Companies Act, 1956

Companies Act, 1956IntroductionObjects of Company LawTo encourage investmentsTo ensure proper administrationTo prevent malpracticesTo allow for investigationsMeaning of CompanyA company is defined as a form of business organization in which the funds of a large number of investors are managed by a few persons for the purpose of earning profits which are shared by all investors Characteristics of a CompanyRegistrationSeparate legal entityPerpetual SuccessionTransferable sharesLimited liabilityCommon sealSeparate propertyCapacity to sueTypes of CompaniesFrom the point of view of Incorporation

From the point of view of Liability

From the viewpoint of Nationality

From the view point of Public Interest

1.From the point of view of Incorporation

Chartered CompanyHistorically, most of the early companies were set up through a Royal Charter. For example, the East India Company, the Chartered Bank of Australia, India and China, etc., were incorporated by the grant of a special Royal Charter.In India, this form of organization does not exist now because there is no monarchy. Even in England, this method is rarely used now. Companies of this kind may be called chartered companies.Statutory CompanyIn this case, a special law is passed to establish the company.This is done only in special cases when it is necessary to regulate the working of the company for some specific purposes. These are mostly concerned with public utilitiesExamples of such companies in India are: the Industrial Finance Corporation, the Life Insurance Corporation of India, the Air India, Reserve Bank of India, etc. The provisions of Indian companies act 1956 apply to them if they are not inconsistent with the provisions of their special Acts.Registered CompanyThe Companies Act, 1956, lays down procedures by which a company can be brought into existence. Anybody who wants to incorporate a company can do so by taking necessary steps outlined therein. By far the largest number of companies is incorporated under the Companies Act. These companies may be called registered companies.

2.From the point of view of Liability

Unlimited CompanyDo not have any limit on the extent of liability of its members.Liability of each member extends to whole amount of the companys debts and liabilities.However, the members cannot be sued upon the directly by the company's creditors.Company Limited By GuaranteeCompany Limited By Guarantee Not Having Share CapitalMemorandum Limits the members liability.It is limited to the amount as may have been undertaken by MOA to contribute in the case of winding up.

Company Limited By Guarantee Having Share CapitalMemorandum Limits the members liability.Moreover, liability would also extend to the unpaid value of the shares held by the member.Limited CompanyThe liability of the members of the company is limited to the amount remaining unpaid on the shares. Hence the holders of the fully paid up shares cannot be called upon for the further contribution. The liability of the members holding the partly paid up shares exists even if the company is in process of winding up.

3.From the viewpoint of Nationality

National CompanyIn this case, the control and the management of the affairs of the company are to be carried out within the geographical boundaries of the country. Multinational CompanyThe branch is not an Independent entity and is linked up to the parent company existing in some other country.4.From the view point of Public InterestPrivate CompanyPrivate Company is a company Which by its Articles :-Restricts the rights of the members to transfer the shares, Limits the membership to 50, excluding the past and present employees of the company who are the members of the company, and Prohibits the invitation to public, for subscription of shares or debentures of the company.Public CompanyPublic Company is a company Which by its Articles :-Does not restrict the rights of the members to transfer the shares, Does not limit the membership to 50, excluding the past and present employees of the company who are the members of the company, andInvites the public, for subscription of shares or debentures of the company.Government CompanyIt is a company in which not less than 51% of the paid-up share capital is held by one or more of the following or any combination thereof:-The Central Gov. & one or more Govt. Co.Any State Gov. or Govts and one or more Govt. Co.;The Central Govt., one or more State Govt. and one or more Govt. Companies;The Central Govt. and one or more corporations owned or controlled by Central Govt.;The Central Govt., one or more State Govt. and one or more Corps. Owned or controlled by the Central Govt.One or more corps. Owned or controlled by Central Govt. or State Govt.More than one Govt. Company

Distinction Between Private Ltd. & Public Ltd. CompanyMinimum capital required is 1,00,000Minimum 2 and maximum 50 membersAt least 2 directorsNo restriction on appointment of directorsNon-transferable sharesRestriction on invitation to subscribe for sharesCan start business without obtaining certificate of commencementMinimum capital required is 5,00,000Minimum 7 members. No limit on maximum membersAt least 3 directorsNo restriction on appointment of directorsTransferable sharesInvitation to subscribe for shares is allowedCan start business only after obtaining certificate of comencement

