Companies Act, 1956
IMI
Meaning and Definition of a
Company
 Section 3(1)(i) of the Companies Act,
1956 defines a company as: “a
company formed and registered under
this Act or an existing Company”.
 ‘Existing Company’ means a company
formed and registered under any of
the earlier Company Laws.
Characteristic Features
 Separate Legal Entity
Case: Salomon v. Salomon & Co. Ltd.
 Limited Liability
However, liability of a company is never
limited. It’s liability of members only that
is limited.
 Free Transferability of Shares
 Other Features:
Perpetual Succession: Separate property
and Common Seal.
Types of Companies
Private Company
Public Company
Private Company [Section 3(1)(iii)]
 A private company means a company
which has a minimum paid up capital of
one lakh rupees or such higher paid-up
capital as may be prescribed and by its
articles :
(a) restricts the right to transfer its
shares, if any;
(b)limits the number of its members to
50, not including:
Private Company
(i)
…contd.
persons who are in the employment
of the company, and
(ii) persons who, having been formerly in
the employment of the company, were
members of the company while in that
employment and have continued to be
members after the employment ceased;
(c) prohibits invitation to the public to
subscribe for any shares in or
debentures of, the company; and
Private Company
…contd.
(d) prohibits any invitation or acceptance of
deposits from persons other than its
members, directors or their relatives.
 Where two or more persons hold one or
more shares in a company jointly, they
shall, for the purposes of membership,
be treated as a single member.
Public Company [Section 3(1)(iv)]
 A public company means a company which:
(a) is not a private company [In other words, it
should not have the restrictions of Section
3(1)(iii) in its articles ];
(b) has a minimum paid-up capital of five lakh
rupees or such higher paid-up capital, as
may be prescribed; and
(c) is a private company, which a subsidiary of
a company, which is not a private company.
How to form a company?
 The whole process of formation of a
company may be divided into four
stages, namely:
(i) Promotion
(ii) Registration
(iii) Floatation/Raising of Capital
(iv) Commencement of Business.
Promotion

Who is a Promoter?
 Bowen, L.J.
The term promoter is “a term not of law but of
business”, usefully summing up, in a single
word— promotion, “a number of business
operations familiar to the commercial world by
which a company is brought into existence”.
However, the persons assisting the promoters
by acting in a professional capacity do not
thereby become promoters themselves.
Legal Position of a Promoter
 Promoter stands in a fiduciary position
towards the company.
 In other words, he is not allowed to make
secret profits.
Case: Gluckstein v. Barnes
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.
Registration/Incorporation
 Private Company
 Minimum
Number of Members
required – 2.
 Public Company
 Minimum
Number of Members
required – 7.
Steps
1. Application for availability of name:
 Three names in order of priority
conforming to the provisions of the Act
and the Guidelines issued by Department
of Company Affairs in this regard:

Name to end with the word(s) ‘Limited’ or
‘Private Limited’, as the case may be,
except:
(i) Section 25 Companies
(ii) Govt. Companies (need not use Pvt. Ltd.)
(iii)Producer Companies.
Steps
…contd.
 Name
should not be identical or too
similar to the name of an already existing
company.
 Should not include the name of a
registered trade mark.
2. Preparation of Memorandum and
Articles of Association

Memorandum defines and limits the
scope of activities of a company.
…contd.
Steps
 Contents of Memorandum
1.
2.
3.
Name clause
Registered office clause
Object clause

4.
5.
Doctrine of ultra-vires
Liability clause
Capital clause
Steps
…contd.
3. Preparation of other documents




Power of Attorney in favour of a
professional to effect registration.
Consent of Directors (in case of a
Public Company)
Particulars of Directors, Manager,
Secretary, etc. in the prescribed form.
Notice of registered address

To be supplied within 30 days of
incorporation.
…contd.
Steps
 Statutory
Declaration
To the effect that all requirements of law
with respect to incorporation have been
duly 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
Certificate of Incorporation
 Effect of Certificate of Incorporation
(Section 34)
On incorporation, the association of persons
becomes a body corporate by the name
contained in the memorandum, capable
forthwith of exercising all the functions of an
incorporated company and having perpetual
succession and a common seal but with such
liability on the part of the members to
contribute to the assets of the company in the
event of its being wound-up as is mentioned in
the Act.
Conclusiveness of Certificate of
Incorporation (Section 35)
 Conclusive to the effect that all
requirements of law relating to
registration and matters precedent and
incidental thereto have been duly
complied with.

