Companies Act, 1956

Meaning and Definition of a Company

Section 3(1)(i) of the Companies Act, 1956 defines a company as: a company formed and registered under this Act or an existing Company. Existing Company means a company formed and registered under any of the earlier Company Laws.

Characteristic of a company

Incorporated Association Separate Legal Entity Limited Liability An artificial person Perpetual succession Common seal Separate Name Free Transferability of Shares Number of members Separate Property Capacity to Sue Statutory Requirement Rigidity of objects Raising of Capital on large scale Shareholders are actual owners Separation of ownership and management

Types of Companies

Classification on the basis of liabilityCompanies limited by shares- (Sec 12(2)(a))- limited to the extent of unpaid amount on the shares held. Companies limited by guarantee-(Sec 12(2)(b))- Limited by the memorandum. Unlimited companies- Sec 12 Every member is liable in proportion to their interest.

1.

2.
3.

Classification on the basis of number of members

Private Company Public Company

Private Company [Section

3(1)(iii)]

A private company means a company which has a minimum paid up capital of one lakh rupees or such higher paid-up capital as may be prescribed and by its articles : (a) restricts the right to transfer its shares, if any; (b) limits the number of its members to 50, not including:

Private Company
contd.
(i) persons who are in the employment of the
company, and (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; prohibits invitation to the public to subscribe for any shares in or debentures of, the company; and

(c)

Private Company
contd.
(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

Where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of membership, be treated as a single member.

Public Company [Section 3(1)(iv)]

A public company means a company which: (a) is not a private company [In other words, it should not have the restrictions of Section 3(1)(iii) in its articles ]; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; and (c) is a private company, which a subsidiary of a company, which is not a private company.

Classification on the basis of ownership

Government Company Non Government Company

Classification on the basis of control

Holding Company- Sec 4(4)- A company is deemed to be the holding company of another if but only if that other is its subsidiary. Subsidiary Company-Sec 4(1)- A company is known as the subsidiary of another company when control is exercised by the holding over the subsidiary.

Classification on the basis of jurisdiction of functioning

A National Company Multinational Company Foreign Company

Formation of a company

The whole process of formation of a company may be divided into four stages, namely:
(i) (ii) (iii) (iv) Promotion Registration Floatation/Raising of Capital Commencement of Business.

Promotion

Promoters

The term promoter is a term not of law but of business, usefully summing up, in a single word promotion, a number of business operations familiar to the commercial world by which a company is brought into existence. However, the persons assisting the promoters by acting in a professional capacity do not thereby become promoters themselves.

Legal position of promoters

Promoter stands in a fiduciary position towards the company. In other words, he is not allowed to make secret profits.

Pre incorporation contract

Void-ab-initio.

However, pre-incorporation contracts shall be valid if:

The contract is made for the purpose of the company and the contract is warranted by the terms of incorporation. The company adopts the transactions after incorporation.

Steps to be followed
1.

Application for availability of name:

Three names in order of priority conforming to the provisions of the Act and the Guidelines issued by Department of Company Affairs in this regard:

Name to end with the word(s) Limited or Private Limited, as the case may be, except: (i) Section 25 Companies (ii) Govt. Companies (need not use Pvt. Ltd.) (iii) Producer Companies.

Name should not be identical or too similar to the name of an already existing company. Should not include the name of a registered trade mark.

Preparation of Memorandum and Articles of Association

Memorandum defines and limits the scope of activities of a company.

Contents of Memorandum 1.Name clause 2.Registered office clause 3.Object clause

Doctrine of ultra-vires

4.Liability clause 5.Capital clause

3. Preparation of other documents

Power of Attorney in favour of a professional to effect registration. Consent of Directors (in case of a Public Company) Particulars of Directors, Manager, Secretary, etc. in the prescribed form. Notice of registered address

Statutory Declaration

To be supplied within 30 days of incorporation.

