company law 1956 final

8/3/2019 Company Law 1956 Final

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Introduction:-Company law in India owea its origin to the English Company Law. Companies Act passed in

India have followed the English Companies Act from time to time with certain modification.

In India the first Company Law legislation passed was Joint Stock Companies Act, 1850 which

was based on English Joint Stock Companies Act 1844.

In 1913, the India companies act was passed by following the English companies

(consolidation)act 1908.several amendments were made in this act, as it was found to be highly

unsatisfactory.

In 1956, Indian companies act 1956 was passed, which was modeled on the English companies

act 1948.

The provisions of the Indian companies act 1956 were incorporated on the recommendation of

Bhalsa Committee constituted by the government of India, to look into the working of the

company law and to suggest appropriate changes and amendments.

The present companies act is a complete code, covering the entire field of company organization

and management. It has been amended several times to keep pace with the changing business

scenario and to meet the new challenges. Some of the important amendments took place in the

year 1960,1963,1965,1969,1972,1974,1977,1985,1988,1996,197,1999,2000,2001,and2002.

The law, relating to companies in India is contained in the companies act 1956.the main object ofthe companies act,1956 is:

To encourage investment. To ensure proper administration. To prevent malprectices. To allow for investigation.

The present chapter deals with important section of part IV, V, and part VI the act.


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Characteristics ofa company:- Types of companies

Most companies fall into two categories, depending on the type of liability that can be

imposed on the owners:

y A company limited by shares, limits the liability of shareholders to the value of theirshares. This structure is suitable for most trading businesses and can be a private

company or a public company

y A company limited by guarantee, most often used by non-trading organisations, forexample, sporting clubs.

The pros and consAdvantages of a company include :

y it is a separate legal entity from the owners;y you can own property in the name of the company;y there is usually limited liability for the shareholders (unless they have given a personal

guarantee);

y you may be able to take advantage of tax minimisation schemes (legal ones, of course!);y it can be owned and operated by only one shareholder and director;y it may make it easier to attract capital investment because of shareholders' limited

liability.

Possible disadvantages include:

y they can be complicated and expensive to establish and administer if it is a "largecompany";

y if you are not a sole shareholder, the shares may be difficult to sell;y if you have only a minority shareholding you may be allowed little or no input into the

affairs of the company;

y you will only be able to leave the shares in the company to your beneficiaries under yourwill, not the assets of the company separately; and

ythey require expensive procedures to comply with reporting regulations.


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Is liability always limited?No, there are types of structures that do not provide limited liability for owners, but they are

unusual and we will not look at them here.

However, even in companies limited by shares it is possible for owners to be exposed to

personal liability. For example:

y a bank may require a personal guarantee against loans or overdrafts; ory sometimes a director can be held personally responsible for actions that are clearly

beyond the ability of the company to pay.

ShareholdersShares can either be available to the general public or the private owners. If the shares are

available to the public it is called a "public" company. If the shares are available to private

owners it is called a private (proprietary) company. We will deal solely with private

companies.

Private companiesThe Corporations Act makes the procedures for small companies a lot easier than they used

to be.

A company will also have:

y the words "Proprietary Limited" (Pty. Ltd.) after its name;y a unique Australian Company Number (ACN) that will be included in most company

literature and business documents, e.g. invoices, receipts, business letterhead, cheques

etc;y a common seal (i.e. a stamp) which contains the company name and other identifying

details, e.g. the ACN (it is no longer compulsory to have a common seal);

y a registered office, although this doesn't have to be the place of business, in fact it is oftenthe address of an accountant or lawyer. However, under the law, companies are required

to notify the ASIC of changes in the company's place of business where that place is

different from the registered office.


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Shelf companiesShelf companies are "sold" by services that simultaneously register a number of companies

and then sell them "off the shelf". They suit people who have straightforward requirements

for their company structure.

Starting a private companyYou must:

y choose a name for the company and ensure the name is acceptable for registration, e.g. itis not identical to another name or otherwise unacceptable (e.g. it cannot be the same as a

pre-existing name). This can be checked with the ASIC. Remember, this refers only to

the corporate name - if the company operates in the public under a different business

name, that name must be registered with the Office of Fair Trading;

y reserve the company name. It will be reserved for two months. Otherwise you can applyto use the name at the time you register, but remember it may already have been taken;

y decide on the names of members, directors and the secretary of the company - thesepeople must agree to taking on theses roles. A company must have at least one company

secretary who may also be a director and member - the secretary has responsibility for

record-keeping including registers required by Corporations Law and minutes of

meetings. Changes to appointments and changes of addresses of directors must be

supplied to the ASIC within 14 days of the change;

y decide where the registered office will be;y lodge the application with any ASIC Business Centre or with the Local ASIC

Representative

y notify the ASIC of certain changes to the business practices of the company e.g. changesto the registered office, operating hours, company name, substantial transfers of

shareholdings;

y lodge annual returns with the ASIC if this is needed (this is not always the case for asmall private companies);

y keep company books and records.

