Companies Act, 1956

IMI

Meaning and Definition of a

Company
Section 3(1)(i) of the Companies Act,

1956 defines a company as: a

company formed and registered under
this Act or an existing Company.
Existing Company means a company
formed and registered under any of
the earlier Company Laws.

Characteristic Features
Separate Legal Entity
Case: Salomon v. Salomon & Co. Ltd.
Limited Liability
However, liability of a company is never
limited. Its liability of members only that
is limited.
Free Transferability of Shares
Other Features:
Perpetual Succession: Separate property
and Common Seal.

Types of Companies
Private Company
Public Company

Private Company [Section 3(1)(iii)]

A private company means a company

which has a minimum paid up capital of

one lakh rupees or such higher paid-up
capital as may be prescribed and by its
articles :
(a) restricts the right to transfer its
shares, if any;
(b)limits the number of its members to
50, not including:

Private Company
(i)

contd.

persons who are in the employment

of the company, and

(ii) persons who, having been formerly in

the employment of the company, were

members of the company while in that
employment and have continued to be
members after the employment ceased;

(c) prohibits invitation to the public to

subscribe for any shares in or

debentures of, the company; and

Private Company

contd.

(d) prohibits any invitation or acceptance of

deposits from persons other than its
members, directors or their relatives.
Where two or more persons hold one or

more shares in a company jointly, they

shall, for the purposes of membership,
be treated as a single member.

Public Company [Section 3(1)(iv)]

A public company means a company which:

(a) is not a private company [In other words,

it should not have the restrictions of Section
3(1)(iii) in its articles ];
(b) has a minimum paid-up capital of five lakh
rupees or such higher paid-up capital, as
may be prescribed; and
(c) is a private company, which a subsidiary of
a company, which is not a private company.

How to form a company?

The whole process of formation of a

company may be divided into four

stages, namely:
(i) Promotion
(ii) Registration
(iii) Floatation/Raising of Capital
(iv) Commencement of Business.

Promotion

Who is a Promoter?

Bowen, L.J.

The term promoter is a term not of law but of

business, usefully summing up, in a single
word promotion, a number of business
operations familiar to the commercial world by
which a company is brought into existence.
However, the persons assisting the promoters
by acting in a professional capacity do not
thereby become promoters themselves.

Legal Position of a Promoter

Promoter stands in a fiduciary position

towards the company.

In other words, he is not allowed to make
secret profits.
Case: Gluckstein v. Barnes

Pre-incorporation contracts
Void-ab-initio.
However, pre-incorporation contracts

shall be valid if:

The contract is made for the purpose of

the company and the contract is
warranted by the terms of incorporation.

The company adopts the transactions

after incorporation.

Registration/Incorporation
Private Company
Minimum

Number of Members
required 2.

Public Company
Minimum

Number of Members
required 7.

Steps
1. Application for availability of name:
Three names in order of priority
conforming to the provisions of the Act
and the Guidelines issued by Department
of Company Affairs in this regard:

Name to end with the word(s) Limited or

Private Limited, as the case may be,
except:
(i) Section 25 Companies
(ii) Govt. Companies (need not use Pvt. Ltd.)
(iii)Producer Companies.

Steps

contd.

Name

should not be identical or too

similar to the name of an already existing
company.
Should not include the name of a
registered trade mark.

2. Preparation of Memorandum and

Articles of Association

Memorandum defines and limits the

scope of activities of a company.

Steps

contd.

Contents of Memorandum
1.
2.
3.

Name clause
Registered office clause
Object clause

4.
5.

Doctrine of ultra-vires

Liability clause
Capital clause

Steps

contd.

3. Preparation of other documents

Power of Attorney in favour of a

professional to effect registration.
Consent of Directors (in case of a
Public Company)
Particulars of Directors, Manager,
Secretary, etc. in the prescribed form.
Notice of registered address

To be supplied within 30 days of

incorporation.

Steps
Statutory

contd.
Declaration

To the effect that all requirements of law

with respect to incorporation have been
duly complied with.
The declaration to be signed by:

Advocate of Supreme Court or High Court; OR

C.A../C.S. practising in India and associated
with the formation of the company; OR
Director, Manager, Secretary of the company
(as named in the Articles)

4. Filing of documents with ROC

Certificate of Incorporation
Effect of Certificate of Incorporation

(Section 34)

On incorporation, the association of persons

becomes a body corporate by the name
contained in the memorandum, capable
forthwith of exercising all the functions of an
incorporated company and having perpetual
succession and a common seal but with such
liability on the part of the members to contribute
to the assets of the company in the event of its
being wound-up as is mentioned in the Act.

