companies act, 1956

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An Introduction to Company Law


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The Companies Act, 1956:

The Companies Act, 1956 By Prof. V.Y.Dhupdale Lecturer, Dept. of Law, SUK


Syllabus Company Definition and Characteristics Company v. Partnership Kinds of Companies Incorporation Memorandum of Association Articles of Association Prospectus Share Capital


Company Meaning: Sec.3 of Companies Act, 1956 defines company as- A company formed and registered under the Act or an existing company formed and registered under any of the previous company laws. Characteristic Features of a Company: Incorporated Association Artificial Person Separate Legal Entity Limited Liability Separate Property Transferability of Shares Perpetual Existence Common Seal Company may sue and be sued in its own name

Types of Companies:

Types of Companies Incorporated Co. may be- Chartered Co. Statutory Co. A Registered Co. A Registered Co. may be- A Co. with Limited Liability A Co. with unlimited Liability A Co. with a Ltd. Liability may be- Ltd. by shares Ltd. By Guarantee Ltd. By both A Registered Co. may be- A Private Co. A Public Co.

Formation of a Company:

Formation of a Company Divided into 3 parts: Promotion Registration Floatation

Slide 6:

Promotion: Initial Steps Taken for Registration and Floatation of Co. Done by Promoters Registration: Following Three Documents are Required to be presented to the Registrar of Cos. for Registration: The Memorandum of Association Articles of Association, if any The Agreement, if any. Floatation: When Co. has been registered and has received the certificate of incorporation, it is ready for “floatation”. Means the Co. can go ahead with raising capital.

Slide 7:

Public Co. – Act requires Pub.Co. to – Issue a Prospectus File a “Statement in lieu of Prospectus Name of a Co.: Following 2 docs are also submitted The Address of Registered Office of the Co. Particulars about Directors, Manager and Secretary Certificate of Incorporation: Issued after all formalities are completed Certificate of Commencement of Business: Pub.Co. must obtain this – Pvt.Co. no such condition Obtained after floatation of a Co. If not complied – Penalty Every person at faulty is liable to a fine upto Rs.50,000 for every day of default.


MEMORANDOM OF ASSOCIATION Meaning and Purpose: It is a Charter of Co. – consisting of fundamental conditions. It tells the objectives of Co’s Formation Co. cannot operate beyond it – otherwise amounts to ultra vires Purpose: To enable creditors, shareholders and others dealing with Co. to know its powers.

Form and Contents of MOA :

Form and Contents of MOA Shall be in the forms in Tables B,C,D, and E in Schedule I to Company’s Act, 1956. Printed, Divided into paras Numbered Consequently, and Signed by members of Co. before atleast one witness

Contents of MOA:

Contents of MOA Divided into Following Clauses: The Name Clause Registered Office Clause Objects Clause: Main Objects Objects incidental or ancillary to main objects Other Objects 4. Liability Clause The Capital Clause The Association Clause


ARTICLES OF ASSOCIATION Meaning and Purpose: AOA are Co’s bye laws and regulations Governs Management of its internal affairs It’s a contractual force between Co. and its members. Purpose: Govern the ways in which objects of a Co. are to be carried out. Registration of Articles: Pub.Co. Ltd by shares may register the Articles

Subject-Matter of Articles:

Subject-Matter of Articles AOA of a Co. deals with- The business of the Co. Amt of Capital issued, class of shares Rights of Shareholders Allotment of shares Transfer of shares Co’s lien on shares, etc

Effect/Binding Force of MOA & AOA:

Effect/Binding Force of MOA & AOA When registered they bind the Co. and its Members. Who is bound to whom? Co. is bound to members Members are bound to Co. Members are bound to other members. But neither the Co. nor its members are bound to outsiders.


