THE COMPANIES ACT 1956

WHAT IS COMPANY
It is an association of persons for some common objects. In common parlance the word company is normally reserved for thoswe associated for economic purposes.

DEFINITION OF COMPANY
The Companies Act1956 does not define company. In terms of its features Section 3 (1)(i) lays down that A company means a company formed and registered under Companies Act

DEFINITION OF COMPANY BY LORD JUSTICE LINDLEY

A company is an association of many persons who contribute money worth to common stock and employed in some tradeiich the charter of or business and who share the profit and loss arising therefrom As per Chief Justice Marshall, A corporation is an artificial being, invisible, intangible existing only in contemplation of law, it possess the only properties which the charter of its creation confers upon it either expressly or an incidental to its existence

Professor Haney defines company

A company is an artificial person created by law, having separate entity with a perpetual succession and common seal

 1. Incorporated Association - minimum number required in a public company - 7 Private company - two u/s. 12 2. Legal entity distinct from its members Soloman vs Soloman & Co.Ltd. (1895) Lee vs Lees Air Farming Ltd(1960) Gramophone & Type writer Ltd vs Stanley 1908

CHARACTERISTIC FEATURES/NATURE OF A COMPANY

 3. Artificial Person - It has to depend upon natural persons. 4. Limited Liability - Members are liable to contribute to limited extent. 5. Separate Property - Share holders are not part owners of undertaking - Bacha F, Guzdar vs Commissioner of Income Tax. Transferability of shares - Shares, debentures shall be movable property transferable in the manner provided in Article of Association.

7.Perpetual Succession - It continues even if all its human members are dead King is dead, long live the king. 8. Common seal - It does not have mind or limbs of human being. It can be held bound by only those documents which bears its signature, common seal is signature of company. 9. Company to sue - and to be sued.

KINDS OF COMPANY
Companies may be classified on following basis: I. CLASSIFICATION ON BASIS OF INCORPORATION (1) Statutory Co. created by special Act of the legislature (2) Registered Company

II. ON BASIS BASIS OF LIABILITY; 1 Company with limited liability

(a) Company limited by shares (b) Company limited by guarante 2 Company with unlimited liability Sec 12(2) 3 Classification on the basis of number of members: i.Private company - minimum paid up capital 1 lakh. Maximum 50 members ii.Public company - Min. paid upcapital 5 lakhs.

4. Classification on basis of control 1. Holding company 2. Subsidiary company 5. Government company - 51 per cent of paidup share held by central or any state government. 6. Association not for profit 7. Foreign company Sec.591 - company incorporated abroad but having place of business in India 8. Producer company 9. Public financial Institutional Sec 4 A - UTI,LIC,IFCI etc.

SPECIAL PRIVILEGES AND EXEMPTION AVAILABLE TO PRIVATE COMPANIES: 1. A minimum of two persons may form Co. 2. Allot shares without issuing prospectus 3. In the event of further issue of capital, need not be first offered to the existing shareholders 4. A certificate of commencement of business is not necessary 5. Need not hold statutory meeting 6. A demand for poll u/s 179 may be made by only one member

7. Need not have more than two directors 8. Directors are not required to file their consent in writing 9. A life director appointed by a private company on or before 1st April 1952 cannot be removed by the co. in general meeting 10.Need not keep index of members S. 151 11. Quorum for general meeting of S.H. is two persons 12. Financial assistance S. 77(2) & (3)

13. Share capital and voting rights S. 85 89.

14. Right of appeal to company law board (now Tribunal) against rejection of transfer of shares S. 111(13) 15. Provisions as to General Meeting S.170 shorter notice than 21 days is permissible 16. Managerial remuneration S.198 rxempted. 17. Appointment of firms or body corporate S.204 the restriction of not exceeding 5 years period is not applicable

18. Restriction on disclosure of profit and loss S.220 not to be made open. 19. Rotational retirement of directors S. 255 not applicable. 20. Notice for election as director S. 257 not applicable 21. Filing casual vacancies S. 262 do not apply 22. Filing of consent of directors S. 264 not applicable 23. Appointment of managing or whole time directors S. 268-69 no approval of central government is required.

24. Qualification shares S. 270-273 not applicable 25. Special disqualification for appointment as directors S. 274 a private co. may by its AOA provide special disqualifications for appointment of directors 26. Restrictions on number of directorships S 275-79 (15 in case of Pub. Co.) 27. Restriction of powers of directors S. 293 28. Loan to directors S. 295 no restriction

29. Interested directors S..300 not apply 30. Determination of net profits for remuneration S. 349-50 31. Loans to other companies S 372 A restriction not applicable to Prvt. Co. 32. inter-corporate investments S. 372A 33. Power to prenent changes in Board of Directors S. 409 not applicable 34. Paid-up capita S. 3 : A private company can be registered with a paid-up capital of Rs.1 lakh whereas a public co. is required to have a minimum paid-up capital of Rs. 5 lakh.

