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8/2/2019 Companies Act2

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LAB/Mrinal Rao/SIBAR/09 1

Companies Act, 1956

Mrinal Rao

LL.M., M.P.M., D.L.L.& L.W.


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Meaning and Definition of a

Company

Section 3(1)(i) : a company formed

and registered under this Act or anexisting Company.

Existing Company means a company

formed and registered under any ofthe earlier Company Laws.


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Characteristic Features

Separate Legal EntityCase: Salomonv. Salomon & Co. Ltd.

Limited Liability

However, liability of a company is neverlimited. Its liability of members only thatis limited.

Free Transferability of Shares

Other Features:Perpetual Succession: Separate propertyand Common Seal.


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Types of Companies

Private Company

Public Company


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Private Company [Section 3(1)(iii)]

A private company means a companywhich has a minimum paid up capital ofone lakh rupees or such higher paid-up

capital as may be prescribed and by itsarticles :

(a) restricts the right to transfer its

shares, if any;(b) limits the number of its members to50, not including:


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Private Company contd.

(i) persons who are in the employmentof the company, and

(ii) persons who, having been formerly in

the employment of the company, weremembers of the company while in thatemployment and have continued to bemembers after the employment ceased;

(c) prohibits invitation to the public tosubscribe for any shares in ordebentures of, the company; and


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Private Company contd.

(d) prohibits any invitation or acceptance ofdeposits from persons other than itsmembers, directors or their relatives.

Where two or more persons hold one ormore shares in a company jointly, theyshall, for the purposes of membership,

be treated as a single member.


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

A public company means a companywhich:

(a) is not a private company

(b) has a minimum paid-up capital of five lakhrupees or such higher paid-up capital, asmay be prescribed; and

(c) is a private company, which a subsidiary of

a company, which is not a privatecompany.


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How to form a company?

The whole process of formation of acompany may be divided into four

stages, namely:(i) Promotion

(ii) Registration

(iii) Floatation/Raising of Capital(iv) Commencement of Business.


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Promotion

Who is a Promoter?

Promotion is a business term and means, a

number of business operations familiar to the

commercial world by which a company isbrought into existence.

However, the persons assisting the promoters

by acting in a professional capacity do notthereby become promoters themselves.


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Legal Position of a Promoter

Promoter stands in a fiduciary positiontowards the company.

In other words, he is not allowed to makesecret profits.

Case:Glucksteinv. Barnes


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Pre-incorporation contracts

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.


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Registration/Incorporation

Private Company

Minimum Number of Membersrequired 2; maximum 50.

Public Company

Minimum Number of Membersrequired 7; no limit for maximumno. of members.


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Steps

1. Application for availability of name:

Three names in order of priorityconforming to the provisions of the Act

and the Guidelines issued by Departmentof Company Affairs in this regard:

Name to end with the word(s) Limited orPrivate Limited, as the case may be,

except:(i) Section 25 Companies

(ii) Govt. Companies (need not use Pvt. Ltd.)

(iii)Producer Companies.


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Steps contd.

Name should not be identical or toosimilar to the name of an already existingcompany.

Should not include the name of aregistered trade mark.

2. Preparation of Memorandum and

Articles of Association Memorandum defines and limits the

scope of activities of a company.


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Steps contd.

Contents of Memorandum

1. Name clause

2. Registered office clause

3. Object clause

Doctrine of ultra-vires

4. Liability clause

5. Capital clause


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Steps contd.

3.Preparation of other documents

Power of Attorney in favour of aprofessional to effect registration.

Consent of Directors (in case of aPublic Company)

Particulars of Directors, Manager,

Secretary, etc. in the prescribed form. Notice of registered address

To be supplied within 30 days of

incorporation.


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Steps contd.

Statutory Declaration To the effect that all requirements of law

with respect to incorporation have beenduly complied with.

