Unit 4

Companies Act, 1956:

Steps and procedure for incorporation of

the company, Company Management Appointment of Directors, Powers, duties, & liabilities of Directors, Company Meetings, Resolutions, Winding-up of a Company.

NATURE OF COMPANY
A voluntary association of persons. It is an artificial person created by law.
It has a perpetual succession and common seal. An artificial person has no body or soul.

 A company means a group of persons associated

together for the attainment of a common end, social or economic. The term Registered Company means a company incorporated under Companies Act 1956 or some earlier Companies Acts. Companies incorporated under the companies act 1956 are mostly business companies but they may also be formed for promoting art, charity, research, religion, commerce or any other useful purpose. The laws relating to companies in India is contained in the Companies Act 1956. latest amendment to the act was made in 2006

It is a voluntary association of persons.

It has capital divisible into parts, known as shares.

It is an artificial person created by a process of law. It has perpetual succession and a common seal. An artificial person has no body or soul

CHARACTERISTICS OF A COMPANY
Separate legal entity. - e.g. ram & co ltd

Limited liability. - Co ltd by shares/ guarantee.

Perpetual succession. Common seal. Transferability of shares. Separate property. Capacity to sue. Incorporation

 Separate legal entity. - e.g. ram & co ltd Salomon V Salomon Co ltd. Limited liability. Co ltd by shares/ guarantee. Perpetual succession. Common seal. Since a company has no physical existence, it must act through its agents and all such contracts entered into by its agents must be under the seal of the company. The common seal acts as official signature of the company. Transferability of shares. The capital of the company is divided into parts called shares These shares are free transferable subject to certain conditions Separate property. Capacity to sue. Incorporation

Point of difference Regulating Act

DIFFERENTIATION BETWEEN COMPANY AND PARTNERSHIP

Company Partnership Companies Act 1956 Partnership Act 1932

Mode of creation
Legal Status

After registration it exists

Members of company are not personally liable for its contracts debts of wrongs The property and rights of a company are vested in it so that it is never necessary to transfer its assets when there is a change in its membership

Registration is not compulsory

They are personally liable

The property and rights of a partnership are vested in its members so that on 1 change in its membership its assets must be transferred to a new partners The property of partnership firm is joint property of partners

The property of company belongs to the company and not to its members or share holders

Company continues to exists

Partnership comes to an

Point of difference Liability of members

Company The liability of members of a company to contribute towards satisfaction of companies debt and liabilities is limited Affair of companies are managed by directors , managing directors , managers and its members have no right to take part in management Shares of a company are freely transferable unless its articles otherwise provide Share holder is not an agent of a company and has no power to bind the company by his Act Companies powers are limited to those allowed by the objects, clause in its memorandum association

Partnership Partners are liable without limit to contribute towards payment of partnership debts and liabilities Every member of partnership firm may take part in its management unless a partnership agreement is provided Partner cannot transfer his share without consent of other partners Each partner is an agent of partnership firm to make contracts and incur liabilities Partnership firm can do anything which the partners agree to do and there is no limit to its activities

Management

Transferability of interest Authority of members

Powers

Point of difference Insolvency of firm and winding up of company Number of members

Company The winding up of an insolvent company does not make the members insolvent Min private co 2 Public ltd co -7 Max private co 50 Public ltd co no limit A company is bound by law to maintain books of account and have its accounts audited annually by qualified auditors. A company has perpetual succession It comes to end only when it is wound up according to the provisions of the Companies Act 1956

Partnership Insolvency means insolvency of all the partners Min-2 Max 10 in banking and any other business 20

Maintenance of books

There is no such statutory provision in the case of a partnership firm Unless a partnership is entered into for a fixed period , it may be dissolved at anytime by any partner Partnership will be dissolved by the death or insolvency of the partner

Dissolution

KINDS/TYPES/CLASSIFICATION OF COMPANIES

1. ON BASIS OF INCORPORATION

Statutory companies.

Registered companies.

STATUTORY COMPANIES
They are created by a special act of legislature e.g.:

RBI,SBI, LIC These are mostly concerned with public utilities like railways , gas & electricity companies and enterprises of national importance.