COVERSION OF A PRIVATE COMPANY INTO A PUBLIC COMPANY: 1. Conversion by default; S. 43 2. Conversion by operation of law; S. 43A ; Deemed public company; certain managements incorporated their companies as private companies but employed substantial public funds.S. 43A introduced certain criteria according to which such private companies were treated as deemed public companies. 3. Conversion by choice.

CONVERSION BY CHOICE; S. 44. The following steps are necessary for this purpose: 1. Special resolution deleting from its articles the requirement of s. 3(1)(iii) 2. Increase in membership S. 12 3. Increase in number of directors S. 252 4. Raising of paid-up capita to the minimum prescribed for public companies 5. Within 30 days from the passing of the special resolution, a prospectus or a statement in lieu of prospectus in the prescribed form must be filed with the registrar S. 44(1)(b)

DISTINCTION BET. PUB.& PRVT.Company

Sl. No. 1. 2. 3 Details Min.capital Min.No.of members Max.No.of Members No.of directors Restriction on apptt. Private 1 lakh 2 50 Public 5 lakhs 7 No restriction 3 Not required

4. 5

2 consent

6.

7. 8. 9. 10

Ragerialest Prohibits n. On genl.invita. invita.subs. shares Transferabil Restricted ity of share Special privilege Quorum Privilege enjoyed 2

Genl. Pub.subs.

Free No such privilege 5 11% profit

Remunerati No restn. on mangl

FORMATION OF COMPANY
Any 7 or more persons (2 or more in case of prvt. Co. may form a company. DOCUMENTS TO BE FILED WITH REGISTRAR: The MOA and AOA - agreement, if any, reg. apptt. Of MD or whole time Director A list of Directors - agreed to become Declaration about co. law compliance

CERTIFICALE OF INCORPORATION
After filing requisite documents and Registrar being satisfied,he retains and registers MOA & AOA and Certificate of incorporation is issued. EFFECT OF REGISTRATION: 1. The company becomes distinct entity 2. The com. acquires,perpetu.succession 3. The co. property not shareholdrs.prop.

PROMOTERS
The role of promoters is to decide name of co., nominate Directors, MOA &AOA finalisation, registration of company. Fiduciary relations Not to make any profit To give benefit of nego.to company To make full disclosures Not to make unfair use of position CO.NOT BOUND BY PRE.INCORPN.CONTRACT

Memo.of Assn.(MOA)
MOA contains fundamental conditions upon which alone the co. has been incorporated. FORM AND CONTENTS The name clause Sec.13(1)(a) The regd. Office clause Sec.13(1)(b) Doctrine of ultra virus Liability clause Capital clause - Subscrip. clause

ALTERATION OF MOA Sec.16

1. change of name can take place by passing special resolution at a genl.meet.with approval of centl.govt. 2. change of regd. Office Spl. Reso.confirmation of R.Dir.copy to ROCo. 3. Alteration of object clause 4. Alteration of liability clause 5. Alteration of capital clause authorise cap.

ARTI. OF ASSN.(AOA) BYE LAWS OF COMPANY

Contents: 1.share capital 2.lien on share 3.calls on share 4.transfer of share 5.transmission of shares 6.forfeiture of shares 7.surrender of shares

8.conversion of shares into stock 9.share warrants 10.alteration of capital 11.general meetings & proceedings 12.voting rights of members, by poll,proxy 13.directors,their apptt.remu.quali.BOD 14.dividends and reserves 15.accounts and audit 16.borrowing powers 17.winding - up.

Companies which must have AOA Sec 26 A. Unlimited company B. Co. limited by guarantee C. Prvt. co,. by shares ADOPTION OF TABLE A There are 3 alternative forms Pub.Co.may adopt: 1. It may adopt Table A in full 2. It may set out its own AOA 3. Own AOA and part of Table A.

LIMITATION TO ALTER AOA

1.must not be inconsistent with the Act 2.must not conflict with the MOA 3.must not sanction illegal thing 4.must be for the benefit of co. 5.must not increase liability of members 6.alteration by special resolution 7.approval of central government 8.breach of contract 9.must not result into expulsn. Of members 10. No power of Tribunal to amend AOA 11.alteration may be with retros.effect

 DOCTRINE OF CONSTRUCTIVENOTICE S. 610 provides that the MOA and AOA when regd. become public document They can be inspected on payment of fee. Any person who contemplate entering into contract with the co. has the means of ascertaining and presumed to know the powersof the company. This is known as doctrince of constructive notice.

