Dr. Arun Mittal

BIT, Noida

Companies Act 1956

Definition of a Company

Section - 3 of the Companies Act,1956 defines a

‘company’ as a company formed and registered under

the Act, or an existing company formed and registered

under any of the previous company laws.

Justice Lord Lindley’s description of a

‘company’

An association of many persons who, contribute money or

money's worth to a common stock and employ it in some

trade or business; and who share the profit and loss arising

there from.

The common stock so contributed is denoted in money and

is the capital of the company.

The persons who contribute it , or to whom it belongs are

members.

..contd.The proportion of capital to which each member is

entitled is his ‘share’.

The member may sell his share in the company, thuswithdrawing himself and making someone else amember to whom he transfers shares.

The life of the company is independent of the lives ofthe members of the company.

What is a Company?

The term "company" has been defined as a collection of

many individuals united into one body under special

domination, having perpetual succession under an

artificial form and vested by the policies of law with the

capacity of acting in several respect as an individual,

particularly for taking and granting of property, for

contracting obligation and for suing and being sued,

for enjoying privileges and immunities.

Distinctive Features A Company

Incorporated Association Artificial Person Separate Legal Entity Limited Liability Separate Property Transferability of Shares Perpetual Succession Common Seal Capacity to sue and being sued Separate Management

Types of Companies: Public Company

Public Company means a company which

is not a private company.

Has a minimum paid up capital of Rs. 5 lac or such

higher paid up capital as may be prescribed.

Is a private company which is subsidiary of a company

which is not a private company.

Private Company

Private Company means a company which has

a minimum paid up capital of Rs. One lakh or

such higher paid up capital as may be

prescribed;

and by its articles of association :-

Private Company.. contd

Restricts the right to transfer its shares

Limits the number of its members to fifty.

Prohibits an invitation to the public to subscribe to

any shares in or the debentures of the company.

Prohibits any invitation or acceptance of deposits

from persons other than its members, directors or

their relatives

Some of the privileges of a private

limited company Minimum number is members is 2 (7 in case of public

companies)

Prospectus or statement in lieu of prospectus does not apply.

Restriction contained in Section 81 related to the rights issues of share capital does not apply.

A private company does not need a separate certificate of commencement of business.

contd…

Provisions of Section 165 relating to statutory meeting and

submission of statutory report does not apply.

no person other than the member of the company concerned

shall be entitled to inspect or obtain the copies of profit and

loss account of that company.

Minimum number of directors is only two. (3 in case of a

public company)

Government Companies

A Government company means any company in which not

less than 51% of the paid up share capital is held by the

Central Government or any State Government or partly

by the Central Government and partly by the one or

more State Governments and includes a company

which is a subsidiary of a government company.

…contd.

The Central Government may direct that certain provisions

of the Companies Act shall not apply or shall apply only with

such exceptions, modifications and adaptations as may be

specified to such government companies.

Foreign Companies

Foreign Company, means a company

incorporated in a country outside India under the

law of that other country and has established the

place of business in India.

Formation of a Company

Any seven or more persons associated for any lawful

purpose may form an incorporated company, by

subscribing their name to the memorandum of

association, and submitting certain documents

with the registrar of companies

Steps in formation of a company

Promotion

Incorporation / Registration

Capital Subscription

Commencement of Business

Promotion of a company

Promotion refers to the entire process by which a

company is brought into existence.

It starts with the conceptualization of the birth a

company and determination of the purpose for which it is

to be formed.

The persons who conceive the company and invest the

initial funds are known as the promoters of the company.

…contd.

The promoters enter into preliminary contracts with

vendors and make arrangements for the preparation,

advertisement and the circulation of prospectus and

placement of capital.

Pre incorporation and provisional

contracts

A pre incorporation contract never binds a company since a

person cannot contract before its existence.

Provisional contracts are contracts entered into by public

company after obtaining the certificate of incorporation,

but before getting the certificate to commence business.

Such contracts are not binding on the company until the

company is entitled to commence business.

Incorporation /Registration

The promoters must make a decision regarding the

type of company i.e. a public company or a private

company and accordingly prepare the documents

for incorporation of the company.

Memorandum and Articles of Association (MA &

AA) are crucial documents to be prepared.

Memorandum of Association

Memorandum of Association of a company is the

constitution or charter of the company and

contains the powers of the company.

No company can be registered under the Companies Act,

1956, without the memorandum of association.

The memorandum of association should be in any of the one

form specified in the tables B,C,D and E of Schedule 1 to

the Companies Act, 1956.

