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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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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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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


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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

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