Company Law

w.e.f. 1.4.1956
Introduction:-
• COMPANIES ACT, 1956

• BASED ON REPORT SUBMITTED BY 12

MEMBER BHABHBA COMMITTEE

• “A VOLUNTARY ASSOCIATION OF
PERSONS WHICH IS AN ARTIFICIAL
PERSON CREATED BY LAW WITH
LIMITED LIABILITY, HAVING A
PERPETUAL SUCCESSION AND A
COMMON SEAL.”
Statutory Definition:-
• s. 3 – “A COMPANY MEANS A
COMPANY FORMED AND REGISTERED
UNDER THIS ACT OR AN EXISTING
COMPANY.”
Characteristics of a Company:-
1. INCORPORATION
2. ARTIFICIAL PERSON - (CITIZEN)
3. SEPARATE LEGAL ENTITY
-SALOMON vs SALOMON & Co. Ltd.
-LEE vs LEE AIR FARMING Ltd.
4. LIMITED LIABILITY
LIMITED BY SHARES
LIMITED BY GUARANTEE
5. PERPETUAL SUCCESSION
-EVEN A HYDROGEN BOMB CANNOT PUT AN END TO A COMPANY
-A COMPANY IS CREATED BY LAW AND PUT TO AN END BY LAW
6. COMMON SEAL
7. TRANSFERABILITY OF SHARES
8. SEPARATE PROPERTY
 LIFTING THE CORPORATE VEIL
TO INVESTIGATE

• Object Clause of MOA – legal/lawful

• Character of a Company – enemy
(India-Pakistan/England-Germany)
• Oppression & Mis-Management
• Fraud –
- to circumvent legal obligation
- tax evasion
- to defraud creditors
- sham/hoax/bogus
Formation of Company:-
• MOA
• AOA
• Authorized Capital
• Registered Office (Domicile) of the Company
• List of Promoters/Directors
• Undertaking
• Declaration
• Certificate of Incorporation
• Certificate of Commencement of Business
• Promoter
• Liability of Promoters
• Remuneration of Promoters

• Preliminary or Pre-Incorporation contracts

• Provisional contracts
Classification of Companies on the basis of
Incorporation:-
1. Chartered Companies
The royal prerogative has power to create a
corporation by the grant of a charter to persons
assenting to be incorporated.
e.g. East India Company
2. Statutory Companies
These are companies created by a special act of
the Legislature.
e.g. Reserve Bank of India, State Bank of India,
Life Insurance Corporation
3. Registered Companies
These are companies which are formed and
registered under the Companies Act, 1956.
Classification of Companies on the basis of
Membership:-
• s.3(1)(iii)
Private Company means a company which has a
minimum paid up capital of 1 lakh rupees or such
higher paid up capital as may be prescribed and by its
articles –
(i) restricts the right to transfer its shares, if any;
(ii) limits the number of its members to 50, not including:-
(a) persons who are in the employment of the
company; and
(b) 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; and
(iii) prohibits any invitation to the public to subscribe for any
shares in, or debentures of, the company;
(iv) prohibits any invitation or acceptance of deposits from
persons other than its members, directors or their
relatives.
Classification of Companies on the basis of
Membership:-

• s.3(1)(iv)
A public company shall mean a company,
which –
(a) is not a private company;
(b) has a minimum paid up capital of 5
lakh rupees or such higher paid up
capital, as may be prescribed;
(c) is a private company which is a
subsidiary of a company which is not a
private company.
Classification of Companies on the basis of
Liability:-
• Company limited by SHARES
A company in which the liability of the members is
limited to the extent of the outstanding amount on
the shares held by such members.

• Company limited by GUARENTEE

A company in which the liability of the members is
limited to a fixed amount, which the members
undertake to contribute to the assets of the
company, in case of its winding up.

