SKN Companies Act 1956

8/7/2019 SKN Companies Act 1956

1/65

Module VI

Companies Act 1956

Ms.Sandhya K N

15-04-2010


2/65

Companies act 1956: Definition, Characteristics

and Kinds of Companies, Steps in Formation of

Company. Memorandum of Association, Articles

Association and Prospectus. Shares: Kinds of

Shares, Kinds of Debentures. Directors:

Appointment, Power, Duties and Liabilities of

Directors. Meeting and Resolutions: Types of Meetings. Auditor: Appointment, Rights and

Liabilities of Auditor. Modes of Winding-up of a

Company.

MODULE 6 (7 Hours)


3/65

Meaning and Definition of a

CompanySection 3(1)(i) of the Companies

Act, 1956 defines a company as: a

company formed and registeredunder this Act or an existing

Company.

An Existing Company means a

company formed and registered

under any of the previous

Companies Law.


4/65

Definitions

According to Justice Lindley a company is

An association of many persons who

contribute money or money's worth to a

common stock and employed for a commonpurpose. The common stock So contributed is

denoted in money and is capital of the

company. The persons who contribute it or to

whom it belongs are members. The proportionof capital to which each member is entitled is

his share. Shares are always transferable

altough the right to transfer them is aften more

or less restricted.


5/65

Definitions

A company may be defined as an

incorporated association,which is an

artificial person,having an independentlegal entity,with a perpetual seccession, a

common seal, a common stock capital

comprised of transferable shares and

carrying limited liability in relation to its

members.


6/65

Characteristics of a company

1. Separate legal entity

Salomon vs. Saloman & Co Ltd

2. Limited liability

3. Perpetual succession (long continuity)4. Common seal

5. Transferability of shares

6. Separate property

7. Capacity to sue & to be sued8. Not a citizen

9. Company's actions limited


7/65

Kinds of Companies

Chart showing kinds of Companies

On the basis of

Constitution

On the basis of

incorporation

On the basis of

control

Public Co Private CoGovt Co

Holding &

Subsidiary

Co

Chartered

Co

Registered

Co

Statutor

yCo

Foreign

Co

Limited

By Shares

Limited by

Guarantee

Unlimited

Co


8/65

I. On the basis of Constitution

a. Public Company: A public company means a

company which is not a private company.

There is no maximum limit as to its number of

shareholders or members

There must be at least seven persons to form a

public company

The shares of a public company are capable of

being dealt in on a stock exchange


9/65

b.Private Company: [Section 3(10)(iii)]

A private company means a company which byits Articles

i) Restricts the rights to transfer its shares

ii) Limits the number of its members to fiftyIii) Prohibits any invitation to the public to

subscribe for any shares or debentures of the

company


10/65

Privileges of a Private Company

1.A private Company may consist of two membersonly

2.A private Company is entitled to commence

business immediately on incorporation

3. It may allot shares without issuing a prospectusor delivering to the Registrar a statement in lieu

of prospectus

4. It is not required to hold a statutory meeting or file

a statutory report with the registrar 5.It can have a minimum of two directors

6. The provisions of section 81 as regards further

issue of capital do not apply to a private

company.


11/65

7.It can give financial assistance for purchase of its

shares or its holding companys shares8.Copies of Balance sheet and Profit and Loss Accountfiled with the Registrar can not be inspected by the

Public9.A director of a private company need not hold the

share qualification10.Restriction in regard to overall managerial

remuneration imposed by Section 309 do not apply to aprivate company

10.An interested director can participate in the Boardproceedings and exercise his vote


12/65

The privileges mentioned above are not

available to a private company which is asubsidiary of a public company


13/65

Distinction Between Public and Private CoBasis Public Co Private Co

1.Minimum Numberof members Seven Two

2.Maximum Numberof Members

No limit Fifty

3.Commencement ofBusiness

Shall not commence itsbusiness immediatelyunless it has beengranted the Certificateof Commencement ofBusiness

