Company Law

Features of the Company act of 1956

Company act of 1956 states that,

The Company Act came into force from 1 April 1956.

The Act was based upon the recommendation of company law committee appointed
under the chairmanship of Mr. C. H. Bhaba on 25th October, 1950.

The committee submitted its report in 1952. The Indian company act extends to the
whole India.

DEFINITION AND NATURE OF A COMPANY

Companys Act of 1956 defines

a group of persons associated together for the purpose of carrying on a business, with a view to
earn profits.
The word Company is an amalgamation (combination) of the Latin word Com meaning
with or together and Pains meaning bread.
a group of persons who have come together or who have contributed money for some common
person and thus have incorporated themselves into a distinct legal entity in the form of a
company.
Section 3(1) (i) & (ii) of the Companies Act, 1956 defines a company as:
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 earlier
Company Laws.

Objects & Purposes of Company Legislation

The company is a form of business organization in which the funds of a large number of
investors are managed by a few persons for the purpose of earning profits which are then
shared by all the investors. The main object and purposes of statues relation to companies are:
1. Encourage investments in companies by providing certain facilities,
Ex: Limitation of liability, Transferability of shares etc.
2. Ensure due and proper administration of the funds and assets of companies in the interest of
the investing public.
3. Present malpractices by directors and managers.
4. Arrange for investigation into the affairs of companies and provide for effective audit in
dealing with cases of dishonesty and fraud in the corporate sector.

Characteristics of a Company
The principal characteristics of an incorporated company can be summarised as follows:
1. Registration
2. Voluntary association
3. Legal personality
4. Contractual capacity
5. Management
6. Capital
7. Permanent existence
8. Registered Office
9. Common Seal
10. Limited liability
11. Transferability
12. Statutory Obligation
13. Not a citizen
14. Residence
15. No fundamental rights
11. 16. Social Objectives
17. Centrally administered
18. Lifting the veil

Types of companies Registered under company act 1956

Types of companies Registered under company act 1956

OWNERSHIP
Government Company (Sec 617) :
A government company means any company in which at least 51% of the paid up share capital
is held by the central government or by any state government or partly by one or more state
Government.

COMPANY WITH LIABILITY

Limited by Share[sec12(2)a]: Companies in which the liability of its members is limited to the
extent of the amount unpaid on the shares held by a particular member.
Company limited by Guarantee: The liability of members is limited to a fixed amount which
members undertake to contribute to the assets of the company in case of its winding up.
Unlimited Liability: Wherein members are liable for the debts of the company irrespective of
their interest in the company

NUMBER OF MEMBERS
Private Company [Sec 3(1)(iii)]:
A private company is one which, by its Article of association

restricts the right to transfer its share, if any

limits the maximum number of its member to fifty

prohibits any invitation to the public to subscribe for any share or debenture of the company.
Public Company [SEC 3(1)(iv)]:
A public company means a company which is not a private company. In other words, a public
company, means a company which by its article does not-

limits the number of its member.

Allows the invitation to the public to subscribe for any share in, or debentures, of the company.

COMPANIES ACCORDING TO CONTROL

Holding Company:
Where a company has control over another company, it is known as the holding company.
Subsidiary Company:
The company over which control is exercised is called the subsidiary company.

INCORPORATED COMPANIES
1. Chartered Companies: These companies are incorporated under a special charter such as the
east India company. The bank of England. the company act does not apply to it.

2. Statutory Companies: These companies are incorporated by special act of legislature (Act of
parliament or state legislature) eg. RBI, UTI, LIC.
3. Registered Companies: Companies which are registered under the Indian Companies Act,
1956 are called registered companies. To become a registered company one has to take the
certification of incorporation from the registrar.

Memorandum of Association

Memorandum of Association of a company charter & defines the limitations of the powers of a
company. It contains the fundamental condition upon which alone the company is allowed to be
incorporated - Lord Cairns
According to Sec 2 (28) of the Act,
Memorandum of Association of a company as originally framed or as altered from time to
time in pursuance of any previous companies law or of this Act.
Lord Macmillan stated that The purpose of Memorandum of Association is to enable the share
holders, creditors and those who deal with the company to know what its permitted range of
enterprise is.

Memorandum of Association

The first step in the formation of the company is to prepare memorandum of

association. It is one of the documents which has to be filed with registrar of the
companies at the time of incorporation of a company.

It is vital document, tell about the object of the companys formation ,the power of the
company as well as the boundaries beyond which the action of the company cannot go.

Purpose of The Memorandum

There are two purposes of the MOA
1. Share Holder Purpose
Field of investment
Risk of investment

2. Outsiders Purpose
Objects of the company
Contractual Relation

Format of The Memorandum

The format of the memorandum should follow the following rules:

Divided into paragraphs and numbered consecutively

 Signed by subscriber

For Private company 2 subscriber

For Public company 7 subscriber

In the presence of at least 1 witness

Printed
Should be accepted by the Registrar

Importance of memorandum
The memorandum shows the range of the enterprise. It is an important part of company
formation due to the following points:

It defines the rights and liabilities of the members.

It shows the capital structure of the company.

It shows the object of the company.

It specifies the state in which the registered office of the company is situated.

It shows the constitution of the company.

It specify the conditions under which the company has been incorporated.

