IMT Nagpur; 2010-12

COMPANIES ACT, 1956

1

NATURE, FORM AND TYPES OF BUSINESS ENTERPRISES

Business Enterprises
IMT Nagpur; 2010-12

Non-Corporate (Sole Proprietorship, Partnerships & HUF)

Corporate (Cos. & Co-operatives)

The basic difference between and Corporate and Non-Corporate form of business organization is that while a non-corporate form of business can be started without Registration, Corporate bodies cannot be set 2 up without registration under the laws which govern their functioning.

BRIEF STRUCTURE OF THE COMPANIES ACT, 1956

Section 1 Short Title, Extent and Commencement
IMT Nagpur; 2010-12

Section 2 Definitions

Section 3 to 658 Other Provisions

BRIEF STRUCTURE OF THE COMPANIES ACT, 1956

Section 1 Short Title, Extent and Commencement
IMT Nagpur; 2010-12

Section 2 Definitions

Section 3 to 658 Other Provisions

COMPANIES ACT, 1956 - FEATURES

The Companies Act, 1956 is the longest piece of legislation ever passed by our Parliament.
The Act consists of 658 Sections and 15 Schedules.

IMT Nagpur; 2010-12

SHORT TITLE, EXTENT AND COMMENCEMENT (SECTION 1)

This Act may be called the Companies Act, 1956.

It extends the whole of India. It came into force on April 01, 1956.

IMT Nagpur; 2010-12

COMPANY ITS MEANING

A Company in broad sense may mean an association of individuals formed for carrying on some business or undertaking for acquisition of gain.

IMT Nagpur; 2010-12

However, an association formed not for profit acquires a corporate life and falls within the meaning of a company by reason of a license u/s 25 of the Companies Act, 1956.

COMPANY ITS MEANING

An incorporated co. is a single and legal (artificial) person distinct from the individuals constituting it, whereas an unincorporated co. such as a partnership, is a mere collection of individuals.

IMT Nagpur; 2010-12

Therefore, unlike a partnership, a co. is a corporate body and a legal person having status and personality distinct and separate from that of the members constituting it.

COMPANY ITS MEANING

The incorporated co. owes its existence either to a special act of Parliament (LIC, DVC, Air India) or to a company legislation (TISCO, RIL, WIPRO).

IMT Nagpur; 2010-12

The trading partnership which is governed by Partnership Act is the most apt example of an unincorporated association.

COMPANY ITS MEANING

In legal sense, a co. is an association of both natural and artificial persons incorporated under the existing laws of the country.

IMT Nagpur; 2010-12

As per the Co. Act, 1956, a co. means a co. formed and registered under the Co. Act, 1956 or under the previous laws relating to companies. (Sec. 3(1)(iii).

10

COMPANY ITS MEANING

Co means as association of many persons who contribute money or moneys worth to a common stock & employ it in some trade or business & who share the profit or loss arising there from.

IMT Nagpur; 2010-12

The common stock so contributed is the capital. The persons who form it are the members. The proportion of the capital to which each member is entitled is his share.

11

COMPANY ITS CHARACTERISTICS

The most striking characteristics of a company are:
1. Corporate Personality By incorporation under the Act, the co. is vested with a corporate personality quite distinct from individuals who are its members.

12

IMT Nagpur; 2010-12

CORPORATE PERSONALITY
Being a separate legal entity : It bears its own name; It has a seal of its own; It is capable of owning property, Incurring debts, borrowing money, Having a bank account, Employing people, entering into contracts, Suing and being sued

13

IMT Nagpur; 2010-12

CORPORATE PERSONALITY

Saloman V. Saloman and Co. Ltd.

IMT Nagpur; 2010-12

Saloman V. Saloman.xlsx

14

CORPORATE PERSONALITY

Lee V. Lees Air Farming Ltd.

IMT Nagpur; 2010-12

Lee V. Lee Air Farming.xlsx

15

CORPORATE PERSONALITY
Small deviation from the Corporate Personality Rule Experience of a Shareholder is the experience of a Company New Horizons Limited V. Union of India

IMT Nagpur; 2010-12

New Horizons Limited.xlsx

16

COMPANY ITS CHARACTERISTICS

2. Limited Liability
One of the most important advantages of doing business under the corporate form or organization.

IMT Nagpur; 2010-12

This means that the liability of a members is limited.

