companies act1956 a

8/4/2019 Companies Act1956 A

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Dr. Vilas Kulkarni.

Introduction to Companies Act1956

Introduction� Definition of Company.

� Features of company� Types of Companies� Lifting the Corporate Veil

S hort Title and extent.

IN TRODUCT ION :� This Act may be called the Companies

Act, 1956. It is a Business Law.It is a commercial Law & its roots are seenin English Company Law. Many provisionsof it are incorporated in this IndianCompanies Act of 1956.

Applicability of Act

� Being a Central Government Act it isapplicable to all the states of Indiaincluding Union Territories.

� The provisions of this Act are applicable toall the class of companies in India.

� The provisions are also applicable to all

the companies incorporated out of Indiabut they have established places of business in India.

Objectives :

� To conduct the business smoothly with thehelp of limited liabilities & with limited

shares.� To serve the community by providingQuality products & services at reasonablecost.

� To earn the profit & distribute it among allthe investors & Board of Directors in

proportionate with their investments.� To grow the business with the help of share capital & Ideas so that the part of itis contributed towards national prosperity.

� To create an employment opportunities for qualified and eligible person towards C S R.

Definition

General Definitions : 1)A Company is aform of business organization in which thefunds of a large number of investors aremanaged by a few persons for thepurpose of earning profits which areshared by all the investors.

2)It is an association of persons formed toachieve the common goal set by their

Board of Directors.

� As per c ompanies A c t 1956.(Se c3 (1)(i))It means a business organization formedas per the companies Act 1956to achievefollowing objectives

� a) To encourage the investors to do their investments.

� b) To ensure proper Administration� c) To prevent Malpractices� d) To allow for investigation if required.

Essential Characteristics/Features

of a Company.� Registration- S hould be registered under the Companies Act.

� Distinct Person- S eparate legal entity.� Perpetual succession- N ever dies.� Easy transfer of shares.

� Limited liability.� Artificial person but not a citizen.

Continued«

� Common S eal.� Capacity to sue and be sued.

S hare holders are actual owners of CompanyN umber of persons are as per MOA

S eparate Property

S eparation of ownership and Management� Rigidity of objectives� Authority to raise share capital in large scale.� To comply S tatutory Requirements on

regular basis

� Company is a Corporate Body

Types of Companies

Companies limitedby guarantee.

RegisteredCompanies

StatutoryCompanies

Royal Charter/Chartered Companies

Private CompaniesPublic Companies

Companies limitedby shares.

O n basis of Liability

Unlimitedc ompanies

Types of Companies

� A) On the basis of Liability� B) On the basis of Incorporation

� C) On the basis of Ownership� D) Government Companies� E) On the basis of Jurisdiction

� F) On the basis of Control & S hareholding� G) One Man Company

A) O n the basis of Liability� 1)Limited by shares

� 2)Limited by Guarantee� 3)Unlimited CompanyB) O n the basis of In c orporation

� 1)Chartered Company2) S tatutory Company

� 3)Registered Company

C ) O n the basis of Ow nership� 1)Private Limited Company

� 2) Public Limited CompanyD) Government C ompaniesE) O n the basis of Jurisdi c tion

� 1) Foreign Company� 2) M N C Company

F ) O n the basis of C ontrol &Shareholding

� 1) Holding Company2) S ubsidiary CompanyG) O ne Man C ompany

A) On the basis of Liability

a ) C ompanies Limited by shares :companies limited by shares are the mostcommonly found companies.Se c tion 12 (2) (a) implies that where theliability of the shareholders of a companyis limited to the extent of the unpaid

amount on the shares held by them, thecompany is known as a company limitedby shares.

In su c h c ompanies , each share has afixed nominal or face value which theshareholder is required to pay either at atime or in various installments.Whatsoever may be the liabilities of acompany, shareholders are not bound to

pay anything more than the face value of the shares held by them.

� Thus, the liability of each of theshareholders of such a company is alwayslimited to the extent of the amount unpaidon his shares.

b) C ompanies Limited byGuarantee :-

� Words µCompanies limited by Guaranteeimplies that the liability of members of such company is always limited to a fixedamount agreed by its members tocontribute towards the assets of thecompany.

Se c tion 12 (2) (b) states that, a companyhaving the liability of its members limitedby the memorandum to such amount asthe members may respectively undertakeby the memorandum to contribute to theassets of the company in any event of its

being wound up, such company in this Actis termed as a c ompany limited byguarantee

c . Unlimited c ompanies: it is obviousthat where the liability of the members of acompany is unlimited, it is called as anunlimited company. S ection 12 providesthat any seven or more persons in thecase of a public company and 2 or morepersons in the case of a private limitedcompany can have such liability. Anycompany registered without limited liabilityis known as an unlimited company.