The declaration to be signed by:

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)

4.Filing of documents with ROC


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Certificate of Incorporation

Effect of Certificate of Incorporation(Section 34)

Becomes a body corporate

Specific rights and liabilities are acquired afterincorporation

Perpetual succession

Common seal

Limited Liability

Can sue and be sued

Can own its capital and assets

Transferable shares


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Conclusiveness of Certificate of

Incorporation (Section 35)

Conclusive to the effect that allrequirements of law relating toregistration and matters precedent and

incidental thereto have been dulycomplied with.

Case Laws:

Moosav. Ibrahim

Jubilee Cotton Mills Ltd. v. Lewis


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Provisional Contracts

Contracts entered into by company afterincorporation but before getting thecertificate to commence business arecalled provisional contracts.

Provisional contracts are, therefore,relevant to public companies only.

Such contracts become void, if company

fails to obtain certificate to commencebusiness and automatically become valid,and binding if company obtains thecertificate.


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Raising of Capital

A company may raise capital

through

Private placement Issue of Prospectus

Private placementmeans raising of

capital from friends, relatives andthrough brokers.


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Commencement of Business(Section 149)

Where Company has issued a Prospectus:

a company cannot commence business orexercise borrowing powers unless:

(a) shares up to the amount of the minimumsubscription have been allotted by thecompany;

(b) every director of the company has paid tothe company, on each of the shares taken orcontracted to be taken by him and for whichhe is liable to pay in cash,


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Commencement of Businesscontd.

the same proportion as is payable onapplication and allotment on the shares,offered for public subscription;

(c) no money is, or may become, liable to berepaid to the applicants for shares ordebentures offered for public subscription, forfailure to obtain permission for the shares tobe dealt in on any recognised stockexchange;


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Commencement of Businesscontd.

(d) there has been filed with the Registrar a dulyverified declaration by one of the directors orthe secretary or, where the company has not

appointed a secretary, a secretary in wholetime practice in the prescribed form thatclauses (a), (b) and (c) (mentioned above)have been complied with.

Penalty: Every person at fault may be fined upto

Rs.5,000/- for every day of default.


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Memorandum of Association

Every company has to have a Memorandumof Association.

It contains, besides other significant

information, the objects for which thecompany is formed.

Object clause defines as well as confinesthe powers of the company.

Anything done beyond these objects is ultra-viresthe company and void.


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1. Name Clause: It contains the name withwhich company is proposed to beregistered. Companies Act requires that:

(a) The name chosen should end with theword Limited or the words PrivateLimited, as the case may be.

(b) The name should not be undesirable i.e., it

should not be identical or too similar to thename of an already existing company ORinclude the name of a registered trademark unless consent of the owner of the

trade mark is obtained.


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2. Registered Office Clause:This clause states the name of the State inwhich registered office of the company is to besituated.

3. Objects ClauseThis clause is to be divided into:

(a) Main objects and objects incidental or ancillary to

main objects(b) Other objects

A company cannot commence any businessstated under other objects unless special

resolution by the shareholders is passed.


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Doctrine ofUltra-Vires

Case Law: Ashbury Rly. Carriage

Co. v. Riche.

Effects of Ultra-vires transactions(i) void-ab-initio

(ii) Injunction

(iii) Personal liability of directors towards the company

towards the outsiders


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4. Liability Clause

5. Capital Clause

This clause states the authorised capitaland the number of shares into whichthe same shall be divided.


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Alteration of Memorandum

Various clauses of memorandum ofassociation can be altered by following

the procedure laid down in the Act.

Different requirements are prescribedfor different clauses:

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

(b) Obtaining the approval of the Central

Govt.


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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, if no

change in jurisdiction of Regional Director by passing special resolution, and

Obtaining the approval of RegionalDirector.


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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


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5. Capital Clause

Authorised capital may be increasedby passing an ordinary resolution at

a meeting of the shareholders.


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Articles of Association

The articles of association of a company are its bye-laws or rules and regulations that govern themanagement of its internal affairs and the conduct ofits business.