• UNLIMITED Company
A company in which the members are liable for the
debts of the company, jointly and severally,
irrespective of their interest in the company.
Classification of Companies on the basis of
Control:-
• Holding Company

- composition of BOD
- more than half of the total voting power
- more than half of the nominal value of ESC
- subsidiary of subsidiary

• Subsidiary Company

• Govt. Company – e.g. ONGC

- any company in which not less than 51% of the paid up
share capital is held by the Central Govt. or by any State Govt.
or Govts. or partly by the Central Govt. and partly by one or
more State Govts. is called a Govt. Company

• Foreign Company – e.g. MICROSOFT

- a company incorporated outside India is a Foreign
Company
Section 25 Company:-
• art, science, religion, charity or any other
useful object
• prohibits payment of dividend to its
members
 Public Company vs Private Company

• Number of Members
• Transferability of Shares
• Invitation to Public
• Restrictions vis-à-vis Privileges
 MEMORANDUM OF ASSOCIATION

• MOA is one of the core documents which

has to be filed with the registrar of
companies at the time of incorporation. It
sets out the constitution of the company. A
company cannot depart from the
provisions contained in its memoradum, if
it does, it would be considered ultra vires
and therefore void
• MOA is a public document and can be
inspected by everybody
 MEMORANDUM OF ASSOCIATION

NAME CLAUSE
Public Company should mention ‘Limited’ after its
name whereas Private Company should mention
‘Private Limited” after its name.

REGISTERED OFFICE (DOMICILE) CLAUSE

Jurisdiction.

OBJECTS CLAUSE
Most important clause.
Defines limit and scope of the activities of a
company.
 MEMORANDUM OF ASSOCIATION
LIABILITY CLAUSE
Liability of members of a company is limited to the
extent of shares held or guarantee given.

CAPITAL CLAUSE
Authorised or nominal share capital, kinds of shares
and nominal value of each share is to be mentioned.

SUBSCRIPTION CLAUSE
Those who have agreed to subscribe to the
memorandum, must signify their willingness to
associate and form a company.
 ALTERATION OF MOA

• CHANGE OF NAME
• CHANGE OF REGISTERED OFFICE
• CHANGE OF THE OBJECTS CLAUSE
• CHANGE OF LIABILITY CLAUSE
• CHANGE OF CAPITAL CLAUSE
 ARTICLES OF ASSOCIATION

• The AOA are the rules and regulations

of a company framed for the purpose of
internal management of the company.
• AOA of a company is subordinate to
the MOA.
• AOA must be signed by each
subscriber to the MOA in the presence
of at least one witness each.
 CONTENTS OF AOA
• Exclusion wholly or part of Table-A
• Adoption of preliminary contracts
• Number and value of shares
• Allotment of shares
• Calls on shares
• Lien on shares
• Transfer and transmission of shares
• Forfeiture of shares
• Alteration of share capital
• Share certificates
• Conversion of shares into stock
• Voting rights and proxies
• Rules of conducting meetings
• Directors, their appointment etc
• Borrowing power
• Accounts and audit
• Dividends and reserves
• Winding up
 Alteration Of AOA
• Articles can be altered by passing a
special resolution.
• Such resolution has to be filed with the
ROC within one month.
 DOCTRINE OF ULTRA-VIRES
• ULTRA means beyond & VIRES means
legal powers.
• Hence, an act beyond the legal powers of
a company.
• ULTRA-VIRES act does not create any
legal obligations and is absolutely void-ab-
initio.
• Ashbury Railway Carriage & Iron
Company Ltd. vs Riche
(if an act is Ultra-Vires the company, even
the whole body of shareholders cannot
ratify it…)
 DOCTRINE OF ULTRA-VIRES
• An act which is Ultra-Vires the powers of
the directors but not Ultra-Vires the
company can be ratified by the
shareholders.
• An act which is Ultra-Vires the AOA but
not Ultra-Vires the MOA can be ratified by
the shareholders.
 Doctrine of Constructive Notice
• Exception to the Doctrine of Ultra-Vires.
• Anyone dealing with the company is
deemed/presumed to have knowledge of
MOA & AOA.
 Doctrine of Indoor Management
• Exception of Doctrine of Constructive
Notice.
• The doors of management are closed to
outsiders.
• Outsiders need not inquire about the
internal irregularities.
• They can presume that the company has
followed requisite practice & procedure.
 Royal British Bank v/s Turquand
• Directors of Royal British Bank issued
bonds to Turquand without a resolution
passed by shareholders.
• On maturity company refused to redeem
on ground that the act was ULTRA-VIRES
& therefore not liable.
• It was held that Turquand was not required
to inquire into internal irregularities and
was entitled to recover the amount.
 Exceptions to Doctrine of Indoor Management

