001 Companies Act Intro

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BY:

Dr. Subhash Gupta


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Short Title and extent.

INTRODUCTION:

This Act may be called the Companies

Act, 1956. It is a Business Law. It is a commercial Law & its roots are seen

in English Company Law. Many provisions

of it are incorporated in this Indian

Companies Act of 1956.


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Applicability of Act

Being a Central Government Act it isapplicable to all the states ofIndiaincluding Union Territories.

The provisions of this Act are applicable toall the class of companies inIndia.

The provisions are also applicable to all

the companies incorporated out ofIndiabut they have established places ofbusiness inIndia.


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Objectives :

To conduct the business smoothly with the

help of limited liabilities & with limited

shares. To serve the community by providing

Quality products & services at reasonable

cost.


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Definition

General Definitions: 1)A Company is aform of business organization in which thefunds of a large number of investors are

managed by a few persons for thepurpose of earning profits which areshared by all the investors.

2)It is an association of persons formed toachieve the commongoal set by theirBoard of Directors.


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As percompanies Act 1956.(Sec3(1)(i))

It means a business organization formedas per the companies Act 1956to achievefollowing objectives

a) To encourage the investors to do theirinvestments.

b) To ensure proper Administration c) To prevent Malpractices

d) To allow for investigation if required.


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Essential Characteristics/Features

of a Company. Registration- Should be registered under

the Companies Act.

Distinct Person- Separate legal entity. Perpetual succession- Never dies.

Easy transfer of shares.

Limited liability. Artificial person but not a citizen.


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Continued

Common Seal.

Capacity to sue and be sued.

Share holders are actual owners ofCompany

Number of persons are as per MOA

Separate Property


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Separation of ownership and Management

Rigidity of objectives

Authority to raise share capital in large scale.

To comply Statutory Requirements on

regular basis

Company is a Corporate Body


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Types of Companies

Companies limitedby guarantee.

RegisteredCompanies

StatutoryCompanies

Royal Charter/Chartered Companies

Private CompaniesPublic Companies

Companies limitedby shares.

On basis of Liability

Unlimited

companies


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Types of Companies

A) On the basis of Liability

B) On the basis ofIncorporation

C) On the basis of Ownership D) Government Companies

E) On the basis of Jurisdiction

F) On the basis of Control &Shareholding G) One Man Company


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1)Limited by shares

2)Limited by Guarantee 3)Unlimited Company

B) On the basis of Incorporation

1)Chartered Company

2)Statutory Company

3)Registered Company


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C) On the basis ofOwnership

1)Private Limited Company

2) Public Limited Company D) Government Companies

E) On the basis of Jurisdiction

1) Foreign Company 2) MNC Company


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F) On the basis ofControl &

Shareholding

1) Holding Company 2) Subsidiary Company

G) One Man Company


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a ) Companies Limited by shares :companies limited by shares are the mostcommonly found companies.

Section 12 (2) (a) implies that where theliability of the shareholders of a companyis limited to the extent of the unpaid

amount on the shares held by them, thecompany is known as a company limitedby shares.


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In such companies, each share has a

fixed nominal or face value which the

shareholder is required to pay either at a

time or in various installments.

Whatsoever may be the liabilities of a

company, shareholders are not bound to

pay anything more than the face value ofthe shares held by them.


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Thus, the liability of each of the

shareholders of such a company is always

limited to the extent of the amount unpaid

on his shares.


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b) Companies Limited by

Guarantee:-

Words Companies limited by Guaranteeimplies that the liability of members of

such company is always limited to a fixed

amount agreed by its members to

contribute towards the assets of thecompany.


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Section 12 (2) (b) states that, a company

having the liability of its members limited

by the memorandum to such amount as

the members may respectively undertake

by the memorandum to contribute to the

assets of the company in any event of its

being wound up, such company in this Actis termed as a company limited by

guarantee


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c. Unlimited companies: it is obviousthat where the liability of the members of acompany is unlimited, it is called as an

unlimited company. Section 12 providesthat any seven or more persons in thecase of a public company and 2 or morepersons in the case of a private limited

company can have such liability. Anycompany registered without limited liabilityis known as an unlimited company.


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The liability of members of such company is

unlimited like an ordinary partnership firm

and every member of such company is

liable for debts of the company in

proportion to his interest in the company.

An unlimited company may have or may

not have a share capital. But if it has ashare capital, it may be a public company

or a private company


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B) Mode of Incorporation

a) chartered companies : chartered

companies are also known as Royalcharter companies. Such companies are

incorporated under the Royal (special)

chartergranted by the King or the Queen.

Such companies as given exclusivepowers rights and privileges under the

Royal charter.


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They have to function in accordance withthe terms and conditions of the Royal

charter. The East India company, /bankof England, The chartered bank ofAustralia are some of the examples of chartered or Royal companies. However,

such companies find no place in Indiaafter independence, since there nomonarchy in India now.


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b) Statutory companies :- Companies

which are created by special Acts of

Legislature are known as statutory

companies. A statutory company can be

defined as a company which is

incorporated by a special Act passed by

whether the Central Legislature or stateLegislature and such a company enjoys

certain powers,


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rights, privileges as laid down in the Act.

Therefore such companies do not require

to have a Memorandum of Association.

Companies Act 1956 is applicable to the

statutory companies. Eg.Reserve Bank of

India.


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c) Registered companies Under the Act :

Registered companies are those

companies which are registered or

incorporated with the Registrar of

companies as per the provisions of the

companies act. At present, inIndia, almost

all companies are registered under thecompanies Act of 1956.