The articles regulate the internal management of thecompany. They define the powers of its officers.They also establish a contract between the companyand the members and between the members inter

se. This contract governs the ordinary rights andobligations incidental to membership in the company[Naresh Chandra Sanyal v. Calcutta StockExchange Association Ltd. (1971)].


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Companies which must have Articles

Unlimited Companies:

The Articles of such a company muststate:

Total number of members; and

Share capital.

Companies limited by Guarantee:Articles of such company must state

total number of members.


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Companies which must have Articles

contd.

Private Companies limited by shares:

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

No Article Company

A publiclimited company having share

capital may be registered withoutArticles.


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Alteration of Articles

Articles may be altered by a companyby passing special resolution at ageneral body meeting of shareholders.

However, where alteration has theeffect of converting a public companyinto a private company (i.e., introduction

of restrictive clauses of Section 3(1)(iii),approval of Central Government mustbe obtained.


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Doctrine of Constructive Notice

According to Section 610, every persondealing with the company is deemed tohave 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 of Indoor Management is an exception

to the Doctrine of Constructive notice.


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Exceptions of Indoor Management

1. Knowledgeof 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 twodirectors]

4. No knowledge of articles: Case:RamaCorporationv. Proved Tin & GeneralInvestment Co.


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Prospectus

A prospectus, as per Section 2(36),means any document described or issuedas prospectus and includes any notice,

circular, advertisement or other documentinviting deposits from the public or invitingoffers from the public for the subscription

or purchase of any shares or debenturesof a body corporate.


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Prospectus contd.

Thus, a prospectus is not merely anadvertisement; it may be a circular oreven 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.


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What constitutes Invitation to

Public

As per Section 67, Invitation to publicincludes:

invitation to any section of the publichowsoever selected provided the invitationis made to all the members of that sectionof public indiscriminately.

Invitation calculated to be made availableeven to those who do not receive thesame.

Invitation to 50 or more persons.


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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 ismisleading in the form and context in which it isincluded; and

(b) where the omission from a prospectus of anymatter is calculated to mislead, the prospectusshall be deemed in respect of such omission, tobe a prospectus in which an untrue statement isincluded. Case:Rexv. Kylsant


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RemediesLiabilityforMis-statements in aProspectus

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

panyAgainst the Promoters,

Directors, otherOfficers and Experts

Against the CompanyAgainst the Promoters,

Directors and Other officers(not available against experts)

escission of Contract

Claim for Damages

Damages

Compensation under Sections62 and 56

Fine uptoRs. 50,000

Imprisonment

Fine upto

Bo


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Share and Share Capital

According to Section 2(46), A Share representsa unit into which capital of a company is divided.However, courts have held that a share is notmerely a unit of capital, it represents a bundle of

rights and obligations. Holder of a share isentitled to certain rights (say, right to receivedividends, to receive notice of meetings, toparticipate in the proceedings of a meeting, to

elect directors) and is also subjected to a numberof obligations (say, to abide by Articles ofAssociation, to maintain decorum of themeetings).


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Kinds of Shares

The following kinds of shares may beissued by a company:

1. Equity shares carrying voting rights.

2. Equity shares carrying differential rightsas to voting or dividend (commonly calledNon-Voting Equity Shares)

3. Preference Shares4. Cumulative convertible Preferable

Shares


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Kinds of Shares contd.

Preference Sharescarry preferencewith 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 ofcapital in case of winding up.

Equity Sharesmeans a share which is

not a preference share.


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Allotment of Shares

Allotment is an acceptance to an offer forpurchase of shares.

Where allotment does not conform to the

statutory requirements, it is called irregularallotment. For allotment to be valid,following requirements must be satisfied:

1. A copy of prospectus or statement in lieu ofprospectus must have been delivered toRegistrar of Companies.


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Allotment of Shares contd.

2. Application money must not be less than5% of the nominal value.

3. Minimum subscription (i.e., at least 90% of

the issue) must have been received.