DOCTRICE OF INDOOR MANAGEMENT Normally, those dealing with the co. can assume that if the Directors or other officers are entering into those transactions, they would have obtained the ncecessary sanctions. This is known as doctrine of indoor management. This doctrine was laid down in the case of ROYAL BRITISH BANK VS TURQUARD (1856) 6 E.

 IN FOLLOWING CASES IM CAN NOT BE CLAIMED BY AN OUTSIDER: 1.when outsider has knowledge about irregularity 2.no knowledge of AOA 3.forgery 4.negligence 5.when question is in regard to existence of agency Where pre-condition is required.

 PROSPECTUS Sec. 2(36) A public co. Ltd. by shares generally issues shares to public for which it has to issue prospectus. After Certificate of Incorporation is obtained, the affairs of the co. are taken over by the first Directors. The Board attends to the following: Appointment of Bankers,Auditors, Secretary etc Entering into u/writing contract,brokerage etc. Listing of shares on Stock Exchange Drafting Prospectus for the purpose of issue to public.

 Definition of prospectus u/s 2(36): Any document described or issued as a prospectus and includes any notice,circular, advertisement or other document inviting deposits from public for subscription or purchase of shares in, or debentures of, a body corporate. Prospectus should be in writing and is an invitation to public.

 SHARES: Meaning - the capital of co. is divided into a number of indivisible units of a fixed amount. These units are known as shares. A share is not a sum of money but is the interest of the share holder in the company. A share is regarded as goods u/s 2(7) Sales of Goods act 1930. A share is not a negotiable instrument Share represents property and share certificate is an evidence of title of member to such property

 SHARE VS STOCK; Share represents a unit into which capital of Co is divided. If share capital is 500000.00 divided into 50000 units of rupees 10/-each unit shall be called share of company. The term stock may be defined as the aggregate of fully paid up shares of a member merged into one fund of equal value. It is set of shares put together in a bundle. Stock is expressed in terms of money and not as so many shares.

 TYPES OF SHARES: A company can issue two types of shares viz. (1) Preference share and (2) Equity share. Preference shares Sec. 85(1) have two characteristics: (a) they have a preferential rights to be paid dividend during life time of company. (b)preferential rights to the return of capital when the company goes into liquidation.

 2.Equity shares Sec 85(2) are those which are not preference shares. Sweat equity shares Sec79-A means equity shares issued at a discount or for consideration other than cash for providing know-how. KINDS OF PREFERENCE SHARES: 1.cumulative pref. shares - dividend goes on accumulating till it is fully paid 2.non-cumulative pref. share 3.participating pref.share - fixed dividend as well as share in surplus profit.

 4.non-participating pref, shares to convert into equity shares within certain period. 5.convertible pref. shares to convert into equity shares within certain period 6.non-convertible preference shares 7.redeemable pref. shares Sec.80 if AOA permits it can be redeemed SHARE WARRANT Sec. 114 and 115 Docu. Issued by pub.co.bearer is entitled to shares specified therein.

 DISTINCTION BET. SHARE WARRANT AND SHARE CERTIFICATE 1. All companies are required to issue SC. Share warrant can be issued by pub. Co. 2. Approval of CGovt. For issue of SW by pub.co. As per law, every co. has to issue SC. 3.SW. can be issued only with respect to fully paidup shares. SC is to be issued even where shares are partly paid up.

 4.the holder of SC is member of co. Holder of SW is not member unless AOA authorises. 5.SW is by mercantile usage a negotiable instrument. SC is not. 6.SW can be transferred mere delivery but not in case of SC. 7.No stamp duty is payable on transfer of SW. Stamp duty is payable in case of transfer of SC 8.where a Director is required to hold some qualification shares, SW does not constitute such qualifications

 9.SC is prima facie title to the shares. SW is the share security itself. 10.the holder of SC can present petition for winding up. The holder of SW cannot do so. 11.Dividend is paid to holder of SC by issue of SW. Dividend due on SW is advertised in new papers.

 BUY BACK SECURITIES: Sec. 77 A and AA permits a company to purchase its own shares .or other specified securities RULES REGARDING DIVIDEND: 1.Resolution at annual general meeting 2.Payment of dividend in proportion to paid up capital 3. Dividend to be paid only out of profits 4.Unpaid dividend to be transferred to special dividend account 5.Payment of unpaid dividend entitled to get 6.Dividend to be paid registered share holders

 SHARE CAPITAL: means the capital raised by a company by the issue of shares.