The liability of members of such company isunlimited like an ordinary partnership firmand every member of such company isliable for debts of the company inproportion to his interest in the company.

An unlimited company may have or may

not have a share capital. But if it has ashare capital, it may be a public companyor a private company

B) Mode of In c orporation

a) c hartered c ompanies : chartered

companies are also known as Royalcharter companies. S uch companies areincorporated under the Royal (special)charter granted by the King or the Queen.S uch companies as given exclusivepowers rights and privileges under theRoyal charter.

They have to function in accordance withthe terms and conditions of the Royal

charter. The East India company, /bankof England, The chartered bank of Australia are some of the examples of chartered or Royal companies. However,

such companies find no place in Indiaafter independence, since there nomonarchy in India now.

b) Statutory c ompanies :- Companieswhich are created by special Acts of Legislature are known as statutorycompanies. A statutory company can bedefined as a company which isincorporated by a special Act passed by

whether the Central Legislature or stateLegislature and such a company enjoyscertain powers,

rights, privileges as laid down in the Act.Therefore such companies do not requireto have a Memorandum of Association.Companies Act 1956 is applicable to thestatutory companies. Eg.Reserve Bank of India.

c) R egistered c ompanies Under the Act :Registered companies are thosecompanies which are registered or incorporated with the Registrar of companies as per the provisions of thecompanies act. At present, in India, almost

all companies are registered under thecompanies Act of 1956.

C ) O n the Basis of o w nership

A) Private c ompany : S ection 3 (i) (iii) definesa private company as follows-

� µPrivate company´ means a company which byits Articles ±a) Restricts the rights to transfer its shares, if any,

b) Limits the number of its members to fifty andc) N ot includes the persons who are inemployment of the company;

� d) Persons, who having been formerly in theemployment of the company, were members of thecompany while in that employment and have continuedto be members after the employment ceased; and

� e) prohibits any invitation to the public to subscribe for any shares in or debentures of the company.

� Thus, the three features i.e. restriction on right totransfer, limit on the number of members and invitationto the public to subscribe as mentioned above are themandatory provisions of a private limited company wordsµPrivate Limited´ are required to be used at the end of the name of every company.

Publi c c ompany ; section 3 (1)(iv) laysdown that. µPublic company means acompany which is not a private company.´Thus it can be said that a public companyis a company which by its Articles, doesnot restricts the right to transfer its shares,

if any, does not limit the number of itsmembers and further does not

prohibit any invitation to the public tosubscribe for any shares in or debenturesof the company. Any seven or morepersons can come together and join handsto form a public company. However, thereis no restriction on the maximum number

of members

Private c ompany& Publi c c ompany Differen c es:-1.) A private c ompany c annot have less than t w omembers and more than fifty members

The minimum number of persons required to form apubli c c ompany is seven. There is no restri c tion onthe maximum numbers of members in a publi c c ompany.2.) A private c ompany c annot invite publi c tosubs c ribe its share c apital neither it c an invite thepeople to buy its debentures

A publi c c ompany invites the publi c to subs c ribeto share c apital or to pur c hase the debentures.

� 5). A private company enjoys certain privilegesi.e. exemption from certain provisions of the

companies Act. Of 1956.� A Public company does not enjoy any suchprivileges.

� 6).Directors of a private company need not file

their consent with the Registrar to Act as director or sign an undertaking the take up qualificationshares.

Dire c tors of a Publi c c ompany have to file their c onsent w ith the R egistrar to A c t as dire c tor or signan undertaking to take up qualifi c ation shares.7). Legal c ontrols on private c ompanies are less.

Legal c ontrols, restri c tions on publi c c ompaniesare more and stri c t.8) In private c ompanies, restri c tions on the

remuneration of Dire c tor's are far less.

In public

ompanies, there are restric

tions on theremuneration of Dire c tors. The remuneration of Dire c tors c annot be more than 11 %of net profits of the c ompany .

� 9). Directors are allowed to borrow fromthe private companies

Directors cannot borrow from the publiccompanies

10). In the case of a private company,unless the articles of the company provide

for a large number, two memberspersonally present are quorum for ameeting of the company.

