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Company Law

Company Law

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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

Comes into existence by law and comes to an end by law. insolvency or unsoundness of mind of its members does not in any way affect the existence of the company.Characteristics of a company  Perpetual existence    Continued existence Death. Companies Act 1956 6 .

Lifting of corporate veil   Veil of corporate personality used as a cloak for fraud and improper conduct. Companies Act 1956 7 . Where a company is acting as the agent of the shareholders Where a company has been formed for a fraudulent purpose. Exceptions    For the protection of revenue.

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 .

two or more persons. form an incorporated company with or without limited liability.Registration and incorporation  Sec 12: Any seven or more persons or where the company to be formed will be a private company. Companies Act 1956 9 . by subscribing their names to a memorandum of association and otherwise complying with the requirements of this act in respect of registration. associated for any lawful purpose may.

Contd   Before a company is registered.  Memorandum of association duly signed by the subscribers Companies Act 1956 10 . 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.

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 declaration stating that all the requirements of the companies act and other formalities relating to registration have been complied with Companies Act 1956 11 . A list of directors who have agreed to become the first directors of the company.

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 .Contd  Certificate of incorporation is issued by the registrar after due examination of the documents.

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. liability of members is unlimited.1956. Act. Companies Act 1956 13 . unlimited.1956. In such companies the them. Unincorporated Companies These companies are large partnerships. not regarded as distinct entities separate from the members constituting them.

SBI. formed. it is called a chartered company.Statutory Companies : These are companies which are created by a special Act of the Legislature. 2. Chartered Companies: If a company is incorporated by a Companies: charter granted by a monarch. LIC. if they are not inconsistent with the provisions of the special Act under which they are formed.UTI.1956 apply to them . Company.SBI. The provisions of the Company¶s Act . Companies Act 1956 14 .UTI. LIC. Ex: company. e. Ex: East India Company.g.Classification of Companies Companies on the basis of Incorporation 1.

Acts. Companies Act 1956 15 . Registered companies : These are the companies which are formed and registered under the Companies Act. 1956. registered under any of the earlier Companies Acts.Classification of Companies 2. or were 1956.

Public company: company: 1. Company which has a minimum paid up capital of Rs 1. 2.50 members: Minimum paid up capital: 5 lakhs capital: Minimum no of members: 7 members: Companies Act 1956 16 2.000. . Minimum members: 2 . Private Company : 1. 00.Classification of Companies Companies on the basis of Number of Members 1.000.00. 2.

Companies Act 1956 17 . if any.Classification of Companies Companies on the basis of Liability Companies with limited liability (a) Companies limited by shares: It is a registered company shares: with the liability of members limited by the memorandum of association to the amount. them. unpaid on the shares respectively held by them.

Classification of companies  Company limited by guarantee: A guarantee: 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 .

The members of such companies may be required to pay the losses from their personal property.Classification of Companies  Unlimited company: company:    It is a company in which the liability of the members is not limited by its memorandum. Because such companies have separate legal entity. its creditors cannot file a suit against the members directly. Companies Act 1956 19 .

Government company: 51% of the paid up shares held by the government.Classification of Companies  Classification based on control      1. Holding and subsidiary company: If one company controls another company Companies Act 1956 20 . Foreign Company: Company which is incorporated in a country outside India under the law of that country. 2. Domestic company: Company which cannot be termed as a foreign company 5. 4. Non-government Company: Non3.

Public financial Institutions: LIC.Classification of Companies    The controlling company is called the holding company and the company so controlled may be called the subsidiary company. One-man company: A member may Onehold virtually the entire share capital of a company. 5. company. UTI etc 6. Companies Act 1956 21 .

Classification of Companies   NonNon-trading company or association not for profit company formed for profit promoting the objects of art. religion a license is granted by the central government. Investment company A company whose principal business is the acquisition of shares. debentures etc. Companies Act 1956 22 . science . stock.

Multinational Companies companies operating in more than one country ex: Coca Cola.Classification of Companies   Producer Company Cooperative societies can be made companies under the Companies Act. LG Companies Act 1956 23 . a company formed and registered under theses provisions shall be known as producer companies.

Classification of Companies  Illegal Association: According to sec 11 No Association: 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 .

purpose.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 .

