The Companies Act , 1956

Presented by : Group 9

Definition of Company

According to section3(1)(i) of the companies Act,1956 a company means, “A company formed and registered under this Act or an existing company ”.

“An association of many persons who contribute money or money’s worth to a common stock and employed for a common purpose, and who share the profit and loss arising thereform.”

- Lindley, L.J.

Characteristics of a CompanySeparate legal EntityPerpetual succession

Limited liabilityCommon seal

Transferability of sharesCapacity to sue and be sued

Not a citizenCompany’s actions limited

Separate property

KINDS OF COMPANIES

On the basis of constitution:1)Public company2)Private company

On the basis of incorporation:1)Chartered company2)Statutory company3)Registered company

CONT.

a)Limited companies - Limited by shares - Limited by guarantee b)unlimited companies4)Foreign company

On the basis of control:1)Government companies2)Holding and subsidiary companies

FORMATION OF COMPANY

It includes 4 stages:

1) Promotion of a company2) Incorporation or registration of the

company3) Capital subscription4) Commencement of business

1) Promotion of a company

Promotion is the first stage in the formation of acompany. Before a company is formed, somepersons come together and conceive the idea ofdoing business i.e. the company is born in theirminds. “promotion is the process of creating a specificbusiness enterprise. The aggregate of activitiescontributed by all those who participate in thebuilding of the business constitutes promotion.”

Promoter

“promoter is the person who assembles themen, the money and the material into a goingconcern.”

Rights of promoters:1)Rights to the legitimate preliminary expenses2)Right to get proportionate amount from co-

promoters3)Right to get remuneration

Duties of promoters

1)To disclose private arrangements 2)To disclose secret profits3)To disclose all material facts4)To disclose the profits which he has earned as

trustee5)To show goodwill towards future shareholders

2) Incorporation or registration of the company

Incorporation is the second stage of the company’s formation, which is done by getting the company registered with the registrar of the companies. The required fee for registration is paid and the certificate of registration obtained from the registrar of companies.

Preliminary activities:1) To decide where the registered office of the company will be located.2) To decide the name of the company3) To get the license under industrial development and regulation act, 19514) To make appointments5) To get the important documents prepared 6) To send the application to the registrar

3) Capital subscription

A private company or a public company nothaving share capital can commence itsbusiness immediately on its incorporation. Incase of capital subscription, a company has tocomplete the following procedures to obtain thenecessary capital:1) Issue of prospectus2) Statement in lieu of prospectus

4) Commencement of business

A private company can commence its businessimmediately on incorporation. A public companyon the other hand, can not commence itsbusiness till it receives the certificate ofcommencement.To obtain the certificate of commencement, apublic company needs to fulfill the provisionsof section 149.

MEMORANDUM OF ASSOCIATION

It is the most important document of a company. It defines the objects and

powers of a company and the company’s relationship with the outside world. The

purpose of the memorandum is to enable the shareholders, creditors and others who

deal with the company to know its permitted range of activities.

SIGNIFICANCE OF MEMORANDUM

• Its is the basis of incorporation and a company cannot be registered without a memorandum of association

• It informs the investors of the purposes for which their money will be utilized by the company.

• It makes known to the shareholders the extent of their liability.

• It defines the objectives of the company.• It indicates the names and addresses of the people

who have promoted the company.

CONTENTS OF MEMORANDUM

1. NAME CLAUSE: The clause contains the name of the company. A company can choose any name it likes, subject, however, to the following conditions:

a. The proposed name should not be identical or similar to the name of an existing company.

b. The proposed name should not convey any connection or like with a government department or local authority as it is undesirable and may mislead the public.

c. The name of the public company limited by shares should end with the word ‘limited’ while that of the private company should contain the words ‘private limited’.

2. THE SITUATION (DOMICILE) CLAUSE: This clause specifies the name of the state in which the Registered Office of the Company is to be situated.