Can commence itsbusiness as soon as it isincorporated

4.Invitation to public By issuing a

prospectus may invitepublic to subscribe toits shares/debentures

Can not extend such

invitation to the public

5.Transferability ofShares

No restriction on thetransfer of shares

By its Articles mustrestrict the right of

members to transfer theshares


14/65

Distinction between Public and Private Co

Basis Public Co Private Co

6. Number of Directors Must have at least threedirectors

May have two directors

7.Statutory Meeting Must hold as statutorymeeting and file with the

Registrar a Statutoryreport

There are no suchobligations

8.Restrictions onappointment of Directors

Shall file with theRegistrar a consent to actas such

These restrictions do notapply

9.ManageralRemuneration Total ManagerialRemuneration can notexceed 11% of the NetProfits

These restrictions do notapply

10.Further issue ofCapital

Proposing further issueof shares must offer themto the existing members

Is free to allot new issuesto outsiders


15/65

II.On the basis ofIncorporationa. Chartered company:The Crowning the exercise of

the royal prerogative, has power to create a corporationby the grant of a charter to persons assenting to beincorporated. Such companies or Corporations are

known as Chartered Companies

Examples: Bank of England, East India Company

b.Statutory Companies:A company may beincorporated by means of a special Act of the

Parliament or any StateLegislature. They are generally formed to carry out some

special public undertaking. Examples:Railways,waterworks,electricity generation,LIC,RBI,UTI

etc


16/65

#

Statutory companies are governed by the Actscreating them

#They are not required to have any memorandumor articles of Association changing in their structure are

possible only by amendment in the Acts creating them.

# A statutory company though owned by theGovernment has a separate legal entity

# It can not be regarded as a department of theGovernment


17/65

C.Foreign Company : A company incorporated outsideIndia and having a place of business in India

i.Documentsii.Accountsiii.Namesiv.Winding up


18/65

d.Registered Companies : Companies registeredunder the Companies Act,1956 or the earlier

Companies Act are called Registered CompaniesSuch companies come into existence when they are

registered under the Companies Act and a certificate ofincorporation is granted to them by the registrar

i.Companies limited by shares

ii.Companies limited by guaranteeiii.Unlimited Companies


19/65

i.Companies limited by shares:This is a companywhere the liability of its members is limited to the

amount fixed by the memorandum of the company,if

any unpaid on the shares respectively held by them.The liability can be enforced during the existence of the

company as well as during the winding upWhere the shares are fully paid up, no further liability

rests on them


20/65

ii.Companies limited by guarantee:This is a

company where the liability of its members is limited tosuch amounts as they may respectively undertake asfixed by the memorandum to contribute to the assetsof the company in the event of its being wound up.


21/65

iii.Unlimited Companies : It is a company where theliability of its members is not limited at all. In such acompany, the liability of each member extends to

the whole amount of the companys debts andliabilities, but he will be entitled to claim rateable

contribution from other members.


22/65

III. On the basis of Control

a. Government company : Section 617 of theCompanies Act defines a government company

as a company in which not less than fifty onepercent of the paid up share capital is held by the

Central Government or by any Stategovernment,or partly by the central Governmentand partly by one or more state governments.

It also includes a company which is a subsidiaryof a Government company


23/65

b. Holding Company & Subsidiary Company

A company which controls another company is knownas the holding company and the company so controlled

is termed as subsidiary company

A holding company is one of it:

1.controls the composition of board of directors ofanother company or

2.holds more than half of the nominal value of equityshare capital of another company or

3.controls more than of the total voting power of theother company

4.is a subsidiary of any company which is in turn asubsidiary of another company


24/65

Example: Company P is a subsidiary of companyQ, and company R is a subsidiary of company P.

Company R will be a subsidiary of company Q

Q P

R


25/65

Other companies

One man company and family Company

These are companies in which one man holdsvirtually the whole of the share capital with a fewextra members holding the remainder,who may

be his relations and nominees.Being the largest holder ,such a person is

generally the sole or the managing director andenjoys complete control over the company


26/65

Licensed Companies or Companies not for Profit(Section 25)These licensed companies are formed for a nontrading object or for a noble cause,like the promotion

of art,science,education,commerce etc.Charitable associations,sports clubs,tradeassociations,chamber of commerce etc are examplesof companies not for profit

Such companies can be formed only on obtaining thelicense from the Government i,e they can beregistered only after such licence