PROSPECTUS Steps before issue of Prospectus: Pvt. Co. not required – Private Capitalisation Pub. Co.: If No Public Issue, Shall issue a “Statement in lieu of Prospectus” If shares are issued to Pubic, Prospectus must be issued Definition of Prospectus: Means a document which includes- Notice, Circular, Advertisement, etc. Date of Prospectus: Every Prospectus must be dated Date on the Prospectus is the date of publication of Prospectus

Contents of Prospectus:

Sch.II of the Act requires the Prospectus to be divided into 3 parts PART – I General Information Eg. Name and Address of Regd. Office of a Co., etc. Capital Structure of the Co. Terms of the Present Value Terms of Payment How to Apply Any Special Tax Benefits Contents of Prospectus

Slide 16:

Particulars of the Issue Objects Project Cost Means of Financing Company Management and Project Eg. History and main objects and present business of the Co., etc. Capital Prescribed Particulars Outstanding cases relating to financial matters or criminal cases against the Co. or directors, etc. Management perception of risk factors

Slide 17:

Part II Further divided into 3 parts: General Information Eg. Consent of Directors, Auditors, Solicitors, etc. to issue Prospectus, etc. Financial Information Eg., Reports of Auditors of Co. with respect to its profit and losses and assets and liabilities, etc. Statutory and Other Information Eg., Minimum Subscription, etc. Part III Gives explanation of certain terms and expressions used under Part I and II of the Schedule II.

Liability for Untrue Statement in the Prospectus:

Liability for Untrue Statement in the Prospectus Prospective Shareholders are entitled to all true disclosures in the Prospectus Persons issuing Prospectus are bound to state everything accurately. Liability: Civil Liability: Following persons are liable to pay compensation: Directors at the time of issue of Prospectus Persons authorised himself to be named and is named in Prospectus as a director. Every promoter of the Co. Every person (including expert) authorised issue of Prospectus

Slide 19:

Remedies Against the Company: The person aggrieved may- Rescind the contract to take the shares Claim Damages Remedies against Directors: Aggrieved person may also bring action for deceit (fraudulent mis-representation) against the directors. May file suit for compensation Defenses available: Withdrew his consent before issue of Prospectus Issue of Prospectus without his knowledge, etc.

Criminal Liability:

Criminal Liability Every person authorising issue of Prospectus is punishable- With imprisonment upto 2 years, or With Fine upto Rs.50,000/-, or With both But Expert is not criminal Liable.

Shares and Share Capital:

Shares and Share Capital Share in a Co. includes- Stock, Interest of shareholder in a Co., Right to receive dividend, Right to vote at the meeting, Share in the surplus assets of the Co., Liability of shareholder in a Co. to pay calls on shares until fully paid, Right to transfer shares, It is a binding covenants on part of a Co. as well as its shareholders.

Slide 22:

Share vs. Share Certificate Share - movable property transferable according to the Articles of a Co. Share Certificate – specifies any share held by any member. It is evidence of title of the member to shares Share vs. Stock Shares - divided into units, each unit is called a ‘Share’. Eg., Capital of Rs.5,00,000 – divided into 50,000 units of Rs.10 each Stock – aggregate of fully paidup shares of a member merged into one fund of equal value. Can be divided into fraction of any amount which may be transferred like shares.

Classes of Shares:

Classes of Shares Following classes: Preference Shares Equity/Ordinary Shares Deferred or Founders Shares 1. Preference Shares: Carries following 2 rights over Equity Shares: Preferential right in respect of dividends at a fixed rate. Preferential right in regard to repayment of capital on winding up.

Slide 24:

Kinds of Preference Shares: Participating: Along with dividend, or In surplus assets at the time of Winding up Non-Participating P.S.: If no such provision Cumulative: Right for dividend from future profits – Cumulative Non-Cumulative P.S.: If No such Provision Redeemable: Redeemed upon resolution of the BODs Redeemed only if fully paid up No Reduction of Capital – Co. may issue fresh Shares Irredeemable P.S.: Perpetual P.S.