Remember, unless a court agrees, you cannot be a company director if:

y you are declared bankrupt and have not been discharged; ory you have been convicted of certain offences connected with the management of a

company, a serious fraud, or certain other offences to do with the breach of duties of

directors and insolvent trading. Usually you are barred for five years after the conviction.


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FormsYou can get the ASIC forms from ASA Business & Management Services.

ConstitutionsCompanies no longer require a memorandum and articles of association. Instead they may:

y have a set of rules called a "constitution", which sets out the objects of the company. Itdoes not have to be lodged with the application for registration but must to be kept with

the company's records; or

y depend on the rules of internal management - these are called "replaceable rules" becausethey can be replaced in whole or part by a constitution. The replaceable rules do not

apply to private companies with a single member who is also the sole director.

Annual returnsAll companies must lodge an annual return with the ASIC not later than January 3


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Capital structure:-In finance, capital structure refers to the way a corporation finances its assets through some

combination of equity, debt, or hybrid securities. A firm's capital structure is then the

composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and$80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of

debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality,

capital structure may be highly complex and include dozens of sources. Gearing Ratio is the

proportion of the capital employed of the firm which come from outside of the business finance,

e.g. by taking a short term loan etc.

The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the

basis for modern thinking on capital structure, though it is generally viewed as a purely

theoretical result since it disregards many important factors in the capital structure decision. The

theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. Thisresult provides the base with which to examine real world reasons why capital structure is

relevant, that is, a company's value is affected by the capital structure it employs. Some other

reasons include bankruptcy costs, agency costs, taxes, and information asymmetry. This analysis

can then be extended to look at whether there is in fact an optimal capital structure: the one

which maximizes the value of the firm.


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Capital structure in a perfect market:-Consider a perfect capital market (no transaction or bankruptcy costs; perfect information); firms

and individuals can borrow at the same interest rate; no taxes; and investment decisions aren't

affected by financing decisions. Modigliani and Miller made two findings under theseconditions. Their first 'proposition' was that the value of a company is independent of its capital

structure. Their second 'proposition' stated that the cost of equity for a leveraged firm is equal to

the cost of equity for an unleveraged firm, plus an added premium for financial risk. That is, as

leverage increases, while the burden of individual risks is shifted between different investor

classes, total risk is conserved and hence no extra value created.

Their analysis was extended to include the effect of taxes and risky debt. Under a classical tax

system, the tax deductibility of interest makes debt financing valuable; that is, the cost of capital

decreases as the proportion of debt in the capital structure increases. The optimal structure, then

would be to have virtually no equity at all.

Capital structure in the real world:-If capital structure is irrelevant in a perfect market, then imperfections which exist in the real

world must be the cause of its relevance. The theories below try to address some of these

imperfections, by relaxing assumptions made in the M&M model


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Formation or incorporation ofACompany:-


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Formation or incorporation of A Company For the formation of acompany, a company passes through the following thee stages :-

Promotion Stage Incorporation Stage Raising of Capital (Capital Subscription) Commencement of business stage

Promotion Stage:-The stage of conceiving an idea and its working is termed as promotion of a company. The

person involved in this task is termed as Promoter. There are certain important decisions which

are taken before the formation of the company. There first important matter to decide could be

either :-

(1)To start a new business altogether, or(2)To acquire an alreadyrunning business, if it is available at considerable attractive terms

and conditions. Some time it does happen that some people may start a business without

having sufficient knowledge or sufficient experience or sufficient funds and later on they

decide to dispose of that business to avoid huge losses. In such a case it may be better to

acquire a running business with favorable terms and conditions and it may prove to be a

good decision

The other important matters be decided before the formation of the company could be the

decision regarding the product to be produced, the size of the company, the capital involved

in the project, the sources of the capital and whether it shall be a Private Company or a

Public Company.

