3-Indian Companies Act1956

Social & Legal Issues
Indian Companies Act
1956
Companies Act, 1956

A company implies an association of persons for
some common object(s). According to the act :A
company formed and registered under the companies
act 1956 or under any previous company law. A
company is a contractual entity created by the
members.
Characteristics of a Company
1.
2.
3.
4.
5.
6.
7.
8.
9.
Incorporated Association
Artificial legal Person
Separate legal Entity
Perpetual Succession
Limited Liability
Transferable Shares
Common Seal
Separate Property
Capacity to Sue and Being Sued
Kinds Of Companies
A) On the basis of mode of Incorporation:

Chartered Companies
Statutory Companies
Registered Companies
B) On the basis of Liability of Members
Limited by Shares
Limited by Guarantee
Unlimited
C) On the basis on the number of members
Private
Public
D) Others: Govt. Companies, Foreign company, Holding and
subsidiary company
Distinction between private and Public

Company
Pvt. Company
Public Company
Minimum number of members Minimum number of members to

to form a company is 2
form a company is 7
Max. number of members
should not exceed 50
No restriction
Right to transfer share is

restricted
Freely transferable
Prospectus can not be issued
Prospectus is issued
Commence business
immediately after getting the
certificate of incorporation
Can start only after receiving the

certificate to commence business
from registrar of companies
Numbers of Directors must be

at least 2
Must have at least 3
Distinction between private and Public Company

Directors consent to work as a
Director with Registrar is not
necessary
Necessary
Number of Directors can be

increased to any number
Not more than 12 without the

approval of the central govt.
Directors are required to retire by

rotation
At least 2/3rd of Directors must

retire by rotation
Managerial Remuneration No
restriction
Not more than 11% of net profit.(

not mere than 5% to a sgl.Director)
Can be registered with a paid up

capital of Rs. 1 lakh
Rs 5 Lakh
Can not accepts deposits from

public
Can accept deposits from public
Need not hold statutory meeting or

file a statutory report
Must do so
Lifting The Corporate Veil
The circumstances under which the courts may lift the corporate
veil are:
1.
Under Statutory Provisions
Reduction of Membership
Misrepresentation of Prospectus
Fraudulent Conduct of Business
Failure to return application money
Mis-description of name
Non-payment of tax
Liability of ultra -Vires acts
Lifting of the Corporate Veil

2) Under Judicial Interpretations:
For determining the enemy of the company: Daimler
Company vs Continental Tyre rubber company
For the Benefit of revenue-Sir Dinshaw Maneckjee Petil,
Re
For prevention of Fraud and Improper conduct
Others
Formation and Incorporation of a Company
Promotion
Registration/Incorporation
Flotation/Raising of Capital
Commencement of Business
Promotion
Promotion refers to the entire process through which a

company is brought into existence.
It starts with the conceptualization of the birth of the
company
with an objective for which it is to be formed.
The persons who conceive the company and invest the initial
funds, are known as promoters.
Registration/Incorporation of Company
The Promoters of the company will submit the following

documents with the Registrar of Companies for the
registration of company:
Memorandum of Association
The article of association
A list of persons who have consented to act as directors
of the proposed company
A statutory declaration of compliance.
Any agreement with the relevant persons of the proposed
company.
Registration/Incorporation of Company
The Registrar of the Companies is to allot a Corporate
Identity Number to each company registered on or after

November 1, 2000.
After scrutiny of all the documents a certificate of
incorporation is issued
Flotation and Raising of Capital
A public company can take either of the following
steps:
a) Issue a prospectus to invite public for
subscription
b) Deliver a statement in lieu of prospectus where
the
company has either not issued the prospectus or it has
issued the prospectus , has not proceeded to allot any
shares offered to the public for subscription
Every private company and a company not limited by shares can

commence business immediately on receipt of certificate of
incorporation. But a public company limited by shares is debarred
from commencing business on borrowing money without the
certificate of commencement of business
Where a company has issued Prospectus
The minimum subscription in cash has been raised
Every director of the company has paid in cash his qualification
shares , a proportion payable on application and allotment on the
shares offered for public subscription.
No money is liable to be repaid to applicants for any shares or
debentures which have been offered for public subscription by
reason for any failure to apply for, or to obtain permission for the
shares of debentures to be dealt in any recognized stock exchange
A statutory declaration duly verified by one of the directors or the

