Subject :- BUSINESS LAW

Semester:- 2

Topics Covered:- COMPANIES ACT &

CONSUMER PROTECTION ACT
UNIT-4
Companies Act, 1956
Meaning and Definition of a Company

• Section 3(1)(i) of the Companies Act,

1956 defines a company as: “a company
formed and registered under this Act or
an existing Company”.
• ‘Existing Company’ means a company
formed and registered under any of the
earlier Company Laws.
 Characteristic Features
• Separate Legal Entity
Case: Salomon v. Salomon & Co. Ltd.
• Limited Liability
However, liability of a company is never limited.
It’s liability of members only that is limited.
• Free Transferability of Shares
• Other Features:
Perpetual Succession: Separate property and
Common Seal.
 Types of Companies

• Private Company
• Public Company
Private Company [Section 3(1)(iii)]
• A private company means a company
which has a minimum paid up capital of
one lakh rupees or such higher paid-up
capital as may be prescribed and by its
articles :
(a) restricts the right to transfer its
shares, if any;
(b)limits the number of its members to 50,
not including:
 Private Company …contd.
(i) persons who are in the employment of
the company, and
(ii) persons who, having been formerly in the
employment of the company, were
members of the company while in that
employment and have continued to be
members after the employment ceased;
(c) prohibits invitation to the public to
subscribe for any shares in or debentures of,
the company; and
 Private Company …contd.
(d) prohibits any invitation or acceptance of
deposits from persons other than its
members, directors or their relatives.
• Where two or more persons hold one or
more shares in a company jointly, they shall,
for the purposes of membership, be treated
as a single member.
 Public Company [Section 3(1)(iv)]
• A public company means a company which:
(a) is not a private company [In other words, it
should not have the restrictions of Section 3(1)(iii)
in its articles ];
(b) has a minimum paid-up capital of five lakh rupees
or such higher paid-up capital, as may be
prescribed; and
(c) is a private company, which a subsidiary of a
company, which is not a private company.
 How to form a company?
• The whole process of formation of a
company may be divided into four stages,
namely:
(i) Promotion
(ii) Registration
(iii) Floatation/Raising of Capital
(iv) Commencement of Business.
 Promotion
• Who is a Promoter?
• Bowen, L.J.
The term promoter is “a term not of law but of
business”, usefully summing up, in a single word—
promotion, “a number of business operations
familiar to the commercial world by which a
company is brought into existence”.
However, the persons assisting the promoters by
acting in a professional capacity do not thereby
become promoters themselves.
 Legal Position of a Promoter
• Promoter stands in a fiduciary position
towards the company.
• In other words, he is not allowed to make
secret profits.
Case: Gluckstein v. Barnes
 Pre-incorporation contracts
• Void-ab-initio.
• However, pre-incorporation contracts shall
be valid if:
– The contract is made for the purpose of the
company and the contract is warranted by
the terms of incorporation.
– The company adopts the transactions after
incorporation.
 Registration/Incorporation
• Private Company
– Minimum Number of Members required
– 2.

• Public Company
– Minimum Number of Members required
– 7.
 Steps
1. Application for availability of name:
– Three names in order of priority conforming
to the provisions of the Act and the
Guidelines issued by Department of
Company Affairs in this regard:
• Name to end with the word(s) ‘Limited’ or
‘Private Limited’, as the case may be, except:
(i) Section 25 Companies
(ii) Govt. Companies (need not use Pvt. Ltd.)
(iii)Producer Companies.
 Steps …contd.

– Name should not be identical or too similar to

the name of an already existing company.
– Should not include the name of a registered
trade mark.
2. Preparation of Memorandum and Articles
of Association
– Memorandum defines and limits the scope of
activities of a company.
 Steps …contd.