REGISTERED COMPANIES
They are companies which are formed and registered

under the companies act 1956

2. ON THE BASIS OF LIABILITY

Companies limited with limited liability. [sec 45] Companies limited by shares. Companies with unlimited liability [sec 12 (2)]

Companies limited by guarantee.

3. ON THE BASIS OF NO OF MEMBERS

Min capital 100000 Restriction of right to transfer its shares Limits no of members - 50

Private company[sec3(1)]

Min capital 500000 Limits no of members no restriction

Public company

DISTINCTION BETWEEN PUBLIC COMPANY AND PRIVATE COMPANY

MINIMUM

CAPITAL

PRIVATE - 100000 PUBLIC - 500000

PRIVATE - 2 PUBLIC 7 PRIVATE not exceed 50 PUBLIC no restriction

MIN NO

MAX NO

No of directors

PRIVATE - 2 PUBLIC - 3

Sec 266

PUBLIC consent must be filed with registrar appointmen PRIVATE not necessary t of directors
Restriction on

PUBLIC can invite general public to purchase its shares/debentures Restriction on invitation to PRIVATE prohibits such invitation
public

 PRIVATE -restricted TRANSFER PUBLIC freely transferable sec 82S

ABILITY

SPECIAL PRIVILEGES

PRIVATE enjoys some privileges PUBLIC no such

MANAGERIAL REMUNERATION

PRIVATE - No restriction PUBLIC cannot exceed 11% of net profits. Sec 198

4.ON BASIS OF CONTROL

HOLDING COMPANY SEC 4(4)

SUBSIDARY COMPANY CO CONTROLLING BOARD OF DIRECTORS HOLDING MAJORITY OF SHARES SUBSIDARY IF ANOTHER SUBSIDARY

5.ON THE BASIS OF OWNERSHIP

GOVERNMENT COMPAY
THE CENTRAL GOVERNMENT STATE GOVERNMENT PARTLY STATE/CENTRAL

NON GOVERNMENT COMPANY SEC591

FORMATION OF A COMPANY
MCA- 21 ELECTRONIC FILING OF FORMS SEC 610B: PROVISION ARE RELATING TO FILING OF APPLICATIONS, DOCUMENTS, INSPECTION ETC, THROUGH ELECTRONIC FORM SEC 610 C: POWER TO MODIFY ACT IN RELATION TO ELECTRONIC RECORDS SEC 610 D: PROVIDING OF VALUE ADDED SERVICES THROUGH ELECTRONIC FORM

SEC 610 E: APPLICATION OF PROVISIONS OF INFORMATION TECHNOLOGY ACT 2000

MCA- 21 ELECTRONIC FILING OF FORMS

The following are the nine matters are covered under MCA-

21 project since 15-09-2006

1. 2. 3. 4. 5. 6. 7. 8. 9.

Registration & incorporation of new companies Filing of annual returns & balance sheets Filing of forms for change of name/address/directors details Registration, modification & verification of charges Inspection of documents Issue of certified copies Application for permissions required under various provisions of company law Approval from central government, regional director Investor grievance redressal.

FORMATION OF A COMPANY
MODE OF FORMING INCORPORATED COMPANY:
2/7 MEMBERS ASSOCIATED FOR ANY LAWFUL PURPOSE THEY SHALL SUBSCRIBE THEIR NAMES TO

MEMORANDUM OF ASSOCIATIONS.

DOCUMENTS FILLED WITH THE REGISTRAR

BEFORE REGISTRATION - NAME OF THE COMPANY

MUST BE APPROVED
THE FOLLOWING DOC MUST BE DULY STAMPED WITH

NECESSARY FEES TO BE FILED WITH REGISTRAR

DOCUMENTS FILLED WITH THE REGISTRAR

MEMORANDUM OF ASSOCIATION SIGNED BY

SUBSCRIBERS ARTICLES OF ASSOCIATION AGREEMENT Sec 33(1) LIST OF DIRECTORS sec 266 DECLARATION STATING THE REQUIREMENTS OF COS ACT SUCH DECLARATION MUST BE SIGNED BY any one
Advocate of supreme court or high court An attorney to appear before high court A person named as director ,manager , secretary in AA

When these documents are filed with registrar, the registrar shall satisfy himself that the statutory requirements regarding registration have been duly compiled with.