secretary in the prescribed form that the above conditions have
been complied with, is filed with the registrar
Where the company has not issued prospectus it has to satisfy the
following conditions:
A statement in lieu of the prospectus if filed with the Registrar
Every director of the company has paid in cash his qualification
shares , a proportion payable on application and allotment on the
shares.
A statutory declaration duly verified by one of the directors or the
secretary in the prescribed form that the above conditions have
been complied with, is filed with the registrar.
When the company has compiled with the above conditions the
Registrar will issue a certificate to commence business.
Meaning and Importance
MOA of a company is its charter and defines the
limitations of the
powers of the company
It is not unalterable
Content:
i) Name of the Company: with limited and private
limited as the
last word(s) of the name
ii) Registered Office
iii) Objects of the company : main objects , Incidental and
ancillary
objects, other objects not included in first two.
iv) Liability: A declaration is made that the liability of

the members is limited.
v) Capital-The amount of authorized share capital
divided into shares if fixed amount
vi) Association or Subscription: The initial members are
called subscribers, who sign the memorandum in the
presence of one witness
Articles of Association
Article of Association of a company are its bye laws.

It controls the internal management of the company
and defines the powers of its offices.
Difference of MoA and AoA

Charter of Company
Defines the scope of
activities
Supreme Document
Must for every company
Strict restrictions, some
alterations may require
sanction of central govt.
Act ultra-vires is wholly
void and cant be ratified
Regulations for internal

Mgt
Rules for carrying out the
objects of Co.
Subordinate to the
memorandum
Company limited by
shares need to have it.
Act ultra-vires but intravires the memorandum
can be ratified
Doctrine of Ultra -Vires
Ultra Vires means beyond the powers.

Ashbury Railway Cairrageand Iron Company Ltd vs
Riche
Doctrine of Constructive Notice
The memorandum and articles when registered with the
Registrar becomes public document and accessible to
all.
Therefore there is a presumption that any outsider
dealing with the company has read and understood these
documents. This is known as doctring of constructive
notice.
Kotla Venkatswamy vs C Ramamurthy.
Doctrine of Indoor Management
Persons dealing with the company in good faith have

a right to assume that the internal requirements
prescribed in public documents (memorandum and
articles have been observed.
Exceptions:
Where the outsider had knowledge of irregularity.
In case of forgery
Negligence on the part of the outsider
Acts outside the scope of apparent authority
Rayal British Bank v.Turquand
Registration of the Company
The promoters file the memorandum of association
article of association and a declaration by a lawyer

that the requirements of the act have been followed
with the Registrar of the Companies.
Registrar of the Companies issues the Certificate of
Incorporation of the company.
Distinct Legal Entity
Prospectus
Prospectus means any document described or

issued as a prospectus and includes any notice,
circular, advertisement or other document
inviting offers from the public for the
subscription and purchase of shares in,or
debentures of a body corporate.
Prospectus
Pre-Requisites of Prospectus
Prospectus must be dated

Prospectus must be signed
Prospectus must be registered
Golden rule of the Prospectus

There should be an honest disclosure of all facts. The
true nature of the companys venture to be disclosed.
Prospectus
Deemed Prospectus- When a company allots shares or

debentures to the public through the medium of Issue Houses,
then the issue houses invite subscription from the public
through their own offer document. This is also called
prospectus by implication.
Statement in Lieu of Prospectus- Where a public company
does not invite public to subscribe for its shares, but arranges
to get money from private sources>The promoters here need
not issue a prospectus but are required to draft prospectus
Red Herring Prospectus- is a prospectus ,which does not
have complete particulars on Price of securities offered and
quantum of securities offered. E.g.-Jet Airways, Suzlon
Membership
Persons who collectively constitute the company as a
corporate entity are members or shareholders
a) The subscribers to the memorandum
b) Who agrees in writing to become member and whose name
appears in the register of members
c) Who holds equity share capital and whose name is entered
as beneficial owner in the records of the depository
The agreement in writing to take shares of the company
The registration of name in the register of members
Member/Shareholder
S.no
Shareholder
Member
Is a member
May not be a
shareholder because
the company may not
have a share capital
Person who owns a bearer share

