A General Overview of Company Law

Introduction:

Statutory Company Legislation in the sub-continent starts actually from 1850 with the passing of
the British Companies Act in that Year. Following the said law, a comprehensive Companies Act
was passed in 1866 which was again recast in 1888. Thereafter several amendments were made
and ultimately the Indian Companies Act, 1913 was passed consolidating the laws relating to
companies.

In 1994, the Companies Act which is at present applicable was passed on the basis of the
structure of the Companies Act, 1913.

What is a Company?

A company may be defined as a “legal person or legal entity separate from and capable of
surviving beyond the lives of its members.”(Salomon Vs Salomon & Co, 1897)

According to Avtar Singh, Two or more persons who are desirous of carrying on joint business
enterprises may have the choice of forming a company or a partnership. But where the enterprise
requires a rather greater mobilisation of capital which the resources of few persons can’t provide,
the formation of a company is the only choice.

However, in the terms of the Companies Act, 1994, company means a company formed and
registered under the Companies Act.
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Advantages of a Company:

1. Independent corporate existence:

A Company is in Law a person. It is a distinct legal person existing independent of its members.
By incorporation under the Act, the company is vested with a corporate personality which is
distinct from the members who compose it.

2. Limited Liability:

The Company, being a separate person, is the owner of its assets and bound by its liabilities.
Members, even as a whole, are neither the owners of the company’s undertaking, nor liable for
its debts. Where the subscribers exercise the choice of registering the company with limited
liability, the members’ liability becomes limited or restricted to the nominal value of the shares
taken by them or the amount guaranteed by them.

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3. Perpetual Succession:

An incorporated company never dies. It is an entity with perpetual succession. Membership of a

company may keep changing from time to time, but that doesn’t affect the Company’s continuity.
The death or insolvency of individual members doesn’t, in any way, affect the corporate
existence of a company.

4. Separate Property:

A company, being a legal person, is capable of owning, enjoying and disposing of property in its
own name. The company becomes the owner of its capital and assets. A member doesn’t even
have an insurable interest in the property of the company.

5. Transferable shares:

Another advantage of a company is the transferability of its shares. Thus incorporation enables a
member to sell his shares in the open market and to get back his investment without having to
withdraw the money from the company. This provides liquidity to the investor and stability to the
company.

6. Capacity to sue and to be sued:

A company, being a body corporate, can sue and be sued in its own name.

Kinds of Companies:

Company may be limited by shares or limited by guarantee. It may be even with unlimited
liability. Companies limited by shares may be of two types: a) Public Company and b) Private
Company.

In case of Private company, some restrictions are imposed on members’ right to transfer their
shares, the maximum number of members (up to fifty) and also on the issue of prospectus.

A public company is one which is not a private company. In case of public company, the articles
of association do not contain any such restrictions as found in case of private company.

It is to be noted here that, the minimum number of members in case of private company is two
and in case of public company is seven.

Memorandum of Association:

The Memorandum of Association is a document which contains the fundamental rules regarding
the constitution and activities of a company. It is the basic document which lays down how the
company is to be constituted and what work it shall undertake. The memorandum contains rules

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regarding the capital structure, liability and objects of the company. The memorandum is altered
only after certain formalities are observed.

Clauses of Memorandum of Association:

The main clauses of Memo are :

Name clause:

This clause contains the name of the proposed company. The company as a legal person must
have a name to establish its identity. A company may choose any suitable name it likes, but it
can’t be identical or too closely resemble to any name of any other existing company.

Registered office clause:

This clause contains the name of the place in which the registered office of the Company is to be
situated.

Objects Clause:

This clause is very important as it contains the objects for which the proposed company is to be
formed. It should be drafted very carefully. The objects should not be illegal, or against public
policy, or against the provisions of Companies Act. It should not be against the general law of the
land.

Capital Clause:

This clause contains the amount of share capital with which the company is to be registered. This
clause also states the number and value of shares into which the capital of the company is
divided. The effect of this clause is that the company can’t issue more shares than are authorised
by its Memorandum of Association.

Liability Clause:

This clause contains the nature of liability of the members of the company. This clause is mainly
necessary for those companies in which the liability of the members is limited. The
Memorandum of such company must state that the liability of its members is limited.

Alteration of Memorandum of Association:

The Memorandum of Association is a very important document of a company. It can’t be altered

by the sweet will of the members of the company. However, it may be altered only by following
the procedure as laid down in the Companies Act, 1994. Even the object clause of the company
can be altered by the special resolution.

