CHARACTERISTICS OF COMPANIES :-

1. Voluntary Association:
A company is a voluntary association of two or more persons. A single person cannot
constitute a company. At least two persons must join hands to form a private
company. While a minimum of seven persons are required to form a public company.
The maximum membership of a private company is restricted to fifty, whereas, no
upper limit has been laid down for public companies.

2. Incorporation:
A company comes into existence the day it is incorporated/registered. In other
words, a company cannot come into being unless it is incorporated and recognised by
law. This feature distinguishes a company from partnership which is also a voluntary
association of persons but in whose case registration is optional.

3. Artificial Person:
In the eyes of law there are two types of persons viz:
(a) Natural persons i.e. human beings and

(b) Artificial persons such as companies, firms, institutions etc.

Legally, a company has got a personality of its own. Like human beings it can buy,
own or sell its property. It can sue others for the enforcement of its rights and
likewise be sued by others.

4. Separate Entity:
The law recognizes the independent status of the company. A company has got an
identity of its own which is quite different from its members. This implies that a
company cannot be held liable for the actions of its members and vice versa. The
distinct entity of a company from its members was upheld in the famous Salomon Vs.
Salomon & Co case.

5. Perpetual Existence:
A company enjoys a continuous existence. Retirement, death, insolvency and
insanity of its members do not affect the continuity of the company. The shares of the
company may change millions of hands, but the life of the company remains
unaffected. In an accident all the members of a company died but the company
continued its operations.

6. Common Seal:
A company being an artificial person cannot sign for itself. A seal with the name of
the company embossed on it acts as a substitute for the company’s signatures. The
company gives its assent to any contract or document by the common seal. A
document which does not bear the common seal of the company is not binding on it.

7. Transferability of Shares:
The capital of the company is contributed by its members. It is divided into shares of
predetermined value. The members of a public company are free to transfer their
shares to anyone else without any restriction. The private companies, however, do
impose some restrictions on the transfer of shares by their members.
8. Limited Liability:
The liability of the members of a company is invariably limited to the extent of the
face value of shares held by them. This means that if the assets of a company fall
short of its liabilities, the members cannot be asked to contribute anything more than
the unpaid amount on the shares held by them. Unlike the partnership firms, the
private property of the members cannot be utilized to satisfy the claims of company’s
creditors.

9. Diffused Ownership:
The ownership of a company is scattered over a large number of persons. According
to the provisions of the Companies Act, a private company can have a maximum of
fifty members. While, no upper limit is put on the maximum number of members in
public companies.

10. Separation of Ownership from Management:

Though shareholders of a company are its owners, yet every shareholder, unlike a
partner, does not have a right to take an active part in the day to day management of
the company. A company is managed by the elected representatives of its members.
The elected representatives are individually known as directors and collectively as
‘Board of Directors’.

