Unit 4

Companies Act-2013
Road Map. . .

▰ 4.1. Company definition, Characteristics, Kinds of Companies

▰ 4.2. Incorporation of Company
▰ 4.3. Overview of Memorandum & Articles of Association, Prospectus
▰ 4.4. Company Management (Appointment, removal & duties of director)
▰ 4.5. Critical Review of companies act 2013

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 4.1
Company definition,
Characteristics, Kinds of
Companies
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▰ Company is defined as
▻ “A voluntary incorporated association which is an artificial
person, created by law with limited liability having a common seal
and perpetual (long-lasting)succession (progression).”

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Characteristics of a company

▰ 1. Registration
▻ A company is to be compulsorily registered under the Companies
Act.
▰ 2. Distinct Person – Separate legal entity
▻ A company is a distinct person possession its own identity. It is
altogether a separate legal entity, independent from it’s members,
though controlled by the Board of Directors.

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▰ 3. Perpetual succession
▻ A company incorporated never dies. It has a perpetual succession.
Its members may come and go but the company can go on for
ever and remain the same entity.
▻ The death or insolvency of the members does not affect the
corporate existence of the company.

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▰ 4. Artificial Person but not a Citizen
▻ The company is an artificial person.
▻ It functions through its Board of Directors. However, it is not a
citizen as it cannot enjoy the rights under the Constitution of India
or Citizenship Act.
▻ Though a company does not possess fundamental rights, yet it is a
person in the eyes of law.
▻ Company being an artificial person, its nationality is to be
determined in reference to the law of country where it is
incorporated. 7
▰ 5. Transferable shares
▻ A company has the greatest advantage of its shares being easily
transferable.
▻ Unlike a partnership firm, the members in an incorporated
company can easily transfer their shares.

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▰ 6. Limited Liability
▻ The novel idea of limited liability was for the first time introduced
by the Companies Act of 1857.
▻ Any person can participate in the share capital of an incorporated
company and limit his liability to the extent of his participation.
▻ The members cannot be called upon, in case of liquidation or
winding up of the company to contribute more than what has been
agreed by them to subscribe, by way of participation in the share
capital of the company.
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▰ 7. Common seal
▻ The company has a separate legal existence under its own
common seal.
▻ It can enter into contracts with outsiders, with its Directors or with
its members.
▻ The common seal of the company gives it an independent
existence.

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▰ 8. Separate Property
▻ The company being a distinct and legal personality can own,
enjoy and dispose off property in its own name.
▻ It is the owner of its capital and assets though contributed by its
members.
▻ The shareholders are not the owners of the company’s property.

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▰ 9. Capacity to sue and be sued
▻ A company can sue and be sued in its corporate name.
▻ The company’s right to sue arises when some loss is caused to the
company, or the property or the personality of the company, as
distinct from a loss occasioned to the directors of the company.
▻ A company is a person separate from its members, may even sue
one of its own members for libel.

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Types of Companies

▰ 1. Royal Charter or Chartered Companies

▻ These companies are incorporated under special Royal Charter
issued by the King or Queen.
▻ Their powers and actions are governed by the charter.
▻ Example. East India Company, Bank of England etc.
▻ Such companies are treated as foreign companies in India.

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▰ 2. Statutory companies
▰ These companies are formed under the Special Statutory Act of the
Parliament or State Legislature, for example, Reserve Bank of India,
State Bank of India, Industrial Finance Corporation of India, Life
Insurance Corporation of India etc.
▰ Theses companies are governed by the Act of parliament of by State
Legislature.