Private Ltd.Public Ltd.Holding Company & Subsidiary CompanyWhen one company controls another company it is called holding company. Control may be in any following ways:Where it controls the composition of the Board of Directors of another company; orWhere it controls more than half of the total voting power of the other company; or Where it holds more than half of the nominal value of equity share capital of the other company; orWhere it is a subsidiary of any company which is the subsidiary of some other company.One Man CompanyWHEN A SINGLE PERSON HOLDS ALMOST ALL THE SHARES OF THE COMPANY IT IS CALLED ONE MAN COMPANY. SUCH A COMPANY HAS ITS LEGAL PERSONALITY IF IT COMPLIES WITH THE NECESSARY REQUIREMENTS OF REGISTRATION, IT MAY BE A PUBLIC OR PRIVATE COMPANY.Illegal AssociationANY COMPANY, ASSOCIATION OR PARTNERSHIP CARRYING ON BANKING BUSINESS WITH MORE THAN TEN MEMBERS OR CARRYING ON ANY OTHER BUSINESS WITH MORE THAN TWENTY MEMBERS THAT HAS FOR ITS OBJECT THE ACQUISITION OF GAIN, WITHOUT BEING REGISTERED UNDER THE COMPANIES ACT, SHALL BE CONSIDERED AN ILLEGAL ASSOCIATION.Incorporation of Companies Steps for formation of a companyTypes of Company Availability of NameThe Memorandum and Articles of Association duly signed, and stamped.The agreement, if any with any individual for appointment as its Managing or whole-time director.Consent of directors in Form 29. Notice of Registered address in Form 18 to be given within 30 days of the date of incorporation.Particulars of Directors in Form 32. Steps for formation of a companyPayment of Registration Fees.Power of attorney, to fulfill various legal and other formalities.Statutory Declaration in Form No. 1 that all requirements of the Companies Act and the rules there under have been complied with. The declaration should be made by either an advocate of Supreme Court / High Court, a practicing Chartered Accountant or a director, or a manager or a secretary named in the Articles of the proposed company. [Section 33 (2)]DOCUMENTS OF COMPANYDocumentsMemorandum of AssociationMain document of the company.It defines the objects of the company for which it is established.Lays down the conditions upon which alone the company allowed to be formed.Charter of the constitution of the company.It defines the scope of its activity and also states that anything beyond it is unauthorized and illegal. The memorandum shall be one of the forms given in Tables B, C, D and E in schedule 1 of the Act.

How MOA Looks?The Memorandum of Association must beprinted,divided into paragraphs,numbered consecutively,and signed by each (seven or more in case of a public company), who must add his name, address and descriptionin the presence of at lease one witness who is to attest the signature.Clauses of MOAName clauseRegistered office or Situation clauseObject clauseLiability clauseCapital clauseSubscription clauseName ClauseThe Company is a legal entity. Therefore, it must have its name to establish its identity. The name of the company should not be Similar, Undesirable, or which will mislead the public. E.g. Indian National flag, name or pictorial representation of Mahatma Gandhi or Prime Minister of India, etc.Its use has been, therefore, prohibited by the Government under the Emblems and Names (Prevention of Improper Use) Act, 1950.The company can change its name by passing a special resolution and obtaining he approval of the Central Government.Registered Office Clause Every company must have a registered office from the day it starts its business or within 30 days of getting the Certificate of Incorporation, whichever is earlier.Memorandum of Association must state the name of the State in which the registered office of the company is situated. This clause is important as it mentions the residence for the purpose of the communication with the company. It determines the jurisdiction of the company and also mentions the place where all the records of company are maintained.Registered Office ClauseWhere the company wants to change its registered office from one state to another then it can do so by passing a special resolution as well as by confirmation of Company Law Board.Such confirmation will be given provided debenture holders and creditors are satisfied and such alteration is fair.

