IMT Nagpur; 2010-12

COMPANIES ACT, 1956

1
 NATURE, FORM AND TYPES OF BUSINESS
ENTERPRISES

Business Enterprises

IMT Nagpur; 2010-12

Non-Corporate Corporate
(Sole Proprietorship, Partnerships & HUF) (Cos. & Co-operatives)

The basic difference between and Corporate and Non-Corporate form

of business organization is that while a non-corporate form of business
can be started without Registration, Corporate bodies cannot be set
up without 2 registration under the laws which govern their
functioning.
 BRIEF STRUCTURE OF THE COMPANIES ACT,
1956

Section 1 – Short Title, Extent and Commencement

IMT Nagpur; 2010-12

Section 2 – Definitions

Section 3 to 658 – Other Provisions

3
 BRIEF STRUCTURE OF THE COMPANIES ACT,
1956

Section 1 – Short Title, Extent and Commencement

IMT Nagpur; 2010-12

Section 2 – Definitions

Section 3 to 658 – Other Provisions

4
 COMPANIES ACT, 1956 - FEATURES

The Companies Act, 1956 is the longest piece of

legislation ever passed by our Parliament.

IMT Nagpur; 2010-12

The Act consists of 658 Sections and 15 Schedules.

5
SHORT TITLE, EXTENT AND
COMMENCEMENT (SECTION 1)

 This Act may be called the Companies Act, 1956.

IMT Nagpur; 2010-12

 It extends the whole of India.

 It came into force on April 01, 1956.

6
COMPANY – ITS MEANING

 A Company in broad sense may mean an

IMT Nagpur; 2010-12

association of individuals formed for carrying on
some business or undertaking for acquisition of
gain.

 However, an association formed not for profit

acquires a corporate life and falls within the
meaning of a company by reason of a license u/s 25
of the Companies Act, 1956.
7
COMPANY – ITS MEANING

 An incorporated co. is a single and legal

IMT Nagpur; 2010-12

(artificial) person distinct from the individuals
constituting it, whereas an unincorporated co. such
as a partnership, is a mere collection of
individuals.

 Therefore, unlike a partnership, a co. is a

corporate body and a legal person having status
and personality distinct and separate from that of
the members constituting it.
8
COMPANY – ITS MEANING

 The incorporated co. owes its existence either to a

IMT Nagpur; 2010-12

special act of Parliament (LIC, DVC, Air India)
or to a company legislation (TISCO, RIL,
WIPRO).

The trading partnership which is governed by

Partnership Act is the most apt example of an
unincorporated association.

9
COMPANY – ITS MEANING

In legal sense, a co. is an association of both

IMT Nagpur; 2010-12

natural and artificial persons incorporated
under the existing laws of the country.

 As per the Co. Act, 1956, a co. means a co. formed

and registered under the Co. Act, 1956 or
under the previous laws relating to companies.
(Sec. 3(1)(iii).

10
COMPANY – ITS MEANING

 Co means as association of many persons who

IMT Nagpur; 2010-12

contribute money or money’s worth to a common
stock & employ it in some trade or business & who
share the profit or loss arising there from.

 The common stock so contributed is the capital.

 The persons who form it are the members.

 The proportion of the capital to which each

member is entitled is his share.
11
COMPANY – ITS CHARACTERISTICS

The most striking characteristics of a company are:

IMT Nagpur; 2010-12

1. Corporate Personality

 By incorporation under the Act, the co. is vested

with a corporate personality quite distinct from
individuals who are its members.

12
CORPORATE PERSONALITY

Being a separate legal entity :

IMT Nagpur; 2010-12

 It bears its own name;

 It has a seal of its own;

 It is capable of owning property,

 Incurring debts, borrowing money,

 Having a bank account,

 Employing people, entering into contracts,

 Suing and being sued

13
CORPORATE PERSONALITY

 Saloman V. Saloman and Co. Ltd.

IMT Nagpur; 2010-12

Saloman V. Saloman.xlsx

14
CORPORATE PERSONALITY

 Lee V. Lee’s Air Farming Ltd.

IMT Nagpur; 2010-12

 Lee V. Lee Air Farming.xlsx

15
CORPORATE PERSONALITY

Small deviation from the Corporate Personality

Rule

IMT Nagpur; 2010-12

Experience of a Shareholder is the experience of a
Company

New Horizons Limited V. Union of India

 New Horizons Limited.xlsx

16
COMPANY – ITS CHARACTERISTICS

2. Limited Liability

IMT Nagpur; 2010-12

 One of the most important advantages of doing
business under the corporate form or organization.