3. THE OBJECT CLAUSE: This clause may be considered as the core of the memorandum of association because it defines powers of the company and the scope of its activities. A company is not authorized to do the any business outside the scope of the objects clause.

4. THE LIABILITY CLAUSE: This clause states that the liability of members is limited to the amount, if any, unpaid on the shares held by them. In case of ‘companies limited by guarantee’, this clause will also state the amount which every member undertakes to contribute to the assets of the company in the event of its winding up. The Memorandum may provide for the unlimited liability of directors.

5. THE CAPITAL CLAUSE: This clause states the total amount of authorized share capital with which a company is to be registered.

6. THE SUBSCRIPTION OR ASSOCIATION CLAUSE: This clause contains the full names, occupations and addresses of subscribers to the memorandum.

ARTICLES OF ASSOCIATION:

The articles of association of the company contains the rules and regulations relating to the management of its internal affairs. They define the rights, powers and duties of the management, the mode and form in which the business of the company is need to b carried on and the manner in which changes in the internal regulations of the company may b made from time to time.

CONTENTS OF ARTICLES1. Adoption of preliminary contracts.2. Number and value of shares.3. Allotment of shares.4. Calls on shares.5. Lien on shares6. Transfer and transmission of shares.7. Forfeiture of shares.8. Borrowing powers.9. Meetings.10. Winding up.11. Accounts and audit, etc.

PROSPECTUS

What is Prospectus?

• Section 2 (36)• It is a document which includes notice,

advertisement or circular.• Invites deposits from the public or offers from

the public for the purchase of any shares or debentures.

• It is not merely an advertisement; it may be a circular or a notice.

Document -> Prospectus

A document shall be called a prospectus if it satisfies the following two things:

• It invites subscriptions to shares or debentures or invites deposits.

• The invitation is made to the public.

Registration of Prospectus

• Section 60• A prospectus cannot be issued without its

registration.• A prospectus can be issued by or on behalf of

a company or in relation to an intended company only when a copy has been delivered to the Registrar for registration.

Cntd….

• The prospectus must be issued within 90 days of the date on which a copy is delivered for registration.

• If a prospectus is not issued within this period, it is deemed to be a prospectus, a copy of which has not been delivered to the registrar.

Penalty for non- registration of Prospectus

• A prospectus should not be issued without delivering a copy to the registrar.

• If so, then the company and every person, who is a party to the issue of the prospectus, shall be punishable with fine which may extent to Rs. 5000.

Contents of a Prospectus:• General information• Capital structure of the company• Terms of the present issue• Particulars of the issue• Company management and project• Report by the auditors• Report by the accountants• Statutory and other information.

Misstatements in the Prospectus

• Section 65• Untrue statements• Statements which produce wrong impression• Concealment of material facts• Omission of facts.

Statement in Lieu of Prospectus• Section 70

A company having a share capital which does not issue a prospectus or, which has issued a prospectus but has not proceeded to allot any of the share offered to the public for subscription, shall not allot any of its share or debenture, unless at least 3 days before the allot of share or debenture, there has been delivered to the registrar for registration a ‘statement in lieu of prospectus’.

SHARES AND DEBENTURES

Meaning of share: The capital of a company is usually divided

into certain indivisible units of a fixed value and each such unit is known as ‘share’.

Types of shares:1) Preference share2) Equity share

Types of preference share:

1) Cumulative preference share2) Non cumulative preference share 3) Participating preference share4) Non participating preference share5) Convertible preference share6) Non convertible preference share7) Redeemable preference share

Meaning of debentures: The term debenture may be defined

as a certificate of loan issued by the company, which creates or acknowledges and indebtedness of the company.

“Debenture mean a document which either creates a debt or acknowledges it, and any document which fulfills either of these conditions is a debenture.”

1) Registered debentures2) Bearer debenture 3) Secured debenture4) Unsecured debenture5) Redeemable debenture6) Irredeemable debenture7) Convertible debenture