A company gets its legal status only after incorporation.PRE-INCORPORATION CONTRACT  A contract made by promoters on behalf of the company before its incorporation is termed as pre-incorporation contract.Therefore.the only remedy open to the company after incorporation is to enter into a fresh contract. Companies Act 1956 26 .It is correct to say that a company can t retify PIC.

is a nullity . A pre-incorporation contract which is purported preto be made by the company which does not exist. The legal position is that for a valid contract two consenting parties are necessary and a company before incorporation is a non-entity.Legal position of prepreincorporation contracts The promoters while entering into preliminary contracts are treated as agents of the company that is about to be formed. non-entity. formed. Thus when the company comes into existence it can neither sue nor be sued on that contract Companies Act 1956 27 .

and shall not be binding on the company until that date. and on that date it shall become binding Companies Act 1956 28 .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. any contract made by a 149( company before the date at which it is entitled to commence business shall be provisional only. According to sec 149(4). business.

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 .

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 .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   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. Strict procedure has to be followed. Companies Act 1956 31  . The MOA cannot be easily altered.

Contents        The The The The The The The name clause registered office clause objects clause territorial limit clause liability clause capital clause 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. Subordinate to the memorandum They can be easily altered by passing a special resolution. its accounts and audit. 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. Companies Act 1956 33 .

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

and the relation between the company and directors is that of Principal and agent. It can only act through directors. company.Directors Director is a person who has control over the direction . According to Lord Cairns A company cannot act on its own . agent. Companies Act 1956 35 . conduct and management of the affairs of the company.

called. 13) A Director is defined as any person occupying the position of the director. Companies Act 1956 36 .Management and Administration According to Companies Act 1956. Sec 2(13) 1956.  Only Individuals can be Directors  No Body corporate or Association or firm can be appointed as director of the company. by whatsoever name called.

possess. The Articles may director.Management and Administration Qualification of a Director The Act prescribes no academic or professional qualification for a director. 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 .

care and diligence Attend board meetings Not to delegate his functions Companies Act 1956 39  Duties     .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 Fiduciary duties Duties of skill.

Meetings  General meetings    Statutory meeting Annual General meeting Extraordinary meeting Meeting of creditors and debenture holders Meeting of directors Companies Act 1956 40  Class meeting   .

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 Applicability  Company limited by shares  Company limited by guarantee and having a share capital  Not applicable to Private Limited Company Should be held between 1 months • 6 months from the date at which the company is entitled to commence business Report has to be forwarded to every member at-least 21 days before the date of meeting Companies Act 1956 42 Periodicity Statutory Report .

Frequency of Meeting  Once every year  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).     To Consider and adopt Audited Balance Sheet To declare dividend on shares To appoint Directors in place of those retiring by rotation To appoint Auditors and to fix their remuneration.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. Companies Act 1956 Ordinary Business 43 .

500 for each day of default Companies Act 1956 44 .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.

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. fix the time and place for its AGM Companies Act 1956 45 . 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.

Extra Ordinary General Meetings (Sec 169) Every general meeting other than the statutory meeting and the annual general meeting or any adjournment thereof. 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 .  Every business transacted at such a meeting is special business. 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.

 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 in the company of every such person Companies Act 1956 47 .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.

Company 5 members personally present * Private Ltd. the Quorum for the meeting : * Public ltd.Quorum of Shareholders¶ Meetings Quorum for meeting . at the same time & place or such other day at such other time & place as Board may decide members present shall form the quorum Companies Act 1956 48  meeting stands dissolved * In case of adjourned meeting . Company 2 members personally present If Quorum not present within 30 minutes of the time fixed for the meeting : * Meeting called on requisition from members * Other meetings shall stand adjourned to the same day in the next week.section 174  Unless the article provides for a larger number.

appointment of managing director (Sec 316). one in each quarter. no agenda required In some matters prior intimation of the business to be transacted is required i. 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. inter .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.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 .e.

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. 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 .  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.

Assets of the company are disposed of.Winding up    Winding up or liquidation of a company represents the last stage in its life. A proceeding by which a company is dissolved. debts are paid out Companies Act 1956 51 .

Modes of winding up   Winding up by the court winding up Voluntary winding up   compulsory (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 .

Companies Act 1956 54 . 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.Voluntary winding up    Winding up by the creditors or members without the intervention of the court.

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 .

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 .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.

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