Slide 25:

2. Equity Shares: Definition: Means a share which is not a Preference Share. Rate of Dividend is not fixed Deferred or Founders’ Shares A pure Pvt. Co. can issue this kind of shares Normally held by promoters and directors of the Co. Usually of smaller denomination, say one rupee each. Higher the profit higher Dividend If this Co. is converted into Pub. Co., it has to retain only two kinds of shares Equity and Preference shares.

Issue of Shares:

Issue of Shares Co. may issue shares at par, or at premium, or at a discount. Issue at Par: When subscribers are required to pay only the nominal (face) value. Eg., if face value is Rs.10/- then they are required to pay only Rs.10 (nothing less nothing more). Issue at a Premium: Eg. Rs.12.50 on a share of Rs.10, then share is said to be issued at a premium

Slide 27:

No conditions on issue But Conditions are imposed by Govt. on its utilisation: They are: Premium cannot be treated as profit – no distribution as dividend Amount must be kept in a separate bank A/c called “Securities Premium A/C”. This amount is to be maintained with the same sanctity as the share capital This A/C cannot be treated as free reserves Issue at a Discount: Eg., Rs.8.50 on a share of Rs.10 this is on discount. This is regulated by law

Share Capital:

Share Capital Meaning: Means the capital of a Co. Pub.Co. can issue two kinds of share capital Preference and Equity share capital These expression are used in following different senses: Nominal, Authorised or Registered Capital This is the sum stated in MOA It is a max amt. of capital a Co. can raise. This limit can be increased by ordinary resolution.

Slide 29:

Issued Capital: A part of authorised Capital the Co. has issued for subscription. Subscribed Capital: A portion of issued capital which has been subscribed The amount can be either equal or less than issued capital. Called-up Capital: The total amount called-up on the shares subscribed. The amount can be equal or less than the subscribed capital Paid-up Capital: The Amount paid-up on the shares subscribed.

Allotment of Shares:

Allotment of Shares In response to issue of Prospectus Co. receives applications along with application money. BODs make the allotment of shares But before allotment there are statutory restrictions.

Slide 31:

Allotment : Meaning When an application is accepted, it amounts to allotment. Essentials: Allotted by Proper Authority Allotment against application only Allotment not in contravention of any other law Reasonable Time of allotment Communication of allotment Absolute and unconditional allotment Statutory Restrictions on Allotment: Registration of Prospectus before allotment Application Money – amount payable on application on each share shall not be less than 5% of the nominal value.

Calls on Shares:

Calls on Shares A member bound to pay nominal value But Co. can call not less than 5% of nominal value by way of application money. Co. may ask some payment at the time of allotment. The balance may be payable as and when called for. Thus Call is a demand by a Co. to pay the whole or part of the balance still due on each share.

Forfeiture of Shares:

Forfeiture of Shares It is against the non-payment of calls. Taking away shares from the members Extremely serious step It amounts to reduction of capital Rules for forfeiture of shares: In accordance with the articles Proper Notice Effect of forfeiture: Holder ceases to be a member Liability still remains on unpaid shares even after forfeiture

General Meetings and Procedure:

General Meetings and Procedure Why Meetings Co. is an artificial person hence requires to be run through human intermediary. Therefore, meetings of shareholders and directors are important. Types of Meetings: Statutory Meeting, Annual General Meeting, Extra-ordinary G.M., and

Types of Meetings:

Types of Meetings 1. Statutory Meeting: Important provisions: To be held only by a Pub.Co. having share capital Must be held within not less than one month and not more than six months from date of commencement of business Notice at least 21 days before the day of meeting to be sent to every member Statutory Report – must be sent to each member and Registrar of Co. Report should consist of- The total shares allotted Total cash received Abstract of receipts and payments Any Commission or discount paid on issue of shares or debentures Names, addresses, occupations of directors, auditors, etc. Arrears due on calls Any commission or brokerage paid to any director pr manager on issue of shares and debentures

Slide 36:

Members may discuss any matters relating formation of Co., etc, Meeting may adjourn. Penalties: If defaulted Every director or other officer who is in default – punishable with fine upto Rs.5,000 The Registrar or contributory may apply to the Court for the winding up of the Co. It is required to be held only once in the life time of a Public Company, having share capital.