4. Application money must be kept depositedin a Scheduled Bank till the minimum

subscription has been received.5. Shares must have been listed on the stock

exchange(s) mentioned in the Prospectus.

Ad i i t ti /M t f


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Administration/Management of

a company

A company functions through the medium ofBoard of Directors. However, certain powershave been reserved to be exercised by

shareholders in general body meetings.Section 291 of the Companies Act, 1956confers general power on the Board ofDirectors. It provides: Subject to the provisions

of the Act, the Board of Directors of a companyshall be entitled to exercise all such powers,and to do all such acts and things, as thecompany is authorised to exercise and do.

P hi h i bl


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Powers which are exerciseable

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

substantially the whole, of the undertaking ofthe company, or where the company owns

more than one undertaking, of the whole orsubstantially the whole, of any suchundertaking.

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 madeby a banking company to its directors in theordinary course of business.


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Powers contd.

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

4. Borrow monies exceeding the aggregate of thepaid-up capital of the company and its freereserves. Borrowing does not includetemporary loans (i.e., loans payable on

demand or within six months but excludingloans for capital expenditure) obtained fromthe companys bankers in the ordinary courseof business.


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Powers contd.

The resolution passed at the general meetingmust specify the total amount upto whichmoneys 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 thecompany or the welfare of its employees any

amount exceeding Rs. 50,000 or five per centof its average net profits of the last threefinancial years, whichever is higher.


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Powers contd.

However, the resolution must specify the totalamount that may be contributed by the Boardof directors in any financial year.

However, contributions to National DefenceFund, the Prime Ministers National Relief

Fund or any other fund approved by theCentral Government* for the purpose are

exempted from the above provisions.

Qualifications and


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Qualifications and

Disqualifications for Directors

Qualifications

A public company cannot prescribe anyqualifications for directorship except sharequalification. Again, share qualificationrequirement cannot exceed holding ofshares exceeding Rs. 5000/- in nominal

value or value of one share where nominalvalue of one share exceeds Rs.5000/-. Adirector may obtain his share qualification

within 2 months after his appointment.


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Disqualifications

Section 274 of the Companies Act, 1956provides that the following persons shallnot be capable of being appointed as

directors of any company :(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 adjudgedan insolvent;


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Disqualifications contd.

(d) a person who has been convicted by a Court ofan offence involving moral turpitude and sentencedin respect thereof to imprisonment for not less than

six months, and a period of five years has notelapsed from the date of the expiry of thesentence;

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

shares of the company held by him, whether aloneor jointly with others and six months have elapsedfrom the last date fixed for the payment of the call;and


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Disqualifications contd.

(g) a person who is already a director of apublic company which,

(i) has not filed the annual accounts and

annual returns for any continuous threefinancial years commencing on and after thefirst day of April, 1999; or

(ii) has failed to repay its deposit or interestthereon on due date or redeem itsdebentures on due date or pay dividend andsuch failure continues for one year or more.


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Number of Directorships

Whole-time Directorship

A person cannot be appointed as awhole-time director in more than one

company.

Part-time Directorship

Not more than 15 companiesexcluding the directorships of,


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No. of Directorships contd.

i. private companies [other than subsidiariesor holding companies of publiccompany(ies)].

ii. unlimited companies,

iii. associations not carrying on business forprofit or which prohibit payment of adividend, and

iv. alternate directorships (i.e., he is appointedto act as a director only during the absenceor incapacity of some other director).


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S

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

BothFine uptoRs.50,000

Imprisonment

upto 2 yearsCompensation under

Sections 62 and 56Damages

Liability for Mis-statements in a Prospectus

DamagesCompensationunder Sections

62 and 56

Imprisonmentupto 2 years

Fine uptoRs.50,000

Both

Rescissionof Contract

Claim for

Damages Fine upto Rs. 50,000

Against the Promoters,

Directors and Otherofficers (not available

against experts)

Against theCompany

Against the Promoters,

Directors, otherOfficers and Experts

Against the

Company

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

Remedies