 This means that the liability of a members is

limited.

17
COMPANY – ITS CHARACTERISTICS

2. Limited Liability

IMT Nagpur; 2010-12

 Eg., If A holds shares of nominal value of Rs.
1000 and has already paid Rs. 500, he cannot be
called upon to pay more than Rs. 500, the amount
remaining unpaid on his shares.

 If he holds fully paid up shares, he has no further

liability to pay even if the co. is declared insolvent.
18
COMPANY – ITS CHARACTERISTICS

2. Limited Liability

IMT Nagpur; 2010-12

 In Partnership firms, the liability of the partners
for the debts of the business is unlimited.

 Not only their share in the firm but their

personal assets may be attached to satisfy the
debts and liabilities of the firm.

19
COMPANY – ITS CHARACTERISTICS

3. Perpetual Succession

IMT Nagpur; 2010-12

 “Members may come and members may go, but
the co. can go on forever.”

 During the war, all the members of one Private

Co., while in the General Meeting, were killed by a
bomb, but the co. survived – not even a hydrogen
bomb could have destroyed it.”
20
COMPANY – ITS CHARACTERISTICS

4. Separate Property

IMT Nagpur; 2010-12

 A Co. being a legal person and entirely distinct
from its members, is capable of owning, enjoying
and disposing of property in its own name.

 The property of the Co. is not the property of the

shareholders, it is the property of the Co.

 Norther Insurance Co. Ltd..xlsx 21

COMPANY – ITS CHARACTERISTICS

5. Transferability of Shares

IMT Nagpur; 2010-12

 The capital of a co. is divided into parts, called
Shares.
 A member may sell his shares in the open market
and realise the money.
 This provides liquidity to the members and
ensures stability to the Co. (as the member is not
withdrawing his money from the Co.).
22
COMPANY – ITS CHARACTERISTICS

6. Common Seal

IMT Nagpur; 2010-12

 Since, the Co. has no physical existence, it must
act through its agents and all contract entered into
by his agents must be under the seal of the Co.

 The Common Seal of a Co. is of great importance

and acts as official signature of a Co.

 The name of the Co. must be engraved on its seal. 23

COMPANY – ITS CHARACTERISTICS

7. Capacity to sue and be sued

IMT Nagpur; 2010-12

 A Co. being a body corporate, can sue and be sued
in its name.

 To sue means, to institute a legal proceedings

against (a person) or to bring a suit in a court of
law.

24
COMPANY – ITS CHARACTERISTICS

8. Contractual Rights

IMT Nagpur; 2010-12

 A Co., being a separate legal entity different from
its members, can enter into contracts for the
conduct of the business in its own name.

25
COMPANY – ITS CHARACTERISTICS

9. Limitation of action

IMT Nagpur; 2010-12

A Co. cannot go beyond the power stated in the
MOA.

 MOA of the Co. regulates the powers and fixes

the objects of the Co. and provides the entire super
structure of the Co. rests.

26
COMPANY – ITS CHARACTERISTICS

10. Separate Management

IMT Nagpur; 2010-12

 Members do not have effective and intimate
control over its working and elect its
representatives to conduct corporate functioning.

The Co. is administered and managed by its

managerial personnel.

27
COMPANY – ITS CHARACTERISTICS

11. Termination of Existence

IMT Nagpur; 2010-12

 A Co., being an abstract and artificial person,
does not die a natural death.

 It has its existence only in contemplation of law.

 It is created by law, carries on its affairs as per

law and ultimately is effaced by law.
28
COMPANY – ITS CHARACTERISTICS

11. Termination of Existence

IMT Nagpur; 2010-12

The existence of a Co. is terminated by means of
winding up.

 However, to avoid winding up sometimes

companies change their form by means of
reorganization, reconstruction and
amalgamation.
29
LIFTING OF CORPORATE VEIL

 Fraudulent Conduct :

IMT Nagpur; 2010-12

Where the business has been carried on with an
intent to defraud creditors or any other person or
for any fraudulent purpose, those who are
knowingly parties to such conduct of business be
made personally liable without any limitation for
all or any debts or other liabilities of the Co.

30
LIFTING OF CORPORATE VEIL

 Non Payment of Tax:

IMT Nagpur; 2010-12

When any Pvt. Co. is wound up, any tax assessed
on the Co., whether before or in the course of
liquidation in respect of any income of any PY
cannot be recovered, every person who was
Director of that co. at any time during the relevant
PY shall be jointly and severally liable for payment
of tax.
31
LIFTING OF CORPORATE VEIL

 Ultra Vires Act:

IMT Nagpur; 2010-12

Directors of a Co. will be personally liable for all
those acts which they have done on behalf of a co. if
they are Ultra Vires the Co.