• Knowledge of Irregularity
• Negligence
• Forgery
• Acts Beyond Ostensible Authority
 MOA & AOA-RELATIONSHIP
1. The AOA are subordinate to MOA.

2. The AOA must be read in conjunction with

MOA:-

a) To explain any ambiguity in the terms

of MOA

b) To supplement the MOA upon any

matter about which it is silent.
 PROSPECTUS
• s.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.”
 PROSPECTUS
• It is mandatory to issue a prospectus with requisite
particulars, except:-

(i) when the shares or debentures are not offered to

the public;
(ii) when the shares are offered to the existing
shareholders or debenture holders as rights issue;
(iii) when the issue relates to shares or debentures
which are in all respects uniform with the shares or
debentures previously issued and quoted in a
stock exchange;
(iv) where a person is bonafide invited to enter into an
underwriting agreement.
 PROSPECTUS
MINIMUM SUBSCRIPTION

• The minimum amount which shall be raised is called ‘Minimum

Subscription’.
• BOD decide ‘Minimum Subscription’ taking into consideration,
the following:-
(i) purchase of property;
(ii) preliminary expenses;
(iii) underwriting commission;
(iv) repayment of borrowed capital;
(v) working capital;
(vi) any other expenditure.
• If ‘Minimum Subscription’ is not received within 120 days after
the first issue of the prospectus, entire sum received in the
ESCROW A/C. shall be refunded forthwith.
• If such sum is not refunded within 130 days after the first issue
of the prospectus, BOD shall be personally liable to repay the
money along with interest @ 6% p.a.
 PROSPECTUS
• Statement In Lieu Of Prospectus
• Shelf Prospectus
• Information Memorandum
• Red-Herring Prospectus
 LIABILITY for MIS-STATEMENT in ROSPECTUS
• Civil Liability
-Compensation
-Damages
-Recission of Contract
• Defences Against Civil Liability
-Reasonable Belief
-Statement by Expert/Official Person
-No Consent/Withdrawal of Consent

• Criminal Liability
• Defences Against Civil Liability
-Reasonable Belief
-Immateriality

• Derry vs Peek
 s.68A
• s.68A
Any person who –
(a) makes in a fictitious name an
application to a company for acquiring or
subscribing for any shares therein;
or
(b) otherwise induces a company to allot
or register any transfer of shares therein to
him or to any other person in a fictitious
name;
shall be punishable with imprisonment for
a term which may extend to 5 years.
 MEETINGS
• Meetings of SHs:-

(i) General Meetings

-Statutory Meeting
-Annual General Meeting
-Extra-Ordinary General Meeting

(ii) Class Meetings

• Meetings of BOD

• Meetings of Creditors & Debenture-Holders

 STATUTORY MEETING (S.165)
• Statutory meeting is the first meeting of the shareholders
of a company. This meeting is held only once in the life
time of the company.

• Objectives:
-To approve the preliminary contracts specified in the
prospectus of the company with modification if any.
-To discuss the success of floating the project of the
company.
 STATUTORY MEETING (S.165)
• Provisions:

1. Time: Every company, shall, within a period of not less than ONE month
and not more than SIX months from the date on which the company is
entitled to commence the business, hold the Statutory meeting.

2. Notice: The company must give notice to its member at least 21 clear
days before holding the statutory meeting stating the time, date and place
of meeting.

3. Statutory Report: The Directors of the company are required to send a

report called Statutory Report to every member of the company along with
the notice of the meeting at least 21 days before the date of the meeting.

