Introduction to Companies Act 1956-1

7/29/2019 Introduction to Companies Act 1956-1

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COMPANIES ACT

1956


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INTRODUCTION TOCOMPANIES ACT 1956


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What is a company

A company is an artificial person created by law.

A company means a group of persons associatedtogether for the attainment of a common end,

social or economic. IT is a voluntary association

of persons formed for some common purpose,with capital divisible into parts, known as shares,

and with a limited liability. It is a creation of the

law and is sometimes known as an artificial

person with a perpetual succession and a common

seal. IT exists only in the eyes of the law, I.e., it is

regarded by the law as person, just as a human

being. But it has no physical existence.


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Definition of a company

According to Sec (1), A company formed and registeredunder the act.

According to Sec (3) of the act, on incorporation acompany becomes a body corporate or a corporation witha perpetual succession and a common seal.

Lindley says, the company as an association of manypersons who contribute money or money's worth to acommon stock and employ it in some trade or business;and who share the profit and loss arising there from


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CHARACTERISTICS OF A COMPANY

Incorporated Association

Artificial person

Separate legal entity

Limited liability

Perpetual succession

Common seal

Transferability of shares

Separate property

Capacity to sue


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Classification of CompanyCompanies

On the basis ofincorporation

On the basis ofliability

On the basisOf no. ofmembers

On theBasis

Of control

On theBasis

Of ownershi

Statutory companies

Registered companies

Cos. With limitedliability

Ltd.By

shares

Ltd.By

guarantee

Unlimited liability

Privatecompany

Publiccompany

Holdingcompany

Subsidiarycompany

government

Non-government

Charter companies


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Classification on the basis ofincorporation

chartered companies : charteredcompanies are also known as Royalcharter companies. Such companies are

incorporated under the Royal (special)charter granted by the King or theQueen. Such companies as given

exclusive powers rights and privilegesunder the Royal charter. For ex. EastIndia Company


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Statutory companies: These are created byspecial act of the legislature

E.g.: The Reserve bank of IndiaThe Life Insurance corporationThe Unit Trust Of India

Registered Companies: These are thecompanies which are formed and registeredunder the companies Act, 1956 or were

registered under any of the earliercompanies act.


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Classification on the basis ofliability

Companies limited by shares : Companies limited byshares are the most commonly found companies.

Section 12 (2) (a) implies that where the liability of theshareholders of a company is limited to the extent of

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

Company limited by guarantee : Section 12 (2) (b)

states that, a company having the liability of itsmembers limited by the memorandum to such amountas the members may respectively undertake by thememorandum to contribute to the assets of thecompany in any event of its being wound up, such

company in this Act is termed as a company limited by


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Classification on the basis of number ofmembers

Private company

A private company means a company which has aminimum paid up capital of Rs.1,00,000 or such higherpaid up capital as may be prescribed , and by articles- (a) restricts the right to transfer its shares, if any. This restriction

Is meant to preserve the private character of the company

(b) limits the number of its members to 50 not including itsemployee-members

( C) prohibits any invitation to the public to subscribe for anyshares in or debentures of the company

(d) prohibits any invitation or acceptance of deposits from

persons other than its members, directors and their relatives Public company

A public company means a company which Has a minimum paid up capital of Rs.5 lakh or such high paid-up

capital, as may be prescribed


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Classification on the basis of control Holding company

A company is known as the holding company ofanother company if it has control over that othercompany.

Subsidiary company

A company is known as a subsidiary of anothercompany when control is exercised by the latter overthe former called a subsidiary company.

Company controlling composition of Board of Directors

Holding of majority of shares Subsidiary of another subsidiary


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Classification on the basis of ownership

Government company

A Government Company means any company inwhich not less than 51% of the paid-up sharecapital is held by The central government or

Any state government or governments or Partly by the central government and partly by

one or more state governments. E.g.: State Trading Corporation of India Limited

Minerals and Metals Trading Corporation of Indialimited

Non-government company Foreign companies


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FORMATION OF ACOMPANY


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Formation of a companyThe whole process of formation of a company

may be roughly divided , for convenience,into three parts. These are-

(i) Promotion

(ii) Registration

(iii) Floatation

Explanation-


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(i) PromotionBefore a company is formed, certain

preliminary steps are necessary, whether itshould be private company or a publiccompany ,what its capital should be ,whether it is worthwhile forming a newcompany or taking over the business of analready established concern. All these stepsare taken by certain persons known as