• Contents of Memorandum
1. Name clause
2. Registered office clause
3. Object clause
• Doctrine of ultra-vires
4. Liability clause
5. Capital clause
 Steps …contd.
3. Preparation of other documents
– Power of Attorney in favour of a
professional to effect registration.
– Consent of Directors (in case of a Public
Company)
– Particulars of Directors, Manager,
Secretary, etc. in the prescribed form.
– Notice of registered address
• To be supplied within 30 days of
incorporation.
 Steps …contd.
– Statutory Declaration
• To the effect that all requirements of law with
respect to incorporation have been duly
complied with.
• The declaration to be signed by:
– Advocate of Supreme Court or High Court; OR
– C.A../C.S. practising in India and associated with the
formation of the company; OR
– Director, Manager, Secretary of the company (as
named in the Articles)
4. Filing of documents with ROC
 Certificate of Incorporation
• Effect of Certificate of Incorporation (Section 34)
On incorporation, the association of persons
becomes a body corporate by the name
contained in the memorandum, capable
forthwith of exercising all the functions of an
incorporated company and having perpetual
succession and a common seal but with such
liability on the part of the members to contribute
to the assets of the company in the event of its
being wound-up as is mentioned in the Act.
 Conclusiveness of Certificate of
Incorporation (Section 35)
• Conclusive to the effect that all requirements
of law relating to registration and matters
precedent and incidental thereto have been
duly complied with.
– Case Laws:
Moosa v. Ibrahim
Jubilee Cotton Mills Ltd. v. Lewis
 Provisional Contracts
• Contracts entered into by company after
incorporation but before getting the certificate
to commence business are called ‘provisional
contracts’.
• Provisional contracts are, therefore, relevant
to public companies only.
• Such contracts become void, if company fails
to obtain certificate to commence business
and automatically become valid, and binding if
company obtains the certificate.
 Raising of Capital
• A company may raise capital through
– Private placement
– Issue of Prospectus
• Private placement means raising of
capital from friends, relatives and
through brokers.
 Commencement of Business (Section
149)
• Where Company has issued a Prospectus:
• a company cannot commence business or
exercise borrowing powers unless:
(a) shares up to the amount of the minimum
subscription have been allotted by the company;
(b) every director of the company has paid to the
company, on each of the shares taken or
contracted to be taken by him and for which he is
liable to pay in cash,
 Commencement of Business
…contd.
the same proportion as is payable on application
and allotment on the shares, offered for public
subscription;
(c) no money is, or may become, liable to be repaid
to the applicants for shares or debentures offered
for public subscription, for failure to obtain
permission for the shares to be dealt in on any
recognised stock exchange;
 Commencement of Business
…contd.
(d) there has been filed with the Registrar a
duly verified declaration by one of the
directors or the secretary or, where the
company has not appointed a secretary, a
secretary in whole time practice in the
prescribed form that clauses (a), (b) and (c)
(mentioned above) have been complied with.
Penalty:
• Every person at fault may be fined upto
Rs.5,000/- for every day of default.
 Memorandum of Association

• Every company has to have a

Memorandum of Association.
• It contains, besides other significant
information, the objects for which the
company is formed.
• ‘Object clause’ defines as well as confines
the powers of the company.
• Anything done beyond these objects is
ultra-vires the company and void.
 Contents of Memorandum
1. Name Clause: It contains the name with which
company is proposed to be registered.
Companies Act requires that:
(a) The name chosen should end with the word
‘Limited’ or the words ‘Private Limited’, as the
case may be.
(b) The name should not be undesirable i.e., it
should not be identical or too similar to the
name of an already existing company OR
include the name of a registered trade mark
unless consent of the owner of the trade mark
is obtained.
 Contents of Memorandum
2. Registered Office Clause:
This clause states the name of the State in
which registered office of the company is to
be situated.
3. Objects Clause
This clause is to be divided into:
(a) Main objects and objects incidental or ancillary to
main objects
(b) Other objects
A company cannot commence any business
stated under other objects unless ‘special
resolution’ by the shareholders is passed.
 Doctrine of Ultra-Vires
Case Law: Ashbury Rly. Carriage Co. v.
Riche.
Effects of Ultra-vires transactions
(i) void-ab-initio
(ii) Injunction
(iii) Personal liability of directors
– towards the company
– towards the outsiders
 Contents of Memorandum
4. Liability Clause
5. Capital Clause
This clause states the authorised capital and
the number of shares into which the same
shall be divided.
 Alteration of Memorandum
• Various clauses of memorandum of
association can be altered by following the
procedure laid down in the Act. Different
requirements are prescribed for different
clauses:
1. Name Clause: can be altered by:
(a) Passing a special resolution; and
(b)Obtaining the approval of the Central Govt.
 Alteration of Memorandum
2. Registered Office Clause: may be shifted:
(a) within the same city by passing Directors’
Resolution;
(b) From one city to another city within the same
State:
• by passing special resolution only, if no change
in jurisdiction of Regional Director
• by passing special resolution, and
• Obtaining the approval of Regional Director.
 Alteration of Memorandum
3. Objects Clause
– Special Resolution
– Only on Grounds stated in Sec.17(1).
4. Liability Clause
– Cannot be increased without written consent
of each and every member.
– Can be reduced:
• by passing special resolution
• Confirmation of court
 Alteration of Memorandum
5. Capital Clause
– Authorised capital may be increased by
passing an ordinary resolution at a
meeting of the shareholders.
 Articles of Association
• The articles of association of a company are its bye-laws
or rules and regulations that govern the management of
its internal affairs and the conduct of its business.
• The articles regulate the internal management of the
company. They define the powers of its officers. They
also establish a contract between the company and the
members and between the members inter se. This
contract governs the ordinary rights and obligations
incidental to membership in the company [Naresh
Chandra Sanyal v. Calcutta Stock Exchange Association
Ltd. (1971)].
 Companies which must have Articles

