UNIT 2

Nature and Types of Companies – Major Principles –

Formation – Memorandum and Articles of Association –
Prospectus – Power – Duties and Responsibilities – Liabilities
of Directors – Winding up of Companies – Corporate
Governance
DEFINE COMPANY
 According to Justice Cave, “A corporation is
a legal person just as much as an individual,
but with no physical existence”
CHARACTERISTICS OF A
COMPANY
 Legal Personality
 Limited Liability
 Perpetual Succession – members may come
and go but the company is forever
 Right to property
 Common Seal
 Transferability of Shares
 Capacity to sue and be sued
 Not a citizen
ADVANTAGES OF COMPANIES
 Limited Liability
 Easy Mobilization of Resources
 Possibilities for expansion
 Long Life
 Easy transferability of shares
 Democratic Management
 Capital Formation
LIMITATIONS OF COMPANIES
 Long Drawn Process
 Expensive
 Separation of ownership from control
 Rigid Government Control
 Erosion of Limited liability
 Administrative Delays
TYPES OF COMPANIES
I. Classification on the Basis of Incorporation
1. Chartered Companies – King or Queens.
Ex. Queen of England incorporated several
companies like East India Company, bank of
England etc. In India, we have no such
company
2. Statutory Companies - Companies which
are established by special act of the central
legislature or any state legislature are
called statutory companies
3. Registered Companies
Companies which are established by
registration under the companies act, 1956
or under earlier companies acts are called
registered companies.
II. Classification on the Basis of Liability
1. Companies limited by shares
2. Companies limited by guarantee
Companies in which the liability of
members is limited by the memorandum to
such an amount as the members undertake
to pay are called companies limited by
guarantee
III. Classifications on the basis of members
1. Private Companies
– minimum paid up capital of Rs.1,00,000 and
more
- Word Private limited has been included with
the company name
- minimum 2 members, maximum – 50 members
2. Public Companies
– minimum paid up capital of Rs.5,00,000 and
more
- minimum 7 members, maximum – no limit
IV. Classification on the Basis of Control of
Ownership
1. Holding company
A company is deemed to be a holding
company of another
2. Subsidiary company
The company which is controlled by another
company
3. Government Company
51% of the company owned by government
4. Foreign Company
 DIFFERENCE
Public Company Private Company
1. Minimum number of 7 2
members
2. Commencement of After getting As soon as getting
Business certificate of certificate of
incorporation and incorporation
certificate of
commencement of
business
3. Allotment of Shares Allot shares only after Allot shares
minimum subscription irrespective of the
has been subscribed by number of shares
the public subscribed by the
applicant
4. Kinds of shares Equity shares and Any kind of shares and
preference shares with such voting rights
as it may think
5. Minimum number of Not less than 3 Minimum two directors
directors directors
DIFFERENCE
Public Company Private Company
6. Qualification of Directors of a public Need not acquire
shares company should
acquire the
qualification shares
specified in the
articles of association
7. Consent to act as a In writing and filed No need
Director with registrar
8. Statutory meeting Must hold Need not
9. Multiple Cannot be a director Can have any number
Directorship of more than 15 of companies
companies at a time
10. Managerial 10% of net profit No limit
Remuneration
DIFFERENCE
Public Company Private Company
11. Compulsory 1/3 of the directors Directors need not
retirement of a public company retire
are compelled to
retire by rotation
every year
12. Maximum No limit 50
members
13. Issue of Can issue Cannot issue
Prospectus
14. Use of the word Public company may Private company may
“Ltd” add simply the word add the words
“Ltd” “Private Limited”
15. Meeting (Quorum) Five members Two members
personally present
FORMATION OF A COMPANY
1. Promotion
2. Registration
3. Commencement of Business
I. PROMOTION
Definition
“The discovery of business opportunities and
the subsequent organization of funds,
property and management ability into a
business concern for the purpose of making
profit therefrom”
Promoter: The person who undertakes all these
activities is known as the promoter
Define Promoter
“a promoter is a person who undertakes to
form a company with reference to a given
object and to set it going and who takes
necessary steps to accomplish that purpose”
FUNCTIONS OF A PROMOTER
 Promotion of an idea
 Detailed investigation
 Verification
 Assembling
 Financing the proposition
 Presentation of the proposition
DUTIES OF A PROMOTER
 Duty to Disclose
 Not to make any secret profit
 Duty to give benefits of negotiations to the
company
 Not to make unfair use of his position
2. INCORPORATION OR
REGISTRATION
1. Approval of the proposed name
2. Documents to be filed with the Registrar
a. Memorandum of Association
b. Articles of Association
c. List of directors
d. Consent of the directors
e. Statutory declaration – Advocate,
Chartered accountant, Director or Managing
Director
f. Notices of the Address of the Registered
Office (within 30 days)
g. A letter of authority for making necessary
corrections in Memorandum and articles
h. Letter of Registrar of companies about the
availability of name