CONTENTS OF MEMORANDUM OF ASSOSCIATION:-

A memorandum of association contains a name clause, registered office clause, object (or
objective clause), objects clause, liability clause, capital clause, and association clause. An
MOA is a type of legal paper that is prepared when forming and registering a limited liability
company (LLC).
The MOA's purpose is to explain the LLC's relationship with its shareholders. The articles of
Association and MOA make up the company's constitution. An MOA isn't required in the
United States, but limited liability companies that are based in European countries, which
include the U.K., the Netherlands, France, and some Commonwealth Nations do require
MOAs.
Name Clause
This clause states the company's proposed name.
 It must end in the word "limited" if it's a public company or "private limited" if it's a
private company.
 It can't be identical to any existing company's name.
 It can't allude to the new company doing the business of an existing company.
 It should not be misleading in any way.
Registered Office Clause
The registered office clause lists the name of the state where the company's registered
office is physically located.
  The registered office's physical location determines which jurisdiction the Registrar
of Companies and which court the company would fall under.
 It also confirms the company's nationality.
 The registered office's full address must be provided to the Registrar of Companies
to simplify further communications.
Objects or Objective Clause
The objects clause, also called the objective clause, is considered the most important in the
MOA.
 It defines and limits the scope of the company's operations.
 It details the company's scope of activity for the members and explains how the
members' capital will be used.
 It protects shareholders funds and ensures the funds will be used for the specific
business purposes for which they were raised and that they won't be risked in other
endeavors.
Object Clause
The object clause explained why the company is establishing. Companies aren't legally
allowed to do any kind of business other than the kind of business that is specifically stated
in this clause. An object clause should contain:
 A list of the main objects the company will be pursuing after it's Incorporated
 Incidental objects that are necessary to achieve the main object
 Any other objects that aren't included in the main objects or incidental object
 Nothing illegal
 Nothing that's against the public interest
 Nothing that's against the country's general rule of law
Liability Clause
The liability clause explains what liability each of the company's members faces. If the
company is limited by shares, the liability that each member faces can be no more than the
face value of shares that he or she holds. If it's a company that's limited by guarantee, this
clause must define how much liability each individual company member holds. If it's an
unlimited company, this particular clause would not be included in the MOA.
Capital Clause
The capital clause lists information about the total capital held by the proposed company.
This amount is called the company's authorized capital. Companies aren't permitted to
collect more money than the amount listed under authorized capital. The way the capital is
divided into equity share capital and preference share capital also needs to be listed in the
capital clause. The number of shares the company puts in equity share capital and
preference share capital, alongside their value, needs to be included in the MOA.
Association Clause
The association clause explains that any individual signing the bottom of the MOA wants to
be part of the association that's being formed by the memorandum. The MOA has to be
signed by at least seven people or more if it's a public company. It has to be signed by at
least two or more people if it's a private company. The signatures also have to be affirmed
by witnesses. There can be one witness for all of the signatures, but none of the subscribers
can witness the signatures of the others. All subscribers and witnesses must provide their
addresses and occupations in writing.
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ALTERATION OF MOM: -
1. Alteration of Name Clause in Memorandum of Association
A company may by passing a special resolution alter is name with the approval of the
Central Government. If the alteration involves change of the name to private limited or
public limited, permission of Central Government is not required.
In case a company has been registered with a name which resembles a name of an existing
company, the Central Government may ask it to change its name. In such case ordinary
resolution is sufficient.
The intimation of name change should be given to the Registrar who will issue a fresh
certificate of incorporation. Alteration of Situation clause
1. In case registered office has to be shifted within the same city, town or village, a notice
has to given to the Registrar within thirty day of the change.
2. In case registered office has to be shifted from one town to another town or one village to
another village, a special resolution has to be passed.
3. A company can change its registered office from one State to another State for the
following reasons:
a. to carry on business more efficiently and economically;
b. to achieve the important purpose of the company by sophisticated means;
c. to expand its operations in the current location;
d. to control any of the existing objects;
e. to sell whole or part of the business undertaking;
f. to amalgamate with other business or person.
In case, registered office has to be shifted from one State to another State, a special
resolution has to be passed and approval from the Company Law Board has to be obtained
by the company. The altered memorandum should be filed with the Registrar of the State
from which the company is shifting and also to the Registrar of the State to which the
company is shifted.
2. Alteration of Objects Clause in Memorandum of Association
A company can alter is objects clause by passing a special resolution. Alteration of objects
clause can be done for the following reasons:
1. For the purpose of carrying on its business more economically and efficiently.
2. For the purpose of obtaining the main business of the company by new and improved
means
3. For the purpose of enlarging or changing the local area of its operations.
4. For the purpose of carrying on some business, which may be conveniently or
advantageously combined with the existing business.
5. For the purpose of abandoning any of the objects specified in the memorandum.
6. For the purpose of selling the whole or any part of the undertaking.
7. For the purpose of amalgamating with any other company.
3. Alteration of Liability Clause in Memorandum of Association
The liability clause can be altered only when a public company is converted to a private
company.
4. Alteration of Capital Clause in Memorandum of Association
A company can alter its capital clause by passing an ordinary resolution in a general
meeting. Alteration of capital may relate to:
i. Sub division of shares
ii. consolidation of shares
iii. conversion of shares into stock and cancellation of unsubscribed capital.
Within thirty days of passing a resolution, the altered Articles and Memorandum have to be
submitted to the Registrar.
5. Alteration of subscription clause in Memorandum of Association
The company can alter is subscription clause to make the liability of the directors appointed
subsequent to the alteration as unlimited.
 Difference between MOA and AOA
The fundamental points of distinction between MOA and AOA are as follows:
BASIS FOR MEMORANDUM OF
COMPARISON ASSOCIATION
Memorandum of Association
(MOA) is a document that
Definition contains all the fundamental
data which are required for
the company incorporation.
MOA must be registered at the
Registration
time of incorporation.
The Memorandum is the
charter, which characterizes
Scope and limits powers and
constraints of the
organization.
Status Supreme document.
The memorandum cannot give
the company power to do
Power anything opposed to the
provision of the companies
act.
A memorandum must contain
Contents
six clauses.
The memorandum contains
Objectives the objectives and powers of
the company.
The memorandum is the
Validity dominant instrument and
controls articles.
Alteration Alteration can be done, after
passing Special Resolution
ARTICLES OF ASSOCIATION
Articles of Association (AOA) is a
document containing all the rules and
regulations that govern the company
The articles may or may not be
registered.
The articles demonstrate obligations,
rights, and powers of individuals,
who are endowed with the
responsibility of running the
organization and administration.
It is subordinate to the
memorandum.
The articles are constrained by the
act, but they are also subsidiary to
the memorandum and cannot exceed
the powers contained therein.
The articles can be drafted according
to the decision of the Company.
The articles provide the regulations
by which those objectives and
powers are to be conveyed into
impact.
Any provision, as opposed to a
memorandum of association, is
invalid.
Alteration can be done in the Articles
by passing Special Resolution (SR) at
 (SR) in Annual General
Meeting (AGM) and previous
approval of Central Annual General Meeting (AGM)
Government (CG) or Company
Law Board (CLB) is required.