 A certificate of incorporation given by the registrar in

respect of a company is conclusive evidence that all the requirements of the companies act have been compiled with in respect of registration. This is known as Rule in peels case

EFFECTS OF REGISTRATION
The company becomes a separate legal entity. Its life

starts from the date mentioned in the certificate of incorporation The company acquires a perpetual succession. The company's property is not the property of the share holders

PROMOTER
A promoter is a person who does the necessary

preliminary work i.e. incidental to formation of company It is fiduciary relationship/position

MEMORANDUM OF ASSOCIATION
It is a document that contains fundamental conditions

upon which company is allowed to be incorporated. It is the charter of the company and defines its raison detre ( i.e. reason for existence) It lays down the area of operation of the company. It regulates the external affairs of the company in relation to the outsiders. Its purpose is to enable shareholders and those who deals with the company to know what its permitted range of enterprise is. It tells about the objectives of the company and also about scope of the company

PURPOSE OF MEMORANDUM
The purpose of memorandum is two fold 1. The shareholders shall know the field in or the purpose for which their money is used for and what risk they are undertaking in making investment. 2. The outsiders dealing with the company shall know with certainty as to what the objectives of the company are

PRINTING AND SIGNING OF MEMORANDUM

Printed

Divided into paragraphs numbered consecutively

Signed by 7 (2in case of a private ) subscribers.

CONTENTS OF MEMORANDUM SEC13

The memorandum of every company shall contain the

following clauses
The name with limited incase of public limited company and private limited in case of private limited company. 2. The state in which the registered office of the company is to be situate 3. The objects of the company 4. In case of companies with objects not confined to one state, the states to whose territories the objects extend 5. Limited liability 6. Share capital The memorandum shall conclude with a association clause which states that the subscribers desire to form a company and agree to take hares in it. These clauses are ..
1.

 The Name clause Sec20 1. Undesirable name should be avoided (central government)

Too similar name Misleading

2.

3.
4. 5.

Injunction if identical name adopted Limited or private limited as the last word or words in the name Prohibition of use of certain names Use of some key words according to authorized capital

The registered office clause sec 146: Every company shall have

a registered office from the day it begins to carry on business or from 30th day after its date of incorporation The objects clause 13/1: It defines and confines scope of a companies power and once registered it can be altered only as provided by the act The capital clause 13/4: In capital clause it contains amount of share capital and its division of share of fixed amount. A company cannot issue more shares than authorized for time being by the memorandum

 The liability clause 13/2: The members can be called

only upon to pay the company at any time the uncalled or unpaid amount on the shares held by them or up to the maximum of the amount which they have guaranteed. The association clause 13/4: This clause states: We the several persons whose names and addresses are subscribed are desirous are being formed into a company and we respectively agree to take the number of shares in the capital of company set opposite our respective names This is followed by the name addresses and description of the subscribers and the number of shares taken by the each one of them and should be signed by them.

Alteration of Memorandum Change of name By special resolution( sec 21) : A company can

change its change by special resolution and with a approval of central Government signified in writing but change of name just involves the deletion or addition of word private. On conversion of public into Private or vice versa does not require approval By Ordinary Resolution(sec 22): Some times in the opinion of central Government some company name is identical or too nearly resembles the name of an existing company in such a case

May change its name with previous approval of central Govt. Shall change its name if central Govt. so directs within 12 months of its registration

 Change of Registered Office-This may involve Change of registered office from one jurisdiction of ROC to Jurisdiction of another ROC within a state-sec17a

It can change if it is confirmed by regional director Confirmation shall be communicated to the company within four weeks Company will then file with the registrar if certified copy of confirmation by regional director Within 2 months from the date of confirmation along with altered memorandum Registrar will register the same within one month from the date of filing of such document

Change of registered office from one state to other-sec17 It can do so by special resolution Alteration of Objects -sec17 A power of alteration of objects is subject to two limits 1. Physical limit sec171 2. Procedural limit

Doctrine of Ultra Vires

A Company has power to do all such things Authorized under companies act 1956 Essential to attainment of its objectives specified in memorandum Reasonably and fairly incidental to its objects Anything else ultra vires the company Ultra means beyond Vires means Power Purpose To protect Investors in the company so that they know the purpose of their investment. To protect creditors by ensuring that the company's funds are not wasted in unauthorized activities. ULTRA VIRES ACT IS VOID

ARTICLES OF ASSOCIATION
They 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 the memorandum of associations . It contains fundamental conditions. Companies must have their own articles sec26
Private companies limited by shares Unlimited companies Co limited by guatantee

Public limited company may have , if it doesnt have it can

adopt Table A given in Schedule I to the act.