3. Payment of necessary fees

4. Registration of the company
CERTIFICATE OF
INCORPORATION
 After the above documents are filed with the
Registrar and the prescribed fees are paid
and the registrar is satisfied then he will
issue a certificate known as Certificate of
Incorporation. (in other words, upon the
issue, the company is born)
3. COMMENCEMENT OF
BUSINESS
 A private company can commence business
right from the date of the certificate of
incorporation
 A public company cannot commence business
immediately upon incorporation. A further
certificate known as Certificate of
Commencement of Business is necessary
before it commences its business
MEMORANDUM OF ASSOCIATION
 Memorandum of association is the
constitution of the company.
DEFINITION OF MOA
 “The MOA of a company as originally framed
or as altered from time to time in pursuance
of any previous companies law or of this act”
CONTENTS OF THE
MEMORANDUM
1. Name Clause
The name clause contains the name of the
company. A company being a legal person,
must have a name to establish its corporate
existence.

The last word of the name must be “Limited”

in case of Public companies and in case of
private companies it should be a “Private
Limited”
2. Situation Clause
It contains the name of the state in which the
company’s registered office is to be situated
3. Objects Clause - Objectives of the company
4. Liability Clause
5. Capital Clause
6. Association Clause
ALTERATION OF MEMORANDUM
1. Alteration of the Name Clause
 General change of the name
 Change of name under the direction of the
central government
 Addition or Deletion
 Minor Mistakes
2. Alteration of the Situation Clause
 Change of registered office
3. Alteration of the objects Clause
4. Alteration of the Liability Clause
5. Alteration of the Capital Clause
DOCTRINE OF ULTRA VIRES
 The term “Ultra” means beyond and “Vires”
means powers. The term, therefore, means
the doing of an act which is beyond the legal
power and authority of the company
DOCTRINE OF CONSTRUCTIVE
NOTICE
 MOA and AOA are available for public
inspection in the registrar’s office on
payment of nominal fee for each inspection
DOCTRINE OF INDOOR
MANAGEMENT
 Its purpose is to safeguard the ignorant
stranger who deals with the company in good
faith
ARTICLES OF ASSOCIATION
 This document contains the rules and
regulations regarding the internal
management of the company.