Regulates the relationship between

Defines the relation between
Relation company and its members and also
company and outsider.
between the members interse.

Types of Companies
Company forms of businesses have become immensely popular over the years.
Their development has led to the creation of so many new types of companies. Companies are to
be classified on the basis of liabilities, members and on the basis of control.

 Companies on the Basis of Liabilities - When we look at the liabilities of members,

companies can be limited by shares, limited by guarantee or simply unlimited.

Companies Limited by Shares - Sometimes, shareholders of some companies might not

pay the entire value of their shares in one go. In these companies, the liabilities of members is
limited to the extent of the amount not paid by them on their shares. This means that in case of
winding up, members will be liable only until they pay the remaining amount of their shares.

Companies Limited by Guarantee - In some companies, the memorandum

of association mentions amounts of money that some members guarantee to pay. In case of
winding up, they will be liable only to pay only the amount so guaranteed. The company or its
creditors cannot compel them to pay any more money.

Unlimited Companies - Unlimited companies have no limits on their members’ liabilities.

Hence, the company can use all personal assets of shareholders to meet its debts while winding
up. Their liabilities will extend to the company’s entire debt.

Companies on the basis of members

 One Person Companies (OPC) - These kinds of companies have only one member as
their sole shareholder. They are separate from sole proprietorships because OPCs are legal
entities distinct from their sole members. Unlike other companies, OPCs don’t need to have
any minimum share capital.
 Private Companies - Private companies are those whose articles of association restrict
free transferability of shares. In terms of members, private companies need to have a
minimum of 2 and a maximum of 200. These members include present and former
 employees who also hold shares.

 Public Companies - In contrast to private companies, public companies allow their

members to freely transfer their shares to others. Secondly, they need to have a minimum of
7 members, but the maximum number of members they can have is unlimited
.

Companies on the basis of Control or Holding

In terms of control, there are two types of companies.

 Holding and Subsidiary Companies

In some cases, a company’s shares might be held fully or partly by another company. Here, the
company owning these shares becomes the holding or parent company. Likewise, the company
whose shares the parent company owns becomes its subsidiary company.

Holding companies exercise control over their subsidiaries by dictating the composition of their
board of directors. Furthermore, parent companies also exercise control by owning more than
50% of their subsidiary companies’ shares.

 Associate Companies

Associate companies are those in which other companies have significant influence. This
“significant influence” amounts to ownership of at least 20% shares of the associate company.

The other company’s control can exist in terms of the associate company’s business decisions
under an agreement. Associate companies can also exist under joint venture agreements.