Slide 37:

Annual General Meeting: Annual Meeting of a Co. Important Provisions: Co. whether Pvt. Or Pub., having share capital or not, Limited or unlimited must hold this meeting. Time of Interval Must be held in each calendar year and not more than 15 months shall elapse between two meetings. But the First AGM may be held within 18 months from the date of incorporation Gap may be extended by three months with the permission from the Registrar of Co. Day and Hour of Meeting: Must be held (1) One a day which is not a public holiday, (2) During business hrs. (3) At the registered office or at some other place within the city, town or village in which the Rgd. Office is situated.

Slide 38:

Business to be Transacted: May comprise of- Consideration of Accounts, Balance sheet and Reports of BODs. & Auditors Declaration of Dividend Appointment of new directors; and Appointment of auditors and their remuneration Special Business: Any other business will be a special business In case of Absence of Annual Accounts: It is open to the Co. to adjourn the meeting to future date. Notice: Co. must give 21 days notice to all the members and the auditor.

Slide 39:

Default in Holding Meeting: The Company Law Board may call or direct the call of the meeting. If Co. fails to hold either originally or after the CLB’s directions, The Company and every officer who is in default shall be punishable with fine upto Rs.50,000 and In case of continuing default, with further fine of Rs.2,500 per day during the default.

Slide 40:

Extra-Ordinary General Meeting: All meetings other than AGM are Extra-Ord. GM. Legal Provisions: It is called for transacting some special or urgent business that may arise between two AGMs. Who may call: By Directors on their own By Directors on requisition By the Requisitionists themselves By the Company Law Board

Management of Company:

Management of Company Managerial Personnel: It is necessary to have a BODs for every Co. In addition following personnel may be appointed: Managing Director; or Manager. Others may be- Executive or wholetime directors – which does not come under the category of MD or Manager.


Directors Legal Position of Directors Director includes any person occupying the position of director, by whatever name called. In reality directors are those who- Direct, Conduct, Manage or Superintend A Company’s affairs.

Slide 43:

Legal Provisions regarding Directors: Number of Directors: Every Pub. Co. must have at least three directors. Every Pvt. Co. must have at least two directors. But a Co. having- Paid-up capital of 5 crore rupees or more. One thousand or more small shareholders; May have a director elected by such small shareholders. Increase in Number of Directors In General Meeting, By ordinary resolution Only individuals to be directors Appointment of Directors: Rests in following hands: Subscriber to the Memorandum Company in General Meeting Board of Directors Central Government Third Parties

Slide 44:

Number of Directorship: A person cannot be a director in more than 15 companies. Qualifications and Disqualifications of Directors: Qualifications: Act not prescribed any academic or professional qualifications Dis-qualifications: Unsound mind Undischarged insolvent Applied to be adjudged an insolvent Convicted offence involving moral turpitude and sentenced imprisonment for not less than 6 months.


Contd… Failed to pay calls on shares for six months from the date of payment. Disqualified by the court Already a director of public company which has- Not filed annual accounts, etc Has failed to repay its deposit or interest Minor as a Director: There is no provisions in the Act expressly disqualifying him. But In case of Pvt. Co. he can be an ornamental director

Slide 46:

Penalty If a person continues in the office which is vacant is liable to a fine of Rs.5,000 for every day. Removal of Director: By Shareholders: By ordinary resolution But following directors cannot be removed by Co. in General Meeting: Appointed by the Central Govt. Director of Pvt.Co. holding office for life. Elected by the principle of proportional representation 3. By Central Govt: Under Sec.388-B, Cent.Govt. has a power to make a reference to the CLB against any manager if following circumstances exits: Is guilty of fraud, breach of trust, etc. Does not manage business in accordance with sound principles His conduct is likely to or has caused injury to the business. He has conducted the business with intent to defraud the creditors, members, etc.