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C) On the Basis of ownership

A) Private company : Section 3 (i) (iii) definesa private company as follows-

Private company means a company which byits Articles

a) Restricts the rights to transfer its shares, ifany,

b) Limits the number of its members to fifty andc) Not includes the persons who are inemployment of the company;


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d) Persons, who having been formerly in theemployment of the company, were members of thecompany while in that employment and have continuedto be members after the employment ceased; and

e) prohibits any invitation to the public to subscribe forany shares in or debentures of the company.

Thus, the three features i.e. restriction on right totransfer, limit on the number of members and invitationto the public to subscribe as mentioned above are the

mandatory provisions of a private limited company wordsPrivate Limited are required to be used at the end ofthe name of every company.


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Publiccompany ; section 3 (1)(iv) lays

down that. Public company means a

company which is not a private company.

Thus it can be said that a public company

is a company which by its Articles, does

not restricts the right to transfer its shares,

if any, does not limit the number of itsmembers and further does not


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prohibit any invitation to the public to

subscribe for any shares in or debentures

of the company. Any seven or more

persons can come together and join hands

to form a public company. However, there

is no restriction on the maximum number

of members


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Private company& Publiccompany Differences:-

1.) A private company cannot have less than twomembers and more than fifty members

The minimum number of persons required to form apubliccompany is seven. There is no restriction onthe maximum numbers of members in a publiccompany.

2.) A private company cannot invite public tosubscribe its share capital neither it can invite thepeople to buy its debentures

A publiccompany invites the public to subscribeto share capital or to purchase the debentures.


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3).In a private company, the right to transfer itsshares is restricted by its Articles. Thus, if aprivate company has a share capital, it imposescertain restrictions on the right of its members to

transfer the shares of the company they hold In a public company, its shares are freely

transferable.

4). A private company has to add the words

Private Limited at the end of its name. A Public company has to use the wordLimited at the end of its name.


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Directors of a Publiccompany have to file theirconsent with the Registrar to Act as director or signan undertaking to take up qualification shares.

7). Legal controls on private companies are less.

Legal controls, restrictions on publiccompaniesare more and strict.

8) In private companies, restrictions on theremuneration of Director's are far less.

In publiccompanies, there are restri

ctions on theremuneration of Directors. The remuneration of

Directors cannot be more than 11 %of net profits ofthe company.


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9). Directors are allowed to borrow fromthe private companies

Directors cannot borrow from the public

companies

10).In the case of a private company,unless the articles of the company provide

for a large number, two memberspersonally present are quorum for ameeting of the company.


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In the case of a public company, unless theArticles of the company provide for a largenumber, five members personally present are

quorum for a meeting of the company. (section174 (1)).

11) A private company is not required to file aprospectus or a statement in lieu of prospectuswith the registrar [section 70 (3)].

A public company has to file a prospectus ora statement in lieu of prospectus with theRegistrar.


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D) Government Company

Section 617 of the companies Act of 1956

defines government company as follows

i) For the purpose of this Act Governmentcompany means any company in which

more than fifty one percent of the paid up

share capital is held by the central

government, or by any State Government,or Governments or partly by others.


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(b) MNC:Companies incorporated outside

India before/after the commencement of

this act at many places, established a

place of business withinIndia and

continue their business at established

places withinIndia at the commencement

of this Act and after.


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F) On the basis ofcontrol and/or

share holding

a) Holding company :- section 4 (4) of thecompanies Act of 1956 implies that acompany is deemed to be holding

company of another if that other is itssubsidiary. Thus, a holding company canbe defined as a company which has acontrol over a subsidiary company through

anyone of the several methods asexplainedinsection4(1).


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b) Subsidiary company :- A company is a

subsidiary of a holding company if a holding

company controls the majority composition of its

board of directors, having an object to controlthe management of the subsidiary or that other

company i.e. holding company holds the

majority of its shares or the holding companys

subsidiary has its own subsidiary, it becomes thesubsidiary of the first mentioned company


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G) Other types ofcompanies:

One Man company :- One man company can

be a public or a private company, but it is usually

a private company wherein one man holds

practically the whole of the share capital of thecompany. In other words, it can be said that

where a single man holds almost all the shares

of a company such a company is called as one

man company. If one man company satisfies allthe conditions and requirements of incorporation

as laid down in the companies Act, it becomes a

legal personality.


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Generally for formation of one man company in

order to meet the statutory requirements, certain

persons are invited to become members who

may hold a few shares. Such dummy membersare usuallynominees of the main shareholder

who is the de-facto owner of the company and

carries on the business with Limited Liability e.g.

X and Y register their company as a privatecompany with a share capital of Rs 7,00,000

divided into 70000 shares of Rs. 10/- each. X

holds 69,999 shares whileY holds only 1 share.

This is nothing but an example of one man Co.


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Lifting OR Piercing the

Corporate Veil:

A company is distinct from its members. Itis a separate legal entity (Salomon v.Salomon and Co. Ltd- (1897) A.C. 22).

There is thus a veil between a companyand its members keeping them bothseparate from each other. However,sometimes it becomes necessary to lift

this veil, disregard the distinct corporateentity of the company and find out therealities of the company.


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The Court may investigate the real affairs,ownership etc., of the company. This is

called Lifting or piercing the corporate veil

In other words the Court investigates into

the true state of affairs of the company.


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It has been observed that though acorporation is a distinct entity, yet inreality it is an association of persons whoare in fact the beneficial owners of allthe corporate property.


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continue

H) To investigate the company affairs whereit is used for tax evasion or to circumventtax obligation.

I) To investigate if the company is acting asan agent for its shareholders.

J) To investigate the affairs, where it is

formed for fraudulent purpose, to defectand circumvent the law or to defraud itscreditors or to avoid valid obligation.


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END OFCHAPTER

Documents

001 Companies Act Intro