Promoters. They do all the necessarypreliminary work incidental to the formationof a company


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(ii) Registration

Before a company is registered , it isdesirable to ascertain from the registrar ofthe companies if the proposed name ofthe company is approved. Then thefollowing documents duly stampedtogether with the necessary fees are to befiled with the Registrar:


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DOCUMENTS NEEDED :-

MEMORANDUM OF ASSOCIATION

ARTICLES OF ASSOCIATION

LIST OF THE DIRECTORS CONSENT LETTER FROM DIRECTORS

STATEMENT OF CAPITAL

STATUTORY DECLARATION
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Memorandum of association duly signedby the subscribers.

The Articles of Association , if any signedby the subscribers to the memorandum ofassociation .


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OTHERDOCUMENTS
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LIST OF DIRECTORS :-

THE LIST OF DIRECTORS WHO HAVE AGREEDTO ACT AS A DIRECTORS SHOULD FILEDWITH REGISTRAR

THEY SHOULD SUBMIT THEIR- NAMES

- AGE

- OCCUPATION- FULL ADDRESSES

IN CASE WHEN THE LIST IS NOT READY

Subscribers of the MEMORANDUMWILL BE DEEMED TO BE THE DIRECTORS
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CONSENT LETTER OF DIRECTORS :- EVERY PERSON WHO IS READY TO ACT AS

DIRECTOR MUST GIVE A WRITTEN UNDERTAKING

STATING THAT HE IS WILLINGLY AGREED TO ACTAS A DIRECTORS OF THE COMPANY

ALONG WITH THE LETTER HE MUST SUBSCRIBETHE QUALIFICATION OF SHARES AS MENTIONEDIN ARTICLES OF ASSOCIATION AND HAVE PAIDTHE AMOUNT ACCORDINGLY


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NAME APPROVAL

CERTIFICATE :-

A COPY OF LETTER FROM THE

REGISTRAR ANNOUNCING THAT THENAME OF COMPANY WAS APPROVEDWITHOUT ANY OBJECTION


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STATEMENT OF AUTHORISED

CAPITAL :- THE COMPANY SHOULD PREPARE AND

SUBMIT A STATEMENT OF PROPOSED

CAPITAL WHICH IS AUTHORISED TOCOLLECT FROM THE PUBLIC

IT CONTAIN THE NUMBER OF SHARES AND

DEBENTURES AND THE AMOUNT OF EACHCATEGORY


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STATUTORY DECLARATION :-A COPY OF STATUTORY DECLARATION SHOULD BE

ENCLOSED STATING TO THAT ALL THE FORMALITIES

HAVE DULY COMPLIED WITH AS PER THEPROVISIONS OF COMPANIES ACT.

IT SHOULD BE SIGNED BY AN ADVOCATE OF HIGH

COURT OR THE SUPREME COURT OR A CHARTEDACCOUNTANT OR A DIRECTOR OR A SECRETARY ORMANAGER .


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RECEIPT OF REGISTRATION FEE

:- IT IS NECESSARY TO ATTACH THE RECIPTOF THE REGISTRATION WHICH IS PAIDTO REGISTRAR OFFICE OF WHICH IT ISCALCULATED BASIS ON THE

AUTHORISED CAPITAL OF THE COMPANY
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ISSUE OF CERTIFICATEOF INCORPORATION


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ISSUE OF CERTIFICATE

AFTER THE RECEIPT OF THE ALL THEDOCUMENTS , THE REGISTRAR WILL

SCRUITANISE THE DOCUMENTS .

AFTER EVERYTHING IS SATISFIED , THEREGISTRAR WIL ISSUE THECERTIFICATE OF INCORPORATION

WITH THIS CERTIFICATE, THECOMPANY GETS ITS RECOGNITION AS ABODY OF CORPORATE.


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A PRIVATE COMPANY CAN START ITS

OPERATIONS IMMEDIATELY AFTEROBTAINING THE CERTIFICATE OFINCORPORATION


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BUT A PUBLIC COMPANY HAS TO WAIT

TILL IT GETS CERTIFICATE OFCOMMENCEMENT OF BUSINESS .