Any of the above decisions i.e., to start a new business altogether or to acquire an already

running business, along with the other matters shall have to be taken by some person orpersons who are at the helm of the affairs. They are called PROMOTERS

Where it has been decided to form a Private Company 2 persons and where it has been

decided to form a Public Company at least 7 persons shall subscribe their names to a

Memorandum of Association and they shall also comply with the other formalities in respect

of the registration of the company under the Indian Companies Act, 1956.


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Document to be filed with the Registrar: It is desirable to ascertain from the Registrar

(Registrar of the State in which the Registered office of the company shall be situated) of the

companies that whether the proposed name of the company shall be approved if registration

is sought for a new company with such name.

Where already a company with such name is existing, it shall not be allowed by the

Registrar, because tow companies with the similar name cannot be registered.

But if he says yes, because no other company is registered with that name, an application for

the registration of the company should be presented to the Registrar of the State in which the

Registered office of the company shall be situated. The appl9ication along with necessary fee

shall be presented along with the following documents :

(1)The Memorandum ofAssociation.(2) The Articles ofAssociation, if any which should be signed by the subscribers to the

Memorandum of Association.

(3) Any agreement with the individual persons who are proposed to e appointed asManagers, Directors or Managing Director of the company.

(4) A statement of the nominal capital of the Company.(5)A notice of address of the registered office of the company.(6) A list of the Directors who have agreed to become the first Directors of the company

along with their consent to act as Directors and to take up the qualification shares of the

company in the case of a public company.(7) A declaration that all the requirements of the Companies Act have been complied with,shall also be submitted, which shall be signed by one nay of the following persons :

(i) An advocate of the Supreme Court or High Court, or(ii) An attorney or a pleader entitled to appear before a High Court, or(iii) A Secretary or a Chartered Accountant in whole time practice in India, who

is engaged in the formation of the company, or

(iv) A person named in the Articles as a Directors, Manager or Secretary of thecompany.

Where the Registrar ofCompanies is satisfied that all the requirement have been complied

with, he will register the company and enter the name of the company in the Register of

Companie


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Commencement of Business:-A public company having a share capital and issuing a prospectus will have to file the following

documents with the Registrar of Companies to secure the 'Certificate of Commencement of

Business'.

The declaration that the shares payable in cash have been allotted upto the amount of minimum

subscription.

The declaration that every director has paid in cash the application and allotment money on the

shares in the same proportion as others.

The declaration that no money is liable to become refundable to the applicant by reasons of

failure to apply for or to obtain the permission for shares or debentures to be dealt in on any

recognised stock exchange.

The statutory declaration by the Secretary or one of the directors that all the requirements have

been duly complied.

The Registrar will scrutinise the documents and if he is satisfied, then he will issue the certificate

of commencement of business. After getting this certificate the public company is entitled to

commence business from the date of issue of the certificate. The public company which has not

issued a prospectus can submit the declaration immediately after the statement in lieu of

prospectus is filed and other conditions have been fulfilled.


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steps to Register aCompany in India:-The steps of registering a company in Indiaare as under:

Step 1

Acquire director identification number (DIN) by filling Form DIN-1. The temporary DIN is

immediately issued which must then be printed, signed and sent to RoC for its consent along

with the identity and address proofs.

The Identity Proof should contain any one of the following:

y PAN Cardy Driving Licensey

Passporty Voter Id Card

The Residence Proof should contain any one of the following:

y Driving Licensey Passporty Voter Id Cardy Telephone Billy Ration Cardy Electricity Billy Bank Statemen

Step 2

Acquire digital signature certificate. This certificate can be acquired from any one of the six

private bureaus sanctioned by MCA 21. Director of the company is required to submit therecommended application form along with the identity and residence proof.


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Step 3

To attain name of the Company, Form No. 1A should be filled citing the address of the

Registered Office of the projected firm along with the signature of one of the promoters. A

maximum of 6 proposed names can be presented which are verified by RoC staff for any

resemblance with other company names in India. This process takes two days for attaining

consent of the name

Step 4

Arrange for stamping of the Memorandum and Articles with the appropriate stamp duty. The

price of stamp duty differs from state to state.Stamp duty need to paid online.

The documents should be signed by the firms promoters after the MOA and AOA have been

stamped. Besides the promoters signature, other information which must be filled in applicants

handwriting is the companys name, description of companys activities and motive, fathers

name, address, occupation and number of shares subscribed.

Step 5

Attain the Certificate of Incorporation from the Registrar of Companies, Ministry of Corporate

Affairs. File e-form 1; e-form 18; and e-form 32 online on the Ministry of Company Affairs

website. Along with these papers, copies of agreement of the original directors and signed and

sealed form of the Memorandum and Article of Association must be enclosed in Form 1.