Conclusiveness of Certificate of
Incorporation (Section 35)
Conclusive to the effect that all

requirements of law relating to

registration and matters precedent and
incidental thereto have been duly
complied with.

Case Laws:
Moosa v. Ibrahim
Jubilee Cotton Mills Ltd. v. Lewis

Provisional Contracts
Contracts entered into by company after

incorporation but before getting the

certificate to commence business are
called provisional contracts.
Provisional contracts are, therefore,
relevant to public companies only.
Such contracts become void, if company
fails to obtain certificate to commence
business and automatically become valid,
and binding if company obtains the
certificate.

Raising of Capital
A company may raise capital

through

Private placement
Issue of Prospectus

Private placement means raising of

capital from friends, relatives and

through brokers.

Commencement of Business
(Section 149)
Where Company has issued a Prospectus:

a company cannot commence business

or exercise borrowing powers unless:
(a) shares up to the amount of the minimum
subscription have been allotted by the
company;
(b) every director of the company has paid to
the company, on each of the shares taken or
contracted to be taken by him and for which
he is liable to pay in cash,

Commencement of Business
contd.
the same proportion as is payable on
application and allotment on the shares,
offered for public subscription;
(c) no money is, or may become, liable to be
repaid to the applicants for shares or
debentures offered for public subscription, for
failure to obtain permission for the shares to
be dealt in on any recognised stock
exchange;

Commencement of Business
contd.
(d) there has been filed with the Registrar a duly
verified declaration by one of the directors or
the secretary or, where the company has not
appointed a secretary, a secretary in whole
time practice in the prescribed form that
clauses (a), (b) and (c) (mentioned above)
have been complied with.

Penalty:
Every person at fault may be fined upto

Rs.5,000/- for every day of default.

Memorandum of Association
Every company has to have a Memorandum

of Association.
It contains, besides other significant
information, the objects for which the
company is formed.
Object clause defines as well as confines
the powers of the company.
Anything done beyond these objects is ultravires the company and void.

Contents of Memorandum
1. Name Clause: It contains the name with
which company is proposed to be
registered. Companies Act requires that:

(a)

(b)

The name chosen should end with the

word Limited or the words Private
Limited, as the case may be.
The name should not be undesirable i.e., it
should not be identical or too similar to the
name of an already existing company OR
include the name of a registered trade
mark unless consent of the owner of the
trade mark is obtained.

Contents of Memorandum
2. Registered Office Clause:
This clause states the name of the State in
which registered office of the company is to be
situated.

3. Objects Clause
This clause is to be divided into:
(a)

(b)

Main objects and objects incidental or ancillary to

main objects
Other objects

A company cannot commence any business

stated under other objects unless special
resolution by the shareholders is passed.

Doctrine of Ultra-Vires
Case Law: Ashbury Rly. Carriage
Co. v. Riche.
Effects of Ultra-vires transactions
(i) void-ab-initio
(ii) Injunction
(iii) Personal liability of directors

towards the company

towards the outsiders

Contents of Memorandum
4. Liability Clause
5. Capital Clause
This clause states the authorised capital
and the number of shares into which
the same shall be divided.

Alteration of Memorandum
Various clauses of memorandum of

association can be altered by following

the procedure laid down in the Act.
Different requirements are prescribed
for different clauses:

1. Name Clause: can be altered by:

(a)
(b)

Passing a special resolution; and

Obtaining the approval of the Central
Govt.

Alteration of Memorandum
2. Registered Office Clause: may be
shifted:
(a)
(b)

within the same city by passing Directors

Resolution;
From one city to another city within the
same State:

by passing special resolution only, if no

change in jurisdiction of Regional Director
by passing special resolution, and
Obtaining the approval of Regional
Director.

Alteration of Memorandum
3. Objects Clause

Special Resolution
Only on Grounds stated in Sec.17(1).

4. Liability Clause

Cannot be increased without written

consent of each and every member.
Can be reduced:

by passing special resolution

Confirmation of court

Alteration of Memorandum
5. Capital Clause

Authorised capital may be

increased by passing an ordinary
resolution at a meeting of the
shareholders.

Articles of Association
The articles of association of a company are its bye-

laws or rules and regulations that govern the

management of its internal affairs and the conduct of
its business.
The articles regulate the internal management of the
company. They define the powers of its officers.
They also establish a contract between the company
and the members and between the members inter
se. This contract governs the ordinary rights and
obligations incidental to membership in the company
[Naresh Chandra Sanyal v. Calcutta Stock
Exchange Association Ltd. (1971)].

