf of the Central
Government.

According to the Act, a company means "a company formed and registered
under the Act or an existing company i.e. a company formed or registered
under any of the previous company laws". The salient features of a
company are:-

 Artificial legal person:- a company is an artificial person in the

sense that it is created by law and lacks the attributes possessed by
natural persons. It is invisible, intangible, immortal and exists only in
 the contemplation of law. Hence, it has to operate through a board of
directors consisting of individuals.

 Separate legal entity:- a company is a distinct legal entity, different

from its members or shareholders. This implies that:- the property of
the company belongs to it and not to the members or shareholders;
no member can either individually or jointly claim any ownership
rights in the assets of the company; an individual member cannot be
held liable for the wrongful acts of the company even if he/she holds
virtually the entire share capital; the members of the company can
enter into contracts with the company.

 Perpetual succession:- a company enjoys continuous existence

and its continuance is not affected by the death, insolvency, mental
or physical incapacity of its members. It is created by law and law
alone can dissolve it.

 Limited liability of members:- the liability of its members is limited

to the amount remaining unpaid on the shares subscribed by them.
Thus, in case of fully paid-up shares, the members cannot be asked
to contribute any further, if the company goes into liquidation.

 Common seal:- a company has a common seal, which is the

signature of that company and signifies common consent of all the
members. The company's seal is affixed on all the documents
executed for and on its behalf.

 Transferability of shares:- the shares of a public company are

freely transferable without the permission of the company but in a
manner provided in the Articles. The shareholders may transfer their
shares to another person and this does not affect the funds of the
 company. But, a private company imposes restrictions on transfer of
its shares.

 Separate property:- all the property of the company vests in it. The
company can control, manage and hold the same in its own name.
The members have no ownership rights in the company's property,
either individually or collectively. A shareholder does not even have
an insurable right in the property of the company. The creditors of
the company can have a claim only against the property of the
company and not against the property of the individual members.

 Capacity to sue and being sued:- a company can enforce its rights
through suits and can also be sued for breach of its statutory rights.

The basic objectives underlying the Act are:-

 A minimum standard of good behaviour and business honesty in

company promotion and management;

 To help in the development of companies on healthy lines;

 To protect the interests of the shareholders;

 To safeguard the interests of the creditors;

 To equip the Government with adequate powers to intervene in the

affairs of a company in public interest and as per the procedure
prescribed by law;

 A fair and true disclosure of the affairs of companies in their annual

published balance sheet and profit and loss accounts;
  Proper standard of accounting and auditing;

 A ceiling on the share of profits payable to managements as

remuneration for services rendered;

 A check on their transactions where there was a possibility of conflict

of duty and interest;

 A provision for investigation into the affairs of any company

managed in a manner oppressive to minority of the shareholders or
prejudicial to the interest of the company as a whole;

 Enforcement of the performance of their duties by those engaged in

the management of public companies or of private companies which
are subsidiaries of public companies by providing sanctions in the
case of breach and subjecting the latter also to the more restrictive
provisions of law applicable to public companies;

 To help in the attainment of the ultimate ends of the social and

economic policy of the Government;

In response to the changing business environment, the Companies Act,

1956 has been amended from time to time so as to provide more
transparency in corporate governance and protect the interests of small
investors, depositors and debenture holders, etc. For example, the
Companies (Amendment) Act, 2006 introduced an important provision of
Director Identification Number (DIN), which is an unique Identification
Number allotted to an individual who is an existing director of a company or
intends to be appointed as director of a company pursuant to section 266A
& 266B of the Companies Act, 1956 (as amended vide Act No 23 of 2006).
The various amendments are:-