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▰ 3. Registered Companies under the Act
▰ Companies registered under the Companies Act , 1956.
▰ All companies are regulated by the provisions of the Companies Act, 1956.
These companies have Memorandum of Association and Article of
Association for their external and internal regulations.
▰ Companies registered under the Companies Act are either
A. Companies limited by shares
B. Companies limited by guarantee
C. Unlimited companies
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▰ A. Companies limited by shares
▰ These types of companies have a share capital and the liability of each
member of the company is limited by the Memorandum to the extent
of face value of shares subscribed by him.
▰ During the existence of the company or in the event of winding up, a
member can be called upon to pay the amount remaining unpaid on the
shares subscribed by him.
▰ A company limited by share may be a public company or a private
company, these are most popular types of companies.
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▰ B. Companies limited by guarantee
▰ These types of companies may or may not have a 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 the debts and liabilities of the company.
▰ This amount promised by him is called ‘Guarantee.’
▰ The liability of the members is limited to the extent of the guarantee
and the face value of the shares subscribed by him, if the company has
a share capital.
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▰ C. Unlimited Companies
▰ The liability of the members in these companies is unlimited like an
ordinary partnership firm, in proportion to his interest in the company.
▰ A company not having any limit on the liability of its members is
called an ‘unlimited company’. An unlimited company may or may not
have a share capital.

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 4.2
Incorporation of Company

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▰ A company obtains separate legal existence only after it is registered
under the Companies Act and is issued a certificate of incorporation by
the Registrar of Companies of the State where registered office of the
company is situated.
▰ Certificate of incorporation is a document which certifies that the
company has been registered with the Registrar of Companies under
the Companies Act on a particular date.

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Procedure for incorporation of a Company

▰ In case of a public company any seven persons and in case of a

private company any two persons my join to form an incorporated
company.
▰ The following formalities shall be complied with to enable the
registered office of the company is to be situated.
▰ 1. Application for availability of name under which the company
proposes to be incorporated is to be made to the Registrar of
Companies in the prescribed form in the State where the registered
office of the company is to be situated.
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▰ 2. After the name is made available, Memorandum and Articles of
Association of the Company is to be filed with Registrar of Companies
with necessary stamp duty and filing fees according to the authorised
capital of the company. Along with the agreement if any, which the
company proposes to enter into with any individual for appointment as
its managing or whole-time director or manager.

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▰ 3. It is advisable to file with the Registrar along with the Memorandum
and articles of Association, particulars of the situation of the
Registered Office of the company and the particulars of first directors
of the company.
▰ If at this stage these particulars are not filed, then the same have to be
filed with the Registrar within 30 days of obtaining the certificate of
incorporation.

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▰ 4. A declaration by an Advocate of the Supreme Court or of a High
Court entitled to appear before a High Court or a Secretary or a
Chartered Accountant practising in India who is engaged in the
formation of a company, or by a person named in the Articles as
director, manager or secretary of the company, that all he requirement
of the Act have been complied with in respect if registration, shall be
filed with the Registrar.

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▰ 5. If a company intend to participate in an industry included in the
schedule of Industries Act 1951, a licence to that effect must be
obtained.
▰ In case of a public company, the following further requirements are to
be complied with;
▻ A list of persons who have consented to act as directors
▻ A written consent of the directors to act in that capacity
▻ An undertaking by the directors to take up and pay for their
qualification share
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▰ If the registrar is satisfied that all the requirements under the Act for
purposes of registration of a company have been complied with he
shall register the company and issue it certificate of incorporation
under his hand and seal.
▰ Once a company is registered, the incorporation cannot be challenged
even though there may be irregularities prior to registration.

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 Advantages of Incorporation

1. Limited Liability
▰ The Companies Act provides that in event of a company being shut
down, the members of the company are solely liable to contribute to the
assets and liabilities of the company
▰ However, in the case of companies that have been incorporated, none of
its members is legally bound to contribute to anything more than the
nominal value of shares held by the member which still remain unpaid.
▰ The advantage of having limited liability for its members is one of the
major reasons for setting up an incorporated company.
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2. Perpetual Succession
▰ As provided by the Companies Act Section 34(2), an incorporated
company has the characteristic of perpetual succession.
▰ In spite of any changes in members of the company, the company will
be the same entity with the same privileges, immunities, estate, and
possessions.
▰ As the Companies Act states, ‘Members may come and members may
go, but the company can go on forever.’

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3. Transferable Shares
▰ Section 82 of the companies act states that ‘The shares or other interest of
any member in a company shall be movable property, transferable in the
manner provided by the articles of the company.’
▰ This leads to the investment of funds in shares. It is done so that members
can encash shares at any given time upon their will.
▰ It also serves the purpose of providing liquidity to the investors. They can
sell shares, anytime they are willing to, on the open market or the stock
exchange.
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4. Separate Property
▰ An incorporated company as a recognised legal entity is permitted to own
its own funds and also other assets. ‘The property of the company is not
the property of shareholders, it is the property of the company.’
▰ ‘The company is the real person in which the property is vested, and by
which it is controlled, managed and disposed of.’ And thus, under the law,
if a majority shareholder of the uses the company’s resources for personal
reasons, he is liable to be held for criminal misappropriation of company
funds.