 Companies in terms of Access to Capital

When we consider the access a company has to capital, companies may be either listed or
unlisted. Listed companies have their securities listed on stock exchanges. This means people
can freely buy their securities. Hence, only public companies can be listed, and not private
companies. Unlisted companies, on the other hand, do not list their securities on stock
exchanges. Both, public, as well as private companies, can come under this category.

Other Types of Companies

 Government Companies - Government companies are those in which more than 50%
of share capital is held by either the central government, or by one or more state government,
 or jointly by the central government and one or more state government.

 Foreign Companies - Foreign companies are incorporated outside India. They also
conduct business in India using a place of business either by themselves or with some other
company.

 Charitable Companies (Section 8) - Certain companies have charitable purposes as

their objectives. These companies are called Section 8 companies because they are registered
under Section 8 of Companies Act, 2013. Charitable companies have the promotion of arts,
science, culture, religion, education, sports, trade, commerce, etc. as their objectives. Since
they do not earn profits, they also do not pay any dividend to their members.

 Dormant Companies - These companies are generally formed for future projects. They
do not have significant accounting transactions and do not have to carry out all compliances
of regular companies

 Nidhi Companies - A Nidhi company functions to promote the habits of thrift and
saving amongst its members. It receives deposits from members and uses them for their
own benefits.

 Public Financial Institutions - Life Insurance Corporation, Unit Trust of India and
other such companies are treated as public financial institutions. They are essentially
government companies that conduct functions of public financing.

CIVIL AND CRIMINAL LIABILITY FOR MIS-STATEMENT

Mis-statements and false statements in the prospectus are instruments by which

dishonest company promoters may practice fraud on the public money. In order to

prevent this practice the law imposes certain duties and liabilities on those persons

who are responsible for such issues.

If, however, the prospectus contains any mis-statement of a material fact or if the

prospectus wants in any material fact, two types of liabilities will arise.

They are:

(1) Civil Liability

(2) Criminal Liability

Before discussing the above we are to know the liability which may arise for Untrue

Statement. It is the duty of the authors of the prospectus to see that the prospectus
does not contain any untrue statement which may mislead the public.

According to Sec. 65 of the Companies Act, Untrue Statement’ in

connection with a prospectus shall deem to include:

(i) A statement which is misleading in the form and context in which it is included,

and

(ii) An omission which is calculated to mislead.

In short, untrue statement means and includes any statement which is not only a
false statement but also a statement which creates a wrong impression of actual
fact. Concealment of material fact is also treated as mis-statement or untrue
statement.

Now we are going to highlight the civil and criminal liabilities that may

appear due to mis-statement in the prospectus:

(1) Civil Liability:

Sec. 62(1) of the Companies Act states that such persons are liable to pay

compensation for any loss or damage which any person may suffer from the
purchase

of any share or debenture on the basis of the untrue statement. Consequently, a

person who has suffered a loss may claim contribution from the others who were

associated relating to issue of prospect until it appears that he was guilty of fraud

while the others were not proved to be guilty.

(2) Criminal Liability:

According to Sec. 63(1) of the Companies Act, every person who has authorised the

issue of a prospectus containing untrue statements shall be punishable with

imprisonment which may extend to two years or with fine which may extend to Rs.

5,000—or both.

Penalty:

Sec. 68 of the Companies Act provides that a person shall not, either knowingly or
recklessly, by making any statement, promise or forecast which is false, deceptive or

misleading or, by any dishonest concealment of material facts, induce or attempt to

induce another person to enter into or to offer to enter into any

(i) agreement for acquiring, disposing-off, subscribing for or underwriting shares or

debentures;

(ii) agreement, the purpose or pretended purpose of which is to secure a profit to any

of the parties from the yield of shares or debentures, or by inference to fluctuations

in the value of shares or debentures.

Otherwise, he shall be punishable with imprisonment for a term which may extend to

5 years or with fine which may extend to Rs. 10,000—or with both.

