THE COMPANIES ACT, 1956

COMPANY: What is it? [Sec.3]

Section 3 (1) (i) of the Act defines: “A company

means a company formed and registered under this
Act or an existing company.”
That is, a company is an association of persons
united for a common object.
It is a form of business organization where the
funds of a large number of investors are managed by
a few persons for the purpose of earning profits
which are shared by all the investors.
 Essential Features of a Company
Registration: Compulsory
Separate legal entity: Distinct person
Perpetual succession
Artificial person: But not a Citizen
Transferable shares
Limited liability
Common seal: Separate and independent legal
existence
Separate property: Can dispose property in its
name.
Capacity to sue and be sued
 Types of Companies
 Royal Charter or Chartered Companies: Treated
as foreign companies.Eg: East India Company,Bank
of England.
 Statutory Companies: Formed under Special
Statutory Act of Parliament or State Legislature. For
e.g., RBI, SBI, IFCI, etc.
 Registered Companies: Are registered under the
Companies Act. These companies have MoA and
AoA for internal & external regulations.
Under the Act the companies are either
(i) Companies limited by shares: Eg : Public or Private
Company ,
 (ii) Companies limited by guarantee: The amount
each member to be paid during the liquidation is
mentioned in the Memorandum.Non- trading or non-profit
firms enouraging Culture,art ,science,religion,sports etc
can be included.
(iii) Unlimited Companies.The liability of members of
such Co. is unlimited like the ordinary partnership Firm.
Companies limited by shares

During the existence of the company or in the event

of winding up, a member can be called up to pay the
amount remaining unpaid on the shares subscribed
by him.
Such a company is called company limited by
shares. A company limited by shares may be a
public limited company or a private limited
company.
 Companies limited by guarantee:

Companies may or may not have share capital.

Each member promises to pay a fixed sum of money
specified in the Memorandum in the event of
liquidation of the company for payment of debts and
liabilities of the company.
The amount promised is called ‘guarantee’.
Depend on entrance and subscription fees for their
existence.
The amount guaranteed by each member is in the
nature of reserve capital. Cannot be called upon except
in the event of winding up of company .
 Unlimited Companies:

Liability of the members is unlimited like an

ordinary partnership firm.
Section 12 gives choice to promoters to form a
company with or w/o limited liability.
A company not having any limit on the liability of
its members is called an ‘unlimited company.’
The articles of such a company shall state the
number of members with which the company is to
be registered.
 Memorandum of Association
It is the document which contains the rules regarding
constitution and activities or objects of the company.
It is a fundamental charter of the company.
The company is governed by it.
The company is allowed to work within the framework
of it. By it outside world knows the state of affairs.
It defines the extent and powers of the company.
If the acts of the company are beyond the limits of the
MoA, such acts would be void and ultra vires.
Directors are personally liable to make good the
Company’s loss if company’s money is spent on an
unauthorized object.
 Contents of MoA [Sec.13]

Name of company with ‘Limited’ suffixed in case of

public company and ‘Private Limited’ suffixed for a
private company.
Registered office of the company.
Objects of the company.
Liability of the members.
Details of share capital of the company.
Subscription or Association clause.
 Articles of Association

Regulations of the company are prescribed by the

Articles of Association.
It can be altered at any time according to the wishes
of the members.
It is subordinate to the MoA and is under full control
of the members.
Members can make their regulations through AoA
subject to Companies Act.
It contains rules & regulations for the internal
management of the company subject to provisions of
the Companies Act.
 Doctrine of Ultra Vires
It means ‘beyond powers’. That is, any act done by
the company beyond its legal powers and
authority.
Any act done by the company which is neither
authorized by its objects nor by the Act, that act is
ultra vires the powers and authority of the
company.
Such an act is void and cannot bind the company.
And since it is void, it cannot be ratified by
shareholders either.
 Membership of a Company
 Members (Section 41): A company when incorporated is an
artificial person. It is a constitution of natural persons
called members of a company.

 Who are the members of a company?