The capital may mean AUTHORISED, ISSUED, AND SUBSCRIBED OR PAID UP OR RESERVE CAPITAL 1.Authorised or nominal capital This is the nominal value of shares which a co. is authorised to issue. This is the maximum capital which the co. will have during its life time unless it is increased.

 2.Issued or subscribed capital: Issued capital is nominal value of shares which are offered to public for subscription 3.Called up capital- This is that part of issued capital which have been called up on shares 4.Paid up capital Which have been paid up by the share holders. 5.Un called capital This is the remainder of the issued capital which has not been called. 6.Reserve capital This is that part of uncalled capital of a company which can be called only in the events of its winding up.

 BORROWING POWERS: A company needs money to finance its activities from time to time. A part of this requirement is met by the issue of shares: for the rest , the company has to resort to borrowing. When company has express powers to borrow, it can borrow subject to the limits set by MOA and AOA. DEBENTURES: Sec 2(12) means to include debentures, stock, bonds, and any other security of company.

KINDS OF DEBENTURE: 1. Bearer debenture or u/regd. Debenture 2.Regd. debenture payable regd.holder 3.Secured debenture 4.Un secured or naked debenture 5.Redeemable debenture-after certain pd. 6.Irredeemable or perpetual debenture 7.Convertible debenture pref. or equity 8.Non convertible debenture duly paid as and when matured.

 COMANY MANAGEMENT: A co. in the eyes of law is an artificial person. It has no physical existence. It has neither soul or body of its own. It can act through Directors. The Directors are the brain of a company. Sec. 2(13) Director includes any person occupying the position of Director by whatever name called. NO. OF DIRECTORS: Every pub.co. shall have at least 3 directors. However a Pub. Co.having(a) paid up capital of 5 crore or more;(b) one thousand or more small shareholders shall have atleast one Director elected by such small shareholders.

 APPOINTMENT OF DIRECTORS 1.First Director Sec 254 2.Appointment of Directors by Co.Directors must be appointed by shareholders in Gen. Meeting 3.Appointment by Directors Sec. 260,262 4.Appointment of Directors by third party 5.Appointment by proportional representation 6.Appointment of Directors by C.Govt.

POSITION OF DIRECTRS: 1.Director as agent 2.Director as employer 3.Director as officer 4.Director as trustee of company

RESTRICTION ON APPTT. OF DIRECTOR: A person shall not be apptted.Director of a Co. by the AOA,unless before registration of AOA or publication of prospectus or his agent authorised In writing has (a) signed and filed with registrar consent in writing (b) signed the MOA for his qualification shares.

 NUMBER OF DIRECTORSHIP: No person to be Director for more than 20 companies. DISQUALIFICATION OF DIRECTORS:Sec 274: A Director must be (a) an individual competent to contract (b) hold qualification shares, if reqd. by AOA. The following persons are disqualified : a.person of unsound mind b.undischarged insolvent c.person who has applied to be adjudjudicated as an insolvent and his case is pending d.convicted person e.whose calls in r/o shares held in arrears -6months f.disqualified by anorder of Tribunal.

 WINDING UP OF COMPANY Winding up is the process by which the life of company is ended and its property administered for the benefits of its members and creditors. THE ACT PROVIDES 3 KINDS OF WU 1.Winding up by court 2.Voluntary winding up (a) by members (b) by creditors. 3.Voluntary winding up under supervision.

WINDING UP BY COURTS Sec. 433 1. BY passing special resolution 2. Default in holding statutory meeting 3. Failure to commence business 4. Reduction in membership 5. Inability to pay debts 6. Just and equitable: where there is deadlock with management, when main object of co. has failed, oppressive policy,co. is conceived for illegal purpose,if court finds that small co. is in essence a partnership.

WHO CAN APPLY FOR WINDING UP 1. Petition by co. if passed spl,resolution 2. Creditors petition 3. Registrars petition 4. Central Govt.petition

PROCEDURE FOR WINDING UP As soon as a winding up order is passed, the official liquidator attached to the High Court or District Court becomes the liquidator of company.

 1. first of all statement of affairs to be submitted by co. to liquidator Sec.454 2 Report by official liquidator Sec. 455 preliminary report regarding capital details, assets and liabilities to be submitted to court. 3. Custody of co. property - by liquidator Sec.456

POWERS OF LIQUIDATOR Sec. 457 With the sanction of court: 1. Institute and defend suits against co. 2. Carry on business if necessary for beneficial winding up 3. To sell movable or immovable property 4. To raise money on co. security of co. 5. To do things necessary for winding up. WITHOUT SANCTION OF COURT: To execute deeds,inspect records, prove co.claim in insolvency, to draw,accept negotiable instruments,appoint agent for business which he cannot do himself.