• Unlimited Companies:
– The Articles of such a company must state:
• Total number of members; and
• Share capital.
• Companies limited by Guarantee:
– Articles of such company must state total
number of members.
 Companies which must have Articles
…contd.
• Private Companies limited by shares:
– must include requirements of Section
3(1)(iii).
No Article Company
• A public limited company having share
capital may be registered without Articles.
 Alteration of Articles
• Articles may be altered by a company by
passing special resolution at a general body
meeting of shareholders.
• However, where alteration has the effect of
converting a public company into a private
company (i.e., introduction of restrictive
clauses of Section 3(1)(iii), approval of
Central Government must be obtained.
 Doctrine of Constructive Notice
• According to Section 610, every person dealing
with the company is deemed to have read M/A
and A/A and understood the contents thereof in
the correct perspective.
• Doctrine of Indoor Management
• The rule was first laid down in Royal British
Bank v. Turquand.
• Rule of Indoor Management is an exception to
the Doctrine of Constructive notice.
Exceptions of Indoor Management
1. Knowledge of irregularity : Case: Howard v.
Patent Ivory Co.
2. Negligence : Case: Anand Behari Lal v.
Dinshaw & Co. (Bankers) Ltd.
3. Forgery : Case: Ruben v. Great Fingal
Consolidated [Secy. Forged signatures of two
directors]
4. No knowledge of articles : Case: Rama
Corporation v. Proved Tin & General
Investment Co.
 Prospectus
• A prospectus, as per Section 2(36), means any
document described or issued as prospectus
and includes any notice, circular,
advertisement or other document inviting
deposits from the public or inviting offers
from the public for the subscription or
purchase of any shares or debentures of a
body corporate.
 Prospectus … contd.

• Thus, a prospectus is not merely an

advertisement; it may be a circular or even a
notice. A document shall be called a
prospectus if it satisfies two things:
(a) It invites subscription to shares or debentures
or invites deposits.
(b) The aforesaid invitation is made to the
public.
What constitutes Invitation to Public
• As per Section 67, Invitation to public includes:
– invitation to any section of the public
howsoever selected provided the invitation is
made to all the members of that section of
public indiscriminately.
– Invitation calculated to be made available even
to those who do not receive the same.
– Invitation to 50 or more persons.
Mis-statement in a Prospectus and its
consequences
What is Mis-statement?
• According to Section 65(1) of the Act:
(a) a statement included in a prospectus shall be
deemed to be untrue, if the statement is
misleading in the form and context in which it is
included; and
(b) where the omission from a prospectus of any
matter is calculated to mislead, the prospectus
shall be deemed in respect of such omission, to be
a prospectus in which an untrue statement is
included. Case: Rex v. Kylsant
 Remedies
Liability for Mis-statements in a Prospectus

Civil Liability (Sec.62 & 56) Criminal Liability (Sec. 63)

 Share and Share Capital
• According to Section 2(46), A ‘Share’
represents a unit into which capital of a
company is divided. However, courts have
held that a share is not merely a unit of capital,
it represents a bundle of rights and
obligations. Holder of a share is entitled to
certain rights (say, right to receive dividends,
to receive notice of meetings, to participate in
the proceedings of a meeting, to elect
directors) and is also subjected to a number of
obligations (say, to abide by Articles of
Association, to maintain decorum of the
 Kinds of Shares
• The following kinds of shares may be issued
by a company:
1. Equity shares carrying voting rights.
2. Equity shares carrying differential rights as to
voting or dividend (commonly called Non-
Voting Equity Shares)
3. Preference Shares
4. Cumulative convertible Preferable Shares
 Kinds of Shares … contd.
• Preference Shares carry preference with
respect to two things:
1. Preference with respect to dividend at a
fixed rate or of a fixed amount.
2. Preference with respect to return of capital
in case of winding up.
• Equity Shares means a share which is not a
preference share.
 Allotment of Shares
• ‘Allotment’ is an acceptance to an offer for
purchase of shares.
• Where allotment does not conform to the
statutory requirements, it is called irregular
allotment. For allotment to be valid, following
requirements must be satisfied:
1. A copy of prospectus or statement in lieu of
prospectus must have been delivered to
Registrar of Companies.
 Allotment of Shares … contd.