32
LIFTING OF CORPORATE VEIL

 Mis Description of name:

IMT Nagpur; 2010-12

Where an officer of a Co. signs on behalf of a Co.
any contract, agreement, cheque, bill of exchange,
order for money or goods or such other documents,
such person shall be personally liable to the holder
if the name of the Co. in not mentioned.

Hendon V. Adelman & Others.xlsx

33
LIFTING OF CORPORATE VEIL

 Misrepresentation in Prospectus:

IMT Nagpur; 2010-12

In case of misrepresentation in Prospectus, every
Director, Promoter and every other persons who
authorises the issue of such prospectus incurs
liability towards those who subscribe for share on
the faith of untrue statement.

34
ILLEGAL ASSOCIATION

 An unincorporated Co., association or

IMT Nagpur; 2010-12

partnership consisting of large number of persons
has been declared illegal.

 No Co., Association or Partnership consisting of

more than 20 persons (10 in case of banking
business) can be formed for the purpose of carrying
on any business for gain, unless it is registered as
a Co. under the Companies Act, 1956 or is formed
in pursuance of some other Indian Law.
35
ILLEGAL ASSOCIATION

This provision is not applicable to:

IMT Nagpur; 2010-12

 A single Joint HUF carrying on any business
whatever may be the no. of its members. But if 2 or
more Joint HUF carry on business together and
their no. of members exceeds 20, then their
association will be illegal.

 Charitable, Religious or scientific associations,

which are not formed for the purpose of making
profit or gain.
36
 TYPES OF COMPANIES

COMPANIES

IMT Nagpur; 2010-12

Basic Type

Private Co. Public Co.

37
 TYPES OF COMPANIES

COMPANIES

IMT Nagpur; 2010-12

On the basis of Incorporation

Statutory Cos. Registered Cos.

38
 TYPES OF COMPANIES

COMPANIES

IMT Nagpur; 2010-12

On the basis of Liability

Unlimited Cos. Limited Cos.

Cos. Limited by Guarantee Cos. Limited by Shares

39
 TYPES OF COMPANIES

COMPANIES

IMT Nagpur; 2010-12

Other Classification

Government Co. Foreign Co.

Holding & Subsidiary Co.

Association not for Profit
40
 TYPES OF COMPANIES

COMPANIES

IMT Nagpur; 2010-12

On the basis of Listing

Listed Cos. Unlisted Cos.

41
PRIVATE COMPANIES

 A Pvt. Co. means a Co. which has a minimum

IMT Nagpur; 2010-12

share capital of Rs. 1.00 lacs and by its AOA:

 a) Restricts the right to transfer its shares;

 b) Limits the no. of its members as 50;

 c) Prohibits any invitation to public to subscribe

for any shares or debentures of the Co.,
 c) Prohibits any invitation or acceptance of
deposits from persons other than its members or
Directors or their relatives 42
PRIVATE COMPANIES

 The word “Private Limited” must be added at the

IMT Nagpur; 2010-12

end of its name by a Pvt. Co.

 Minimum no. of Members = 2

 Minimum no. of Directors = 2

The only 2 members may also be the only 2

Directors of a Pvt. Co.
43
PRIVILEGES AND EXEMPTIONS TO
PRIVATE COMPANIES

Co. Act confers certain privileges on Pvt. Cos. and

IMT Nagpur; 2010-12

such Cos. are exempt from complying with few
provisions of the Act.

The basic rationale behind this is that since Pvt.

Cos. are restrained from inviting capital and
deposits from the public, not much public interest
in involved in their affairs as compared to Public
Cos.
44
PUBLIC COMPANIES

 A Public Co. means a Co. which:

IMT Nagpur; 2010-12

 a) is not a Private Co.;
 b) has a minimum paid up capital of 5.00 lacs;
 c) is a Pvt. Co. which is a subsidiary of Public Co.,

 Minimum no. of Members = 7

 Minimum no. of Directors = 3 45

STATUTORY COMPANIES

 Constituted by a Special Act of Parliament or

IMT Nagpur; 2010-12

State Legislature.

 Companies Act, 1956 do not apply to them.

Eg., Reserve Bank of India, Life Insurance

Corporation of India, ONGC,

 Such Cos. Do not use the word “Limited” as part

of their name. 46
REGISTERED COMPANIES

Companies registered or incorporation under the

IMT Nagpur; 2010-12

Companies Act, 1956.