Case Laws:
Moosa v. Ibrahim
Jubilee Cotton Mills Ltd. v. Lewis
Provisional Contracts
 Contracts entered into by company after
incorporation but before getting the
certificate to commence business are
called ‘provisional contracts’.
 Provisional contracts are, therefore,
relevant to public companies only.
 Such contracts become void, if company
fails to obtain certificate to commence
business and automatically become valid,
and binding if company obtains the
certificate.
Raising of Capital
 A company may raise capital
through


Private placement
Issue of Prospectus
 Private placement means raising of
capital from friends, relatives and
through brokers.
Commencement of Business
(Section 149)
 Where Company has issued a Prospectus:

a company cannot commence business or
exercise borrowing powers unless:
(a) shares up to the amount of the minimum
subscription have been allotted by the
company;
(b) every director of the company has paid to
the company, on each of the shares taken or
contracted to be taken by him and for which
he is liable to pay in cash,
Commencement of Business
…contd.
the same proportion as is payable on
application and allotment on the shares,
offered for public subscription;
(c) no money is, or may become, liable to be
repaid to the applicants for shares or
debentures offered for public subscription, for
failure to obtain permission for the shares to
be dealt in on any recognised stock
exchange;
Commencement of Business
…contd.
(d) there has been filed with the Registrar a duly
verified declaration by one of the directors or
the secretary or, where the company has not
appointed a secretary, a secretary in whole
time practice in the prescribed form that
clauses (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.
Memorandum of Association
 Every company has to have a Memorandum
of Association.
 It contains, besides other significant
information, the objects for which the
company is formed.
 ‘Object clause’ defines as well as confines
the powers of the company.
 Anything done beyond these objects is ultravires the company and void.
Contents of Memorandum
1. Name Clause: It contains the name with
which company is proposed to be
registered. Companies Act requires that:
(a)
(b)
The name chosen should end with the
word ‘Limited’ or the words ‘Private
Limited’, as the case may be.
The name should not be undesirable i.e., it
should not be identical or too similar to the
name of an already existing company OR
include the name of a registered trade
mark unless consent of the owner of the
trade mark is obtained.
Contents of Memorandum
2. Registered Office Clause:
This clause states the name of the State in
which registered office of the company is to be
situated.
3. Objects Clause
This clause is to be divided into:
(a)
(b)
Main objects and objects incidental or ancillary to
main objects
Other objects
A company cannot commence any business
stated under other objects unless ‘special
resolution’ by the shareholders is passed.
Doctrine of Ultra-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
Contents of Memorandum
4. Liability Clause
5. Capital Clause
This clause states the authorised capital
and the number of shares into which
the same shall be divided.
Alteration of Memorandum
 Various clauses of memorandum of
association can be altered by following
the procedure laid down in the Act.
Different requirements are prescribed
for different clauses:
1. Name Clause: can be altered by:
(a)
(b)
Passing a special resolution; and
Obtaining the approval of the Central
Govt.
Alteration of Memorandum
2. Registered Office Clause: may be
shifted:
(a)
(b)
within the same city by passing Directors’
Resolution;
From one city to another city 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 Regional
Director.
Alteration of Memorandum
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
Alteration of Memorandum
5. Capital Clause

Authorised capital may be increased
by passing an ordinary resolution at
a meeting of the shareholders.
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)].
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.
Companies which must have Articles
…contd.
 Private Companies limited by shares:
 must
include requirements of
Section 3(1)(iii).
No Article Company
 A public limited company having share
capital may be registered without
Articles.
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.
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
Bank v. Turquand.
 Rule of Indoor Management is an exception
to the Doctrine of Constructive notice.
Exceptions of Indoor Management
1. Knowledge of irregularity : Case: Howard
v. 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.
Prospectus
 A prospectus, as per Section 2(36),
means any document described or issued
as prospectus and includes any notice,
circular, advertisement or other document
inviting deposits from the public or inviting
offers from the public for the subscription
or purchase of any shares or debentures
of a body corporate.
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 two
things:
(a) It invites subscription to shares or
debentures or invites deposits.
(b) The aforesaid invitation is made to the
public.
What constitutes Invitation to
Public
 As per Section 67, Invitation to public
includes:

