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Unit 4
Companies Act, 1956:
Steps and procedure for incorporation ofthe company,
Company ManagementAppointment of Directors,
Powers, duties, & liabilities of Directors,
Company Meetings,Resolutions,
Winding-up of a Company.
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NATURE OF COMPANY
A voluntary association ofpersons.
It is an artificial person created by law.
It has a perpetual successionand common seal.
An artificial person has nobody or soul.
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A company means a group of persons associatedtogether for the attainment of a common end, social or
economic. The term Registered Company means a company
incorporated under Companies Act 1956 or someearlier Companies Acts.
Companies incorporated under the companies act 1956are mostly business companies but they may also beformed for promoting art, charity, research, religion,commerce or any other useful purpose.
The laws relating to companies in India is contained inthe Companies Act 1956.
latest amendment to the act was made in 2006
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It is a voluntary association of persons.
It has capital divisible into parts, known as shares.
It is an artificial person created by a process of law.
It has perpetual succession and a common seal.
An artificial person has no body or soul
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CHARACTERISTICS OF A COMPANY
Separate legal entity. - e.g. ram & co ltd
Limited liability. - Co ltd by shares/ guarantee.
Perpetual succession.
Common seal.
Transferability of shares.
Separate property.
Capacity to sue.
Incorporation
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Separate legal entity. - e.g. ram & co ltd Salomon V Salomon Co ltd.
Limited liability. Co ltd by shares/ guarantee.
Perpetual succession. Common seal.
Since a company has no physical existence, it must actthrough its agents and all such contracts entered into by itsagents must be under the seal of the company.
The common seal acts as official signature of the company.
Transferability of shares. The capital of the company is divided into parts called shares These shares are free transferable subject to certain
conditions Separate property. Capacity to sue. Incorporation
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DIFFERENTIATION BETWEEN COMPANY AND
PARTNERSHIPPoint of difference Company Partnership
Regulating Act Companies Act 1956 Partnership Act 1932
Mode of creation After registration it exists Registration is notcompulsory
Legal Status Members of company are notpersonally liable for its contractsdebts of wrongs
They are personally liable
The property and rights of acompany are vested in it so thatit is never necessary to transferits assets when there is a changein its membership
The property and rights ofa partnership are vested inits members so that on 1change in its membershipits assets must betransferred to a newpartners
The property of companybelongs to the company and notto its members or share holders
The property ofpartnership firm is jointproperty of partners
Company continues to exists Partnership comes to an
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Point of difference Company Partnership
Liability ofmembers
The liability of members of acompany to contribute towardssatisfaction of companies debtand liabilities is limited
Partners are liable withoutlimit to contributetowards payment ofpartnership debts and
liabilities
Management Affair of companies are managedby directors , managing directors, managers and its members haveno right to take part in
management
Every member ofpartnership firm may takepart in its managementunless a partnership
agreement is providedTransferability ofinterest
Shares of a company are freelytransferable unless its articlesotherwise provide
Partner cannot transferhis share without consentof other partners
Authority of
members
Share holder is not an agent of a
company and has no power tobind the company by his Act
Each partner is an agent
of partnership firm tomake contracts and incurliabilities
Powers Companies powers are limitedto those allowed by the objects,clause in its memorandum
association
Partnership firm can doanything which thepartners agree to do and
there is no limit to itsactivities
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Point of difference Company Partnership
Insolvency of firmand winding up ofcompany
The winding up of an insolventcompany does not make themembers insolvent
Insolvency meansinsolvency of all thepartners
Number ofmembers Minprivate co 2Public ltd co -7Maxprivate co 50Public ltd co no limit
Min-2Max 10 in banking andany other business 20
Maintenance ofbooks
A company is bound by law tomaintain books of account andhave its accounts auditedannually by qualified auditors.
There is no such statutoryprovision in the case of apartnership firm
Dissolution A company has perpetual
successionIt comes to end only when it iswound up according to theprovisions of the Companies Act1956
Unless a partnership is
entered into for a fixedperiod , it may bedissolved at anytime byany partnerPartnership will bedissolved by the death or
insolvency of the partner
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KINDS/TYPES/CLASSIFICATION OFCOMPANIES
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1. ON BASIS OF INCORPORATION
Statutorycompanies.
Registeredcompanies.
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STATUTORY COMPANIES
They are companies which are formed and registeredunder the companies act 1956
REGISTERED COMPANIES
They are created by a special act of legislature e.g.:
RBI,SBI, LIC These are mostly concerned with public utilities like
railways , gas & electricity companies and enterprisesof national importance.