17

COMPANY ITS CHARACTERISTICS

2. Limited Liability
Eg., If A holds shares of nominal value of Rs. 1000 and has already paid Rs. 500, he cannot be called upon to pay more than Rs. 500, the amount remaining unpaid on his shares.

IMT Nagpur; 2010-12

If he holds fully paid up shares, he has no further liability to pay even if the co. is declared insolvent.

18

COMPANY ITS CHARACTERISTICS

2. Limited Liability
In Partnership firms, the liability of the partners for the debts of the business is unlimited.

IMT Nagpur; 2010-12

Not only their share in the firm but their personal assets may be attached to satisfy the debts and liabilities of the firm.

19

COMPANY ITS CHARACTERISTICS

3. Perpetual Succession
Members may come and members may go, but the co. can go on forever.

IMT Nagpur; 2010-12

During the war, all the members of one Private Co., while in the General Meeting, were killed by a bomb, but the co. survived not even a hydrogen bomb could have destroyed it.

20

COMPANY ITS CHARACTERISTICS

4. Separate Property
A Co. being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name.

IMT Nagpur; 2010-12

The property of the Co. is not the property of the shareholders, it is the property of the Co.

Norther Insurance Co. Ltd..xlsx

21

COMPANY ITS CHARACTERISTICS

5. Transferability of Shares
The capital of a co. is divided into parts, called Shares. A member may sell his shares in the open market and realise the money. This provides liquidity to the members and ensures stability to the Co. (as the member is not withdrawing his money from the Co.).

22

IMT Nagpur; 2010-12

COMPANY ITS CHARACTERISTICS

6. Common Seal
Since, the Co. has no physical existence, it must act through its agents and all contract entered into by his agents must be under the seal of the Co.

IMT Nagpur; 2010-12

The Common Seal of a Co. is of great importance and acts as official signature of a Co.

The name of the Co. must be engraved on its seal.

23

COMPANY ITS CHARACTERISTICS

7. Capacity to sue and be sued
A Co. being a body corporate, can sue and be sued in its name.

IMT Nagpur; 2010-12

To sue means, to institute a legal proceedings against (a person) or to bring a suit in a court of law.

24

COMPANY ITS CHARACTERISTICS

8. Contractual Rights
A Co., being a separate legal entity different from its members, can enter into contracts for the conduct of the business in its own name.

25

IMT Nagpur; 2010-12

COMPANY ITS CHARACTERISTICS

9. Limitation of action
A Co. cannot go beyond the power stated in the MOA.

IMT Nagpur; 2010-12

MOA of the Co. regulates the powers and fixes the objects of the Co. and provides the entire super structure of the Co. rests.

26

COMPANY ITS CHARACTERISTICS

10. Separate Management
Members do not have effective and intimate control over its working and elect its representatives to conduct corporate functioning.

IMT Nagpur; 2010-12

The Co. is administered and managed by its managerial personnel.

27

COMPANY ITS CHARACTERISTICS

11. Termination of Existence
A Co., being an abstract and artificial person, does not die a natural death.

IMT Nagpur; 2010-12

It has its existence only in contemplation of law.

It is created by law, carries on its affairs as per law and ultimately is effaced by law.

28

COMPANY ITS CHARACTERISTICS

11. Termination of Existence
The existence of a Co. is terminated by means of winding up.

IMT Nagpur; 2010-12

However, to avoid winding up sometimes companies change their form by means of reorganization, reconstruction and amalgamation.

29

LIFTING OF CORPORATE VEIL

Fraudulent Conduct :

IMT Nagpur; 2010-12

Where the business has been carried on with an intent to defraud creditors or any other person or for any fraudulent purpose, those who are knowingly parties to such conduct of business be made personally liable without any limitation for all or any debts or other liabilities of the Co.

30

LIFTING OF CORPORATE VEIL

Non Payment of Tax:

IMT Nagpur; 2010-12

When any Pvt. Co. is wound up, any tax assessed on the Co., whether before or in the course of liquidation in respect of any income of any PY cannot be recovered, every person who was Director of that co. at any time during the relevant PY shall be jointly and severally liable for payment of tax.

31

LIFTING OF CORPORATE VEIL

Ultra Vires Act:

IMT Nagpur; 2010-12

Directors of a Co. will be personally liable for all those acts which they have done on behalf of a co. if they are Ultra Vires the Co.