THIS CERTIFICATE SHOULD BE

OBTAINED WITHIN ONE YEAR OF ITSINCORPORATION FAILING WHICH THECOURT CAN PASS AN ORDER FOR ITS

CLOSURE.


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(iii) Floatation

When a company has been registered andhas been received its certificate ofincorporation,it is ready for floatation ,

that is to say it can go ahead with raisingcapital sufficient to commence businessand to carry it on satisfactorily.


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MEMORANDUM OF ASSOCIATION

IT IS AN IMPORTANT DOCUMENT WHICH

DEFINES OBJECTIVES, POWERS, SCOPES AND

RELATIONS WITH OUTSIDERS

It is the charter which contains the fundamental

conditions upon which alone the company can be

incorporated. SOME OF THE IMPORTANT CLAUSES OF

MEMORANDUM OF ASSOCIATION ARE AS

FOLLOWS


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NAME CLAUSE:-

The company is free to choose any suitablename for the company provided-

COMPANYshould not use any objectionable or

identicalwith too nearly resembles the name bywhich a company is already registered.

THE WORDS PRIVATE LIMITED IN CASEOF PRIVATE AND LIMITED IN CASE OF

PUBLIC COMPANY AT THE END.

In the opinion of the central govt. the namechosen is not undesirable.


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SITUATION CLAUSE

/Registered Office clause:-Every company shall have the registered office from the

day on which it begins to carry on business., or the30th day after the date of its incorporation, which ever

is earlier. Notice of such situation of the companymust be given to the registrar within 30 day after thedate of incorporation.


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OBJECTIVE CLAUSE :-

HERE THE COMPANY SHOULD

MENTION ITS

MAIN OBJECTIVES of the company to bepursued by the company on its incorporation

Objects incidental or ancilliary to the

attainment of the main objects.

OTHER OBJECTIVES


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LIABILITY CLAUSE :-

THE EXTENT AND NATURE OF THE

LIABILITY OF SHARESHOLDERSSHOULD BE STATED LIKE

LIMITED LIABILITY

LIMITED BY GAURANTEE UNLIMITED


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CAPITAL CLAUSE :-

DIVISION OF CAPITAL INTO SHARES

OF DIFFERENT DOMINATIONS THE EXTENT OF EACH CAPITAL

SHOULD BE SPECIFIED

THE AUTHORISED CAPITAL SHOULDBE MENTIONED

A COMPANY IS NOT AUTHORISED TOISSUE ABOVE AUTHORISED CAPITAL


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ASSOCIATION CLAUSE:-

THIS CLAUSE CONTAINS DECLARATION

OF MEMBERS

THE NAMES, ADDRESSESS AND

OCCUPATIONS OF THE SUBSCRIBERS

SHOULD BE MENTIONED

THE SIGNATURES ARE TO BE ATTESTEDBY PROPER WITNESS


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ARTICLES OF ASSOCIATION


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ARTICLES OF ASSOCIATION :-

CERTAIN RULES AND REGULATIONS Byelaws that are necessary for the internalmanagement of the affairs of a company arelisted in the articles of association

EVERY COMPANY HAS TO PREPARE ITSOWN ARTICLES


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CONTENTS OF AOA :-

DIFFERENT KINDS OF SHARES TO ISSUE

CALLS ON SHARES

Transfer of SHARE

Transmission OF SHARES

Forfeiture SHARES

Conversion of shares into stock Share warrants

Alteration of capital
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CONTENTS OF AOA:-

DIVIDEND & Reserves

METHOD TO APPROPRIATION OF PROFITS General meetings and proceedings

Voting rights of members

Directors their appointment, remuneration,qualification,, etc.

Manager
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CONTENTS OF AOA:-

Secretary

Accounts & audit Capitalization of Profits. WINDING PROCEDURE OF THE

COMPANY ETC.
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Articles & Memorandum -Distinction

MOA

It is the charter of thecompany.

It defines the scope ofthe activities of thecompany.

It being the charter ofthe company , is the

supreme document. There are strict

restrictions on itsalterations.

AOA

They are the regulationsfor the internalmanagement of thecompany.

They are the rules forcarrying out the objectsof the company.

It is subordinatedocument of thecompany.

They can be altered by aspecial resolution to anyextent,


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ProspectusIn order to finance its activities , a company

needs capital which is raised by a publiccompany by the issue of a prospectus invitingdeposits or offers for shares and debentures

from the public.Any document described or issued as a

prospectus and includes any notice, circular,advertisement or other document invitingdeposits from the public or inviting offersfrom the public for the subscription orpurchase of any shares or debentures of any

body corporate.