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2. ON THE BASIS OF LIABILITY
Companies limitedwith limited liability.
[sec 45]
Companieslimited by
shares.
Companieslimited byguarantee.
Companies withunlimited liability [sec
12 (2)]
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3. ON THE BASIS OF NO OF MEMBERS
Privatecompany[sec3(1)]
Min capital 100000
Restriction of right to transfer its shares
Limits no of members - 50
Public company
Min capital
500000 Limits no of members no restriction
DISTINCTION BETWEEN PUBLIC
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DISTINCTION BETWEEN PUBLIC
COMPANY AND PRIVATE COMPANY
MINIMUMCAPITAL
PRIVATE - 100000 PUBLIC - 500000
MIN NO
PRIVATE - 2 PUBLIC 7
MAX NO
PRIVATE not exceed 50
PUBLIC no restriction
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No ofdirectors
Sec 266
PRIVATE - 2
PUBLIC - 3
Restriction on
appointment of directors
PUBLIC consent must be filed with registrar
PRIVATE not necessary
Restriction on
invitation topublic
PUBLIC can invite general public topurchase its shares/debentures
PRIVATE prohibits such invitation
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TRANSFERABILITY
PRIVATE -restricted
PUBLIC freely transferable sec 82S
SPECIALPRIVILEGES
PRIVATE enjoys some privileges
PUBLIC no such
MANAGERIALREMUNERATION
PRIVATE - No restriction PUBLIC cannot exceed 11% of net profits.
Sec 198
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4.ON BASIS OF CONTROL
HOLDING COMPANYSEC 4(4)
SUBSIDARY COMPANY-
CO CONTROLLING BOARDOF DIRECTORS
HOLDING MAJORITY OFSHARES
SUBSIDARY IF ANOTHERSUBSIDARY
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5.ON THE BASIS OF OWNERSHIP
GOVERNMENT COMPAY
THE CENTRAL GOVERNMENT
STATE GOVERNMENT PARTLY STATE/CENTRAL
NON GOVERNMENTCOMPANY SEC591
FORMATION OF A COMPANY
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FORMATION OF A COMPANY
MCA- 21 ELECTRONIC FILING OF FORMS
SEC 610B: PROVISION ARE RELATING TOFILING OF APPLICATIONS, DOCUMENTS,
INSPECTION ETC, THROUGH ELECTRONIC
FORM
SEC 610 C: POWER TO MODIFY ACT IN
RELATION TO ELECTRONIC RECORDS
SEC 610 D: PROVIDING OF VALUE ADDED
SERVICES THROUGH ELECTRONIC FORM SEC 610 E: APPLICATION OF PROVISIONS OF
INFORMATION TECHNOLOGY ACT 2000
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MCA- 21 ELECTRONIC FILING OF
FORMS The following are the nine matters are covered under MCA-
21 project since 15-09-20061. Registration & incorporation of new companies
2. Filing of annual returns & balance sheets
3. Filing of forms for change of name/address/directorsdetails
4. Registration, modification & verification of charges
5. Inspection of documents
6. Issue of certified copies
7. Application for permissions required under variousprovisions of company law
8. Approval from central government, regional director
9. Investor grievance redressal.
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FORMATION OF A COMPANY
MODE OF FORMING INCORPORATED COMPANY:
2/7 MEMBERS ASSOCIATED FOR ANY LAWFUL PURPOSE
THEY SHALL SUBSCRIBE THEIR NAMES TOMEMORANDUM OF ASSOCIATIONS.
DOCUMENTS FILLED WITH THE REGISTRAR
BEFORE REGISTRATION - NAME OF THE COMPANY
MUST BE APPROVED
THE FOLLOWING DOC MUST BE DULY STAMPED WITH
NECESSARY FEES TO BE FILED WITH REGISTRAR
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DOCUMENTS FILLED WITH THE REGISTRAR
MEMORANDUM OF ASSOCIATION SIGNED BYSUBSCRIBERS
ARTICLES OF ASSOCIATION
AGREEMENT Sec 33(1)
LIST OF DIRECTORS sec 266
DECLARATION STATING THE REQUIREMENTS OF COSACT
SUCH DECLARATION MUST BE SIGNED BY any one Advocate of supreme court or high court
An attorney to appear before high court A person named as director ,manager , secretary in AA
When these documents are filed with registrar, the registrar shall
satisfy himself that the statutory requirements regardingregistration have been duly compiled with.
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A certificate of incorporation given by the registrar inrespect of a company is conclusive evidence that allthe requirements of the companies act have been
compiled with in respect of registration. This is known as Rule in peels case
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EFFECTS OF REGISTRATION
The company becomes a separate legal entity. Its life
starts from the date mentioned in the certificate ofincorporation
The company acquires aperpetual succession.