Object Clause It is the most important clause in the Memorandum of Association.It defines and limits the scope and sphere of the operation of the company and affords protection of its funds.It states the main objects as well as incidental objects of the company. The transaction which does not fall within the scope of the main objects of the company will not be valid and binding on the company simply because it is not beneficial for the company.As regards to the alteration of object clause a special resolution must be passed and the confirmation by the Company Law Board must also be obtained. The alteration is done to obtain a main purpose by new means or to enlarge the area of its operation, or to restrict the objects or sell or dispose of or amalgamate the undertaking.Liability Clause The liability clause states that the member or the shareholder will be liable to pay only the unpaid value of shares held by him.If it is a company limited by guarantee, Memorandum of Association must further state that each member undertakes to contribute to the assets of the company at the time of the winding up while he is a member. Ordinarily this clause cannot be altered except that the liability of the directors may be made unlimited under certain circumstances.Capital Clause Amount of share capital with which the company is to be registered and its division into shares of a fixed amount must be stated in the Memorandum of Association of a company limited by shares.The capital with which the company is registered is called Registered or Authorized or Nominal CapitalCapital clause can be varied or capital can be reduced (by special procedure) or the rights of the shareholders can be varied. Subscription/Association Clause This clause gives idea about the people who have created the company.Maximum seven members in a public company and two members in a private company shall subscribe to the Memorandum of the company. A declaration is to be given. Such declaration is to be signed by a member in presence of a witness.Moreover the details as regards to name, address, age and business of the promoters are also recorded under this clause. Each subscriber has to take at least 1 shareDoctrine of Ultra ViresAny act done by the company which is neither authorized by its object nor by the Companies Act, that act is called Ultra Vires i.e beyond the powers and authority of the company.An act which is ultra vires the company is void and cannot bind the company.Since the act is void i.e it doesnot create any legal relationship, it cannot be ratified even by the shareholders.Doctrine of Ultra ViresIf the directors do any act which are outside the object clause of the company then the shareholders are not liable. The directors are personally liable for the ultra vires act done by them.Act Ultra Vires to MOA cannot be ratified by the shareholders but acts Ultra Vires to AOA can be ratified by them.Any shareholder can bring court order to prevent the company from doing an Ultra Vires Act.

ARTICLES OF ASSOCIATIONSCOPEThe articles of association are subordinate to the memorandum of association of the company.The articles contain the internal regulations of the company. The provisions of the articles must not be inconsistent with or repulsive to any of the provisions of the memorandum of the Act.AOA can be altered at any time according to the wishes of the member.

CONTENTSArticles usually contain provisions relating to the following matters.Share capital, rights of shareholders, variation of these rights, and payment of commissions, share certificatesCalls on shares Transfer of sharesTransmission of sharesForfeiture of sharesConversion of shares into stockAlteration of Capital

CONTENTSGeneral meetings and proceedings thereatVoting rights of members, voting poll and proxiesDirectors, their appointment, remuneration, qualification, powers and proceedings of Boards of DirectorsManagerSecretaryDividends and reservesAccounts, audit and borrowing powersCapitalizations of profitsWinding up

ALTERATIONPass the Special ResolutionFile the copy of the Special Resolution with the Registrar within 30 days of passing the special resolutionAttach the resolution with every copy of AOAMust not be inconsistent with the ActMust not conflict with MOAMust not sanction anything illegalMust be for benefit of the companyMust not increase the liability of the membersMust not result into breach of contract

CONSTRUCTIVE NOTICEEvery outsider dealing with the company is deemed to have the notice of the contents of MOA & AOA.These documents, on registration with the Registrar, assume the character of public documents.This is known as Constructive Notice of Memorandum and Articles.INDOOR MANAGEMENTThere is one limitation to the doctrine of constructive notice of the MOA & AOA of the company.The outsiders dealing with the company are entitled to assume that as far as internal proceedings are concerned, everything has been regularly done.They are presumed to have read these documents and to see that the proposed dealing is not inconsistent therewith.They cannot inquire into the regularity of internal proceedings as required by MOA & AOA. They can presume all is being regularly done.This limitation of doctrine of constructive notice is known as DOCTRINE OF INDOOR MANAGEMENTIt is also called Turquand Rule.Exceptions to the Doctrine of Indoor ManagementKnowledge of IrregularityAct of an agent outside the scope of his authorityNegligence

MOADetermines the constitution and activities of the co.It is fundamental charterEvery co. must have a MOAAlteration of MOA is difficult AOAIt contains rules and regulations of internal management of co.It is subsidiary to MOA& if conflicting, MOA would prevailPublic company limited by shares may or may not have AOAAlteration is easier by special resolutionDifference Between MOA &AOADIRECTORSWhat Does Company Law Speak?Section 2(13) defines director as "director includes any person occupying the position of a director by whatever name called." Director is not servant of the company. He is rather an officer of the company. The articles of association of the company and provisions of the companies Act will govern the selection of the directors of the company. The management or the affairs of the company will be in the hands of the directors. The directors are collectively called the Board of Directors. The articles will determine the number of directors to be appointed to the Board of Directors of a company. As per the Act, minimum three directors will be there in a public company and two directors in a private company.Position of DirectorAS A TRUSTEEA trustee is a person who is owner of the property deals as a principal or owner or master with obligation on behalf of the company/personThe directors have to use their powers in the interest of the company. The directors are expected to show the capacity and diligence as a trustee.If the directors misuse the position, they are held liable. The directors are the trustees in connection with the transfer and distribution of shares. The directors have to disclose the details of his interest. AS AN AGENTThe position of director is like an agent. They have to function as per the provisions contain in the Articles of the company and the Company Law. Their actions are not their personal transactions, but they are the transactions done for and on behalf of the company. AS A PARTNERDirectors held shares. The members of the company also hold shares. The directors work as the representatives of the members. Thus, they are liked partners of the members of the company.Appointment of DirectorsAppointment as First DirectorsAppointment by Election in General MeetingsAppointment by Nomination by BODAppointment by Nomination by Central GovernmentAppointment by Nomination in Statutory CorporationsAppointment on the basis of Qualification sharesAppointment by Proportional RepresentationAlternate Directors

