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Definition of a Company

Features of a Company
Incorporated association
Artificial person
Separate legal entity
The facts of the famous Salomons case were as follows :
Salomon carried on business as a leather merchant. He
sold his business for a sum 30,000 to a company formed
by him along with his wife, a daughter and four sons.The
purchase consideration was satisfied by allotment of
20,000 shares of 1 each and issue of
debentures worth 10,000 secured by floating charge on the
companys assets in favour of Mr. Salomon. All the other
shareholders subscribed for one share of $1 each. Mr. Salomon
was also the managing director of the Company. The company
almost immediately ran into difficulties and eventually became
insolvent and winding up commenced. At the time of winding
up, the total assets of the company amounted to $ 6,050; its
liabilities were $10,000 secured by the debentures issued to
Mr. Salomon and $8,000 owing to unsecured trade creditors.
The unsecured sundry creditors claimed the whole of the
companys assets, viz. $6,050 on the ground that the company
was a mere alias or agent for Salomon.
Held: The contention of the trade creditors could not be
maintained because the company being in law a person
quite distinct from its members, could not be regarded as
an alias or agent or trustee for Salomon. Also the
companys assets must be applied in payment of the
debentures as a secured creditor is entitled to payment out
of the assets on which his debt is secured in priority to
unsecured creditors.
Limited liability
Separate property
Transferability of shares
Perpetual existence
Common Seal
Company may sue and be sued in its own name
Distinction between a company and a Partnership
Agreement, Procedure
Separate legal existence
Perpetual existence
Liability of a partner is unlimited
The number of partners cannot exceed ten in the case of
banking business and twenty in non-banking business.
Cannot transfer his share in the partnership without the
consent of all the other partners.
The capital of a partnership is limited, as the number of
partners are either ten or twenty.
The scope of business of a partnership firm can be changed
at any time with the consent of all the partners.
Every partner is entitled to take part in the day-to-day
management of the partnership firm.
The audit of accounts in the case of a partnership firm is not
compulsory. In the case of a company, audit of its accounts
by a qualified auditor (i.e. a chartered accountant) is
Lifting of the Corporate Veil.

Following are some such cases:

