COMPANIES ACT 1956

Companies Act 1956

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

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 moneys 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

Characteristics of a company

Perpetual existence

Continued existence Death, insolvency or unsoundness of mind of its members does not in any way affect the existence of the company. Comes into existence by law and comes to an end by law.

Companies Act 1956

Lifting of corporate veil

Veil of corporate personality used as a cloak for fraud and improper conduct. Exceptions

For the protection of revenue. Where a company is acting as the agent of the shareholders Where a company has been formed for a fraudulent purpose.
Companies Act 1956 7

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

Registration and incorporation

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

Contd

Before a company is registered, 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.

Memorandum of association duly signed by the subscribers

Companies Act 1956 10

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 list of directors who have agreed to become the first directors of the company. 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

Contd

Certificate of incorporation is issued by the registrar after due examination of the documents. 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
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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 Companys Act,1956.

Unincorporated Companies
These companies are large partnerships, not regarded as distinct entities separate from the members constituting them. In such companies the liability of members is unlimited.
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Classification of Companies
Companies on the basis of Incorporation 1. Chartered Companies: If a company is incorporated by a
charter granted by a monarch, it is called a chartered company. Ex: East India Company. 2.Statutory Companies : These are companies which are created by a special Act of the Legislature, e.g. LIC,SBI,UTI. The provisions of the Companys Act ,1956 apply to them , if they are not inconsistent with the provisions of the special Act under which they are formed.
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Classification of Companies
2. Registered companies : These are the companies which are formed and registered under the Companies Act, 1956, or were registered under any of the earlier Companies Acts.

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15

Classification of Companies
Companies on the basis of Number of Members
1.

Private Company :
1.

2.

Company which has a minimum paid up capital of Rs 1,00,000. Minimum members: 2 - 50

2.

Public company:
1.
2.

Minimum paid up capital: 5 lakhs Minimum no of members: 7

Companies Act 1956 16

Classification of Companies
Companies on the basis of Liability Companies with limited liability
(a)

Companies limited by shares: It is a registered company with the liability of members limited by the memorandum of association to the amount, if any, unpaid on the shares respectively held by them.

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17

Classification of companies

Company limited by guarantee: A 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.
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Classification of Companies

Unlimited company:

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

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19

Classification of Companies

Classification based on control

1. Government company: 51% of the paid up shares held by the government. 2. Non-government Company: 3. Foreign Company: Company which is incorporated in a country outside India under the law of that country. 4. Domestic company: Company which cannot be termed as a foreign company 5. Holding and subsidiary company: If one company controls another company
Companies Act 1956 20

Classification of Companies

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

Classification of Companies

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

Classification of Companies

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

Classification of Companies

Illegal Association: According to sec 11 No 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.

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24

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.
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PRE-INCORPORATION CONTRACT

A contract made by promoters on behalf of the company before its incorporation is termed as pre-incorporation contract.It is correct to say that a company cant retify PIC.A company gets its legal status only after incorporation.Therefore,the only remedy open to the company after incorporation is to enter into a fresh contract.

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26

Legal position of preincorporation contracts

The promoters while entering into preliminary contracts are treated as agents of the company

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

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

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

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

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.

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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. The MOA cannot be easily altered. Strict procedure has to be followed.
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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. 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, its accounts and audit. Subordinate to the memorandum They can be easily altered by passing a special resolution.

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Directors

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

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

Management and Administration

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

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36

Management and Administration

Qualification of a Director
The Act prescribes no academic or professional qualification for a director. The Articles may provide what qualifications the companys 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

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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, care and diligence Attend board meetings Not to delegate his functions
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Duties

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

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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 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

Applicability

Periodicity

Statutory Report

Annual General Meetings (Sec 166)

Definition
AGM is the regular meeting of the members of a company held annually for the purpose of transacting Companys ordinary business. 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.
Companies Act 1956

Frequency of Meeting

Ordinary Business

43

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 2,500 for each day of default
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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, 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, fix the time and place for its AGM
Companies Act 1956 45

Extra Ordinary General Meetings (Sec 169)

Every general meeting other than the statutory meeting and the annual general meeting or any adjournment thereof, 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. Every business transacted at such a meeting is special business.

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

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. 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

Quorum of Shareholders Meetings

Quorum for meeting - section 174
Unless the article provides for a larger number, the Quorum for the meeting : * Public ltd. Company 5 members personally present * Private Ltd. 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, 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

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

Board Meetings
Quorum for Board Meetings 1/3 rd of the Boards 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. 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. The Board shall elect one of the directors as its chairman

Chairman of the Board Meeting

Voting at Board Meeting

Question decided by majority of votes Chairman will have the right exercise casting vote
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Winding up

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

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51

Modes of winding up

Winding up by the court compulsory winding up Voluntary winding up

(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

Voluntary winding up

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

Contd

If the company resolves by special resolution that it shall be wound up voluntarily

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55

Members winding up

Members winding up is possible only when the company is solvent and is able to pay the liabilities in full.

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56

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. 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