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5. Capacity to Sue
▰ As a separate legal entity, an incorporated company has the right to sue
other people in addition to companies. In turn, it can be sued by other
companies and people.
▰ However, the managing directors and other directors are not liable to be
sued in the name of the company.

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6. Flexibility and Autonomy
▰ The company has an autonomy and independence to form its own
policies and further, implement them.
▰ However, they are subject to the general principles of law, equity and a
good conscience.
▰ In accordance with the provisions that are mentioned in the Companies
Act,  Memorandum and Articles of Association.

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 4.3
Overview of Memorandum &
Articles of Association,
Prospectus
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▰ The company to be registered under the Companies Act, is required to
have two documents stamped, registered and filed with Registrar of
Companies – they being Memorandum of Association and Articles of
Association.

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 Memorandum of Association

▰ A Memorandum of Association (MOA) is a legal document prepared in

the formation and registration process of a limited liability company to
define its relationship with shareholders.
▰ The Memorandum of Association or MOA of a company defines the
constitution and the scope of powers of the company.
▰ In simple words, the MOA is the foundation on which the company is
built.

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Object of registering a Memorandum of Association or MOA
▰ The MOA of a company contains the object for which the company is
formed. It identifies the scope of its operations and determines the
boundaries it cannot cross.
▰ It is a public document according to Section 399 of the Companies Act,
2013. Hence, any person who enters into a contract with the company is
expected to have knowledge of the MOA.
▰ It contains details about the powers and rights of the company.

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 Content of the MOA

1. Name Clause
▰ For a public limited company, the name of the company must have the
word ‘Limited’ as the last word
▰ For the private limited company, the name of the company must have the
words ‘Private Limited’ as the last words.
2. Registered Office Clause
▰ It must specify the State in which the registered office of the company
will be situated.

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3 Object Clause
▰ It must specify the objects for which the company is being incorporated.
▰ Further, if a company changes its activities which are not reflected in its
name, then it can change its name within six months of changing its
activities.
▰ The company must comply with all name-change provisions.

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4. Liability Clause
▰ It should specify the liability of the members of the company, whether
limited or unlimited. Also,
▻ For a company limited by shares – it should specify if the liability
of its members is limited to any unpaid amount on the shares that
they hold.
▻ For a company limited by guarantee – it should specify the
amount undertaken by each member to contribute to.

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5. Capital Clause
▰ This is valid only for companies having share capital.
▰ These companies must specify the amount of Authorized capital divided
into shares of fixed amounts.
6. Association Clause
▰ The MOA must clearly specify the desire of the subscriber to form a
company.

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 Articles of Association

▰ Articles of association are a document that specifies the regulations for a

company's operations and defines the company's purpose.
▰ The document lays out: how tasks are to be accomplished within the
organization, including the process for appointing directors and the
handling of financial records.

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 Components of AOA

1. Regulations
▰ The AOA must contain the regulations for the management of the
company.
2. Inclusion of matters
▰ The Articles must specify all matters, in accordance with the rules.
Furthermore, a company can include additional matters deemed
necessary for its management.

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3. Provisions for entrenchment
▰ Entrenchment means fortification or protection.
▰ The AOA can contain provisions for entrenchment for specific
provisions.
▰ The provisions for entrenchment can ensure that the specified provisions
are altered only if certain conditions or procedures are met or complied
with.
▰ These conditions are usually more restrictive than those applicable for a
special resolution.
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 Prospectus

▰ 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.