To the effect that all requirements of law with respect to incorporation have been duly complied with. The declaration to be signed by:

4. Filing of documents with ROC

Advocate of Supreme Court or High Court; OR C.A../C.S. practising in India and associated with the formation of the company; OR Director, Manager, Secretary of the company (as named in the Articles)

Certificate of incorporation

Effect of Certificate of Incorporation (Section 34)

On incorporation, the association of persons becomes a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound-up as is mentioned in the Act.

Conclusiveness of Certificate of Incorporation (Section 35)

Conclusive to the effect that all requirements of law relating to registration and matters precedent and incidental thereto have been duly complied with.

Provisional Contracts

Contracts entered into by company after incorporation but before getting the certificate to commence business are called provisional contracts. Provisional contracts are, therefore, relevant to public companies only. Such contracts become void, if company fails to obtain certificate to commence business and automatically become valid, and binding if company obtains the certificate.

Raising of Capital

A company may raise capital through

Private placement Issue of Prospectus

Private placement means raising of capital from friends, relatives and through brokers.

Commencement of Business
(Section 149)

Where Company has issued a Prospectus:

a company cannot commence business or exercise borrowing powers unless:

(a) shares up to the amount of the minimum subscription have been allotted by the company; (b) every director of the company has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash,

Commencement of Business
contd.
the same proportion as is payable on application and allotment on the shares, offered for public subscription; (c) no money is, or may become, liable to be repaid to the applicants for shares or debentures offered for public subscription, for failure to obtain permission for the shares to be dealt in on any recognised stock exchange;

Memorandum of Association

Every company has to have a Memorandum of Association. It contains, besides other significant information, the objects for which the company is formed. Object clause defines as well as confines the powers of the company. Anything done beyond these objects is ultra-vires the company and void.

Contents of Memorandum
. Name Clause: It contains the name with
which company is proposed to be registered. Companies Act requires that:

(a) The name chosen should end with the word Limited or the words Private Limited, as the case may be. (b) The name should not be undesirable i.e., it should not be identical or too similar to the name of an already existing company OR include the name of a registered trade mark unless consent of the owner of the trade mark is obtained.

Content of Memorandum
Registered Office Clause:
This clause states the name of the State in which registered office of the company is to be situated.

3. Objects Clause
This clause is to be divided into:
(a) (b)

Main objects and objects incidental or ancillary to main objects Other objects

A company cannot commence any business stated under other objects unless special resolution by the shareholders is passed.

Liability Clause 5. Capital Clause

This clause states the authorised capital and the number of shares into which the same shall be divided.

Article of Association

The articles of association of a company are its bye-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business. The articles regulate the internal management of the company. They define the powers of its officers. They also establish a contract between the company and the members and between the members inter se. This contract governs the ordinary rights and obligations incidental to membership in the company [Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. (1971)].

Companies must have articles

Unlimited Companies:

The Articles of such a company must state:

Total number of members; and Share capital.

Companies limited by Guarantee:

Private Companies limited by shares:

must include requirements of

Articles of such company must state total number of members. Section 3(1)(iii).

No Article Company

A public limited company having share capital may be registered without Articles.

Prospectus

A prospectus, as per Section 2(36), means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of a body corporate. Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things:
(a) It invites subscription to shares or debentures or invites deposits. (b) The aforesaid invitation is made to the public.

What constitutes Invitation to Public

As per Section 67, Invitation to public includes:

invitation to any section of the public
howsoever selected provided the invitation is made to all the members of that section of public indiscriminately. Invitation calculated to be made available even to those who do not receive the same. Invitation to 50 or more persons.

Mis-statement in a Prospectus and its consequences

What is Mis-statement?

According to Section 65(1) of the Act:

(a) a statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included; and (b) where the omission from a prospectus of any matter is calculated to mislead, the prospectus shall be deemed in respect of such omission, to be a prospectus in which an untrue statement is included. Case: Rex v. Kylsant