Step 6

Make a seal (applicable for the private limited companies). Making a company seal is not a legal

obligation for the firm to be integrated, but firms require a seal to deliver share certificates and

other certificates.

Step 7

Attain a Permanent Account Number (PAN) from National Securities Depository Ltd. (NSDL)or the Unit Trust of India (UTI) Investors Services Ltd., as outsourced by the Income Tax

Department. Each person is entitled to state his or her Permanent Account Number (PAN) for the

purpose of tax payment under the Income Tax Act, 1961 and the Tax Account Number (TAN)

for submitting tax reduced at source. One can get PAN application from IT PAN Service Centers

or TIN Facilitation Centers using Form 49A with the acknowledged copy of the certificate of

registration, released by the Registrar of Companies along with the identity and residence proof.


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Conversion ofaPublic Company into aPrivateCompany:-

Under the Companies Act (Section31), all public companies, whether originally incorporated as

a public limited company or at any time converted into a public limited company (under section44 of the Act), may be converted into a private limited company, if the members so desire. The

essential conditions for sucha conversion are:-

y The company must not be listed on any recognised stock exchange. In case of a listedcompany,it will have to wait for atleast one year after its delisting.

y Shareholders' approval by special resolution for alteration of Articles of Association forincorporation of the definition of a private company. The Articles shall be suitably

amended to include the basic restrictions applicable on a private company and other

provisions necessary thereto.

y No resolution amending the Articles, which has the effect of converting a publiccompany into a private company, shall be effective unless it has been approved by the

Central Government.

y After the alteration has been approved, a printed copy of the Article shall be filed withthe Registrar of Companies within one month of the date of receipt of the order of

approval.

y The name of the company shall be amended to include the word 'private' on all itsdocuments.

The Companies Act contains the following procedure for the conversion:-

y Convene a Board meeting for consideration of the proposal of conversion of the companyinto a private company.

y Prepare the proposal for alteration of Articles of Association or prepare a new set ofArticles of Association meeting the requirements of a private limited company.

y Hold the Board meeting and get approval of the Board for the proposal, fix up the day,date and time of holding the general meeting of the company, approve notice and

explanatory statement and authority to sign notice.

y Hold the general meeting on the fixed day and pass the special resolution.y Fill e-Form 23 with the copy of special resolution, explanatory statement and

Memorandum and Articles (before and after alteration).

y Pay the requisite application fee.y Publish a newspaper notice in two widely circulated dailies of the State where the Regd.

Office of the company is situated.

y Get a no objection letter from major unsecured creditors and all secured creditors.y Apply to the Central Government in e-Form 1B.


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Documents to be attached with the application are:-

y Notice of extra-ordinary general meeting.y Minutes of extra-ordinary general meeting.y Copy of special resolution.y Copy of newspaper advertisement.y Affidavit that the company is not listed on any stock exchange.y Reference number, date of passing and date of filing the e-Form 23.y Payment of requisite application fee.y One copy each of the annual reports for the last three financial years.y Copy of the last annual return.y Altered Memorandum and Articles of Association.y No objection letters from major unsecured and all secured creditors supported by an

Affidavit.

y Reasons for conversion.y Terms of appointment of all managerial personnel.y Power of attorney in favour of the authorised representative.

On receipt ofapplication, the Registrar ofCompanies(ROC) shall examine:-

y Whether the interest of the public and particularly that of the creditors will be adverselyaffected.

y Whether the company is listed.y Capital contribution by members.y Whethere-Form 23 has been passed and taken on record.y Whether the reasons for conversion are just and sufficient.y How many members voted for the resolution.y Whether any complaint against the company is pending.y Whether any show cause letter has been issued to the company or its Directors.y If there is any objection from members and creditors.


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If the ROC approves the application, he refers it to Technical Section and Prosecution Section

for their report. The Technical Section reports on whether the relevant e-Form23 and the last

years annual report and annual return has been filed and passed/taken on record. The Prosecution

Section reports on whether any complaint is pending from anybody against the company. If

during the scrutiny any adverse point arises, that has to be looked into and the authorised

representative should take the initiative to make good the default or defect. If the reports are

satisfactory, the ROC will issue a letter granting its approval for conversion of a public company

into a private company. The concerned ROC then issues fresh certificates of incorporation

consequent upon change of name after conversion of the company from 'Public Company' to

'Private Company'.


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Conclusion