Definition
“Articles means the Articles of Association of a
company originally framed or as altered from
time to time in pursuance of any previous
companies law or of this act”
CONTENTS OF THE AOA
 Adoption of preliminary contracts
 Number and values of shares
 Allotment of Shares
 Calls of Shares
 Share certificates and rights of different
types of shareholders
 Transfer and transmission of shares
 Forfeiture of shares
 Alteration of capital
 Borrowing Powers
 Alteration of the Memorandum
 General meetings, voting rights of the
members
 Number of directors, their qualifications and
remunerations
 Dividend
 Accounts and audit
 Issue of bonus shares
 Appropriations to various reserves
 Winding up
ALTERATION OF THE AOA
 A special resolution must be passed. The
articles can never be altered by a general
resolution
 A certificate copy of the resolution must be
filled with the registrar within 30 days of the
passing of it
 If the alteration is for converting a public
company into a private company, or if it is
related to the managing director or the
manager, the approval of the central
government is also necessary
 Alteration should be made in all the articles
issued thereafter
 The alteration should not affect the rights of
the outsider
 The alteration should not cause a breach of
contract
 The alteration must be benefit of the
company as a whole
 The alteration should not force the members
to take more shares or to pay more money
for the shares already purchased by them
DIFFERENCE
Memorandum
Charter of the company and
defines and also confines the
fundamental conditions and
objects for which company is
granted incorporation
Subordinate to the companies
act
Principal Document
Specifies the scope of authority
and the objectives
Defines the relationship between Defines the relationship between
company and outsiders
Articles
Bye law or internal regulation of
the company
Subordinate to the memorandum
Secondary Document
Specifies the procedures to be
followed to carry out the
objectives stated in the
memorandum
the company and its members
Alteration is difficult
Memorandum is compulsory for
all companies
Act Ultra vires to Memorandum
cannot be ratified and outsiders
have no remedy against the
company
Alteration is easy
The company need not have its
own articles. Instead, it can
adopt Table A as its articles
Acts Ultra vires to Articles can be
ratified by suitable legal
formalities.
PROSPECTUS
 After obtaining the Certificate of
Incorporation, the promoters of a public
company have to issue a prospectus to
arouse public interest in the proposed
company
DEFINITION
 “any document described or issued as a
prospectus and includes any notice, circular,
advertisement or other document inviting
deposit from the public, inviting offers from
the public for the subscription or purchase of
any shares in or debentures of a body
corporate”
OBJECTIVES OF ISSUING A
PROSPECTUS
 To attract the investors
 To make enough disclosure to the investors
to enable them to decide whether or not to
purchase shares or debentures of the
company
 To secure that the directors of the company
accepted responsibility for the statement in
the prospectus. A prospectus is thus only a
window through which a prospective investor
can look into the soundness of a company’s
venture
STATUTORY PROVISIONS REGARDING
THE ISSUE OF PROSPECTUS
I. As per provisions contained in the companies act,
1956
 A prospectus cannot be issued by a prospective
company before its incorporation
 Every prospectus must be dated usually, that date is
taken as the date of publication of the prospectus.
 A copy of every prospectus must be signed by every
director or proposed director or by their authorized
agents.
 On or before the date of publication, a copy of the
prospectus must be filed with the register.
 This copy must be accomplished by the following documents:
 A) Written consent of all persons named therein as auditors, legal
advisors, bankers, solicitors, attorneys and brokers.
 B) A copy of every contract entered into with the managing directors,
managers etc. regarding their conent.
 C) A copy of every material contract (unless entered into before 2 years)
 D) If a running business is taken over by the company, statement of the
profit and loss for the previous 5 years, certified by a chartered
accountand.
 E) The prospects must contain a statement that a copy of the prospectus
has been filed with the registrar.
 F) The consent of the director U/S 266 in respect of new directors, if any,
named therein.
 G) A copy of underwriting agreement, if any, should also be filed as
required by sec.76(1)(b)(v).
The prospectus must be issued to the public within 90 days of its
registration . If not, it will not be a prospectus under this act
 If any default is made in issuing the prospectus
within 90 days, the company and every officer
responsible thereof shall be fined upto Rs 5,000/-
 The prospectus must contain a statement that a
copy has been delivered for registration, also
indicating the requisite documents (giving names)
delivered with it.
 The consent of the expert should be obtained. If
the prospectus includes a statement purporting to
be made by an expert, a consent in writing of that
expert should be obtained and this fact should be
stated in the prospectus. It should also that the
consent given has not been withdrawn.
CONTENTS OF PROSPECTUS
 Sec.56 requires every prospectus to disclose the matter
as specified in schedule II to the companies act.
 The central government has vide note no 666(e) dated
3.10.1991 amended schedule II. The matters to be
stated in the prospectus under the revised scheduled II
are divided into 3 parts which are as under:

PART 1
1.General information
1. Name and address of registered office of the company.
2. a) consent of the central government for the present issue
and declaration of the central government about non-
responsibility for financial soundness or correctness of
statements.
 b) letter of intent/industrial license and
declaration of the central government about non-
responsibility for financial soundness or correctness
of statements.
 3. Names of regional stock exchanges and other
stock exchanges where application made for listing
of present issue.
 4. provisions of sub section (1) of sec.68A of the
companies act relating to punishment for fictitious
applications.
 5. statement/declaration about refund of the issue
if minimum subscription of 90 per cent is not
received within 90 days from closure of the issue.
 6. Declaration about the issue of allotment
letters/refunds within a period of 10 weeks
and interest in case of any delay in refund at
the prescribed rate under sec. 73(2) & (2A).
 7. Date of opening of the issue.
 Date of closing of the issue
 Date of earliest closing of the issue.