4. Certification of Statutory Report: The Statutory Report shall be certified

by not less than two directors, one of whom shall be the Managing
Director. The Auditor of the company shall certify the particulars regarding
the issue of shares, receipts and payment, etc. and a copy of certified
Statutory Report must be sent to the ROC immediately after it is sent to
the members of the company.

5. Penalty: Maximum of Rs.5,000/-.

 CONTENTS OF STATUTORY REPORT
• Allotment of Shares: The total number of share allotted,
distinguishing fully paid or partly paid up and the extent
to which they are so paid up, shares issued otherwise
than for cash, etc.
• Cash Received: Total amount of cash received by the
company in respect of all the shares allotted.
• Abstract of Receipt and Payment Account
• Names, addresses and occupations of the company’s
Directors, Auditors and all other managerial personnel.
• To approve the preliminary contracts specified in the
prospectus of the company with any modification if any.
• The extent to which the Underwriting Contracts has been
carried out and the reasons thereof.
• The calls in arrears, if any, due from any Director and the
Managers of the company.
• Commission and brokerage paid to any Director or
Manager on the issue of shares or debentures of the
company.
 ANNUAL GENERAL MEETING (s.166)

• Objectives:-

1. Presentation of Annual Accounts

2. Declaration of Dividend
3. Appointment of Auditors
4. Appointment of Directors
5. Any Other Special Business
 ANNUAL GENERAL MEETING (s.166)
• Provisions:-

• First AGM:- First AGM of the company should be held within a maximum
period of 18 Months from the date of its incorporation.
• Subsequent AGM:- There cannot be a gap of more than 15 months
between the dates of two AGMs.
• Power to convene the AGM:- Only BOD of the company has to power to
convene AGM of the company.
• Notice: Atleast 21 days prior notice must be sent to all the member of the
company. However, if all the members, having voting rights, give their
consent, the meeting can be called at a shorter notice.
• Date, Time and Place of holding AGM
• Postponement of AGM:- If an AGM is convened for a particular date and
notice is issued to the members, the BOD may cancel or postpone an
AGM provided that it is being done for bonafide reasons.
• Adjournment:- An AGM can be adjourned by the Chairman for bonafide
reasons only. Where a meeting is adjourned, the adjourned meeting shall
be held on the same day next week at the same place and at the same
time.
• CLB/The National Tribunal:- If a company fails to hold its AGM within the
prescribed period of time, CLB/The National Tribunal, on the application
of any member, may either call or direct the company to call its AGM.
• Penalty: Maximum of Rs.50,000/-.
 EXTRA-ORDINARY GENERAL MEETING
• Any general meeting other than an AGM is called
an Extra-Ordinary General Meeting.

• OBJECTIVE:-
Meeting is called for transacting some urgent or
special business of the company for which it is not
advisable to wait till the next AGM of the company.

• Requisition by:-

-Board of Directors, OR
-Requisition of Members, OR
-CLB/The National Tribunal.
 QUORUM
• Dictionary Meaning – minimum number of
members required to carry on a meeting or
for doing business…
• Quorum means the minimum number of
members required in order to consider a
meeting to be a valid meeting.
• Generally, AOA provide for larger quorum.
But not smaller than statutory minimum,
i.e. five members, personally present, in
case of Public Company and two
members, personally present, in case of a
Private Company.
 QUORUM
• What happens in absence of Quorum?
• If within half an hour, a quorum is not present, by
requisition of the members, it shall stand adjourned
to same day, place and time in the next week.
• If at the adjourned meeting also, a quorum is not
present within half an hour, the members present
will be the quorum.
• When should Quorum be present?
• Article 49 (1) of Table A requires a quorum to be
present at the time when the meeting proceeds to
transact business. Therefore, it need not be
present throughout the meeting.
• Hartley Bairld vs London Flats Limited
 CAN ONE MEMBER CONSTITUTE A QUORUM?