The company's property is not the property of the shareholders
PROMOTERA promoter is a person who does the necessary
preliminary work i.e. incidental to formation of company It is fiduciary relationship/position
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MEMORANDUM OF ASSOCIATION
It is a document that containsfundamental conditions
upon which company is allowed to be incorporated. It is the charter of the company and defines its raisondetre( i.e. reason for existence)
It lays down the area of operation of the company.
It regulates the external affairs of the company inrelation to the outsiders.
Its purpose is to enable shareholders and those who
deals with the company to know what its permittedrange of enterprise is.
It tells about the objectives of the company and alsoabout scope of the company
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PURPOSE OF MEMORANDUM
The purpose of memorandum is two fold
1. The shareholders shall know the field in or the purposefor which their money is used for and what risk they areundertaking in making investment.
2. The outsiders dealing with the company shall know with
certainty as to what the objectives of the company are
PRINTING AND SIGNING OF MEMORANDUM
Printed Divided into paragraphs numbered consecutively
Signed by 7 (2in case of a private ) subscribers.
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CONTENTS OF MEMORANDUM SEC13
The memorandum of every company shall contain thefollowing clauses1. The name with limited incase of public limited company
andprivate limitedin case of private limited company.
2. The state in which the registered office of the company is to
be situate3. The objects of the company
4. In case of companies with objects not confined to one state,the states to whose territories the objects extend
5. Limited liability
6. Share capitalThe memorandum shall conclude with a association
clause which states that the subscribers desire to form acompany and agree to take hares in it.
These clauses are ..
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The Name clause Sec201. Undesirable name should be avoided (central government)
Too similar name
Misleading2. Injunction if identical name adopted
3. Limited or private limited as the last word or words in the name
4. Prohibition of use of certain names
5. Use of some key words according to authorized capital
The registered office clause sec 146: Every company shall havea registered office from the day it begins to carry on business orfrom 30th day after its date of incorporation
The objects clause 13/1: It defines and confines scope of acompanies power and once registered it can be altered only as
provided by the act The capital clause 13/4: In capital clause it contains amount of
share capital and its division of share of fixed amount. Acompany cannot issue more shares than authorized for timebeing by the memorandum
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The liability clause 13/2: The members can be calledonly upon to pay the company at any time the uncalled
or unpaid amount on the shares held by them or up tothe maximum of the amount which they haveguaranteed.
The association clause 13/4: This clause states: We
the several persons whose names and addresses aresubscribed are desirous are being formed into acompany and we respectively agree to take the numberof shares in the capital of company set opposite our
respective names This is followed by the nameaddresses and description of the subscribers and thenumber of shares taken by the each one of them andshould be signed by them.
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Alteration of Memorandum
Change of name-
By special resolution( sec 21) : A company canchange its change by special resolution and with aapproval of central Government signified in writingbut change of name just involves the deletion oraddition of word private. On conversion of public
into Private or vice versa does not require approval By Ordinary Resolution(sec 22): Some times in the
opinion of central Government some companyname is identical or too nearly resembles the name
of an existing company in such a case May change its name with previous approval of centralGovt.
Shall change its name if central Govt. so directs within 12months of its registration
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Change of Registered Office-This may involveChange of registered office from one jurisdiction of ROC
to Jurisdiction of another ROC within a state-sec17a It can change if it is confirmed by regional director Confirmation shall be communicated to the company within
four weeks
Company will then file with the registrar if certified copy ofconfirmation by regional director Within 2 months from the
date of confirmation along with altered memorandum Registrar will register the same within one month from the
date of filing of such document
Change of registered office from one state to other-sec17 It can do so by special resolution
Alteration of Objects -sec17 A power of alteration of objects is subject to two limits
1. Physical limit sec171
2. Procedural limit
D i f Ul Vi
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Doctrine of Ultra ViresA Company has power to do all such things
Authorized under companies act 1956 Essential to attainment of its objectives specified in
memorandum
Reasonably and fairly incidental to its objects
Anything else ultra vires the company Ultra means beyondVires means Power
Purpose-
To protect Investors in the company so that they know the
purpose of their investment.
To protect creditors by ensuring that the company's fundsare not wasted in unauthorized activities.
ULTRA VIRES ACT IS VOID
ARTICLES OF ASSOCIATION
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ARTICLES OF ASSOCIATION
They are the rules, regulations and bye-laws for the internalmanagement of the affairs of a company.
They are framed with the object of carrying out the aims andobjects as set out in the memorandum of associations .