warrant is a shareholder
Struck off from the

list
A legal representative of a member
Applies for
registration
No share are allotted to a subscriber

to the memorandum
Subscriber to a
memorandum
Who can be a member
Minor
Insolvent
Partnership Firm
Foreigner
Company
Trade Union or Society
President of India
Modes of acquiring membership/Index of a member
Membership by subscription
Membership by application and registration
A company with more than fifty members shall keep an index

of members
Rights of member / Register of Member

Statutory Rights
Contractual/otherwise
Name address and occupation

Share held by each member and the amount paid up on those
shares
Date at which each person was entered in the register as a
member
Date at which any person ceased to be a member
Termination of Membership
Transfers his shares

Shares are forfeited by the company
Surrenders his shares
Shares are sold by the company to enforce its lien
Dies
Is adjudged insolvent
Shares have been redeemed by the company
Rescind the contract of membership on fraud or
misrepresentation
Director
A company is an artificial legal person and the directors as a
body endow the artificial legal person with human face than
can act and react.
The person through whom a company acts and does its
business, and termed as director.
An individual can be appointed as director, no corporate
body corporate, association or firm
Cannot hold a office of more than fifteen companies
Qualifications of a director
No academic, professional or share qualification
Articles may provide for any qualifications
Where share qualification is fixed by articles then the act
provides
a) Qualification shares must be taken within 2 months after
appointment
Nominal value of qualification shares must not exceed Rs.
5000 or one share where its value exceeds Rs. 5000
Share warrants will not count for this purpose
Appointment of Directors
First director
Appointment of directors by company
Appointment of directors by the board
Appointment of directors by third parties (nominee director)
Appointment of directors by proportional representation
Appointment by central government
Appointment by small shareholders
Consent for appointment
Written consent is required to be signed and files with the
registrar and the company
Removal of Directors
By shareholders
By Central Government
By Tribunal
Powers of Board of Directors
The board of directors of a company shall be entitled to

exercise all such powers and to do all such acts and things, as
the company is authorized to exercise and do.
The following powers are:
The power to make calls
The power to issue debentures
The power to borrow money otherwise than on debentures
The power to invest funds
The power to make loans
The power to buy back of shares
Power to be exercised in the general meetings
Sale, lease or disposal of the undertaking

Showing any concession regarding payment of debts
Make investment of the amount of compensation received
Contribution to charitable
Borrowing monies exceeding the aggregate of the paid up
capital and free reserves of the company
Duties /Limitations
Good faith
Reasonable care
Disclose interest
Participate in the communities
Attend board meetings
Actions malafide
Incompetent to act
Deadlock in the board
Company meeting
General meeting
Requisites of valid meeting

Notice of meting must be proper and adequate
Chairman of the meeting
Quorum
Voting
Agenda
Minutes
Kinds of Meetings
Meetings
of a Company
Shareholders
General Meetings
Statutory Meetings
Extra Ordinary
Meetings
Class meetings
Annual General
Meetings
Directors
Creditors/
Debenture holders
Statutory Meetings
Object
When held
Not required to be held
Notice
Statutory report
In case of default
Annual general meeting

Which company to hold
When to be held
Gap between two AGM
First AGM
Subsequent AGM
Extension of time
maximum 3 months
Business to be transacted
Notice 21 days
Default
Board Meetings
When to hold:Atleast once in every three calendar months and
4 meetings every year
Notice: To be given to every director in writing. No form or
period of notice is laid down. Usually a weeks notice is
sufficient. The notice must state the date, time and place of
meetings.
Quorum:1/3 of the total strength or two, whichever is higher.
Passing of resolution by circulation is permissible
Motion
A proposal under consideration by members in a meeting
before it is voted upon
Rules
Should be positive in terms and should always be in writing
Within power, scope and relevant to business
Comply with the provisions of the Act, memorandum and
articles
Duly proposed by any member in a meeting
Should not be withdrawn before consent
Resolution
Any motion voted upon and agreed to in a meeting and entered
in minutes. A motion passed with or without amendment is
called resolution
Types of Resolution
Ordinary resolution
Special resolution
Resolutions requiring special notice
Winding up of a Company
Company dissolved
Winding up a company is a process whereby its life is
ended and its property administered for the benefit of its
creditors and members. An administrator called
liquidator, is appointed and he takes control of the
company, collects its assets, pays its debts and finally
distributes any surplus among the members in
accordance with their rights
Winding up of a Company
Winding up of a company differs from insolvency of an