Companies which must have Articles

Unlimited Companies:
The

Articles of such a company must

state:
Total number of members; and
Share capital.

Companies limited by Guarantee:

Articles

of such company must state

total number of members.

Companies which must have Articles

contd.
Private Companies limited by shares:
must

include requirements of
Section 3(1)(iii).

No Article Company
A public limited company having share

capital may be registered without

Articles.

Alteration of Articles
Articles may be altered by a company

by passing special resolution at a

general body meeting of shareholders.
However, where alteration has the
effect of converting a public company
into a private company (i.e., introduction
of restrictive clauses of Section 3(1)(iii),
approval of Central Government must
be obtained.

Doctrine of Constructive Notice

According to Section 610, every person

dealing with the company is deemed to

have read M/A and A/A and understood the
contents thereof in the correct perspective.

Doctrine of Indoor Management

The rule was first laid down in Royal British

Bank v. Turquand.
Rule of Indoor Management is an exception
to the Doctrine of Constructive notice.

Exceptions of Indoor Management

1. Knowledge of irregularity : Case: Howard v.
Patent Ivory Co.
2. Negligence : Case: Anand Behari Lal v.

Dinshaw & Co. (Bankers) Ltd.

3. Forgery : Case: Ruben v. Great Fingal
Consolidated [Secy. Forged signatures of two
directors]
4. No knowledge of articles : Case: Rama
Corporation v. Proved Tin & General
Investment Co.

Prospectus
A prospectus, as per Section 2(36),

means any document described or issued

as prospectus and includes any notice,
circular, advertisement or other document
inviting deposits from the public or inviting
offers from the public for the subscription
or purchase of any shares or debentures
of a body corporate.

Prospectus

contd.

Thus, a prospectus is not merely an

advertisement; it may be a circular or

even a notice. A document shall be
called a prospectus if it satisfies two
things:
(a) It invites subscription to shares or
debentures or invites deposits.
(b) The aforesaid invitation is made to the
public.

What constitutes Invitation to

Public
As per Section 67, Invitation to public

includes:
invitation to any section of the public
howsoever selected provided the invitation
is made to all the members of that section
of public indiscriminately.
Invitation calculated to be made available
even to those who do not receive the
same.
Invitation to 50 or more persons.

Mis-statement in a Prospectus and

its consequences
What is Mis-statement?
According to Section 65(1) of the Act:

(a) a statement included in a prospectus shall be

deemed to be untrue, if the statement is
misleading in the form and context in which it is
included; and
(b) where the omission from a prospectus of any
matter is calculated to mislead, the prospectus
shall be deemed in respect of such omission, to
be a prospectus in which an untrue statement is
included. Case: Rex v. Kylsant

Remedies
Liability for Mis-statements in a Prospectus

Civil Liability (Sec.62 & 56)

Criminal Liability(Sec. 63)

Against the Promoters,

Directors, other
Officers and Experts

mpany

Rescission of Contract

Damages

Claim for Damages

Against the Promoters,

Directors and Other officers
(not available against experts)

Against the Company

Compensation under Sections

62 and 56

Fine upto
Rs. 50,000

Imprisonment

Fine upto R

Bot

Share and Share Capital

According to Section 2(46), A Share represents

a unit into which capital of a company is divided.

However, courts have held that a share is not
merely a unit of capital, it represents a bundle of
rights and obligations. Holder of a share is
entitled to certain rights (say, right to receive
dividends, to receive notice of meetings, to
participate in the proceedings of a meeting, to
elect directors) and is also subjected to a
number of obligations (say, to abide by Articles of
Association, to maintain decorum of the
meetings).

Kinds of Shares
The following kinds of shares may be

issued by a company:
1.
2.

3.
4.

Equity shares carrying voting rights.

Equity shares carrying differential rights
as to voting or dividend (commonly called
Non-Voting Equity Shares)
Preference Shares
Cumulative convertible Preferable
Shares

Kinds of Shares

contd.

Preference Shares carry preference

with respect to two things:

1.
2.

Preference with respect to dividend at a

fixed rate or of a fixed amount.
Preference with respect to return of
capital in case of winding up.

Equity Shares means a share which is

not a preference share.

Allotment of Shares
Allotment is an acceptance to an offer for

purchase of shares.
Where allotment does not conform to the
statutory requirements, it is called irregular
allotment. For allotment to be valid,
following requirements must be satisfied:
1.

A copy of prospectus or statement in lieu of

prospectus must have been delivered to
Registrar of Companies.

Allotment of Shares

contd.

2. Application money must not be less than

5% of the nominal value.