27/65

Steps in Formation of Company

Company formation is an elaborate,timeconsuming and an expensive affair. A typical

formation involves three stages:

a)Registration

b)Capital raising andc) Commencement of business


28/65

a) Registration

The registrar of companies is the appropriate official to

register companies. Before registration, the registrar

expects the promoters to submit a list of names of theproposed company, memorandum of association, articles of

association and a list of directors

The memorandum of association is an important document,

it contains such details as the name of the company, thepurpose of the company, the place of its registered office,

the fact that the members' liability is limited and capital of

the company. The memorandum should be printed, be

divided in to suitable paragraphs and be affixed with stamps

worth Rs 120.

The articles of association contain details about the way in

which the internal affairs of the company are to be carried

out. The article should be printed, be divided in to suitable

paragraphs and be affixed with stamps worth Rs 120.


29/65

The registrar will scrutinize all documents submitted

to him and will ensure that all formalities are complied

with. The registrar will then enter the name of thecompany in the Register maintained by him for the

purpose and will issue certificate of incorporation. It is the

birth certificate of the company.

On registration, the company becomes an independentperson in the eyes of law. For registration the registrar will

charge a fee which depends on the authorized capital of

the company. For an authorized capital of Rs. 1 lakh the

registration fee is Rs. 750. and for a capital of Rs. 1 crore

the fee is Rs. 18,500.


30/65

b) Raising of Capital

The next step in company formation is the raising

of the capital. A public company raises its capitalby inviting the public to subscribe to its share

capital. The steps involved in raising the capital

are :

(i) obtain the SEBI clearance

(ii)entering in to an agreement with the underwriter

(iii) applying to the stock exchange for listing of its

share(iv) inviting the public to subscribe its share

capital through a prospectus

(v) allotment of shares


31/65

c) Commencement of Business

A private company can commence its business

immediately after it is incorporated. But a public

company can't commence its business unless it obtains

a certificate for the purpose. To obtain a certificate the

following statement must be submitted to the registrar :

A declaration that a copy of the prospectus is filed with

him A declaration that minimum subscription has been

received.

A declaration that directors have taken up the

qualification shares and have paid for them.

A certificate issued by a director or secretory to the

effect that all conditions for the commencement of

business have been fulfilled


32/65


33/65

PromoterA promoter is one who undertakes to form a

company with reference to a given object and toset it going and who takes the necessary steps to

accomplish that purpose.

The promoter of a company decide the scope of itsbusiness activities

A promoter stands in fiduciary position towards the

company


34/65

Alteration of Memorandum

Various clauses of memorandum of

association can be altered by

following the procedure laid down inthe Act. Different requirements are

prescribed for different clauses:

1. Name Clause: can be altered by:(a)Passing a special resolution; and

(b)Obtaining the approval of the Central

Govt.


35/65


2. Registered Office Clause: may beshifted:

(a)within the same city by passing

Directors Resolution;(b)From one city to anothercity within the

same State:

by passing special resolution only, ifno change in jurisdiction of RegionalDirector

by passing special resolution, and

Obtaining the approval of RegionalDirector.


36/65


3. Objects Clause

Special Resolution

Only on Grounds stated in Sec.17(1).4. Liability Clause

Cannot be increased without written

consent of each and every member. Can be reduced:

by passing special resolution

Confirmation of court


37/65


5. Capital Clause

Authorised capital may be

increased by passing an ordinary

resolution at a meeting of the

shareholders.


38/65

Articles 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)].


39/65

Companies which must have Articles

Unlimited Companies:

The Articles of such a company

must state:Total number of members; and

Share capital.

Companies limited by Guarantee:Articles of such company must

state total number of members.


40/65

Companies which must have Articles

contd.

Private Companies limited by

shares:

must include requirements ofSection 3(1)(iii).

No Article Company

A public limited company havingshare capital may be registered

without Articles.


41/65

Alteration of Articles

Articles may be altered by a

company by passing special

resolution at a general body meeting

of shareholders.

However, where alteration has the

effect of converting a public

company into a private company (i.e.,introduction of restrictive clauses of

Section 3(1)(iii), approval of Central

Government must be obtained.