Persons who are liable for untrue statements in the prospectus:

According to Sec. 62 (1) of the Companies Act, the following persons are

liable and punishable for untrue statements in the prospectus:

(a) Every person who is a director of the company at the time of the issue of the

prospectus;

(b) Every person who has authorised himself to be named and is named in the

prospectus either as a director or as having agreed to become a director, either

immediately or after an interval of time;

(c) Every person who is a promoter of the company; and

(d) Every person who has authorised the issues of the prospectus.

TYPES OF SHARE CAPITAL

Types of Share Capital

The different types of share capital are as follows –

 Authorised, nominal or registered capital

Every company has to specify the amount of capital it wishes to register within its
Memorandum of Association. The amount thus stated is termed as registered,
authorised or nominal capital. Fundamentally, it is the amount of money a company
is allowed to raise through public subscription. Its size can be increased or
decreased as per requirement by meeting the prescribed method.

 Issued capital

It makes up that part of the nominal capital which is offered for public subscription in
the form of shares. It must be noted that a company may refrain from issuing the
entire registered capital at a single go. Based on their requirement, a company may
raise this capital from time to time.

Under any given situation, issued capital must not exceed the authorised capital.
Generally, it includes all the shares which have been allotted to vendors, public,
signatories of the memorandum of association, etc.

 Unissued capital

Typically, it is made up of that portion of nominal capital which is yet to be issued. In

simpler words, unissued capital can be described as the difference between a
company’s nominal capital and issued capital.

  Subscribed capital

Subscribed capital is a part of issued capital which has been accepted by the public.
The said capital is allotted to each subscriber according to the resolution released by
company directors.

In a situation, where the shares allotted by a company are subscribed by the public,
the issued capital and subscribed capital will be the same. However, it must be noted
that subscribed capital cannot exceed a company’s issued capital.

 Called-up capital

It forms a part of subscribed capital, which can be called up or repurchased by the

company. Notably, a company does not call the entire value of each share that had
been allotted to shareholders. In fact, only a portion of the amount required by the
company is raised at different intervals.

Suppose, a company’s 20,000 shares each of Rs.100 had been subscribed. Now,
the company calls shareholders to pay –

I. Rs. 10 on application
II. Rs. 30 on the first call
III. Rs. 20 on allotment1

Subsequently, the called-up value would amount to Rs. 1,200,000 (20000×60) and
the remaining Rs. 800,000 (20000×40) would be considered as the company’s
uncalled capital.
  Uncalled-up capital 

This capital makes up the uncalled part of allotted capital. In a general sense, it
represents a contingent liability of a company’s shareholders on their shares.

 Paid-up capital

It is essentially a part of called-up capital. It signifies the amount of money paid by

shareholders in response to the call made by a company. Usually, the paid-up
capital of a company can be ascertained by subtracting the outstanding calls from
called up capital.

 Fixed capital

The said capital comprises fixed assets used in the company. The most prominent
examples of fixed capital include – equipment, land, furniture, buildings, etc.

 Reserve capital

This particular capital cannot be called by the company unless it is winding up or

being liquidated. A reserve capital can be created by passing a special resolution
with a 3/4th majority vote in its favour.

Once created, the Articles of Association cannot be altered to make the reserve
liability available at any given time. It must be noted that such capital cannot be
pledged as security to secure loans by the company directors. Also, it cannot be
converted into ordinary capital without receiving the court’s order and is only
available for creditors when a company is winding-up.

 Circulating capital

Fundamentally, this capital is a part of the subscribed capital. It is mostly available in

the form of operational goods and assets like bills receivable, bank balance, book
debts, etc.

By looking at this list of types of share capital, it can be said that the primary point of
distinction and classification is based on issuance and subscription of company
shares.

ALTERATION OF SHARE CAPITAL

• Section 61 of the Companies Act, 2013 provides that a company limited

by shares or guarantee and having a share capital may, if so authorised by
its articles, alter, by an ordinary resolution, its memorandum in the following
ways:
 • It may increase the authorised share capital by such amount
• It may consolidate and divide, all or any of its existing shares into a larger
denomination than of its existing shares e.g., by consolidating ten shares of
Rs. 10 each into one share of Rs. 100 each.
• It may convert all or any of its fully paid-up shares into stock or reconvert that
stock into fully paid-up shares of any denomination.
• It may sub-divide its existing shares or any of them into smaller denomination
than fixed by its Memorandum but it must keep the existing proportion
between the paid-up and unpaid amount e.g., one share of Rs 100 each, Rs
60 paid up and be sub-divided into ten shares of Rs 10 each, Rs 6 paid-up
per share.
• It may cancel shares which have not been taken up or agreed to be taken by
any person and diminish the amount of the share capital by the amount of the
shares so cancelled.