For the protection of revenue
Where the company is acting as agent of the shareholders
Where a company has been formed by certain persons to
avoid their own valid contractual obligation
Where a company has been formed for some fraudulent
purpose or is a sham
Where a company formed is against public interest or public
Where the number of members falls below the statutory
Where prospectus includes a fraudulent misrepresentation
Investigation into related companies
For investigation of ownership of a company
Where in the course of winding up of a company
Private and Public Companies
A private company can be formed by merely two persons by
subscribing their names to the Memorandum of Association.
It means a company which has a minimum paid-up capital
of one lacks rupees or such higher paid up capital as may be
prescribed; and by its Articles:
i. restricts the rights of its members to transfer shares;
ii. limits the number of its members to fifty, excluding its
employee-members or past employee-members; provided
that where two or more persons hold one or more shares in a
company jointly, they shall, for the purpose of this
definition, be treated as a single member;
iii. prohibits an invitation to the public to subscribe to its shares
and debentures; and
iv. prohibits any invitation or acceptance of deposits from
persons other than its members, directors or their relatives.
Distinction between private and public company:
1. minimum number of members.
2. maximum number of members.
3. right to transfer shares is restricted.
4. issue a prospectus.
5. can commence business immediately.
6. statutory meeting
7. Directors of a private company are not required to retire by
8. The number of directors in a private company may be
increased to any extent without the permission of the Central
Government, but in case of a public company if the number
of directors is to be more than twelve then the approval of
the Central Government is necessary.
9. Two members have to be personally present to form the
quorum in a private company but in a public company this
number is five members.
10. No restrictions on managerial remuneration.
Holding and Subsidiary Companies
One-man Company
Government Company
Section 617 defines a Government Company as any company
in which not less than 51% of the paid-up share capital is held
by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly
by one or more State Governments and includes a company
which is a subsidiary of a Government Company.
Foreign Company
Foreign Company is a company incorporated in a country
outside India and has a place of business in India.
Formation of a Company
Duties and Liabilities of Promoters
Availability of Name
Certificate of Incorporation/Consequences of Incorporation
Certificate to Commence Business
Pre-incorporation and Provisional Contracts.
Memorandum of Association
Meaning of Purpose
Form and Contents
Articles of Association
Meaning and Purpose
Registration of Articles
Subject Matter of Articles
Definition of a Prospectus
Contents of a Prospectus
Meaning of a Share
Classes of Shares
Preference Share
Equity Share
Issue of Shares at Par, at Premium and at Discount
Bonus Shares
Rights Shares
Meaning of Share Capital
Allotment of Shares
Definition of a Member
Modes of Acquiring Membership
By subscribing to the memorandum of association
By agreement and registration
Who may become a Member ?
The position of a minor as a member of a company is
follows as :
As a minor is wholly incompetent to enter into a contract
[Mohiri Bibi v. Dharmodas Ghose, (1903) 30 Cal. 539
(P.C.)], an agreement by a minor to take shares is void and
hence, he cannot be a member of a company.
If shares are allotted to a minor in response to his
application and his name entered on the Register of
members, in ignorance of the fact of minority, the company
can repudiate the allotment and remove his name from the
Register on coming to know of the minority of the member.
The company must repay all money received from his in
respect of the allotted shares.
The minor can also repudiate the allotment during his
minority and he shall be returned the amount he paid
towards the allotment of shares.
A partnership firm cannot be registered as a member in
the register of members of a company.
A foreigner
Calls on Shares
Forfeiture of Shares
Variation of Shareholders Rights
Transfer and Transmission of Shares
Procedure of Transfer
Notice of Refusal
Transmission of Shares
Distinction between Transfer and Transmission
Nomination Facility to Shareholders etc.
Kinds of Debentures
a) Redeemable debentures
b) Convertible debentures
General Meetings and Proceedings
o Statutory meeting
o Annual General Meeting
Certain Typical Issues in Respect of AGM
Extra- ordinary General Meeting (EGM)
Matters Relating to General Meetings
Quorum for Meeting
Voting (Ascertaining the Sense of the House)
Passing of resolutions by postal ballot
Essentials of a valid meeting
Managerial Personnel.
Legal Provisions as Regards Directors
Managing Director
Distinction between a Managing Director and
a Manager :
Winding Up of Companies
Modes of Winding up
A company may be wound up in any of the following two
ways: A. Compulsory winding up under an order of the
Tribunal. B. Voluntary winding up.
Winding up by the Tribunal
Grounds for compulsory winding up.
Special resolution
Default in holding statutory meeting
Failure to commence business
Reduction in membership
Inability to pay debts
Just and equitable
i. When the substratum of the Company has gone
ii. When there is a complete deadlock in the
iii. Where the company was formed for fraudulent or
illegal purposes.
iv. Where the principal shareholders have adopted an
aggressive or oppressive policy towards the minority
v. When the company is a bubble i.e. it never had any
real business
vi. Where the business of the company cannot be carried
except at loss
vii. Requirements for Investigation

Who may petition

The Company
Creditors petition
The registrar
Central government petition
Consequence of winding up order
1. The Tribunal must, as soon as the winding up order is made,
cause intimation thereof to be sent to the official liquidator
and the Registrar.
2. The petitioner and the company must also file with the
Registrar within 30 days a certified copy of the order.
3. The Registrar should then make a minute of the order in his
books relating to the company and notify in the Official
Gazette that such an order has been made.
4. The order for winding up is deemed to be a notice of
discharge to the officers and employees of the company,
except when the business of the company is continued.
5. The order operates in the interests of all the creditors and all
the contributories, no matter who is fact asked for it.
6. The Official Liquidator, by virtue of his office becomes the
liquidator of the company and taken possession and control
of the assets of the company.
7. All actions and suits against the company are stayed, unless
the Tribunal gives leave to continue or commence
8. All the power of the Board of Directors cease and the same
are then exercised by the liquidator.
9. On the commencement of winding up, the limitation ceases
to run in favour of the company.
10. Any disposition of the property of the company and any
transfer of shares in the company or alteration in the status
of members made after the commencement of winding up
shall, unless the Tribunal otherwise orders, be void.
11. Any attachment, distress or execution put in force, without
leave of the Tribunal, against the estate or effects of the
company after he commencement of the winding up shall be
void but not for dues payable to Government.