First DirectorsPersons named in the articles of association as directors become the first directors of the company or in the absence of the provision in the articles regarding persons to be appointed First Directors, the subscribers to the memorandum of association will become the first directors. Appointment by Election in General MeetingsThe members at the general meeting of the company will elect the directors. At the general meetings generally directors are appointed in place of retiring directors.Appointment by Nomination by BODThe Board of Directors will fill up the casual vacancy arising among the directors by nomination. A casual vacancy arises in case o death, resignation, disqualification or any other reason than retirement by rotation.Directors so appointed will remain in the office only for the unexpired period for which the director whose post is vacant, would have remained in the office.Appointment by Nomination by Central GovernmentUnder Section 408 of the Act, the Central Government can nominate some directors to the Board in case of mismanagement and oppression.Appointment by Nominations in Statutory CorporationsCertain statutory corporations possess similar powers e.g. the Industrial Finance Corporations Act of 1947 empowers the Corporation to nominate a director to the Board of a companyAppointment on the Basis of Qualification SharesWhere a person holds minimum number of shares as provided in the articles then he is said to have obtained 'qualification shares'. A person can be appointed as a director on the basis of such qualification shares.Appointment by Proportional RepresentationThe articles of the company may provide for the appointment of not less than 2/3rd of the total number of directors of a public company, according to the principles of proportional representation.The appointments must be done once in every 3 years and interim casual vacancies must be filled by the BOD in Board meetings.

Alternate DirectorsThe Board of Directors of a Company, may, if so authorized by its articles or by resolution passed by a company in general meeting, appoint alternate director during absence of the existing director for a period not less than three months from the State in which meeting of the Board are ordinarily held.The alternate director cannot hold office longer than the original director. He will vacate his office if and when the original director returns to the State.Qualification to be a DirectorA director must be-An individual,Competent to contract, andHold a share qualification, if so required by the articlesDisqualification for DirectorsA person shall not be capable of being appointed as director of the company, ifHe has been found to be of unsound mindHe is an insolvent.He has applied to be adjudicated as an insolvent and his application is pending.He is convicted by a Court, of any offence involving moral turpitude and sentenced in respect thereof, to imprisonment for not less than six months and period of five years has not elapsed from the date of the expiry of the sentence.He has not paid any call in respect of shares of the company held by him and six months have elapsed from the last date fixed for the payment of the call.An order disqualifying him from appointment as director has been passed by a Court in pursuance of Section 203Removal of DirectorsBy ShareholdersBy Central GovernmentBy Company Law BoardRemoval By ShareholdersA company may by ordinary resolution remove a director before the expiry of period of office on the intent of the shareholders in the annual general meeting by:-Giving special notice to the director at least 14 days before the meeting in which they are to be removed,A copy of the notice to be sent to the shareholders and to other directors,Shareholders can remove the director by appointing a new director in his place who will hold the office only for the unexpired tenure of the previous director.

Directors who cannot be removed by ShareholdersAn additional director appointed by the Central Government under Section 408 in case of mismanagement and oppression) cannot be removed.In a private company a director appointed for life and holding office as such on 1st April 1952 cannot be removed by member's resolution.Where the articles of a company provide for the election of directors by proportional representation, a director elected by that method cannot be removed by the resolution.Remuneration to the Director for his RemovalIf a director, by an agreement or otherwise is entitled to receive compensation for the premature termination of his service, he can enforce his claim notwithstanding the removal by the resolution.Removal By Central Government The Central Government shall by order remove from the office any directors against whom there is a decision of the High Court, holding that he is not a fit or proper person to hold the office of director Removal By Company Law BoardSection 402 read with Sections 397 and 398 gives wide power to the court including the removal of the directors.On an application by any member/members of the company in cases of mismanagement or oppression, the Company Law Board may terminate any Director.Directors so terminated cannot be appointed as directors of other companies also upto a period of 5 years of their termination.Such directors are not entitled to any damages or compensation for loss of office.RetirementProportion of Directors to retire by rotation-2/3rd only in first AGM the ratio is 1/3rdVacancy to be filled at AGM, if not then retiring directors will be deemed to be re-electedResignation of office of director