42/65

Doctrine of Constructive Notice

According to Section 610, every person

dealing with the company is deemed to

have read M/A and A/A and understood the

contents thereof in the correct perspective. Doctrine of Indoor Management

The rule was first laid down in Royal British

Bankv. Turquand.

Rule ofIndoor Management is an exception

to the Doctrine of Constructive notice.


43/65

xceptions of Indoor Management

1. Knowledge of irregularity: Case: Howardv. Patent Ivory Co.

2. Negligence : Case:Anand Behari Lal v.

Dinshaw & Co. (Bankers) Ltd.3. Forgery: Case: Ruben v. Great Fingal

Consolidated[Secy. Forged signatures of

two directors]

4. No knowledge of articles : Case: Rama

Corporation v. Proved Tin & General

Investment Co.


44/65

Prospectus

A prospectus, as per Section 2(36),

means any document described or

issued as prospectus and includes any

notice, circular, advertisement or otherdocument inviting deposits from the

public or inviting offers from the public

for the subscription or purchase of anyshares or debentures of a body

corporate.


45/65

Prospectus contd.

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 twothings:

(a) It invites subscription to shares or

debentures or invites deposits.(b) The aforesaid invitation is made to the

public.


46/65

What constitutes Invitation to

Public

As per Section 67, Invitation to public

includes:

invitation to any section of the publichowsoever selected provided the

invitation is made to all the members of

that section of public indiscriminately.

Invitation calculated to be madeavailable even to those who do not

receive the same.

Invitation to 50 or more persons.


47/65

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 shallbe 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 ofany 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


48/65

emediesLiability for Mis-statements inaProspectus

CivilLiability (Sec.62&56) CriminalLiability (Sec. 63)

panyAgainst the Promoters,

Directors, other

Officers and ExpertsAgainst the Company

Against the Promoters,

Directors and Other officers

(not available against experts)

escission of Contract

Claim forD

amages

Damages

Compensation under Sections

62 and 56

Fine upto

Rs. 50,000Imprisonment

Fine upto

Bo


49/65

Share and Share Capital

According to Section 2(46), A Sharerepresents a unit into which capital of acompany is divided. However, courts haveheld that a share is not merely a unit ofcapital, it represents a bundle of rights andobligations. Holder of a share is entitled tocertain rights (say, right to receive dividends,to receive notice of meetings, to participate in

the proceedings of a meeting, to electdirectors) and is also subjected to a numberof obligations (say, to abide by Articles ofAssociation, to maintain decorum of the

meetings).


50/65

Kinds of Shares

The following kinds of shares may be

issued by a company:

1. Equity shares carrying voting rights.

2. Equity shares carrying differential

rights as to voting or dividend

(commonly called Non-Voting Equity

Shares)3. Preference Shares

4. Cumulative convertible Preferable

Shares


51/65

Kinds of Shares contd.

Preference Shares carry preference

with respect to two things:

1. Preference with respect to dividend at

a fixed rate or of a fixed amount.

2. Preference with respect to return of

capital in case of winding up.

Equity Shares means a share which is

not a preference share.


52/65

Allotment of Shares

Allotment is an acceptance to an offer

for purchase of shares.

Where allotment does not conform to

the statutory requirements, it is calledirregular allotment. For allotment to be

valid, following requirements must be

satisfied:

1. A copy of prospectus or statement in

lieu of prospectus must have been

delivered to Registrar of Companies.


53/65

Allotment of Shares contd.

1. Application money must not be less

than 5% of the nominal value.

2. Minimum subscription (i.e., at least 90%of the issue) must have been received.

3. Application money must be kept

deposited in a Scheduled Bank till the

minimum subscription has beenreceived.

4. Shares must have been listed on the

stock exchange(s) mentioned in the


54/65

Administration/Management of

a company

A company functions through the medium

of Board ofDirectors. However, certain

powers have been reserved to be exercised

by shareholders in general body meetings.Section 291 of the Companies Act, 1956

confers general power on the Board of

Directors. It provides: Subject to the

provisions of the Act, the Board ofDirectorsof a company shall be entitled to exercise all

such powers, and to do all such acts and

things, as the company is authorised to

exercise and do.


