Module V

Companies Act 1956

Introduction
Meaning and definition of Company
Features/Characteristics of Company
Types of Company
COMPANY
• A company in general terms means a group of persons
associated together for the attainment of a common end,
social or economic.

• Lindley’s Definition- A company is an association of many

persons who contribute money to a common stock, and
employ it in some common trade or business, and who
share the profit or loss arising there from.

• As per Companies Act 1956- No specific definition is

given for company. It only includes registered company
which is incorporated under this Act mostly for business
but may also be formed for promoting art, charity,
research, religion, commerce or any other useful
purpose.
Main Features/Characteristics of a Company-
• Voluntary Association
• Separate Legal entity
• Limited Liability
• Perpetual Succession
• Common Seal
• Transferability of Shares
• Separate Property
• Capacity to sue
• Artificial Personality
 Corporate Veil and Lifting of Corporate Veil
Corporate personality has been described as the ‘most pervading of the
fundamental principles of company law”. It constitutes the bedrock principle upon
which company is regarded as an entity distinct from the shareholders constituting
it. When a company is incorporated it is treated as a separate legal entity distinct
from its promoters, directors, members, and employees; and hence the concept of
the corporate veil, separating those parties from the corporate body, has arisen.
The issue of “lifting the corporate veil” has been considered by courts and
commentators for many years and there are instances in which the courts have
negated from the strict application of this doctrine. This doctrine has been
established for business efficacy, necessity and as a matter of convenience.

In the doctrine of ‘Lifting the Corporate Veil’, the law goes behind the mask or veil
of incorporation in order to determine the real person behind the mask for the
purpose of holding them liable.

But for clarity as to ‘Lifting of the Corporate Veil’, an understanding of the

corporate personality of a company is required, along with study of the provisions
of Indian law that pave the way for courts to pierce the corporate veil. Various
grounds for piercing of the corporate veil and elements of lifting of corporate veil
analyzed through the lens of leading case laws and judgements form the crux of
this project report.
COMPANY AS SEPARATE LEGAL ENTITY

The company as a separate entity was firmly established in the landmark decision in
Salomon v. Salomon & Co. Ltd. Salomon, a sole trader, sold his manufacturing
business to Salomon & Co. Ltd. (a company he incorporated) in consideration for all
but six shares in the company, and received debentures worth 10 thousand pounds.
The other subscribers to the memorandum were his wife and five children who each
took up one share. The business subsequently collapsed, and Salomon made a
claim, on the basis of the debentures held, as a secured creditor. The liquidator
argued that Salomon could not rank ahead of other creditors because, in fact, the
company and Mr. Salomon were one and the same–or alternatively, that the
company carried on business on Salomon’s behalf.

On appeal, the House of Lords held that Salomon & Co. Ltd. was not a sham; that
the debts of the corporation were not the debts of Mr. Salomon because they were
two separate legal entities; and that once the artificial person has been created, “it
must be treated like any other independent person with its rights and liabilities
appropriate to itself.”
Kinds of Companies
• On the basis of incorporation
Statutory Companies- which are created by special Act of Legislature as RBI,
LIC, UTI etc
Registered Companies- which are formed and registered under Companies Act,
1956 or any earlier acts.
Charted Companies- which were formed under Common law of UK. as East
India Co. (Now obsolete)
• On the basis of liability
Companies with Limited Liability- By Shares OR By Guarantee
Companies with unlimited Liability [Sec-12(2)]
• On the basis of number of members
Private Company and Public Company
• On the basis of control
Holding Co. and Subsidiary Co.
• On the basis of ownership
Government Co. Foreign Co. One man Co.
Formation of a Company
• Promoter- A person who do all the necessary preliminary work
incidental to the formation of a company. They are the first persons
who control company affairs. The promoters conceive the idea of
forming the company with reference to a given object and then set it
going. They provide the company with share and loan capital and
acquire the business or property which it is to manage and finally
hand over the control to its directors.
• Documents to be filed with the Registrar
Memorandum of Association duly signed,
Article of Association,
Any agreement made prior to incorporation
List of Directors
Declaration stating that all requirements of Companies Act related to
registration of a company have been compiled with.
◘ Certificate of Incorporation
Memorandum of Association
• MoA is the fundamental document of a proposed Company
It lay down the areas of operation of a company, regulates
external affairs in relation to outsiders, shows the object and
scope of a Company. As per sec- 15 MoA of a company shall
be printed, divided into paragraphs, numbered consecutively
and signed by the subscribers.
Contents of Memorandum includes the following clauses
1) Name clause
2) Registered office clause
3) Object clause
4) Capital clause
5) Liability clause
6) Association clause
● Alteration of Memorandum
Article of Association
• AoA are the rules, regulations and bye-laws for the internal
management of the affairs of a company. They are framed with the
object of carrying out the aims and objects as set out in MoA. It
contains provisions relating to the following-
• Share capital, rights of shareholders, share certificate
• Lien, call, transfer and transmission of shares
• Alteration of capital, conversion of shares into stock
• General meetings and proceedings
• Voting rights of members
• Directors, managers, secretary
• Accounts, audits and borrowing powers
• Capitalisation of profits
• Winding up
 SHARE CAPITAL
• Means the share of the owners in the
company.
• Types of share capital:
1. Authorised share capital
2. Issued share capital
3. Subscribed share capital
4. called-up share capital
5. Paid-up share capital
 Types of Meetings

Two types of meeting:

1. Shareholders meeting
• Statutory meeting
• Annual General Meeting
• Extra Ordinary General Meeting
2. Directors Meeting
 Directors
A Director may be defined as a person having control over
the direction, conduct, management of the affairs of the
company.
Number of Directors:
Every public company shall have at least 3 directors and
every other company at least 2 directors.
However a public company having –
a) Paid-up capital of Rs. 5 crore or more
b) one thousand or more small shareholders,
Shall have atleast one director elected by such small
shareholders.
Powers of Directors
1.General powers of the Board
2. Powers to be exercised in the board meetings.
3.Powers to be exercised with the approval of company in
general meeting.
4.Power to make political contributions
Qualification Of Directors
• The Companies Act has not mentioned any specific
qualification for the directorship, in terms of
Academic, Technical and share holding Qualification.
• But director must have certain Qualification:
– He must be an individual, having the capacity to
contract.
– He must be a shareholder of the company.
– He must not act as a director for more then 15 public
companies at a time.
– He must hold a minimum qualifying amount of share.
Nominal value of share shell not exceed Rs. 5000. and
must hold at least one share, where the nominal value
exceeds Rs. 5000.
 Disqualification Of Director
• If he is a person of Unsound Mind.
• If he is an undercharged insolvent.
• If he is declared fraudulent by a court.
• If he holds more than 15 companies of public
companies.
• If he absents himself from three consecutives
Board meetings.
• If he fails to acquire qualification share within 2
months from the date of appointment.
• If he accepts loan from the company without the
approval of Central Bank.
DISQUALIFICATION UNDER SUB CLAUSE
(A) OF SECTION 274 (1) (g)

• a person shall not be capable of being

appointed as a director of any company, if he
is a director of a public company and such
public company has not filed the annual
accounts and annual returns for any
continuous three financial years commencing
on and after the first day of April, 1999. 
 DISQUALIFICATION UNDER SUB
CLAUSE (B) OF SECTION 274 (1) (g)

• a person shall disqualified from being appointed

as a director of a company, where any public
company of which also he is a director: 
• has failed to repay the deposits on due date; or
• has failed to pay the interest on deposits on due
date; or
• has failed to redeem its debentures on due
date; or
• has failed to pay dividend, and