32

LIFTING OF CORPORATE VEIL

Mis Description of name:

IMT Nagpur; 2010-12

Where an officer of a Co. signs on behalf of a Co. any contract, agreement, cheque, bill of exchange, order for money or goods or such other documents, such person shall be personally liable to the holder if the name of the Co. in not mentioned. Hendon V. Adelman & Others.xlsx

33

LIFTING OF CORPORATE VEIL

Misrepresentation in Prospectus:

IMT Nagpur; 2010-12

In case of misrepresentation in Prospectus, every Director, Promoter and every other persons who authorises the issue of such prospectus incurs liability towards those who subscribe for share on the faith of untrue statement.

34

ILLEGAL ASSOCIATION
An unincorporated Co., association or partnership consisting of large number of persons has been declared illegal.

IMT Nagpur; 2010-12

No Co., Association or Partnership consisting of more than 20 persons (10 in case of banking business) can be formed for the purpose of carrying on any business for gain, unless it is registered as a Co. under the Companies Act, 1956 or is formed in pursuance of some other Indian Law.

35

ILLEGAL ASSOCIATION
This provision is not applicable to:
IMT Nagpur; 2010-12

A single Joint HUF carrying on any business whatever may be the no. of its members. But if 2 or more Joint HUF carry on business together and their no. of members exceeds 20, then their association will be illegal.

Charitable, Religious or scientific associations, which are not formed for the purpose of making profit or gain.

36

TYPES OF COMPANIES
COMPANIES Basic Type Private Co. Public Co.

IMT Nagpur; 2010-12

37

TYPES OF COMPANIES
COMPANIES On the basis of Incorporation Statutory Cos. Registered Cos.

IMT Nagpur; 2010-12

38

TYPES OF COMPANIES
COMPANIES On the basis of Liability Unlimited Cos. Limited Cos.

IMT Nagpur; 2010-12

Cos. Limited by Guarantee

39

Cos. Limited by Shares

TYPES OF COMPANIES
COMPANIES Other Classification Government Co. Foreign Co. Holding & Subsidiary Co. Association not for Profit
40

IMT Nagpur; 2010-12

TYPES OF COMPANIES
COMPANIES On the basis of Listing Listed Cos. Unlisted Cos.

IMT Nagpur; 2010-12

41

PRIVATE COMPANIES
A Pvt. Co. means a Co. which has a minimum share capital of Rs. 1.00 lacs and by its AOA:

IMT Nagpur; 2010-12

a) Restricts the right to transfer its shares; b) Limits the no. of its members as 50; c) Prohibits any invitation to public to subscribe for any shares or debentures of the Co., c) Prohibits any invitation or acceptance of deposits from persons other than its members or Directors or their relatives

42

PRIVATE COMPANIES
The word Private Limited must be added at the end of its name by a Pvt. Co.

IMT Nagpur; 2010-12

Minimum no. of Members = 2 Minimum no. of Directors = 2

The only 2 members may also be the only 2 Directors of a Pvt. Co.

43

PRIVILEGES AND EXEMPTIONS TO PRIVATE COMPANIES

Co. Act confers certain privileges on Pvt. Cos. and such Cos. are exempt from complying with few provisions of the Act. The basic rationale behind this is that since Pvt. Cos. are restrained from inviting capital and deposits from the public, not much public interest in involved in their affairs as compared to Public Cos.

44

IMT Nagpur; 2010-12

PUBLIC COMPANIES

A Public Co. means a Co. which:

a) is not a Private Co.; b) has a minimum paid up capital of 5.00 lacs; c) is a Pvt. Co. which is a subsidiary of Public Co., Minimum no. of Members = 7 Minimum no. of Directors = 3

IMT Nagpur; 2010-12

45

STATUTORY COMPANIES
Constituted by a Special Act of Parliament or State Legislature.

IMT Nagpur; 2010-12

Companies Act, 1956 do not apply to them.

Eg., Reserve Bank of India, Life Insurance Corporation of India, ONGC,

Such Cos. Do not use the word Limited as part of their name.

46

REGISTERED COMPANIES
Companies registered or incorporation under the Companies Act, 1956.

IMT Nagpur; 2010-12

Eg., Reliance Industries Limited, Hero Honda Motors Limited, Tata Consultancy Services Limited.