 VOLUNTARY WINDING UP: 1.Members winding up: A liquidator is appointed and his remuneration fixed in AGM. Fact to be notified to registrar when affairs are completely wound up he calls the final meeting and lays before it final account within a week, the Accounts are filed with registrar. If the report shows that the affairs were not conducted in a manner prejudicial to public interest then the company is dissolved.

 2. CREDITORS WINDING UP: Liquidator in addition to member calls creditors meeting. The creditors may appoint a committee of inspection consisting 5 members of creditors and 5 members of company. Rest procedure is same as in case of members winding up. 3. VOLUNTARY WINDINGUP UNDER SUPERVISION: When co. has passed a resolution for voluntary winding up, the court may make an order that winding up shall proceed subject to its supervision.

 The advantages of voluntary winding up under supervision are: The court may appoint an additional liquidator and remove liquidator according exigencies. The court get the same power as it has in the case kof winding up by court. Any creditor, contributory or person may apply to the court for determining any question connected with the winding up Sec.522 to 526

 CONTRIBUTORIES Sec. 428 To realise the uncalled residueof co. capital the liquidator has to call upon shareholders, who are then called CONTRIBUTORIES to pay unpaid balance. LIST A IS DRAWN FROM THE CO. REGISTER OF MEMBERS: LIABILITY OF PAST MEMBERS: A past membe is no liable to contribute inrespect of any debt or lability of co. contracted after he ceased to be a member.

 PAYMENT OF LIABILITIES Sec 528 Another important duty of liquidator is to pay off the companies liabilities. But where the company in liquidation is insolvent, insolvency rules will apply and lnly such claims shall be provable against the company as are provable against insolvent person. According to law of insolvency demands in the nature of unliquidated damage arising other than by reason of a contract or breach of trust and debts and liabilities which are incapable of being fairly estimated are not provable in insolvency.

 Under section 529 by the amendment of 1985, workers claims have been equated with those of secured creditors by providing that the security of every creditor shall be subject to pari passu charge in favour of workmen. Sec. 529 - A has also been added to the Act. It says that workders dues as equated with those of secured creditors shall be paid in priority to all other debts. If the assets are not sufficietnt to meet them they shall abate in equal proportion.

 PRFEFERENTIAL PAYMENTS Sec.530 The first payment to be made is called preferential payment such payments are (1)All revenues, taxes, cesses and rates due to central and state govts. Or to a local authorities to be paid within 12 months before winding up. (2)All wages or salaries of employees, in respect of services rendered to company and due for 4 months only within 12 months before winding up. contd.

 And any compensation payable toany workman under chapter VA of I.D.Act 1947. Earlier amount was not to exceed rupees 1000/- in case of one claimant. But now rupees 1000/- has ben replaced by the statement that amount not to exced to such as to be notified by central govt. through notification. 3. All accrued holiday remuneration b ecoming payble to any employee on termination of his employment before or by the effect of the winding up. Contd.

 4. All amounts due in respect of contribution to ESI Act 1948 before winding up 5. All amount due under WMCAct 1923. 6. All sums due under EPF&MP Act 1952.and Payment of Gratuity act 1972. 7. The expenseson any investigation held in pursuance of Sec. 235 or 237 of the Act 8. Other payment sec. 511 0. Unclaimed dividend Sec. 555.

 LIFTING THE CORPORATE VEIL: LIC Vs. Escorts ltd. (1986) 59 cc 548 SC, Held,while it is firmly established ever since in Soloman vs Soloman and Co 1879 that a company is an independent and legal personality distinct from individuals who are its members, it has since been held that the corporate veil may be lifted.

 CORPORATE VEIL MAY BE LIFTED IN FOLLOWING TWO HEADS; 1. Under statutory provisions 2. Under judicial interpretation Examples of statutory provisions misrptn. In prospectus.Sec 62, 63.failure to return application money Sec.69 within 8 days with 15% interest etc. Examples of judicial interpretation for Protection of revenue Prevention of fraud Determination of enemy character of a company Formation of subsidiary to act as agent Where co. acts as an agent of shareholders In cases of economic offences Where co. is used to avoid welfare legislation Where co. is used for illegal purposes Where co. is a mere sham or cloack Fraudulent scheme of an arrangement.