 Eg., Reliance Industries Limited, Hero Honda

Motors Limited, Tata Consultancy Services
Limited.

47
UNLIMITED COMPANIES

A Co. not having any limit on the liability of its

IMT Nagpur; 2010-12

members.

 Members are liable for the Company’s debt and

their liability in unlimited.

 Members of an UC are not liable directly to the

creditors of the co., the liability is only towards the
co. and in the event of its being wound up only
liquidator can ask the members to contribute. 48
COMPANIES LIMITED BY GUARANTEE

 A co. having liability of its members limited by its

IMT Nagpur; 2010-12

MOA to such an amount as the member undertake
to contribute to the assets of the Co. in the event of
its winding up.

The liability of the members arises only when the

Co. has gone into liquidation.

 Eg., Club, Trade Association, Socities

49
COMPANIES LIMITED BY SHARES
 Liability of the members is limited by the MOA
to an amount, if any, unpaid on the shares held by
them.

IMT Nagpur; 2010-12

If his shares are fully paid up, he has nothing
more to pay.

 Eg., a shareholder who has paid Rs. 75 on a share

of face value Rs. 100, can be called upon to pay the
balance of Rs. 25 only.
50

 Most common types of Companies.

ASSOCIATION NOT FOR PROFIT OR SEC
25 COMPANIES

 Companies incorporated to promote the

IMT Nagpur; 2010-12

charitable, religious, educational or other similar
objects.

Co. prohibits the payment of dividend to its

members but use it for aforesaid objects.

 Need not end the name of the Co. with “Pvt. Ltd.”
or “Ltd.”
51
GOVERNMENT COMPANIES

 Any Co. in which not less than 51% of the paid up

IMT Nagpur; 2010-12

share capital is held by the CG or by any SG or
Governments or partly by the CG and partly by one
or more SGs.

A subsidiary of the Govt. Co. is also treated as

Govt. Co.

52
FOREIGN COMPANIES

 A Co. which is incorporated in a country

IMT Nagpur; 2010-12

outside India under the laws of that other
country and has a place of business in India.

53
HOLDING AND SUBSIDIARY COMPANIES
A Co. shall be treated as a Subsidiary of another
Co., if and only if –

IMT Nagpur; 2010-12

 a) That other controls the composition of BODs;
 b) That other controls more than half of the total
voting power of such Co.;
 c) That other holds more than half in the nominal
value of its equity share capital;
 The first mentioned Co. is a subsidiary of any Co.
which is the other’s subsidiary.
54
HOLDING AND SUBSIDIARY COMPANIES
To illustrate, Co. A is a subsidiary of Co. B if, and
only if:

IMT Nagpur; 2010-12

1. Co. B (holding) controls the composition of the
BODs of Co. A (subsidiary) ;

 2. Co. B (holding) controls more than 50% voting

power of Co. A (subsidiary) ;

 3. Co. B (holding) holds more than half in the

nominal value of equity shares of Co. A (subsidiary) 55

;
HOLDING AND SUBSIDIARY COMPANIES
To illustrate, Co. A is a subsidiary of Co. B if, and
only if:

IMT Nagpur; 2010-12

 4. If Co. A (subsidiary) is a subsidiary of Co. C
which is subsidiary of Co. B, then the Co. A is also
a subsidiary of Co. B;
B

A 56
HOLDING AND SUBSIDIARY COMPANIES
To illustrate, Co. A is a subsidiary of Co. B if, and
only if:

IMT Nagpur; 2010-12

 5. If Co. D is the subsidiary of Co. A, then D will
be the subsidiary of Co. C and also of Co. B;
B
C
A
D

57
LISTED COMPANIES

 A company is said to be “listed”, if its shares can

be traded on a stock exchange.

IMT Nagpur; 2010-12

 It is the securities that are listed, not the
company.

 The phrase “listed company” is widely used to

mean a company that has listed its Equity
Shares.

 It is possible for a company to have listed Debt

Securities but not listed shares. 58
UNLISTED COMPANIES

Unlisted Cos. means those Cos. whose shares (or

IMT Nagpur; 2010-12

debt instruments) are not listed at any of the
Recognized Stock Exchange (BSE, NSE) in India.

59
IMPORTANT NOTE

 In respect of Insurance, Banking and Electricity

IMT Nagpur; 2010-12

Supply Companies incorporated and registered
under the Companies Act, 1956, the provisions of
Insurance Act, Banking Regulations Act and
Electricity Supply Act will prevail when they are
inconsistent with the provisions of the Companies
Act, applicable generally.

60
IMT Nagpur; 2010-12
61
THANK YOU