Slide 47:

CLB Inquires On the basis of CLB findings the Cent.Govt. may, by order, remove the director. By Company Law Board: Complaint against the director for oppression and mismanagement of Co.’s affairs, the CLB may terminate the agreement between the Co. and He may be removed from the office for 5 years. For this he cannot even claim compensation for loss of office.

Slide 48:

Managing Director: Is a Director by- virtue of an agreement with the Co., or by resolution passed by the Co. in Gnereal Meeting; By virtue of MOA & AOA Is entrusted with substantial powers of management which otherwise he is not entitled to do. He exercises his powers subject to the control of BODs. He is a person who carries on the day to day business


Manager Means an individual has a management of the whole or substantial part the Co. It includes - a director, any other person occupying the post of manager. Disqualification: Undischarged insolvent, or Adjudged as insolvent, or Suspended payment of creditors for 5 years, or Made composition with his creditors, or

Managerial Remuneration:

Managerial Remuneration May in the form of- Monthly payment (Salary), or A percentage of net profit, or Commission and/or Fee for attending each meeting (sitting fees) And may be in the form of- Rent free accommodation Club fee, LIC premium etc. Manner of payment: either by- Way of commission, quarterly or annually with Cent.Govt. approval Way of commission, if Co. by special resolution authorises such payment.

Slide 51:

In either case, the remuneration shall not exceed- 1% of the net profits, in case of wholetime or managing director or a manager; 3% of the net profits in any other cases. But the Co. may in general meeting, with approval of Cent.Govt., authorise the payment of a commission at a rate higher than 1% or 3%.

Powers of the Board of Directors :

Powers of the Board of Directors The BODs may exercise all powers of the Co. and The can do all such acts and things that the Co. can do. But these powers must be according to provisions of Co’s Act., MOA, AOA and the resolutions of the Co. Therefore, in General Meeting, BODs powers can be restrict their powers.


Powers Power to- Make calls on shareholders in respect of money unpaid To buy-back its shares To issue debentures To borrow other than debentures To invest funds of the Co., and To make loans. Powers only at the meetings: To fill casual vacancies in the Board, additional directors or alternate directors. To sanction a contract in which a director is interested To recommend the rate of dividend to be declared.

Restrictions on Powers of Directors:

Restrictions on Powers of Directors The BODs of a public Co. cannot exercise the following powers without the consent of the shareholders in general meeting: Sell or lease the undertaking of the Co. Remit or give time for the re-payment of any debt Invest otherwise than in trust securities. Borrow money exceeding the aggregate of the paid-up capital and free reserves. Contribute to any charitable not directly related to the business of the Co.

Duties of Directors:

Duties of Directors Divided under two heads: Statutory Duties Duties of a general nature Statutory Duties: imposed by the Act. To file return of allotments Not to issue irredeemable Preference Shares or shares redeemable after 10 years. To disclose interest To disclose Receipt from Transfer of Property To disclose Receipt of Compensation from Transferee of Shares To attend Board meetings To convene and hold general meetings To prepare and place before AGM financial accounts To make declaration of solvency

Slide 56:

General Duties: Duty of good faith Eg., he should not make any secret profit. Duty of Care Eg., Much care only which an ordinary prudent man would take in his own case. Duty to Attend Board Meetings Duty Not to Delegate Hoever, he may delegate in foll. Cases: Wherever permitted by the Co’s Act or AOA of Co. Having regard to the exigencies (emergency) of business certain functions may be delegated tp other officials

Liabilities of Directors:

Liabilities of Directors May be considered under the following heads: Liability to the Company Liability to third parties Liability for breach of statutory duties Liability for acts of co-directors Criminal Liability Liability to the Co.: May arise from: Breach of fiduciary duty ultra vires acts, Negligence, and Breach of trust and misfeasance

Slide 58:

Liability to third Parties: May be grouped as under: Liability under the provisions of Co.’s Act. Liability for breach of warranty of authority Liability Under Co.’s Act Prospectus With Regard to allotment Unlimited Liability Fraudulent Trading Liability for Breach of Warranty: If Directors acts ultra vires the Articles, they may be personally liable for loss.