(1) Subscribers to the memorandum of a company and
entered as members in the Register of Members;
(2) Every other person who agrees in writing to become a
member of a company and whose name is entered in its
Register of Members;
(3) Every person holding equity share capital and whose
name is entered as beneficial owner in the records of the
depository.
o How is membership acquired? (In any of the
following ways)
• By subscribing to the MoA before registration.
• By agreeing in writing and name is entered in the register
of members.
• By subscribing to the shares.
• By purchase of shares in his own name and when entered
in the register of members.
• By succession.
• On insolvency of a member where official assignee or
receiver is entitled to be member in his place.
• By allowing his name to appear in register of members.
• By entry as beneficial owner in the records of the
depository.

•
How membership ceases?

 By transfer of shares.
 By forfeiture of shares.
 By surrender of shares.
 By insolvency.
 By death; name of deceased member continues till
shares are registered in the name of his legal
representative.
 By rescission of the contract to take shares on the
ground of misrepresentation in the prospectus.
 By sale of shares by company after it exercises its
right of lien on the shares or in other legal way.
 When company redeems its redeemable preference
shares.
 Rights of a Member/Shareholder
 To receive notices of all general meetings.
 To attend & vote at general meetings, appoint directors &
auditors.
 To receive copies of accounts of company.
 Entitled to a copy of report of a statutory meeting.
 To inspect the minutes of proceedings of any general
meeting.
 To inspect the register, index of members, debenture
holders.
 To transfer his shares.
 Priority to have shares offered if there is increase of capital
by the company.
To receive share certificate.
To receive dividends in case of preference shares.
To make an application to the Central Government for ordering
investigation into the affairs of the company.
To apply to Central Govt to convene the Annual General
Meeting when Board of Directors fail to convene the same.
To present a petition to the Court for winding up of company.
Entitled to share in the surplus assets, if available, on liquidation.
 Liabilities & Duties of Member
To pay calls on the shares whenever demanded by
the company.
To pay the full nominal value of the shares held by
him in case of a company limited by shares.
To pay all the debts of the company, in case of a
company with unlimited liability.
All moneys payable by any member to the company
under the Memorandum or Articles shall be a debt
due from him to the company [Sec. 36(2)]
 Other Concepts