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Meetings and its Types

Meeting may be defined as assembly of peoplefor a lawful purpose .

A company meeting may be defined as a

concurrence or coming together of at least aquorum of members in order to transact either

the ordinary or special business of the

company.

It is at these meetings that matters relating to

the business of the company are decided .In

this context meeting of the shareholders and

directors become necessary.


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Types of Meetings

1. Statutory Meetings

2. Annual general meeting (AGM)

3. Extra-ordinary general meeting4. Class meeting


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STATUTORY MEETING

The first meeting of the share holders of thecompany is known as Statutory Meeting

It is required to be held only by a publiccompany having a share capital.

It must be held within a period of not less thanone month and not more than six months fromthe date at which the company is entitled tocommence business.

At least 21 days before the day of meeting anotice of the meeting is to be sent to everymember stating it to be statutory meeting.

Statutory Report- The board of directors should


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Statutory Report The board of directors should

also get a report, called the statutory report sent to

each member along with the notice of the meeting.

The members present at the meeting may discuss

any matter relating to the formation of the

company or arising out of the statutory report.

is required to be held only once in the lifetime of a

public company having a share capital.

If default is made in complying with the provisions

A. every director or other officer of the company

who is in default shall be punishable with fine up

to Rs. 5000

A l G l M ti


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Annual General MeetingAs the name signifies this is an annual meeting of a

company. The purpose of this meeting is to give full

information to members of progress made by thecompany during the year.

Every company whether public or private , having a share

capital or not, limited or unlimited must hold this

meeting.

Time interval between AGMs- the meeting must be held

in each calendar year and not for more than 15 months

shall elapse between two meetings . The first AGM maybe held within 18 months from the date of its

incorporation and if such general meeting is held within

that period , it need not hold any such meeting in the year

of its incorporation.


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the maximum gap between two such meetings may be

extended by three months by taking permission of the

registrar of companies.

Day and hour of meeting-The meeting must be held

i) on a day which is not a public holiday

ii) During business hours

iii) At the registered office of the company or at some other

place within a city , town or village in which the

registered office is situated.

The business to be transacted at such a meeting maycomprise ofordinary business and special business.

Th t i 21 d ti t ll b


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The company must give 21 days notice to all membersof the company and the auditor .the notice mustspecify the place and day and hour of the meeting.

If default is made in holding the meeting , thecompany law board may, on the application of anymember of the company, call or direct the calling of

the meeting. If the company fails to hold the meetingeither originally or when directed to do so by thecompany law board, then the company and everyofficer of the company who is in default shall be

punishable with fine up to Rs. 50000 and in case ofcontinuing default , with a further fine of Rs. 2500 perday during the continuance of default.

Th t i 21 d ti t ll b


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The company must give 21 days notice to all membersof the company and the auditor .the notice mustspecify the place and day and hour of the meeting.

If default is made in holding the meeting , thecompany law board may, on the application of anymember of the company, call or direct the calling of

the meeting. If the company fails to hold the meetingeither originally or when directed to do so by thecompany law board, then the company and everyofficer of the company who is in default shall be

punishable with fine up to Rs. 50000 and in case ofcontinuing default , with a further fine of Rs. 2500 perday during the continuance of default.


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Class Meetings

When it is proposed to alter , vary or affectthe rights of particular class ofshareholders and it is not possible to

obtain the consent in writing, of theholders of 3/4th of the issued shares ofthat class a meeting of the holders of

those shares may be called. Such ameeting is known as class meeting.


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RESOLUTIONS

Resolution may be defined as the formalexpression of decision of a meeting onthat particular matter.

Ordinary resolution

Special Resolution

Resolution requiring special notice


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Ordinary Resolution

When a motion is passed by simple majorityof the members voting at a generalmeeting, it is said to have been passed by

an ordinary resolution. In other words aresolution shall be an ordinary resolutionwhere the votes cast in favour of the

resolution are more than the votes castagainst the resolution.

Special Resolution


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Special Resolution

A resolution is a special resolution in regard to which-

The intention to propose the resolution as a specialresolution has been specifically mentioned in thenotice calling the general meeting;

21 days notice has been duly given for calling themeeting;

The no. of votes cast in favour of the resolution isthree times the number cast against it.