CONTENTS OF ARTICLES
Share capital, rights of shareholders, variation of these

rights, payment of commissions, share certificates. Lien on shares : lien is a form of security interest granted over
an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienor and the person who has the benefit of the lien is referred to as the lienee.

Calls on shares Transfer of shares Transmission of shares Forfeiture of shares: Share forfeiture is the process by which
the directors of a company cancel the power of share holder if he does not pay his call money when the company demands for it. Company will give 14 days notice, after 14 days if shareholder did not pay then company will forfeit his shares and cut off his name from the register of shareholder.

Conversion shares into stock Share warrants Alteration of capital General meetings and proceedings Voting rights of members, voting and poll, proxies Directors, their appointment, remuneration, qualifications, powers and proceedings of board of directors Manager Secretary Dividends and reserves Accounts, audit and borrowing powers Capitalization of profits Winding up

ALTERATION OF ARTICLES
Sec 31 by passing a special resolution alter its article at

any time A copy of this must be filed with the registrar within 30 days of its passing Limitations
Must not be inconsistent

Must not conflict with the memorandum

Must not sanction any thing illegal Must be for the benefit of the company Must not increase the liability of the members Approval from central govt in case of public co

converted to private Breach of contract

DISTINCTION BETWEEN ARTICLES AND MEMORANDUM

Memorandum of association Articles of association
It is charter of the company indicating They are regulations for internal the nature of its business, its management nationality and its capital . It also defines the co r/s with outside world

It defines scope of activities

It is supreme document

They are rules for carrying out objects of co as set in memorandum

They are subordinate to memorandum

Every company must have its own A public company limited by shares memorandum need not have they can follow table A There are strict restrictions on its They can alteration resolution be altered by special

Legal effect of memorandum and its articles

Members to a company

Company to the members

Members inter se ( among themselves) Company to outsiders

PROSPECTUS
In order to finance its activities, a company needs capital

which is raised by a public company by the issue of a prospectus inviting deposits or offers for shares and debentures from the public. A private company is prohibited from making any invitation to public . Hence it need not issue a prospectus. Sec 2(36) defines a prospectus as any document described or issued as a prospectus and includes any notice, circular, advertisements 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 It must be in writing It must be an invitation to public

MEMBERS AND SHAREHOLDERS

They are the persons who collectively constitute the

company as a corporate entity. The terms members, share holder and holder of a share are used interchangeably. They are synonymous in case of company limited by shares, a company limited by guarantee In case of an unlimited company a member may not be a shareholder, for such company may not have a share capital.

Distinction between member and share holder

Share holder
A registered share holder is a member

Member

A registered member may not be a share holder because the company may not have a share capital. A person who owns bearer A person can be a holder of share warrant is a shareholder shares without being a but he is not the member member A shareholder even though A legal representative of a his name does not appear in deceased member is not a the register of members member until he applies for registration.

 Who can become a member? Minor Insolvent Foreigner How to become a member? Membership by subscription Membership by application and registration Rights and liabilities of members Statutory rights : next slide Documentary rights: these are the rights given to members by the memorandum and the articles of association Legal rights : by general law

STATUTORY RIGHTS
Right to obtain copies of the memorandum and the

articles on request on payment of prescribed fees (Sec 39) Right to transfer shares (Sec82) Liability of member Company with unlimited liability Co limited by shares Co limited by guarantee

SHARE CAPITAL
It means the capital raised by the company by the issue

of shares

Authorized or nominal capital Issued and subscribed capital Called-up capital Paid-up capital Uncalled capital Reserve capital

Kinds Equity shares Preference share capital