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▰ A prospectus is a document issued by the company inviting the public
and investors for the subscription of its securities.
▰ A prospectus also helps in informing the investors about the risk of
investing in the company.
▰ A Prospectus is required to be issued only after the incorporation of the
company. These documents describe stocks, bonds and other types of
securities offered by the company.
▰ A prospectus is always accompanied by performance history and
financial information of the company.
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 Contents of Prospectus

▰ Name and registered address of the office, its secretary, auditor, legal
advisor, bankers, trustees, etc.
▰ Date of the opening and closing of the issue.
▰ Statements of the Board of Directors about separate bank accounts where
receipts of issues are to be kept.
▰ Statement of the Board of Directors about the details of utilization and
non-utilisation of receipts of previous issues.
▰ Consent of the directors, auditors, bankers to the issue, expert opinions.

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▰ Authority for the issue and details of the resolution passed for it.
▰ Procedure and time scheduled for the allotment and issue of securities.
▰ The capital structure in the manner which may be prescribed.
▰ The objective of a public offer.
▰ The objective of the business and its location.
▰ Particulars related to risk factors of the specific project, any pending legal
action and other important details related to the project.

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▰ Minimum subscription and what amount is payable on the premium.
▰ Details of directors, their remuneration and extent of their interest in
the company.
▰ Reports for the purpose of financial information such as auditor’s
report, report of profit and loss of the five financial years, business
and transaction reports, statement of compliance with the provisions
of the Act and any other report.

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 Types of Prospectus under the Companies Act,
2013

1. Abridged Prospectus
▰ The abridged prospectus is a summary of a prospectus filed before the
registrar. It contains all the features of a prospectus.
▰ An abridged prospectus contains all the information of the prospectus in
brief so that it should be convenient and quick for an investor to know all
the useful information in short.

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2. Deemed Prospectus
▰ According to Section 25(1) of the Act, where a company allots or agrees
to allot any securities of the company with a view to all or any of those
securities being offered for sale to the public.
▰ Any document by which such offer for sale to the public is made is
deemed to be a prospectus by implication of law.

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3. Shelf Prospectus
▰ Shelf prospectus can be defined as a prospectus that has been issued by
any public financial institution, company or bank for one or more issues
of securities or class of securities as mentioned in the prospectus.
▰ When a shelf prospectus is issued then the issuer does not need to issue a
separate prospectus for each offering he can offer or sell securities
without issuing any further prospectus.

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4. Red Herring Prospectus (RHP)
▰ Red herring prospectus is the prospectus which lacks the complete
particulars about the quantum of the price of the securities.
▰ A company may issue a red herring prospectus prior to the issue of
prospectus when it is proposing to make an offer of securities.
▰ This type of prospectus needs to be filed with the registrar at least three
days prior to the opening of the subscription list or the offer.

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 4.4
Company Management
(Appointment, removal & duties
of director)
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 Constitution of Board of Directors

▰ The company being a artificial person carried on its activities and

business through individuals called directors.
▰ Any person in accordance with whose directions or instructions the
Board of Directors of a company is accustomed to act shall be deemed to
be a director of the company.
▰ The directors of a company collectively are referred to as “ Board of
Directors” or “Board”.
▰ A director controls the company’s affairs, if a person performs the
functions of a Director, he will be deemed to be a director, even is he is
not so designated. 54
▰ No company shall appoint or reappoint any individual as director of the
company unless he has been allotted a Director Identification Number.

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Number of Directors
▰ Every public company, other than a public company which has become
such by virtue of section 43A shall have at least 3 directors.
▰ Provided that a public company having, -
(a) a paid-up capital of five crore rupees or more;
(b) one thousand or more small shareholders, may have a director elected
by such small shareholders
▰ Every other company shall heave at least 2 directors.

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▰ Company can have minimum two directors.
▰ The maximum number of directors is fixed by the articles. The maximum
permissible limit of directors is 12.any increase in number beyond 12
directors requires Central Government approval.
▰ A company in a general meeting may, by ordinary resolution increase or
reduce the number of its directors within the limits fixes in that behalf by
its articles

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▰ Director Identification Number (DIN)
▰ In view of the need for individual identity of persons appointed as Directors
or intended to be directors of companies to be established, by Companies
(Amendment) Act, 2006.
▰ The Central Government may allot DIN to any individual intending to be
appointed as director or any existing director of a company for the purpose
of his identification.
▰ No company shall appoint or reappoint any individual as director of the
company unless he has been allotted a DIN. An individual shall make an
application to the Central Government for allotment of DIN.
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▰ It shall be the obligation of every director to intimate his DIN to the
company within one week of receipt of DIN.
▰ The company shall within one week of receipt of such information
furnish DIN to the Registrar.
▰ In case of default, Director or the Company as the case my be, shall be
punishable with fine which may extend to Rs. 5,000 and in case of
continuing default, the fine my extend to Rs. 500 for everyday during
which the contravention continues.