Important Stages in the formation of a company :-

The whole process of company formation can be divided into four stages as given
below.

1. Promotion of a Company
2. Registration of a Company
3. Certificate of Incorporation; and
4. Commencement of the Business.

1. Promotion of a Company:

A business enterprise does not come into existence on its own. It comes into
existence as a result of the efforts of an individual or group of people or an
institution. That is, it has to be promoted by some person or persons. The process of
business promotion begins with the conceiving of an idea and ends when that idea is
translated into action i.e., the establishment of the business enterprise and
commencement of its business.

 Who is  a Promoter in a Company?

A successful promoter is a creator of wealth and an economic prophet. The person

who is concerned with the promotion of business enterprise is known as the
Promoter. He conceives the idea of starting a business and takes all the measures
required for bringing the enterprise into existence.

 For example, Dhirubhai Ambani is the promoter of Reliance Industries.

The promoters find out the ways to collect money, investigate business ideas
arranges for finance, assembles resources and establishes a going concern.

The company law has not given any legal status to promoters. He stands in a
fiduciary position.

Types of Promoters
Promoters are different types such as professional promoters, occasional promoters,
promoter companies, financial promoters, entrepreneurs, lawyers and engineers.

2. Registration of a Company

It is registration that brings a company into existence. A company is properly formed

only when it is duly registered under the Companies Act.

Procedure of Registration

In order to get the company registered, the important documents required to be filed
with the Registrar of Companies are as follows.

1. Memorandum of Association: It is to be signed by a minimum of 7 persons for a

public company and by 2 in case of a pvt company. It must be properly stamped.

2. Articles of Association: This document is signed by all those persons who have
signed the Memorandum of Association.

3. List of Directors: A list of directors with their names, address and occupation is to
be prepared and filed with the Registrar of Companies.

4. Written consent of the Directors: A written consent of the directors that they
have agreed to act as directors has to be filed with the Registrar along with a written
undertaking to the effect that they will take qualification shares and will pay for them.

5. Notice of the Address of the Registered Office: It is also customary to file the
notice of the address of the company’s registered office at the time of incorporation.
It is to be given within 30 days after the date of incorporation.

6. Statutory Declaration: A statutory declaration by

a. any advocate of the Supreme Court or

b. of a High Court, or
c. an attorney or pleader entitled to appear before a High Court or
d. a practicing chartered accountant in India, who engages in the Company
formation or
e. by a person indicated in the articles as director, managing director, Secretary
or manager of the company, mentioning that the requisites of the Act and the
rules there under have been complied with. It is to be filed with the Registrar
of Companies.

When the required documents have been filed with the Registrar along with the
prescribed fee, the Registrar scrutinizes the documents. If the Registrar is satisfied,
the name of the company is entered in the register. Then the Registrar issues a
certificate known as Certificate of Incorporation.

3. Certificate of Incorporation
On the registration of Memorandum of Association, Articles of Association and other
documents, the Registrar will issue a certificate known as the ‘Certificate of
Incorporation‘. The issue of certificate is the evidence of the fact that the company
is incorporated and the requirements of the Companies Act have been complied
with.

4. Certificate of Commencement of Business

As soon as a private company gets the certification of incorporation, it can can

commence its business. A public company can commence its business only after
getting the ‘certificate of commencement of business‘. After the company gets the
certificate of incorporation, a public company issues a prospectus for inviting the
public to subscribe to its share capital. It fixes the minimum subscription. Then it is
required to sell the minimum number of shares mentioned in the prospectus.

After completing the sale of the required number of shares, a certificate is sent to the
Registrar along with a letter from the bank stating that all the money is received.

The Registrar then scrutinizes the documents. If he is satisfied he issues a certificate

known as ‘Certificate of Commencement of Business’. This is the conclusive
evidence for the Commencement of Business.