Slide 59:

Liability for Breach of Statutory Duty: Default in compliance of these duties attracts penal consequences. Eg., They are liable as ‘officer-in-default’ for default in filing return of allotments. Liability for acts of Co-directors: A director is the agent of the Co. and not of the other co-director. But where director is made liable for the acts of a co-director he is entitled to contribution from the other director or co-director who were party to the wrongful act. Criminal Liability: Directors may also criminally liability

Prevention of Oppression and Mismanagement:

Prevention of Oppression and Mismanagement Rule of Majority: Shareholders pass resolution on various subjects either by simple majority or by three-fourths majority. As a result the Court will not interfere to protect the minority against the resolution. Because at the time of becoming a member, the shareholders agree to submit to the will of the majority. Thus if wrong is done to the Co., it is the Co. which is legal entity having its own personality, which can institute a suit against the wrongdoer, and shareholders do not have a right to do so. The Courts will not interfere into the internal adm. of a Co. as long as they act within the powers conferred on them under AOA. But other rights of the shareholders such as- Right to vote, Right to dividend Are his personal rights and hence cannot be taken away by the majority, If taken away he sue in his own name, and his right of action is unaffected by any decision of the majority.

Exceptions to ‘The Majority Rule’ (Protection of Minority Rights):

Exceptions to ‘The Majority Rule’ (Protection of Minority Rights) In the following cases the minority shareholders may bring an action to protect their interest: Where the act done is illegal or ultra vires the Co. Breach of fiduciary Duty Where the act complained of constitutes a fraud on the minority. Where as act which required spl. Resoln., but has infact done by a simple majority. Where the personal rights of an individual member have been infringed. Protection under the Companies Act Variation of Class Rights Scheme of reconstruction and amalgamation Oppression and Mis-management Rights of Dissentient shareholders undertake take-over bids

Powers of CLB for Prevention of Mis-management and Oppression:

Powers of CLB for Prevention of Mis-management and Oppression Any member of a Co. who has a complaint that the Co’s affairs are being conducted in a manner oppressive to any member or members may apply to the CLB. The CLB may make such orders if it is of the opinion that- The affairs are conducted prejudice to any member or members. To wind up would be unfair to the person complaint about

Orders of CLB:

Orders of CLB Its orders may include- Regulation of the conduct of the Co.’s affairs Acquisition of the shares or interest of any members by other member or by the Co. Reduction of the share capital Termination, setting aside or modification of any agreement. Termination, setting aside or modification of an agreement between the Co. and any other person.

Slide 64:

Powers of Central Govt. to prevent Oppression or mis-management: It can do it by nominating directors on the Board of directors of a Co.


Winding-Up It is a process where the Co’s life comes to an end. Its property gets administered for the benefit of its creditors and members. An Administrator, called a ‘liquidator’, is appointed and he – takes control of the Co. Collects its assets, Pays its debts and Finally distributes any surplus among the members

Modes of Winding-Up:

Modes of Winding-Up A Co. can be wound up in any of the following ways: Compulsory winding up under an order of the Court Voluntary winding up Voluntary winding-up under supervision of the Court.

Winding-Up By the Court:

Winding-Up By the Court Also called compulsory W-up. Court will make an order for W-up on an application by any of the persons. Grounds: Special Resolution C. may resolve that it be W-up by the Court Default inn holding statutory meeting Failure to commence business Reduction of Membership Inability to pay debts Just and Equitable

Who may petition for W-Up:

Who may petition for W-Up The Company Creditor’s Petition Contributor’s Petition Joint Petition The Registrar Central Government Petition Official Liquidator’s Petition

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Thank you

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