Depositories: Were established to record

ownership details of every person holding equity
shares in the share capital of the company in the
book entry form.
A depository is nothing but an agent of the beneficial
owner, a link between the issuer and the beneficial
owner to facilitate record of allotments and transfer
of securities.
Register of Members: Every company must
keep a register of members with the following
particulars:
i) Name, address & occupation.
ii) Shares held by each member, distinguishing
each share by its number, and the amount paid
on those shares.
iii) Date at which each member was entered in
the register.
iv) Date on which any person cease to be
member.
Index of Members: Every company having
more than 50 members shall keep an index in
the form of a ‘Card-index’ of the names of the
members of the company.
The index, shall at all times, be kept at the same
place as the register of members.
On payment of a fee of Re. 1 for each inspection,
any member may make extracts from any
register or acquire a copy of any register.
Foreign Registers: A company which has a
share capital or which has issued debentures
may keep in any State or country outside India a
branch register ,of members or debenture
holders resident in the State or country.
Annual Returns: Every company has to file
every year with the Registrar annual returns
containing certain particulars. Shall give the
particulars as on the date of holding the annual
general meeting.
 Prospectus
A public company invites public to subscribe
towards its share capital through the issue of a
Prospectus.
A prospective investor would naturally like to
know the financial background of the company, its
activities, future programmes, nature of
investment, risk, etc.
Every investor would like to receive reasonable but
sure returns.
Prospectus of a company provides this
information.
 Definition
Section 2(36): “Prospectus means any document
described or issued as a 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 in, or debentures of a body corporate.”
An “abridged prospectus” means a memorandum
containing such salient features of a prospectus as
may be prescribed [Sect. 2(1)].
 Contents of the Prospectus
 Dating of prospectus (Section 55)
 Registration of Prospectus (Section 60)
With every prospectus shall be attached the following
documents when filed with the Registrar:
1. Expert’s consent. For e.g., engineer, valuer, lawyer,
accountant, etc.
2. Delivery for registration.
 Where any prospectus is published as a newspaper
advertisement, it shall not be necessary in the advertisement
to specify the contents of the memorandum or the
signatories, or the number of shares subscribed for by them.
 Issue of Capital
Shares: Section 2(46) defines “A Share means
‘share’ in the Share Capital of a company”.
Share capital is divided into shares of different
denominations. These denominations are called
‘shares’ which are issued by the company to the
public for subscription.
The holder of a share is issued a Share Certificate.
A Certificate shall be prima facie evidence of the
title of the member to such shares.
Stock: Shares can be converted into Stock
when they are fully paid up.
A sum total of fully paid up shares is Stock.
Fully paid up shares may be converted into
stock for purposes of convenience, as stock can
be divided into fractions of any amount;
irrespective of the original value of the share.
If any shares are converted into stock, company
shall, within 30 days after doing so, give notice
thereof to the Registrar.
 Allotment of Shares
Rule to be observed
 A prospectus shall be filed with Registrar.
 No allotment of shares shall be made to public unless the
minimum subscription amount stated in the prospectus is
raised and received by the company.
 Application for shares should be made in prescribed form.
 No allotment shall be made until the beginning of the 5th day
after a date on which prospectus is issued.
 Companies intending to offer must make an application to
one or more stock exchanges for permission.
 The whole of the application money should have been paid
and received by company in cash.
 All moneys received shall be deposited in a Scheduled Bank
until the certificate to commence business is obtained.
 Transfer of Shares
A share is a movable property, transferable in
the manner provided by the articles.
A share holder has a statutory right, in the
absence of restrictions in the articles, to transfer
shares to any person without consent of
anybody.
A private company with share capital may
restrict the right to transfer its shares by its
articles. Transfer of shares is less strict in a
public company.
 Transmission of Shares
Where shares pass by operation of law from one
person to another.
For example, by holder’s insolvency, or lunacy or by
death and inheritance.
The person to whom shares are transmitted shall
make an application to the company for transmission
of shares in his name.
In case if the company refuses to register
transmission, right of appeal arises in the same
manner as in case of transfer.
No instrument of transfer is required.
 Blank and Forged Transfer
Blank Transfer: Where the transferor only signs the
instrument of transfer and the rest of the
instrument is left blank.
Transferee has an implied authority to complete the
instrument either by entering his own name or
anyone else’s for registering as a shareholder.
Forged Transfer: Where signature of transferor is
forged on the instrument of transfer. A forged
transfer gives no title to the transferee, as it is void.
 Forfeiture of Shares
The articles generally give powers to Board of
Directors to forfeit shares as under:
i) If a member fails to pay any call or installment of
a call, and
ii) Any other circumstance which the articles may
provide.
The articles may also provide that the failure by a
member to fulfill any engagement with any other
member would forfeit his share.
Power of forfeiture is not inherent in a company and
therefore this power exists only when it is given by
the articles.
 Share Warrants
(Sec. 114 & 115)
It is a document which shows that the bearer of the
warrant is entitled to shares specified therein.
It is a substitute to the share certificate.
A public company limited by shares may issue it
under its common seal in the following
circumstances:
i) if it is authorized by its articles;
ii) shares are fully paid up;
iii) previous approval of Central Government is
obtained.
 Issue of Sweat Equity Shares
(Sect. 79 A)
The Companies (Amendment) Act, 1999 has
introduced this concept of issuing shares. It
means equity shares issued by the Company to
employees or directors at a discount or for
consideration other than cash.
Issued for providing know-how or making
available rights in the nature of IPRs or value
additions, by whatever named called, by the
employees or directors.
 Meetings