8. Name and address of auditors, and lead

managers.
9. Name and address of trustee under debenture
trust deed.
 10. Whether rating from CRISIL or any rating
agency has been obtained for the proposed
debenture/preferences shares issue.
 If no rating has been obtained, this
should be answered as “No”
 If yes rating should be indicated.
 11. Underwriting of the issue.
 (Names and address of the underwriters and
the amount underwritten by them)
 (Declaration by board of directors that the
underwriters have sufficient resources to discharge
their respective obligations).
II. CAPITAL STRUCTURE OF THE
COMPANY
1. Authorized, issued, subscribed and paid-up
capital.
 2. size of present issue giving separately
reservation for preferential allotment to
promoters and others.
 3.paid-up capital:
 (a) after the present issue.
 (b) after conversion of debentures (if applicable)
 III. Terms of the present issue
1. Terms of payments.
2. Rights of the instrument holders.
3. How to apply – availability of forms,
prospectus and mode of payment.
4. Any special tax benefits for company and its
shareholders.
 IV. Particulars of the issue
 1. objects.
 2. project cost.
 3. means of financing (including contribution
of promoters).
 V. company, management and project
 1.History and main objects and present
business of the company.
 2. subsidiary(ies) of the company, if any (For
financial data refer to auditors report in part
II).
 3. promoters and their background.
 4. Names, addresses and occupation of
manager, managing directors, whole-time
directors.
 5. Location of Project
 6. Plant and machinery. Technology, process
etc
 7. Infrastructure facilities

Part II
I. General Information
1. Consent of Directors, Auditors, Advocates etc
2. Expert Opinion
3. Resolution passed
II. Financial Information
III. Statutory and other information

Part III
Declaration
DIRECTORS
Definition
“a director means any person occupying the
position of a director by whatever name
called”

Deemed Director
Directions or instruction, the board of
directors is accustomed to act
BOARD OF DIRECTORS
 Directors of a company collectively are
referred to as the Board of Directors.

 Who is eligible to become a director?

 Only an individual can be appointed as a
director.
 Achieving prescribed qualification of shares
APPOINTMENT OF DIRECTORS
 First Director
 Appointment by the company
 Appointment by the board
 Appointment by outsiders
 Appointment by the Central Government
POSITION OF DIRECTORS
 Directors as Agents
 Directors as Trustees
 Directors as Employees
 Directors as Officers
POWERS OF DIRECTORS
I. General Powers
II. Specific Powers
III. Powers Subject to the Consent of the
Company
IV. Powers Subject to the consent of the
Central Government
DUTIES AND RESPONSIBILITIES
OF DIRECTORS
 Statutory Duties
1. Supervise, control and director the
Managing Director and Manager
2. Fresh issue of shares
3. Misleading statements
4. Statutory Report
5. Extra Ordinary General Meeting
6. Annual Accounts
7. Dividends
 Non Statutory Duties
1. Duty to keep the relationship
2. Duty to take care and skill
LIABILITIES OF DIRECTORS
 Civil Liabilities
1. Contracts in their own name
2. Ultra Vires Acts
3. Misleading Prospectus
4. Failure to repay application money
5. Fraudulent act
 Liability to the company

1. Ultra Vires Act

2. Breach of Trust
 Criminal Liabilities
MANAGING DIRECTOR
 Only an individual can be a managing
director. He should be a director of the
company. He should not be the one who is
disqualified for directorship
 WINDING UP
 Winding up of a company is the process
whereby its life is ended and its property
administered for the benefit of its creditors and
members.

 Modes of Winding up - A company may be

would up in any one of the three ways,
(I) compulsory winding up ie., by Court (s.433)
 (Ii) voluntary winding up; (s 484)
 (ii) voluntary winding up subject to the supervision of
the Court.(s 522)
CORPORATE GOVERNANCE
 “CORPORATE GOVERNANCE is the system by which
companies are directed and controlled by the management
in the best interest of the shareholders and others
ensuring greater transparency and better and timely
financial reporting.

 The Board of Directors are responsible for governance of

their companies.”
PRINCIPLES OF CG
 Rights and equitable treatment of shareholders

 Interest of other stakeholders

 Role and responsibilities of the board

 Integrity and ethical behaviour

 Disclosure and transparency

 ESSENTIALS OF CG

 Transparency

 Disclosure

 Fairness

 Independent supervision