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 Appointment in General Meeting

▰ Subject to any regulation in the articles of the company, directors shall be

appointed by the company in the general meeting.
▰ At the general meeting either the retiring director or a person other than a
retiring director can be appointed as a director of the company.
▰ The directors of a company shall be appointed individually by election,
by the members at a general meeting.

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▰ At a general meeting of a public company or a private company which is
subsidiary of a public company, a motion shall not be made for the
appointment of two or more persons as directors of the company by a
single resolution , unless a resolution that it shall be so made has first
been agreed to by the meeting without any vote being given against it.
▰ A resolution moved in contravention shall be void.
▰ Where there are no validly appointed directors functioning, the
shareholders have the right to appoint directors at the annual general
meeting.

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 Right of persons to stand for directorship

▰ A person who is not a retiring directors shall be eligible for appointment

to the office of director at any general meeting, if he or some member
intending to propose him.
▰ Not less than 14 days before the meeting, leaves at the office of the
company a noticed in writing under his hand, signifying his candidature
for the office of the director or the intention of such member to purpose
him as a candidate for that office, as the case may be, along with a
deposit of five hundred rupees which shall be refunded to such person or,
as the case may be, to such member if

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▰ The company shall inform its members of the candidature of person for the
office of director or the intention of a member to propose such person as a
candidate for that office by serving individual notices on the members not
less than 7 days before the date of the meeting.
▰ It shall not be necessary for the company to serve individual notices upon
the members if the company advertises such candidature or intention not
less than 7 days before the meeting in at least two newspapers circulating
in the place where registered office of the company is located, of which
one is published in the English and other in the regional language.

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 Appointment in Board Meetings

▰ 1. Causal Vacancies
▰ In case of a public company or a private company, subject to any
regulations in the articles of the company, the Board of directors at a
meeting of the Board may fill in casual vacancy among the directors.
▰ 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.
▰ If a casual vacancy is not filled, it is presumed that the number of
directors is reduced.
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▰ 2. Additional Directors
▰ The Board of directors may appoint additional directors to hold office
only up to the date of the next annual general meeting of the company.
▰ However, the number of the directors and additional directors together
shall not exceed the maximum strength fixed for the Board by the
articles.

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▰ 3. Alternate Directors:
▰ The Board of directors of the company may appoint an alternate director
to act for the original director during his absence for a period of not less
than 3 months from the State in which meeting of the Board are
ordinarily held.
▰ An alternate directors shall not hold office as such for a period longer
than that permissible to the original director in whose place he has been
appointed and shall vacate office if and when the original director return
to the State in which meeting of the Board are ordinarily held.

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 Powers of appointment by Central Government

▰ The Central Government may appoint such number of persons as the

Company Law Board may, by order in writing, specify as being necessary
to effectively safeguard the interest of the company or its shareholders or
the public interest to hold office as directors thereof for such period not
exceeding three years in any one occasion as it my think fit, if the company
Law Board –
▻ On reference made to it by the Central Government
▻ On an application of not less than 100 members of the company
▻ Of the member of the company holding not less than one-tenth of the
total voting power therein
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 Appointment by Proportional Representation

▰ Unless the articles provide for the retirement of all directors at every
annual general meeting, not than two-third of the total number of
directors of a public company. Or of a private company which is a
subsidiary of a public company, shall –
▻ Be person, whose period of office is liable to determination by
retirement of directors by rotation and
▻ Be appointed by the company in general meeting

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 Number of Directorships

▰ No person shall hold office at the same time as director in more than 15
companies.
▰ Any person holding office as director in more than 15 companies, shall
within two months
▰ Choose not more than 15 of those companies in which he wishes to
continue to hold the office of director.
▻ Resign his office as director in other companies
▻ Intimate to each of the companies, to the Registrar and to the Central
Government the choices made by him
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▰ Where a person already holding the office of director in 15 companies, is
appointed, as a director of any other company, the appointment shall not
take effect unless such person has within 15 days thereof effectively
vacated his office as director in any of the companies in which he was
already a director.
▰ The appointments of directors shall take effect until such choice is made.
All the new appointments shall become void if the choice is not made
within 15 days of the day on which the last of them was made.