• Rule in ‘Sharp vs Dawes’

• A resolution without requisite quorum is void ipso
facto.
• Exceptions:-
-Where there is a class meeting of shareholders
and all shares of that class are held by only one
person.
-(East vs Bennett Bros Limited)
-Article 77 of Table A states that a committee of a
person can constitute a quorum.
-When a Tribunal orders a meeting, it may direct
that even one member present, in person/proxy,
shall be deemed to constitute a meeting.
 RESOLUTIONS
• Questions which generally come for consideration
at the general meeting of a company are
presented in the form of proposals called Motions.
• A motion proposed by the Chairman of the
meeting/any other member, is put to vote after
due discussions and/or deliberations and the final
decision taken becomes a Resolution.
• Kinds of resolutions:-
-Ordinary resolution (s.189(1))
-Special resolution (s.189(2)
-Resolutions requiring special notice
 Ordinary Resolution
• A Simple Majority
• It is required for matters concerning with
Name Clause, Capital Clause, for
appointing auditors and fixing their
remuneration, appointing first directors
who are liable to retire by rotation, for
increasing/decreasing number of directors,
appointment of managing director, removal
of a director, for winding up of a company
voluntarily in certain events, appointing
and fixing of remuneration of liquidators,
etc.
 Special Resolution
• A Special Resolution is required for changing the
place of registered office from one state to another,
for alteration of ‘Objects Clause’, alteration of AOA,
conversion of any portion of uncalled capital into
reserved capital, for payment of interest out of
capital, applying to Central Govt. for an inspector to
investigate in company affairs, for applying in a
court of law for winding up, for authorizing a
liquidator to accept shares as consideration for
transfer of its assets, for disposal of books and
papers of a company in voluntary winding up after
completion of the process, etc.
 Passing of Resolutions by Postal Ballot (s.192A)

• A listed company may resort to postal

ballot. It has to send a notice along with a
draft resolution explaining the reasons for
the same, which should be returned by the
members within a period of 30 days from
the date of posting of the ballot.
 MANAGEMENT
• s.2(13)
“Director includes any person occupying the position of a
director by whatever name called.”
• Only an individual can be appointed as a Director.
• Qualification Shares
• Number of Directors
Public Company – minimum 3
Private Company – minimum 2
• Maximum 12 (AOA), any increase over and above 12 requires
permission of the Central Government.
• However, with the commencement of the Companies
(Amendment) Act, 2000 a public company having –
- a paid-up capital of rupees 5 crore or more;
- 1,000 or more small shareholders;
may have a director elected by such small shareholders in the
manner as may be prescribed.
(‘Small Shareholder’ – any shareholder holding shares of
nominal value of Rs.20,000/- or less in a public company.)
 Appointment of Directors
• 1st Directors
• Appointment of Directors at AGM
• Appointment of Directors at BOD Meeting
• Appointment of Directors by Central
Government
• Appointment by Proportional
Representation
 Appointment of Directors at BOD Meeting
-Casual Vacancy
A casual vacancy among directors arises by reason
of death, resignation, disqualification or any other
reason, except retirement of a director by rotation.
-Additional Directors
Additional Director appointed by the BOD would
hold office only upto the date of the next AGM.
-Alternate Directors
Alternate Director appointed by the BOD to act on
behalf of the original director, in case of absence for
a period of not less than 3 months from the State in
which BOD meetings are ordinarily held, would
vacate office if and when the original director
returns to the State in which BOD meetings are
ordinarily held.
 Appointment of Directors by Central Government

• on an application by not less than 100

members of the company;
• on an application by members of the
company holding not less than 1/10th of
the total voting power
 Appointment by Proportional Representation

• at every AGM, not less than 2/3rd of the

total number of directors of a public
company or a private company which is a
subsidiary of a public company, shall be
liable to retire by rotation
• Single Transferable Vote System
• Cumulative Voting System
Number of Directorships
a private company
an unlimited company
a section 25 company
appointment as alternate director
 Removal of Directors
• By Shareholders
• By Central Government
• By CLB/The National Tribunal
 Removal of Directors By Shareholders

Exceptions:-

• Director appointed by the Central

Government
• Director holding office for life as on
1.4.1952, in a private company
• Director appointed by proportional
representation
 Removal of Directors By Central Government