invitation to any section of the public
howsoever selected provided the invitation
is made to all the members of that section
of public indiscriminately.
 Invitation calculated to be made available
even to those who do not receive the
same.
 Invitation to 50 or more persons.
Mis-statement in a Prospectus and
its consequences
What is Mis-statement?
 According to Section 65(1) of the Act:
(a) a statement included in a prospectus shall be
deemed to be untrue, if the statement is
misleading in the form and context in which it is
included; and
(b) where the omission from a prospectus of any
matter is calculated to mislead, the prospectus
shall be deemed in respect of such omission, to
be a prospectus in which an untrue statement is
included. Case: Rex v. Kylsant
Remedies
Liability for Mis-statements in a Prospectus
Civil Liability (Sec.62 & 56)
Criminal Liability (Sec. 63)
Against the Promoters,
Directors, other
Officers and Experts
mpany
Rescission of Contract
Damages
Claim for Damages
Against the Promoters,
Directors and Other officers
(not available against experts)
Against the Company
Compensation under Sections
62 and 56
Fine upto
Rs. 50,000
Imprisonment
Fine upto R
Bot
Share and Share Capital
 According to Section 2(46), A ‘Share’ represents
a unit into which capital of a company is divided.
However, courts have held that a share is not
merely a unit of capital, it represents a bundle of
rights and obligations. Holder of a share is
entitled to certain rights (say, right to receive
dividends, to receive notice of meetings, to
participate in the proceedings of a meeting, to
elect directors) and is also subjected to a number
of obligations (say, to abide by Articles of
Association, to maintain decorum of the
meetings).
Kinds of Shares
 The following kinds of shares may be
issued by a company:
1.
2.
3.
4.
Equity shares carrying voting rights.
Equity shares carrying differential rights
as to voting or dividend (commonly called
Non-Voting Equity Shares)
Preference Shares
Cumulative convertible Preferable
Shares
Kinds of Shares
… contd.
 Preference Shares carry preference
with respect to two things:
1.
2.
Preference with respect to dividend at a
fixed rate or of a fixed amount.
Preference with respect to return of
capital in case of winding up.
 Equity Shares means a share which is
not a preference share.
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 called irregular
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.
Allotment of Shares
… contd.
2. Application money must not be less than
5% 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 deposited
in 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.
Administration/Management of
a company
 A company functions through the medium of
Board of Directors. 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 of Directors of 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.
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, of the 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 of
renewal or of continuance of an advance made
by a banking company to its directors in the
ordinary course of business.
Powers
…contd.
3. Invest, otherwise than in trust securities, the
amount of compensation received by the
company in respect of compulsory acquisition
of any property or fixed assets of the company.
4. Borrow monies exceeding the aggregate of the
paid-up capital of the company and its free
reserves. ‘Borrowing’ does not include
temporary loans (i.e., loans payable on
demand or within six months but excluding
loans for capital expenditure) obtained from
the company’s bankers in the ordinary course
of business.
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. 50,000 or five per cent
of its average net profits of the last three
financial years, whichever is higher.
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 Minister’s National Relief
Fund or any other fund approved by the
Central Government* for the purpose are
exempted from the above provisions.
Qualifications and
Disqualifications for Directors
 Qualifications
 A public company cannot prescribe any
qualifications for directorship except share
qualification. Again, share qualification
requirement cannot exceed holding of
shares exceeding Rs. 5000/- in nominal
value or value of one share where nominal
value of one share exceeds Rs.5000/-. A
director may obtain his share qualification
within 2 months after his appointment.
Disqualifications
 Section 274 of the Companies Act, 1956
provides that the following persons shall
not 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 finding
remaining in force;
(b) an undischarged insolvent;
(c) a person who has applied to be adjudged
an insolvent;
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 five years 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, whether alone
or jointly with others and six months have elapsed
from the last date fixed for the payment of the call;
and
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 interest
thereon on due date or redeem its
debentures on due date or pay dividend and
such failure continues for one year or more.
Number of Directorships
Whole-time Directorship
 A person cannot be appointed as a
whole-time director in more than one
company.
Part-time Directorship
 Not more than 15 companies
excluding the directorships of,
No. of Directorships
…contd.
private companies [other than subsidiaries
or holding companies of public
company(ies)].
ii. unlimited companies,
iii. associations not carrying on business for
profit or which prohibit payment of a
dividend, and
iv. alternate directorships (i.e., he is appointed
to act as a director only during the absence
or incapacity of some other director).
i.
Remedies
Liability for Mis-statements in a Prospectus
Civil Liability (Sec.62 & 56)
Civil Liability (Sec.62
& 56)
Against the
Company
Rescission
of Contract
Criminal Liability (Sec. 63)
Criminal Liability (Sec. 63)
Against the Promoters,
Against the
Directors, other
Company
Officers and Experts
Claim for
Damages
Against the Promoters,
Directors and Other
officers (not available
against experts)
Fine upto Rs. 50,000
Compensation
Fine upto
Damages Compensation under Imprisonment
Both
Damages under
Sections 62 and Imprisonment
56
upto 2 years
Rs.50,000 Fine upto
Sections
62 and 56
upto 2 years
Rs.50,000
Both