Some of the cases in which a special resolution isnecessary are: alteration of objects clause;change ofregistered office from one state to another;alteration of articles of association ,changes in the

name of the company;

R l i R i i S i l


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Resolution Requiring SpecialNotice

The object of special notice is to give the memberssufficient time to consider the proposed resolution,and also to give the Board Of Directors an

opportunity to indicate views, on the resolution if itis not proposed by them but by some othershareholders. a notice of the intention to move theresolution should be given to the company not less

than 14 days before the meeting at which it isproposed to move. The company on receipt of suchnotice will give the notice of the resolution to themembers at least 7 days before the meeting.


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MANAGEMENT OFCOMPANY

M t Of A C


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Management Of A Company

A company is an artificial person created by law.The person through whom it acts and bywhom the business of the company isconducted are known as directors. Thedirectors of the company are collectivelyknown as the Board of Directors or the Board.

any person occupying the position of

director, by whatever name called. In realitydirectors are the persons who direct , conduct, manage or superintend a company's affairs.


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Number of Directors- Every publiccompany must have at least 3 directors.

Every private company whether it is asubsidiary of a public company or notmust have at least two directors.

Within the limits prescribed by the articles ,the company may increase or reduce the

number of its directors by an ordinaryresolution in general meeting.

A i t t Of Di t


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Appointment Of Directors

The appointment of directors are classified as1.Appointment of first directors

2.Appointment of Subsequent directors

3.Appointment of directors by Board of Directors

Additional Directors

Filling Up the Casual Vacancies

Alternate Directors

4.Appointment of directors by Third Parties etc.

5.Appointment of directors by the centralgovernment

A i t t f Fi t Di t


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Appointment of First Directors

The first directors are usually named in thearticles of a company. The articles may ,however instead of naming the first directors ,confer power on the subscribers, or majority of

them to appoint the directors. If the articlesneither contain the names of the directors norany provision for appointing them , subscribers

of the memorandum who are individuals shallbe deemed to be the directors of the company.They shall hold office until directors are duly

appointed in the first annual general meeting.

A i t t Of S b t


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Appointment Of SubsequentDirectors

Section 255 provides that subsequent directors shallbe appointed by the company in general meeting .In case of public company , at least two- third ofthe total number of directors shall be those who

shall retire by rotation. This means that of the totalnumber of directors only one-third can holdpermanent directorships.

A i t t B B d Of


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Appointment By Board OfDirectors

The BOD can exercise the power toappoint directors in the following threecases-

(i) Additional Directors

(ii) Filling up the casual vacancies(iii)Alternate Directors

Additional Directors- If permitted by the articles ,the


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BOD may appoint additional directors. Such additionaldirectors shall hold office only up to the date of thecompany's next annual general meeting.

Casual Vacancies- If the office of any directorappointed by the company in general meeting is vacatedbefore his term of office expires in the normal course,the resulting casual vacancy may be filled by the board

of directors at a meeting of the board Any person soappointed shall hold office till director in whose place heis appointed would have held office , had it not beenvacated.

Alternate Directors- If authorized by its articles or by a

resolution passed by the company in general meeting ,the board of directors may appoint an alternate directorwhere the original director is likely to be absent for aperiod of not less than 3 months from the state in whichthe meetings of the board are ordinarily held..

Appointment By Third Parties


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The third parties may be empowered by the articles to

nominate directors. Such third parties may be lenders of

money- i.e. financial institutions, debentureholders.

Appointment by the Central Govt.- Section 408empowers the central Govt. to appoint directors on the

board of a company on the recommendation of companylaw board that it is necessary to appoint government

directors to effectively safeguard the interests of the

company or its shareholders or the public interest in case

of oppression or mismanagement.

pp y a

Accounts & Audit


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Accounts & AuditIt provides that every public company having paid

up capital of Rs. 5 crore or more shall constitute a

committee of the board of directors known as

Audit committee .It will consist of three or more

directors as decided by the board . The committee

shall discuss the companys internal controlsystem, scope of audit , auditors observations and

review of the half yearly and annual financial

statements before submission to the board. Therecommendations of eh committee relating to

financial management including the audit report

shall be binding on eh board

Documents

Introduction to Companies Act 1956-1