12. Any sale held, without leave of the Tribunal, of any of the
properties or effects of the company after the
commencement of winding up shall be void.

13. Any floating charge created within 12 months preceding the

commencement of winding up is void unless it is proved that
the company after the creation of the charge was solvent,
Voluntary Winding up
Consequences of voluntary winding up.
1. A voluntary winding up is deemed to commence at the time
when the resolution for voluntary winding up is passed. This
will be so even when after passing a resolution for voluntary
winding up, a petition is presented for winding up by the
2. The company, from the commencement of winding up, must
cease to carry on its business except so far as may be
required to secure a beneficial winding up although the
corporate state and powers of the company continue until
final dissolution.
3. All transfer of shares and alterations in the status of
members, made after the commencement, are void unless
sanctioned by the liquidator.
4. A resolution to wind up voluntarily operates as notice of
discharge to the employees of the company (Fowler v.
Commercial Times Co.) except: (a) when the liquidation is
only with a view to reconstruction [Midland Counties
Bank Ltd. V. Attwood (1905) 1 Cg. 357] or (b) when
business is continued by the liquidator for the beneficial
winding up of the company.
5. On the appointment of the liquidator, all the powers of the
Board of Directors, managing director or manager shall
cease except: (a) for the purpose of giving notice to the
Registrar about the name of the liquidator appointed, or (b)
insofar as the company in general meeting or the liquidator
may sanction the continuance of their powers.
Types of Voluntary Winding up
Voluntary winding up may be of two types : (a) Members
Voluntary winding up; (b) Creditors winding up.
Members Voluntary Winding up
Members Voluntary winding up is possible only when the
company is solvent and is able to pay its liabilities in full.
1. Declaration of solvency
2. Appointment and remuneration of liquidators.
3. Boards power to cease
4. Notice of appointment of liquidator to be given to registrar.
5. Power of liquidator to accept shares, etc., as consideration of
sale of property of the company.
6. Duty of liquidator to call creditors meeting in case of
7. Duty of the liquidator to call general meeting at the end of
each year.
8. Final meeting and dissolution.
Creditors Voluntary Winding up
Meeting of Creditors
Appointment of liquidator
Committee of inspection
Fixing of liquidators remuneration
Boards powers to cease on appointment of liquidator
Duty of liquidator to call meeting of company and of creditors
at the end of each year
Final meeting and dissolution
Distinction Between Members Voluntary Winding up
and Creditors Voluntary Winding up

1) Members voluntary winding up can be resorted to by

solvent companies and thus requires the filing of a
declaration of solvency by the directors of the company
with the Registrar; Creditors winding up, on the other hand,
is resorted to by insolvent companies.

2) In members voluntary winding up there is no need to have

creditors meeting. But in the case of creditors voluntary
winding up, a meeting of the creditors must be called
immediately after the meeting of the members.
3) Liquidator, in the case of members winding up is appointed
by the members. But in the case of creditors voluntary
winding up, if the members and creditors nominate two
different persons as liquidators, creditors nominee shall
become the liquidator.

4) In the case of creditors voluntary winding up, if the

creditors so wish a Committee of Inspection may be
appointed. In the case of members voluntary winding up,
there is no provision for any such committee.
Dissolution of Companies
Modes of Dissolution
In case of defunct companies
In pursuance of amalgamation or reconstruction
In pursuance of the winding up of the company