Contents of Memorandum of Association

Contents of Memorandum of Association

Name Clause:
The name of the company with the word Limited at the end of a public company and Private
Limited at the end of a private company.
It also helps to Avoid Undesirable Names

Too similar to the name of another company

Misleading

Prohibition of use of certain names

Ex: Name, emblem or official seal of UNO, WHO Central & State government,
President & Governor

If the company is promoting art, science, religion etc Limited and Private Limited can be
avoided with the permission of the central government.

Situation / Registered office Clause:

It pinpoints the name of the state or place where the registered office of the company is
situated.

Exact location of registered office should be intimated within 30 days or

Otherwise there is a fine.

Object Clause:
In a memorandum of association this is the section that describes the objectives for which the
firm was formed. If the firm's activities fall outside of these objectives, the firm is said to
be acting ultra vires (beyond its powers). Thus ,

we should clearly divide the main objects

Company should commence its business with the main object

In case of non-trading companies ,state to which the objects extend should also be mentioned

In case of trading companies, this need not be mentioned

Area of Operation Clause:

Except in the case of trading corporations, the state or the states to whose territories the object
extend.

Liability Clause:
The nature of the liability of the members

Limited by shares

Limited by guarantee

or

Capital Clause:
In the case of a company having share capital- unless the company is an unlimited company,
the memorandum shall state the amount of share capital and the division thereof into shares of a
fixed amount. In other words:

Share capital amount should be specified

Cannot issue more shares for the time being

Equity or Preference shares

Private company can issue any type of shares

Association or Subscription Clause:

This clause states that:

Subscribers name, address should be mentioned in the MOA

Each subscriber must take at least 1 share

MOA should be signed by

At least 7 subscriber for Public company
At least 2 subscriber for Private company

Attested by at least 1 witness

Articles of Association
Article means the Articles of Association of a company, as originally framed or as altered
from time to time in pursuance of any previous companies laws or of this Act Sec.2 (2)
The articles proceed to define the duties, the right and the powers of the governing body as between
themselves and the company at large and the mode and form in which the business of the company
is to be carried on and the mode and form in which changes in the internal regulations of the
company may from time to time be made.
IMPORTANCE OF AOA

They are subordinate to, and controlled by, the memorandum.

While framing care must be taken to see the regulations framed do not go beyond the powers of
company or MOA

COMPANIES WHICH MUST HAVE THEIR OWN ARTICLES

Unlimited companies
Companies limited by guarantee
Private companies limited by shares

Public company may adopt Table A given in schedule 1 to the Act

FORM AND SIGNATUREOF ARTICLES

The articles should be:

Printed

Divided into paragraphs

signed by each subscriber of memorandum with his details in the presence of a witness and
registered with the memorandum

REGULATIONS REQUIRED
A. Unlimited company:
- The number of members with whom the company has to be registered
- If it has share capital, the amount of share capital with which the company is to be registered.
B. Company limited by guarantee:
- The articles shall state the number of members with which the company is to be registered.

C. Private company:

For companies having a share capital the following provisions apply

- Restrict the rights to transfer shares.
- Limit the members to 50.
- Prohibits any invitation to public to subscribe for shares or debentures in company

Contents of the Articles

The contents of the Article of association are as follows:

1. The extent to which Table A is applicable
2. Different classes of shares and their rights
3. Procedure of making an issue of share capital and allotment thereof
4. Procedure of issuing share certificates and share warrants
5. Forfeiture of shares and the procedure of their re-issue

6. Procedure for transfer and transmission of shares

7. The time lag in between calls on shares conversion of shares into stock.
8. Directors, their appointment, remuneration, qualifications, etc.
9. Account and audit.
10. Lien of shares.
11. Payment of commission on shares and debentures to underwriters.
12. Rules for adoption for preliminary contracts if any
13. Re-organization and consolidation of shares capital.
14. Alteration of share capital & Buyback of shares.
15. Borrowing power of directors.
16. General meeting, proxies and polls.
17. Voting rights of members.
18. Winding up

Contents of the Articles

In short,
1. Powers, duties, rights and liabilities of Directors
2. Powers, duties, rights and liabilities of members
3. Rules for Meetings of the Company
4. Dividends
5. Borrowing powers of the company
6. Calls on shares
7. Transfer of shares
8. Forfeiture of shares
9. Voting powers of member
10. Appointment of directors and their qualifications
LEGAL EFFECT OF MEMORANDUM & ARTICLES

The Memorandum and Articles when registered, bind a company and the members to the same
extent as if it has been signed by the company and each member.

 The effect of these provisions is to constitute, through the Memorandum and the Articles of a
company, a contract between each member and the company.

HOW FAR THESE DOCUMENTS BIND?

Members to the company
Company to the members
Members inter se
Company to the outsiders

Certificate Of Incorporation
Certificate of Incorporation is the document issued by the registrar of incorporations certifying
the registration of memorandum and article of incorporation of the proposed body corporate on
due compiling of the statutory provisions required for incorporation

Once all the above documents have been filed and they are found to be in order, the Registrar
of Companies will issue Certificate of Incorporation of the Company.

This document is the birth certificate of the company and is proof of the existence of the
company. Once, this certificate is issued, the company cannot cease its existence unless it is
dissolved by order of the Court.