55/65

Powers which are exerciseable

only by the shareholders.1. Sell, lease or otherwise dispose of the

whole, substantially the whole, of the

undertaking of the company, or where the

company owns more than one undertaking, ofthe whole or substantially the whole, of any

such undertaking.

2. Remit or give time for the repayment of any

debt due by a director except in the case ofrenewal or of continuance of an advance made

by a banking company to its directors in the

ordinary course of business.


56/65

Powers contd.

3. Invest, otherwise than in trust securities,the amount of compensation received by thecompany in respect of compulsory acquisitionof any property or fixed assets of thecompany.

4. Borrow monies exceeding the aggregate ofthe paid-up capital of the company and its freereserves. Borrowing does not include

temporary loans (i.e., loans payable ondemand or within six months but excludingloans for capital expenditure) obtained fromthe companys bankers in the ordinary course

of business.


57/65

Powers contd.

The resolution passed at the general

meeting must specify the total amount upto

which moneys may be borrowed by the Board

of directors in any financial year.5. Contribute in any year, to charitable and

other funds not directly relating to the

business of the company or the welfare of its

employees any amount exceeding Rs. 50,000or five per cent of its average net profits of

the last three financial years, whichever is

higher.


58/65

Powers contd.

However, the resolution must specify the

total amount that may be contributed by

the Board of directors in any financial

year.However, contributions to National

Defence Fund, the Prime Ministers

National Relief Fund or any other fund

approved by the Central Government* forthe purpose are exempted from the above

provisions.


59/65

Qualifications and

Disqualifications for Directors

Qualifications

A public company cannot prescribe any

qualifications for directorship exceptshare qualification. Again, share

qualification requirement cannot exceed

holding of shares exceeding Rs. 5000/-

in nominal value or value of one sharewhere nominal value of one share

exceeds Rs.5000/-. A director may

obtain his share qualification within 2


60/65

Disqualifications

Section 274 of the Companies Act,

1956 provides that the following

persons shall not be capable of being

appointed as directors of anycompany :

(a) a person found by a competent court

to be of unsound mind and such findingremaining in force;

(b) an undischarged insolvent;

(c) a person who has applied to be


61/65

Disqualifications contd.

(d) a person who has been convicted by a Court

of an offence involving moral turpitude and

sentenced in respect thereof to imprisonment for

not less than six months, and a period of fiveyears has not elapsed from the date of the expiry

of the sentence;

(e) a person who has not paid any call in respect

of shares of the company held by him, whetheralone or jointly with others and six months have

elapsed from the last date fixed for the payment

of the call; and


62/65

Disqualifications contd.

(g) a person who is already a director of a

public company which,

(i) has not filed the annual accounts and

annual returns for any continuous three

financial years commencing on and after the

first day of April, 1999; or

(ii) has failed to repay its deposit or interestthereon on due date or redeem its

debentures on due date or pay dividend and

such failure continues for one year or more.


63/65

Number of Directorships

Whole-time Directorship

A person cannot be appointed as a

whole-time director in more thanone company.

Part-time Directorship

Not more than 15 companiesexcluding the directorships of,


64/65

No. of Directorships contd.

i. private companies [other thansubsidiaries or holding companies ofpublic company(ies)].

ii. unlimited companies,iii. associations not carrying on business

for profit or which prohibit payment of adividend, and

iv. alternate directorships (i.e., he isappointed to act as a director only duringthe absence or incapacity of some otherdirector).


65/65

Criminal Liability (Sec. 63)Civil Liability (Sec.62 & 56)

BothFine upto

Rs.50,000

Imprisonment

upto 2 years

Compensation under

Sections 62 and 56

Damages

Liability for Mis-statements in a Prospectus

DamagesCompensation

under Sections

62 and 56

Imprisonment

upto 2 years

Fine upto

Rs.50,000Both

Rescission

of Contract

Claim for

Damages Fine upto Rs. 50,000

Against the Promoters,Directors and Other

officers (not available

against experts)

Against theCompany

Against the Promoters,

Directors, otherOfficers and Experts

Against theCompany

Civil Liability (Sec.62 & 56) Criminal Liability (Sec. 63)

Remedies