individual in as much as a company cannot be made insolvent
under the insolvency law. Even a solvent company can be
wound up.
Modes of winding up
Compulsory winding up under orders of the National

company law Tribunal NCLT
Voluntary Winding up
The power of the court are transferred to the National
Company Law Tribunal by the company (Amendment)Act
2002. The central government is in the process of formation of
this Tribunal
Grounds for winding up by the Tribunal (NCLT)

By the company passing a special resolution.
Default in holding statutory meeting or in delivering statutory
report to the registrar
Failure to commence business within a year from the date of
incorporation or suspension of business for a whole year
Reduction in membership below the minimum required
Inability to pay its debts of Rs 1 lakh
Tribunal is of the opinion that it is just and equitable
Default of companys filing its balance sheet and profit and
loss account on annual return for any five consecutive
financial years
Grounds for winding up by the Tribunal (NCLT)

If the company has acted against the interests of sovereignty
and integrity of India, the security of the state, friendly
relations with foreign states public order, decency or morality.
If the Tribunal is of the opinion that the company should be
wound up as it had become sick and is unlikely to become
viable in future
Who may petition for winding up
The company
Any Creditor
Any Contributor
Any combination of creditor, contributory acting jointly or
separately
The registrar
Any person authorized by the central government
The official liquidator
The central government and the state government
Workers of a company cannot prefer a winding up petition
against the company
Liquidator
To conduct proceeding in winding up

To make a report
To take custody of companys property
To comply with directions of the creditors or contributories or
the committee of inspection
To summon meeting of creditors and contributories
To obtain directions from the tribunal
To keep statutory books
To get accounts audited
Central governments control of liquidator
Information as to a pending winding up

3-Indian Companies Act1956

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3-Indian Companies Act1956

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Social & Legal Issues

Indian Companies Act

Social & Legal Issues

Companies Act, 1956

Social & Legal Issues

Social & Legal Issues

A) On the basis of mode of Incorporation:

Social & Legal Issues

Distinction between private and Public

Minimum number of members Minimum number of members to

Right to transfer share is

Prospectus can not be issued

Can start only after receiving the

Numbers of Directors must be

Must have at least 3

Social & Legal Issues

Distinction between private and Public Company

Number of Directors can be

Not more than 12 without the

Directors are required to retire by

At least 2/3rd of Directors must

Not more than 11% of net profit.(

Can be registered with a paid up

Can not accepts deposits from

Can accept deposits from public

Need not hold statutory meeting or

Social & Legal Issues

Lifting The Corporate Veil

Under Statutory Provisions

Social & Legal Issues

Lifting of the Corporate Veil

Social & Legal Issues

Formation and Incorporation of a Company

Social & Legal Issues

Promotion refers to the entire process through which a

Social & Legal Issues

The Promoters of the company will submit the following

Social & Legal Issues

The Registrar of the Companies is to allot a Corporate

Identity Number to each company registered on or after

Social & Legal Issues

Flotation and Raising of Capital

A public company can take either of the following

Social & Legal Issues

Every private company and a company not limited by shares can

Social & Legal Issues

A statutory declaration duly verified by one of the directors or the

Social & Legal Issues

Social & Legal Issues

iv) Liability: A declaration is made that the liability of

Social & Legal Issues

Article of Association of a company are its bye laws.

Social & Legal Issues

Difference of MoA and AoA

Regulations for internal

Social & Legal Issues

Doctrine of Ultra -Vires

Ultra Vires means beyond the powers.

Social & Legal Issues

Doctrine of Indoor Management

Persons dealing with the company in good faith have

Social & Legal Issues

Registration of the Company

The promoters file the memorandum of association