47

UNLIMITED COMPANIES
A Co. not having any limit on the liability of its members.

IMT Nagpur; 2010-12

Members are liable for the Companys debt and their liability in unlimited.

Members of an UC are not liable directly to the creditors of the co., the liability is only towards the co. and in the event of its being wound up only liquidator can ask the members to contribute.

48

COMPANIES LIMITED BY GUARANTEE

A co. having liability of its members limited by its MOA to such an amount as the member undertake to contribute to the assets of the Co. in the event of its winding up.

IMT Nagpur; 2010-12

The liability of the members arises only when the Co. has gone into liquidation.

Eg., Club, Trade Association, Socities

49

COMPANIES LIMITED BY SHARES

Liability of the members is limited by the MOA to an amount, if any, unpaid on the shares held by them.

IMT Nagpur; 2010-12

If his shares are fully paid up, he has nothing more to pay.

Eg., a shareholder who has paid Rs. 75 on a share of face value Rs. 100, can be called upon to pay the balance of Rs. 25 only.

50

Most common types of Companies.

ASSOCIATION NOT FOR PROFIT OR SEC 25 COMPANIES

Companies incorporated to promote the charitable, religious, educational or other similar objects.

IMT Nagpur; 2010-12

Co. prohibits the payment of dividend to its members but use it for aforesaid objects.

Need not end the name of the Co. with Pvt. Ltd. or Ltd.

51

GOVERNMENT COMPANIES
Any Co. in which not less than 51% of the paid up share capital is held by the CG or by any SG or Governments or partly by the CG and partly by one or more SGs.

IMT Nagpur; 2010-12

A subsidiary of the Govt. Co. is also treated as Govt. Co.

52

FOREIGN COMPANIES
A Co. which is incorporated in a country outside India under the laws of that other country and has a place of business in India.

53

IMT Nagpur; 2010-12

HOLDING AND SUBSIDIARY COMPANIES

A Co. shall be treated as a Subsidiary of another Co., if and only if

IMT Nagpur; 2010-12

a) That other controls the composition of BODs; b) That other controls more than half of the total voting power of such Co.; c) That other holds more than half in the nominal value of its equity share capital; The first mentioned Co. is a subsidiary of any Co. which is the others subsidiary.

54

HOLDING AND SUBSIDIARY COMPANIES

To illustrate, Co. A is a subsidiary of Co. B if, and only if:
IMT Nagpur; 2010-12

1. Co. B (holding) controls the composition of the BODs of Co. A (subsidiary) ;

2. Co. B (holding) controls more than 50% voting power of Co. A (subsidiary) ;

3. Co. B (holding) holds more than half in the nominal value of equity shares of Co. A (subsidiary) ;

55

HOLDING AND SUBSIDIARY COMPANIES

To illustrate, Co. A is a subsidiary of Co. B if, and only if:
IMT Nagpur; 2010-12

4. If Co. A (subsidiary) is a subsidiary of Co. C which is subsidiary of Co. B, then the Co. A is also a subsidiary of Co. B; B

C A
56

HOLDING AND SUBSIDIARY COMPANIES

To illustrate, Co. A is a subsidiary of Co. B if, and only if:
IMT Nagpur; 2010-12

5. If Co. D is the subsidiary of Co. A, then D will be the subsidiary of Co. C and also of Co. B; B C A D

57

LISTED COMPANIES

A company is said to be listed, if its shares can be traded on a stock exchange. It is the securities that are listed, not the company. The phrase listed company is widely used to mean a company that has listed its Equity Shares. It is possible for a company to have listed Debt Securities but not listed shares.

IMT Nagpur; 2010-12

58

UNLISTED COMPANIES
Unlisted Cos. means those Cos. whose shares (or debt instruments) are not listed at any of the Recognized Stock Exchange (BSE, NSE) in India.

59

IMT Nagpur; 2010-12

IMPORTANT NOTE
In respect of Insurance, Banking and Electricity Supply Companies incorporated and registered under the Companies Act, 1956, the provisions of Insurance Act, Banking Regulations Act and Electricity Supply Act will prevail when they are inconsistent with the provisions of the Companies Act, applicable generally.

60

IMT Nagpur; 2010-12

THANK YOU

61

IMT Nagpur; 2010-12