Powers of DirectorsMAKE CALLSISSUE DEBENTURESBORROW MONEY INVEST FUNDSMARKET LOANS

Limitations of DirectorsSell, lease, etc. the whole undertakingRemit or give time for the repayment of any debt by a directorInvest or borrow money in contravention of the act.Charity of more than Rs. 50,000.Duties of DirectorsUnder the Companies Act directors are accountable to for their acts done on behalf of the company. Besides the statutory duties, which the directors have to perform to ensure strict compliance with the various provisions of the Act they also have certain duties which arise out of their fiduciary relationship with the company.

Statutory Duties: To file return of allotment:Not to issue irredeemable preference share or shares or share redeemable after 20 years:To disclose interestTo disclose receipt from transfer of propertyDuty to attend Board meetingOther Duties:To convene statutory, Annual General meeting (AGM) and also extraordinary general meetings.To prepare and place at the AGM along with the balance sheet and profit & loss account a report on the companys affairs including the report of the Board of Directors.To authenticate and approve annual financial statement.To appoint first auditor of the company.General Duties: Duty of good faithDuty of care.Duty not to delegateDefinitionWinding up of a company is the process of putting an end to its life. At the end of the winding up, the company will be destroyed or dissolved and will have no assets or liabilities.

Winding up and BankruptcyWinding up is different from Bankruptcy. In bankruptcy, the property of the debtors is divested from him and rests in the official receivers or the official assignees while the winding up the property of the company is not divested from it.

Reasons for winding up of a companyThe main object of the company for which it was established has been accomplished. It has become impossible to carry out the main objects of the company. The company has sold the business or the undertaking to another company or an individual.The company is not in a position to pay its debts in full.

Winding up by tribunalGrounds for winding up by tribunalSpecial resolutionFailure in holding statutory meetings.Failure to commence or suspend its businessReduction of membership below minimumInability to pay debtsJust and equitableDefault in filing balance sheets, profit and loss account or annual returnsActed against sovereignty and integrity of IndiaSick industrial company

Special resolutionIf a company by a special resolution resolved that it may be wound up by the tribunal, the tribunal may pass a winding up order.

Failure in holding statutory meetingsIf a company makes default in holding a statutory meeting or in delivering a statutory report, the court may order winding up the company.

Failure to commence or suspend its businessIf a company does not commence its business within a year from its incorporation or suspends its business for a whole year, the tribunal may order for its winding up.

Reduction of membership below minimum When the number of members is reduced below 7 in the case of a public company and below 2 in the case of a private company, the tribunal may order winding up of the company.

Inability to pay debts Tribunal may order for winding up a company if it is unable to pay debts.

Just and equitable The tribunal may consider it just and equitable that the company should be wound up if it is of that opinion. What is just and equitable will depend on the tests of each particular case.

Default in filing balance sheets, profit and loss account or annual returnsThe tribunal may order for winding up, if the company has made a default in filing with the registrar its balance sheets, profit and loss account or annual returns for any consecutive years.

Acted against sovereignty and integrity of India If company has acted against the sovereignty and integrity of India, the security of the state, public order, decency or morality, the tribunal may order for its winding up.

Sick industrial company If the tribunal is of opinion that the company should be wound up under the circumstances specified in Sec. 424 G, the tribunal may order for its winding up.

Application of winding up According to section 439, the following can send petition to tribunal for winding up of a company. Company itself.Contributories.Creditors.All or any of the above parties jointly or separately.Registrar

Voluntary winding upDefinitionVoluntary winding up means winding up by the members or creditors of the company without the interference of the tribunal.

DefinitionThe object of a voluntary winding up is that the company as well as the creditors is left free to settle their affairs without going to the tribunal.

Circumstances in which company can be wound up voluntarilyBy passing an ordinary resolution.By passing special resolution.

By passing an ordinary resolutionWhen the period for the duration of a company by the Article has expired, the company in General Meeting may pass an ordinary resolution for its voluntary winding up.

By passing special resolutionA company may at any time pass a special resolution what it be wound up temporarily.

Distinction between members and creditors voluntary winding up

DissolutionA company is said to be dissolved when it ceases to exist as a corporate body capable of holding property or of being sued in any tribunal.

Difference between winding up and dissolution