GENERAL MEETINGS: Such meetings are the

meetings of the share holders.
i) Statutory meeting (Sec. 165): Every company
within a period not less than 1 month nor more than
6 months from the date at which the company is
entitled to commence business, will hold a general
meeting of the members of the company.
ii) Annual general meeting (Sec. 166, 167 & 171):
Every company shall in each year hold in addition
to any other meeting an annual general meeting.
Such meeting shall be specified in the notice
calling it.
Not more than 15 months shall elapse between the
date of one general meeting and that of the next.
The directors are responsible for calling a general
meeting.
A company may hold its first annual general
meeting within 18 months from the date of its
incorporation.
If default is made in holding an AGM, the Company
Law Board may, on the application of any member
of the company, call or direct the calling of the
meeting.
Such a meeting shall be deemed to be an annual
general meeting of the company.
By Companies (Amendment) Act, 2002, this power
is conferred on Central Government instead of
Company Law Board.
The same power is vested with a ‘Tribunal’ in case
of revival and rehabilitation of sick industrial
companies.
Proceedings at AGM (Sec. 173): Following
business is transacted in the AGM by passing
ordinary resolutions:
i) Considerations of accounts, and the reports
of the Board of Directors and the auditors;
ii) Appointment of auditors and fixing their
remuneration;
iii) Declaration of a dividend;
iv) Appointment of directors in place of those
retiring;
v) Any other business can be transacted in the
AGM as a special business, by passing a
special resolution.
iii) Extraordinary general meeting (Sec. 169):
This type of meeting is convened to transact any
urgent or special business.
All business transacted at an EGM shall be
deemed special.
The EGM may be called by the Board of Directors;
or by the same on the requisition of not less than
1/10th of members holding paid-up capital and
having voting rights; or by the requisitionists
themselves.
CLASS MEETINGS: The company may vary the
rights attached to the shares of any class.
Such rights can be varied by convening separate
meeting of holders of different classes of shares,
whose rights are so proposed to be varied, and
obtaining their consent.
Class meetings are held in cases where their
rights are sought to be affected.
MEETINGS OF CREDITORS & DEBENTURE
HOLDERS:
Such meetings are generally held in case of winding
up of the company; or
In case of proposed scheme of arrangement and
compromise to obtain their consent; or
By the Court where company desires to reduce its
share capital.
BOARD MEETINGS (Sec. 285 & 286):
A meeting of the BoDs of every company shall be held
atleast once in every 3 months and atleast 4 such
meetings shall be held in every year.
It is a right and duty of a director to attend every
Board meeting.
Though he may not attend all meetings, it would
amount to negligence, if w/o sufficient cause, he
fails to attend the Board meeting.
A Board meeting can be held on a public holiday
or outside business hours for the convenience of
the directors. Normally should be held on working
days.
Board meeting may be held at the registered office
or at any place convenient to the directors.
 Essentials of a Valid Meeting
To be convened by Board.
Notice: Contents of notice; Service of notice.
Explanatory Statement.
Ordinary business and/or Special business.
Quorum: 5 members from public company and 2
members from any other company.
Chairman of the meeting.
 Other Concepts
Proxies: Rules as applicable – shall have no right to
speak at the meeting; a member of a private company
shall not be entitled to appoint more than one proxy
to attend on same occasion; not entitled to vote
except on a poll.
Voting: Every equity shareholder has a right to vote,
while preference shareholder has a right to vote only
on resolutions directly affecting rights attached to his
preference shares. A resolution proposed is decided
by voting (i) by show of hands, or (ii) by poll.
Resolutions: Matters in a company are decided
by resolutions in the meetings.
Items listed in the agenda to the notice of the
meetings are decided by resolutions.
Kinds of Resolutions: i) Ordinary resolutions; ii)
Special resolutions; iii) Resolutions requiring
special notice; iv) Board resolutions.
Minutes of the Meeting: Every company shall
keep the following books at the registered office
of the company for purposes of recording the
minutes:
i) General meetings minute book; ii) Board
meetings minute book; iii) Minutes of
proceedings of Committee of Directors.
 Appointment of Directors
Through Board Meetings
Casual vacancies: A casual vacancy arises when the
office of any director appointed by the company in a
general meeting is vacated before his term of office
expires in the normal course.
Additional directors: BoDs may appoint the same
to hold office only upto the date of the next AGM.
However, the number of the directors and additional
directors shall not exceed maximum strength fixed
for the Board by the articles.
Alternative directors: BoDs may, if
authorized by the articles, or by a resolution
passed in a general meeting, appoint the same
to act for the original director during his
absence for a period not less than 3 months.
An alternative director is in the same position as
any other director as regards his rights, duties
and liabilities as a director. He acts on his own.
 Share Qualification of a Director
It means the shares to be taken by a director to
qualify him as a director of the company.
It shall be the duty of every director to hold a
specified share qualification within two months
after his appointment as director.
The nominal value of the qualification shares shall
not exceed Rs.5000.
A failure to acquire the specified share qualification
will result in the vacation of the office of the
director.
 Removal of Directors
By Shareholders (Sec.284): A company may by
ordinary resolution remove a director before the
expiry of his period of office by:
i) special notice of any resolution;
ii) on receipt of notice of a resolution, the company
shall forthwith send a copy thereof to the director
concerned.
Exceptions: Directors cannot be removed – if
appointed by Central Government; if director holding
office for life in case of private company; or if
appointed by company in general meeting [Sec.
255(1)].
By Central Government (Sec. 388B-388E): The
CG may state a case against the director and refer the
same to the Company Law Board with a request to
enquire into the case and record a decision as to
whether or not the director is fit or proper to hold
office connected with the conduct and management
of any company.
The case against the director may be initiated by the
CG under the circumstances of fraud, persistent
negligence, defaulting on obligations and functions,
lack of sound business/commercial practices, causing
damage to the interest of trade, industry or business
by the director.
If found guilty by CLB, the CG shall remove from
office the director.
By Company Law Board (Secs. 402 & 407): On
application by any member in cases of oppression,
or mismanagement, the CLB may terminate, set
aside or modify any agreement between the
company and a director, MD, and the manager.
The same whose agreement is so terminated shall,
for a period of 5 years be appointed as director or
MD or manager of the company.
Such a director/manager shall not be entitled to
any claim for damages or for compensation for loss
of office.
As per the amendment made in the Act in 2002,
the powers of CLB are conferred upon the Tribunal.
 Reconstruction & Amalgamation (Section
394)