2. Application money must not be less than 5% of

the nominal value.
3. Minimum subscription (i.e., at least 90% of the
issue) must have been received.
4. Application money must be kept deposited in a
Scheduled Bank till the minimum subscription
has been received.
5. Shares must have been listed on the stock
exchange(s) mentioned in the Prospectus.
Administration/Management of a
company
• A company functions through the medium of
Board of Directors. However, certain powers
have been reserved to be exercised by
shareholders in general body meetings.
Section 291 of the Companies Act, 1956
confers general power on the Board of
Directors. It provides: “Subject to the
provisions of the Act, the Board of Directors
of a company shall be entitled to exercise all
such powers, and to do all such acts and
 Powers which are exerciseable
only by the shareholders.
1. Sell, lease or otherwise dispose of the whole,
substantially the whole, of the undertaking
of the company, or where the company owns
more than one undertaking, of the whole or
substantially the whole, of any such
undertaking.
2. Remit or give time for the repayment of any
debt due by a director except in the case of
renewal or of continuance of an advance
made by a banking company to its directors
 Powers …contd.

3. Invest, otherwise than in trust securities, the

amount of compensation received by the
company in respect of compulsory
acquisition of any property or fixed assets of
the company.
4. Borrow monies exceeding the aggregate of
the paid-up capital of the company and its
free reserves. ‘Borrowing’ does not include
temporary loans (i.e., loans payable on
demand or within six months but excluding
loans for capital expenditure) obtained from
 Powers …contd.

The resolution passed at the general meeting

must specify the total amount upto which
moneys may be borrowed by the Board of
directors in any financial year.
5. Contribute in any year, to charitable and
other funds not directly relating to the
business of the company or the welfare of its
employees any amount exceeding Rs. 50,000
or five per cent of its average net profits of
the last three financial years, whichever is
 Powers …contd.

• However, the resolution must specify the total

amount that may be contributed by the Board
of directors in any financial year.
• However, contributions to National Defence
Fund, the Prime Minister’s National Relief
Fund or any other fund approved by the
Central Government* for the purpose are
exempted from the above provisions.
 Qualifications and
Disqualifications for Directors
• Qualifications
• A public company cannot prescribe any
qualifications for directorship except share
qualification. Again, share qualification
requirement cannot exceed holding of shares
exceeding Rs. 5000/- in nominal value or value
of one share where nominal value of one share
exceeds Rs.5000/-. A director may obtain his
share qualification within 2 months after his
appointment.
 Disqualifications
• Section 274 of the Companies Act, 1956
provides that the following persons shall
not be capable of being appointed as
directors of any company :
(a) a person found by a competent court to be of
unsound mind and such finding remaining in
force;
(b) an undischarged insolvent;
(c) a person who has applied to be adjudged an
insolvent;
 Disqualifications …contd.

(d) a person who has been convicted by a Court of

an offence involving moral turpitude and
sentenced in respect thereof to imprisonment
for not less than six months, and a period of five
years has not elapsed from the date of the
expiry of the sentence;
(e) a person who has not paid any call in respect of
shares of the company held by him, whether
alone or jointly with others and six months have
elapsed from the last date fixed for the payment
 Disqualifications …contd.

(g) a person who is already a director of a public

company which,—
(i) has not filed the annual accounts and annual
returns for any continuous three financial years
commencing on and after the first day of April,
1999; or
(ii) has failed to repay its deposit or interest
thereon on due date or redeem its debentures
on due date or pay dividend and such failure
continues for one year or more.
 Number of Directorships
Whole-time Directorship
• A person cannot be appointed as a
whole-time director in more than one
company.
Part-time Directorship
• Not more than 15 companies excluding
the directorships of,
 No. of Directorships …contd.

i. private companies [other than subsidiaries

or holding companies of public
company(ies)].
ii. unlimited companies,
iii. associations not carrying on business for
profit or which prohibit payment of a
dividend, and
iv. alternate directorships (i.e., he is appointed
to act as a director only during the absence
or incapacity of some other director).
 Remedies
Liability for Mis-statements in a Prospectus

Civil Liability (Sec.62 & 56)

Civil Liability (Sec.62 & 56) Criminal Liability (Sec. 63)
Criminal Liability (Sec. 63)

Against the Promoters, Against the Promoters,

Against the Against the
Directors, other Directors and Other
Company Company
Officers and Experts officers (not available
against experts)
Claim for
Rescission Fine upto Rs. 50,000
Damages
of Contract

Compensation
Damages Compensation under Imprisonment Fine upto Both
Damages under Sections 62 and Imprisonment Rs.50,000 Fine upto Both
Sections 56 upto 2 years
upto 2 years Rs.50,000
62 and 56