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Articles of Association:

The Articles of Association is a document which contains rules, regulations and bye-laws
regarding the internal management of the company. Articles must not violate any provision of the
Memorandum of Association or any provision of the Companies Act. The rules laid down in the
Articles of Association must always be read subject to the rules contained in the Memorandum.

Legal Effects of Memorandum & Articles of Association:

A company is incorporated only for the objects and purposes mentioned in the Memorandum of
Association. Any act purported to be done by the company which is beyond the scope of the
functions of the company as laid down in the Memorandum of Association is ultra vires i.e.,
beyond the powers of the company, as is of no effect.

Section 22 of the Companies Act provides that subject to the provisions of this Act, the
Memorandum and the Articles shall, when registered, bind the company and the members
thereof to the same extent as if they respectively had been signed by the company and by each
member and contained covenants on its and his part to observe all the provisions of the
Memorandum and the Articles.

Formation of a Company:

Before a company may be formed, the following steps must be taken:

i) The Memorandum of Association and the Articles of Association must be prepared.

ii) The Company must be registered in accordance with the provisions of the Companies
Act.
iii) The prospectus or a statement in lieu of prospectus, must be issued and registered with
the Registrar.
iv) The minimum subscription must be raised and thereafter the allotment od shares must be
made.

The Certificate of incorporation:

The certificate issued by the Registrar after a company is registered is called Certificate of
incorporation. It is conclusive on the following points :

1. That all the precondition i.e., legal requirements of registration have been complied with.
2. That the company is properly registered.
3. That the company came into existence on the date of certificate of incorporation.

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Prospectus:

A prospectus may be defined as any document described or issued as a prospectus and includes
any notice, circular, advertisement or other document inviting deposits from the public for the
subscription or purchase of any share in, or debentures of a body corporate.

Shares and Shareholders:

The shareholders are the proprietors of the company. Therefore a ‘share’ may be defined as an
interest in the company entitling the owner thereof to receive proportionate part of the profits, if
any, and proportionate part of the assets of the company upon liquidation.

Rights of Shareholders:

i) A shareholder can attend and vote in the general meeting of the company. He is entitled
to receive notice of all such meetings.
ii) A Shareholder has the right to inspect account.
iii) A shareholder has the right to inspect the minutes of the proceedings of any general
meeting.
iv) He has a right to transfer his shares.
v) A shareholder has the right to apply for the winding up of the company.

Meetings and Resolutions:

Meetings:

The following are the three kinds of meeting that may be held by a Company:

a) Annual General Meeting:

A general meeting of every company shall be held within eighteen months from the date of
incorporation and thereafter once at least in every calendar year and not more than fifteen
months after the holding of the last preceding general meeting.

b) Statutory Meeting:

Every company limited by share and every company limited by guarantee and having a share
capital shall, within a period not less than one month or more than six months from the date at
which the company is entitled to commence its business, hold a general meeting of the members
of the company, which shall be called statutory meeting. Thus it is the first meeting of the
members of the company after its incorporation.

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c) Extraordinary General Meeting:

The directors may call an extraordinary general meeting whenever they consider it desirable.
Further, the directors of the company shall, on the requisition of the holders of not less than one-
tenth of issued share capital, call an extraordinary general meeting.

Resolutions:
i) Extraordinary Resolution:

It is a resolution which has been passed by a majority of not less than three-fourths of members
entitled to vote, as are present in person or by proxy, at a general meeting of which notice
specifying the intention to move the resolution has been duly given.

ii) Special Resolution:

It is a resolution passed in the manner for the passing of an extraordinary resolution at a general
meeting of which 21 days notice has been duly given. Special resolutions are necessary when the
Articles, Memorandum etc. are to be altered.

iii) Ordinary Resolution:

Any resolution passed in a general meeting and requiring majority votes is called ordinary
resolution. It is passed by simple majority.

Directors:

The directors of a company are selected according to the Articles of Association and the
provisions of the Companies Act. They are in charge of the management of company. They are
collectively called Board of Directors. The Board is the Company’s executive authority.

In a public company, there must have at least three directors and in a private company, at least
two directors.

Winding Up:

The winding up or liquidation of a company means the termination of the legal existence of the
company stopping its business collecting its assets and distributing the assets among the creditors
and shareholders in the manner laid down in the Act.

There are three methods of winding up of a company:

i) Compulsory winding up by the court;

ii) Voluntary winding up by the members themselves or by the creditors;

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iii) Voluntary winding up under the supervision of the court.