It contains fundamental conditions. Companies must have their own articles sec26
Private companies limited by shares Unlimited companies
Co limited by guatantee Public limited company may have , if it doesnt have it can
adopt Table A given in Schedule I to the act.
CONTENTS OF ARTICLES
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CONTENTS OF ARTICLES
Share capital, rights of shareholders, variation of these
rights, payment of commissions, share certificates. Lien on shares : lien is a form ofsecurity interest granted over
an item of property to secure the payment of a debt or performanceof some other obligation. The owner of the property, who grants thelien, is referred to as the lienor and the person who has the benefitof the lien is referred to as the lienee.
Calls on shares
Transfer of shares
Transmission of shares
Forfeiture of shares: Share forfeiture is the process by whichthe directors of a company cancel the power ofshare holderif hedoes not pay his call moneywhen the company demands for it.Company will give 14 days notice, after 14 days if shareholderdid not pay then company will forfeit his shares and cut off his
name from the register of shareholder.
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Conversion shares into stock
Share warrants
Alteration of capital
General meetings and proceedings
Voting rights of members, voting and poll, proxies
Directors, their appointment, remuneration,qualifications, powers and proceedings of board ofdirectors
Manager
Secretary
Dividends and reservesAccounts, audit and borrowing powers
Capitalization of profits
Winding up
ALTERATION OF ARTICLES
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ALTERATION OF ARTICLES
Sec 31 by passing a special resolution alter its article at
any timeA copy of this must be filed with the registrar within
30 days of its passing
Limitations Must not be inconsistent Must not conflict with the memorandum
Must not sanction any thing illegal
Must be for the benefit of the company
Must not increase the liability of the members Approval from central govt in case of public co
converted to private
Breach of contract
DISTINCTION BETWEEN ARTICLES AND
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DISTINCTION BETWEEN ARTICLES AND
MEMORANDUM
Memorandum ofassociation Articles of association
It is charter of the company indicatingthe nature of its business, itsnationality and its capital . It also
defines the co r/s with outside world
They are regulations for internalmanagement
It defines scope of activities They are rules for carrying out objectsof co as set in memorandum
It is supreme document They are subordinate to memorandum
Every company must have its own
memorandum
A public company limited by shares
need not have they can follow table AThere are strict restrictions on itsalteration
They can be altered by specialresolution
Lega e ect o memoran um an
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Lega e ect o memoran um anits articles
Members to a company Company to the members
Members inter se ( among themselves)
Company to outsiders
PROSPECTUS
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PROSPECTUS In order to finance its activities, a company needs capital
which is raised by a public company by the issue of aprospectus inviting deposits or offers for shares anddebentures from the public.
A private company is prohibited from making anyinvitation to public . Hence it need not issue a
prospectus. Sec 2(36) defines a prospectus as any document
described or issued as a prospectus and includes anynotice, circular, advertisements or other document
inviting deposits from the public or inviting offers fromthe public for the subscription or purchase of any sharesin, or debentures of a body corporate
It must be in writing
It must be an invitation to public
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MEMBERS AND SHAREHOLDERS
They are the persons who collectively constitute thecompany as a corporate entity.
The terms members, share holder and holder of a shareare used interchangeably.
They are synonymous in case ofcompany limited byshares, a company limited by guarantee
In case of an unlimited company a member may not be ashareholder, for such company may not have a share
capital.
Distinction between member and
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Distinction between member and
share holder
Share holder MemberA registered share holder is amember
A registered member may notbe a share holder because thecompany may not have a
share capital.A person who owns bearershare warrant is a shareholderbut he is not the member
A person can be a holder ofshares without being amember
A shareholder even thoughhis name does not appear inthe register of members
A legal representative of adeceased member is not amember until he applies forregistration.
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Who can become a member?
Minor
InsolventForeigner
How to become a member?
Membership by subscription
Membership by application and registration Rights and liabilities of members
Statutory rights : next slide
Documentary rights: these are the rights given tomembers by the memorandum and the articles ofassociation
Legal rights : by general law
STATUTORY RIGHTS
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STATUTORY RIGHTS
Right to obtain copies of the memorandum and thearticles on request on payment of prescribed fees (Sec 39)
Right to transfer shares (Sec82)
Liability of member
Company with unlimited liability
Co limited by shares
Co limited by guarantee
SHARE CAPITAL
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SHARE CAPITAL
It means the capital raised by the company by the issue
of shares Authorized or nominal capital
Issued and subscribed capital
Called-up capital
Paid-up capital Uncalled capital
Reserve capital
Kinds
Equity shares Preference share capital