Schedule 1 to the Companies Act

Form in Table B is applicable in case of companies limited

by the shares , form in Table C is applicable to the

companies limited by guarantee and not having share

capital, form in Table D is applicable to company limited

by guarantee and having a share capital whereas form in

table E is applicable to unlimited companies.

Purpose and Importance of MoA

It is a fundamental document

It is an unalterable document

It defines the limitation of the company’s

operations

It form the basis of relationship

It contains clauses that give important

information about the company

Contents of Memorandum :

Name clause

Domicile clause- Place or Location

Objects clause

Liability clause

Capital clause

Association clause

Name Clause

The name must not be undesirable in the opinion of the

Central Government (Section 20)

The name must not be prohibited under Emblems and Name

(Prevention of Improper Use) Act, 1950

The name must end with words Limited or Private Limited.

A license may be granted by the central government by which,

it shall not be necessary for a body to which a license is so

granted to use the word limited or the words private limited

as a part of its name

The name of the company must be presented and published.

Situation Clause

This clause describes the address, city and state in

which the company’s registered office will be

located. On the basis of this information only it is

possible to establish the domicile of the company

and determine its nationality and the local laws

that will govern its operations.

Object Clause

Object should not be

Immoral

Illegal

Opposed to Public Policy

Violation of Indian Companies Act

Doctrine of the ultra-vires

Any transaction which is outside the scope of the

powers specified in the objects clause of the

Memorandum is ultra-vires the company and therefore

void.

No rights and liabilities on the part of the company

arise out of such transactions and it is a nullity even if

every member agrees to it.

Consequences of an ultra vires

transactions

The company cannot sue any person for enforcement

of any of its rights under such transactions.

No person can sue the company for enforcement of

its/his rights under an ultra vires transaction.

The directors of the company may be held

personally liable to outsiders for an ultra vires

action.

Doctrine of ultra-vires does not apply

If an act is ultra-vires of powers the directors, but intra-vires of company.

If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum.

If an act is within the powers of the company but is irregularly done, consent of the shareholders will validate it.

The lender of the money to a company under the ultra-vires contract has a right to make directors personally liable.

Articles of Association

The Articles of Association (AA) contain the rules and regulations for

internal management

The AA is a contract between the company and its members and also

between the members themselves.

It specifies the rights and duties of the members and directors.

The provisions of the A A must not be in conflict with the provisions

of the MA. In case such a conflict arises, the MA will prevail.

The model AA

Normally, every company has its own AA. if a company does not have its own AA, the

model AA specified in Schedule I -Table A will apply.The articles of association should be in any of

the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956.

Schedule I - Table A

Form in Table B is applicable in case of companies limited by the shares ,

form in Table C is applicable to the companies limited by guarantee and not having share capital,

form in Table D is applicable to company limited by guarantee and having a share capital whereas

form in table E is applicable to unlimited companies.

A private company must have its own AA.

Doctrine of ‘Constructive Notice’

The Memorandum and Articles when registered become

public documents and they can be inspected by anyone on

payment of a nominal fee.

Every person dealing with the company is presumed to have

read these documents and understood them in their true

perspective.

This is known as ‘Doctrine of Constructive Notice’.

Doctrine of Indoor Management

The doctrine of indoor management allows all those who deal

with the company to assume that the provisions of the articles

have been observed by the officers of the company.

An outsider is not expected to see that the company carries out

the internal regulations.

Exceptions to the Doctrine of

Indoor management

Knowledge of irregularity

No knowledge of the Articles.

Void or illegal transactions.

Registration of a Company

The following documents must be filed

The MA & AA vetted, stamped and signed.

Proposed agreement, if any, for appointment as its managing director.

A statutory declaration in Form 1

Written consent of directors in Form 29 to agree to act as directors

The complete address of the registered office of the company in Form 18

Details of the directors, managing director and manager of the company in Form 32.

Certificate of Incorporation

Once all the above documents have been filed and they are found to be in order, the Registrar of Companies will issue Certificate of Incorporation.

This document is the birth certificate of the company and is proof of the existence of the company.

Once, this certificate is issued, the company cannot cease its existence unless it is dissolved by order of the Court.

Commencement of Business

A private company is exempted from obtaining a certificate to commence business.

When a company has issued a prospectus, it shall not commence business unless; shares up to minimum subscription have been allotted; every director has paid to the company on each of the shares taken by him; permission for shares to be dealt in on any stock exchange ; and a duly verified declaration is filed with the Registrar.

End of the Session