• any director who is guilty of fraud, misfeasance,

negligence or default
• any director who is guilty of conduct which is
against sound business principles and prudent
commercial practices
• any director who is guilty of conduct which is likely
to cause or has caused serious injury or damage
to the interest of trade, commerce, industry or
business
• any director who is guilty of conduct which is
illegal, with an intent to defraud any member/s,
creditor/s or any other person/s
 Removal of Directors By CLB/The National Tribunal

• oppression
• mis-management

(No director, whose office is terminated

by CLB/The National Tribunal, shall not,
for a period of 5 years therefrom, be
appointed as a director, without the
obtaining leave from the CLB/The
National Tribunal.)
 Vacation of Office of a Director
• The office of a director shall become vacant, if –

1. if a director fails to obtain qualification shares within 2 months,

or, ceases to hold qualification shares at any time
2. if a director is found to be of unsound mind
3. if a director is adjudged an insolvent
4. if a director is convicted for any offence involving moral
turpitude
5. if a director fails to pay any call in respect of shares
6. if a director absents himself from 3 consecutive BOD meetings
or from all BOD meetings for a continuous period of 3 months,
whichever is longer, without obtaining leave of absence
7. if a director accepts a loan or guarantee or security for a loan
from the company
8. if a director fails to make disclosure of interest
9. if a director is guilty of fraud or misfeasance

• A private company can provide for additional grounds, in

addition to those specified hereinabove, by its AOA.
 Disqualification of Directors
• A director would be disqualified, if –

1. if a director is found to be of unsound mind

2. if a director is adjudged an insolvent
3. if a director is convicted for any offence involving moral turpitude
4. if a director fails to pay any call in respect of shares
5. on an order being passed by a Court of competent jurisdiction,
disqualifying a director, on account of fraud or misfeasance
6. if a director is a director of a public company, which –

• has not filed annual accounts and returns for any continuous
three financial years commencing on or after 1.4.1999;
OR
• has failed to repay any deposit or interest thereon on the due
date, or has failed to redeem debentures on the due date, or has
failed to pay dividend and such failure continues for one year or
more.

• A private company can provide for additional grounds, in addition to

those specified hereinabove, by its AOA.
 Retirement of Directors by Rotation
• Unless the AOA provide for retirement of all the
directors at every AGM, not less than 2/3rd of the
total number of directors of a public company or a
private company which is a subsidiary of a public
company, shall be liable to retire by rotation at the
AGM, including the 1st AGM.
• At every AGM, 1/3rd of such rotational directors
shall retire by rotation.
• The directors who are to retire by rotation at the
AGM shall be those who have been longest in
office since last appointment.
• The company may fill up such vacant post by re-
appointing the retiring director or some other
person.
• The aforesaid provision does not apply to a private
company as well as a government company.
MD / WHOLETIME DIRECTOR / MANAGER
• MD means a director who is entrusted with
substantial powers of management and
administration.
• A wholetime director includes a director who is in
wholetime employment of the company.
• A Manager is an individual who has the
management and administration of the whole or
substantially the whole of the affairs of a company.
• Appointment by MOA, by AOA, by agreement or by
resolution.
• Number of companies in which one person may be
appointed as MD – (1);
However, the aforesaid restriction does not apply
to a private company.
 Remuneration of Directors
Total Managerial 11% of the net profit of the
Remuneration company

MD/WHOLETIME Director 5% of the net profit of the

company for one such
director and 10% of the
net profit of the company
for all of them together
Any Other Director 1% of the net profit of the
company for one such
director and 3% of the net
profit of the company for
all of them together
 MISC
• OFFICE OF PROFIT
• DISCLOSURE OF INTEREST
• LOANS TO A DIRECTOR OR A
RELATIVE OF A DIRECTOR
• POWERS, RIGHTS, DUTIES,
LIABILITIES & DISABILITIES OF A
DIRECTOR
• POSITION OF A DIRECTOR –
AGENT/TRUSTEE/EMPLOYEE