In the case of a public company, unless the Articles of the company provide for a largenumber, five members personally present are

quorum for a meeting of the company. (section174 (1)).� 11) A private company is not required to file a

prospectus or a statement in lieu of prospectuswith the registrar [section 70 (3)].

� A public company has to file a prospectus or a statement in lieu of prospectus with theRegistrar.

D) Government C ompany

S ection 617 of the companies Act of 1956defines government company¶ as follows ±

� i) For the purpose of this Act Governmentcompany means any company in whichmore than fifty one percent of the paid upshare capital is held by the centralgovernment, or by any S tate Government,or Governments or partly by others.

� The Central Government and partly by oneor more state governments and includes acompany which is a subsidiary of aGovernment company as thus defined´ InIndia, there are many companies in which100% paid-up share capital or more than

51% of the paid up share capital isprovided by the Central or S tateGovernment.

E) Based on the Jurisdi c tion of fun c tioning

The boundaries of the country wherein itis registered, such a company is called amultinational or transnational company

F oreign c ompany :- , It can be said thata foreign company is one which isincorporated outside India but has aplace of business in India.

(b) MNC :Companies incorporated outsideIndia before/after the commencement of this act at many places, established aplace of business within India andcontinue their business at establishedplaces within India at the commencement

of this Act and after.

F ) O n the basis of c ontrol and/or share holding

a) Holding c ompany :- section 4 (4) of thecompanies Act of 1956 implies that acompany is deemed to be holdingcompany of another if that other is itssubsidiary. Thus, a holding company canbe defined as a company which has acontrol over a subsidiary company throughanyone of the several methods as

explainedinsection4(1).

b) Subsidiary c ompany :- A company is asubsidiary of a holding company if a holdingcompany controls the majority composition of its

board of directors, having an object to controlthe management of the subsidiary or that other company i.e. holding company holds themajority of its shares or the holding company¶s

subsidiary has its own subsidiary, it becomes thesubsidiary of the first mentioned company

G) O ther types of c ompanies:

O ne Man c ompany :- One man company canbe a public or a private company, but it is usuallya private company wherein one man holds

practically the whole of the share capital of thecompany. In other words, it can be said thatwhere a single man holds almost all the sharesof a company such a company is called as one

man company. If one man company satisfies allthe conditions and requirements of incorporationas laid down in the companies Act, it becomes alegal personality.

� Generally for formation of one man company inorder to meet the statutory requirements, certainpersons are invited to become members who

may hold a few shares. S uch dummy membersare usually nominees of the main shareholder who is the de-facto owner of the company andcarries on the business with Limited Liability e.g.

X and Y register their company as a privatecompany with a share capital of Rs 7,00,000divided into 70000 shares of Rs. 10/- each. X

holds 69,999 shares while Y holds only 1 share.

This is nothing but an example of one man Co.

Lifting O R Pier c ing theC orporate Veil:

� A company is distinct from its members. Itis a separate legal entity ( S alomon v.S alomon and Co. Ltd- (1897) A.C. 22).There is thus a veil between a companyand its members keeping them bothseparate from each other. However,sometimes it becomes necessary to liftthis veil, disregard the distinct corporateentity of the company and find out therealities of the company.

The Court may investigate the real affairs,ownership etc., of the company. This iscalled ³Lifting or piercing the corporate veil´In other words the Court investigates intothe true state of affairs of the company.

It has been observed that though acorporation is a distinct entity, yet inreality it is an association of persons whoare in fact the beneficial owners of allthe corporate property.

� The corporate veil is, therefore, lifted bythe Court when it ignores the companyand concerns itself directly with themembers or managers. It is largely in thediscretion of the Courts and will dependupon the underlying social, economic and

moral factors as they operate in andthrough the corporation.

Situations w hen C orporate Veil is lifted

A) To investigate the relationship betweenthe holding company and subsidiarycompany.

B) To investigate the number and names of members of the company.

C) To investigate the true ownership of shares and controlling power over thecompany.

continue

D) To investigate lawful objects of the company.E) To investigate mismanagement and oppression

by the majority.

F) To investigate the character of a companywhere it is trading with an alien enemy or persons managing the affairs of the companyare under the control of enemies or are

residing in enemy country.G) To investigate into the affairs where thereexists a tendency to create monopoly.

continue

H) To investigate the company affairs whereit is used for tax evasion or to circumventtax obligation.

I) To investigate if the company is acting asan agent for its shareholders.

J) To investigate the affairs, where it is

formed for fraudulent purpose, to defectand circumvent the law or to defraud itscreditors or to avoid valid obligation.

END O F C HAPTE R

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