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▰ Exclusions – in number of companies of which a person may be a
director, the following companies shall be excluded;
▻ A private company which is neither a subsidiary not a holding
company of a public company
▻ An unlimited company
▻ An association not carrying on business for profit or which prohibits
the payment of a dividend
▻ A company in which such person is only an alternate director

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 Removal of Directors

▰ 1. By shareholders
▰ A company may by ordinary resolution remove a director (not being a
director appointed by the Central Government) before the expiry of his
period of office by;
▻ Special notice of any resolution to remove a director at a meeting at
which he is to be removed
▻ On receipt of notice of a resolution to remove a director, the
company shall forth with send a copy thereof to the director
concerned. The director shall be entitled to be heard on the resolution
at the meeting.
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▰ Where notice is given of a resolution to remove a director and the director
concerned makes representations in writing to the company and request the
notification of representations to members of the company, the company shall;
▻ In any notice of the resolution given to members of the company to state
the facts of the representations
▻ Send a copy of the representations to every member of the company to
whom the notice of the meeting is sent. If a copy of the representations is
not sent because they were received too late or because of the company’s
default, the director may require that the representations shall be read out
at the meeting
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▰ Exception – the following directors however, cannot be removed;
▻ Directors appointed by the Central Government
▻ In the case of a private company, the director holding office for life
▻ When the director has been appointed by the principles of
proportional representation

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▰ 2. By Central Government
▰ The Central Government under following circumstances may state a case
against any person and refer the same to the Company Law Board with a
request that the Company Law Board may inquire into the case and
record a decision as to whether or not such person is fit and proper person
to hold the office of a director connected with the conduct and
management of any company;

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▰ Any person concerned with the conduct and management of the affairs of
the company is guilty of fraud, persistent negligence or default in
carrying out his obligations and functions
▰ Business of a company is not conducted and managed by such person in
accordance with sound business principles or prudent commercial
practices
▰ That a company is conducted and managed by such person in a manner
which is likely to cause or has caused serious injury or damage to the
interest of trade, industry or business.

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▰ That the business of a company is conducted and managed by such
person with intent to defraud its creditors, members or any other persons
for a fraudulent or unlawful purpose or in a manner prejudicial to public
interest.

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▰ 3. By Company Law Board
▰ On application by any member of the company in cases of oppression
(abuse) or mismanagement, the Company Law Board may terminate, set
aside or modify any agreement between the company and a director,
managing director, and the manager.
▰ No director or managing director or manager whose agreement is so
terminated shall, for a period of 5 years from the date of the order
termination setting aside the agreement, without the leave of the
Company Law Board, be appointed, or act as the managing or other
director or manager of the company.
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 Vacation of Office of Director

▰ The office of a director shall become vacant in case –

▻ He incurs any of the disqualifications specified in section 164
▻ He absents himself from all the meetings of the Board of Directors held
during a period of twelve months with or without seeking leave of
absence of the Board
▻ He acts in contravention of the provisions of section 184 relating to
entering into contracts or arrangements in which he is directly or
indirectly interested.

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▻ He becomes disqualified by an order of a court
▻ He having been appointed a director by virtue of his holding any office
or other employment in the holding, subsidiary or associate company,
ceases to hold such office or other employment in that company
▻ He fails to disclose his interest in any contract or arrangement in which
he is directly or indirectly interested, in contravention of the provisions
of section 184

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 Duties of Directors

▰ Act honestly
▰ Must not make secret profits
▰ Attend Board meetings
▰ Send his consent of his appointment as a director to the Registrar where
applicable
▰ Not to delegate his functions except authorised by the Act or the articles of
comaony
▰ Obtain qualification shares where applicable
▰ Pay call amount
▰ Disclose his name, occupation, nationality, etc. 81
 4.5
Critical Review of companies
act 2013

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