3. Minimum subscription (i.e., at least 90% of
the issue) must have been received.
4. Application money must be kept deposited
in a Scheduled Bank till the minimum
subscription has been received.
5. Shares must have been listed on the stock
exchange(s) mentioned in the Prospectus.

Administration/Management of
a company
A company functions through the medium of

Board of Directors. However, certain powers

have been reserved to be exercised by
shareholders in general body meetings.
Section 291 of the Companies Act, 1956
confers general power on the Board of
Directors. It provides: Subject to the provisions
of the Act, 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 authorised to exercise and do.

Powers which are exerciseable

only by the shareholders.
1. Sell, lease or otherwise dispose of the whole,
substantially the whole, of the undertaking of
the company, or where the company owns
more than one undertaking, of the whole or
substantially the whole, of any such
undertaking.
2. Remit or give time for the repayment of any
debt due by a director except in the case of
renewal or of continuance of an advance made
by a banking company to its directors in the
ordinary course of business.

Powers

contd.

3. Invest, otherwise than in trust securities, the

amount of compensation received by the
company in respect of compulsory acquisition
of any property or fixed assets of the company.
4. Borrow monies exceeding the aggregate of the
paid-up capital of the company and its free
reserves. Borrowing does not include
temporary loans (i.e., loans payable on
demand or within six months but excluding
loans for capital expenditure) obtained from
the companys bankers in the ordinary course
of business.

Powers

contd.

The resolution passed at the general meeting

must specify the total amount upto which
moneys may be borrowed by the Board of
directors in any financial year.
5. Contribute in any year, to charitable and other
funds not directly relating to the business of the
company or the welfare of its employees any
amount exceeding Rs. 50,000 or five per cent
of its average net profits of the last three
financial years, whichever is higher.

Powers

contd.

However, the resolution must specify the total

amount that may be contributed by the Board

of directors in any financial year.
However, contributions to National Defence
Fund, the Prime Ministers National Relief
Fund or any other fund approved by the
Central Government* for the purpose are
exempted from the above provisions.

Qualifications and
Disqualifications for Directors
Qualifications
A public company cannot prescribe any

qualifications for directorship except share

qualification. Again, share qualification
requirement cannot exceed holding of
shares exceeding Rs. 5000/- in nominal
value or value of one share where nominal
value of one share exceeds Rs.5000/-. A
director may obtain his share qualification
within 2 months after his appointment.

Disqualifications
Section 274 of the Companies Act, 1956

provides that the following persons shall

not be capable of being appointed as
directors of any company :
(a) a person found by a competent court to be
of unsound mind and such finding
remaining in force;
(b) an undischarged insolvent;
(c) a person who has applied to be adjudged
an insolvent;

Disqualifications

contd.

(d) a person who has been convicted by a Court of

an offence involving moral turpitude and sentenced
in respect thereof to imprisonment for not less than
six months, and a period of five years has not
elapsed from the date of the expiry of the
sentence;
(e) a person who has not paid any call in respect of
shares of the company held by him, whether alone
or jointly with others and six months have elapsed
from the last date fixed for the payment of the call;
and

Disqualifications

contd.

(g) a person who is already a director of a

public company which,
(i) has not filed the annual accounts and
annual returns for any continuous three
financial years commencing on and after the
first day of April, 1999; or
(ii)has failed to repay its deposit or interest
thereon on due date or redeem its
debentures on due date or pay dividend and
such failure continues for one year or more.

Number of Directorships
Whole-time Directorship
A person cannot be appointed as a
whole-time director in more than one
company.
Part-time Directorship
Not more than 15 companies
excluding the directorships of,

No. of Directorships

contd.

private companies [other than subsidiaries

or holding companies of public
company(ies)].
ii. unlimited companies,
iii. associations not carrying on business for
profit or which prohibit payment of a
dividend, and
iv. alternate directorships (i.e., he is appointed
to act as a director only during the absence
or incapacity of some other director).
i.

Remedies
Liability for Mis-statements in a Prospectus
Civil Liability (Sec.62 & 56)
Civil Liability (Sec.62
& 56)

Against the
Company

Criminal Liability (Sec. 63)

Criminal Liability (Sec. 63)

Against the Promoters,

Against the
Directors, other
Company
Officers and Experts
Claim for

Rescission
Damages
of Contract

Against the Promoters,

Directors and Other
officers (not available
against experts)

Fine upto Rs. 50,000

Compensation

Damages Compensation under Imprisonment

Fine upto
Both
Damages under
Sections 62 and Imprisonment
56
upto 2 years
Rs.50,000 Fine upto
Sections

62 and 56

upto 2 years

Rs.50,000

Both