Where it is shown to the Court that the compromise or

arrangement has been proposed in connection with a
scheme for the reconstruction or the amalgamation
of any two or more companies, the Court may by
order, sanctioning the compromise or arrangement,
make provision for all or any of the following
matters.
The transfer to transferee of the whole or any part of
the undertaking, property or liabilities of any
transferor company;
The allotment or appropriation by the transferee
company of any shares, debentures, or policies;
The continuation by or against the transferee
company of any legal proceedings pending or against
any transferor company;
The dissolution, without winding-up, of any
transferor company; and
The provision to be made for any persons who, within
such time and in such a manner as the Court directs,
dissent from the compromise or arrangement;
 Reconstruction or Amalgamation
Condition Prohibiting it

Companies (Amendment) Act, 2000, by substitution

of Section 376 provides that where any provision:
i) In the MoA or AoA of a company; or
ii) In any resolution passed in general meeting by, or
by the BoDs of the company; or
iii) In an agreement between the company and any
other person,
Prohibits the reconstruction or amalgamation of
company with any body corporate or bodies
corporate shall be void.
 Power of Central Government
To Provide for Amalgamation in National Interest

Where the CG is satisfied that it is essential in the

public interest that 2 or more companies should
amalgamate, it may, by order provide for the
amalgamation of those companies into a single
company with such constitution, with such property,
powers, rights, interests, authorities and privileges
and with such liabilities, duties and obligations as
may be specified in the order.
The order may provide for the continuation by or
against the transferee company of any legal
proceedings pending by or against any transferor
company and may also contain such consequential,
incidental and supplemental provisions as in the
opinion of the CG may be necessary to give effect to
the amalgamation.
Every member or creditor of each of the companies
before the amalgamation shall have, as nearly as may
be, the same interest in or rights against the company
resulting from the amalgamation as he had in the
company of which he was originally a member or
creditor of a company.