Companies Act 1956

Dr. Arun Mittal BIT, Noida

Definition of a Company
Section - 3 of the Companies Act,1956 defines a company as a company formed and registered under the Act, or an existing company formed and registered under any of the previous company laws.

Justice Lord Lindleys description of a company

An association of many persons who, contribute money or money's worth to a common stock and employ it in some trade or business; and who share the profit and loss arising there from.

The common stock so contributed is denoted in money and is the capital of the company.
The persons who contribute it , or to whom it belongs are members.

..contd.
The proportion of capital to which each member is entitled is his share. The member may sell his share in the company, thus withdrawing himself and making someone else a member to whom he transfers shares. The life of the company is independent of the lives of the members of the company.

What is a Company?
The term "company" has been defined as a collection of many individuals united into one body under special domination, having perpetual succession under an artificial form and vested by the policies of law with the capacity of acting in several respect as an individual, particularly for taking and granting of property, for contracting obligation and for suing and being sued, for enjoying privileges and immunities.

Distinctive Features A Company

Incorporated Association Artificial Person Separate Legal Entity Limited Liability Separate Property Transferability of Shares Perpetual Succession Common Seal Capacity to sue and being sued Separate Management

Types of Companies: Public Company

Public Company means a company which

is not a private company.

Has a minimum paid up capital of Rs. 5 lac or such higher paid up capital as may be prescribed. Is a private company which is subsidiary of a company which is not a private company.

Private Company
Private Company means a company which has a minimum paid up capital of Rs. One lakh or such higher paid up capital as may be prescribed; and by its articles of association :-

Private Company.. contd

Restricts the right to transfer its shares
Limits the number of its members to fifty.
Prohibits an invitation to the public to subscribe to

any shares in or the debentures of the company. Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives

Some of the privileges of a private limited company

Minimum number is members is 2 (7 in case of public

companies)

Prospectus or statement in lieu of prospectus does not

apply.

Restriction contained in Section 81 related to the rights

issues of share capital does not apply.

A private company does not need a separate certificate of

commencement of business.

contd
Provisions of Section 165 relating to statutory meeting and

submission of statutory report does not apply.

no person other than the member of the company concerned

shall be entitled to inspect or obtain the copies of profit and

loss account of that company.
Minimum number of directors is only two. (3 in case of a

public company)

Government Companies
A Government company means any company in which not

less than 51% of the paid up share capital is held by the Central Government or any State Government or partly by the Central Government and partly by the one or more State Governments and includes a company which is a subsidiary of a government company.

contd.
The Central Government may direct that certain provisions

of the Companies Act shall not apply or shall apply only with such exceptions, modifications and adaptations as may be specified to such government companies.

Foreign Companies
Foreign

Company,

means

company

incorporated in a country outside India under the law of that other country and has established the

place of business in India.

Formation of a Company
Any seven or more persons associated for any lawful
purpose may form an incorporated company, by

subscribing their name to the memorandum of

association, and submitting certain documents

with the registrar of companies

Steps in formation of a company

Promotion Incorporation / Registration

Capital Subscription
Commencement of Business

Promotion of a company
Promotion refers to the entire process by which a company is brought into existence.
It starts with the conceptualization of the birth a

company and determination of the purpose for which it is to be formed.

The persons who conceive the company and invest the

initial funds are known as the promoters of the company.

contd.
The promoters enter into preliminary contracts with

vendors and make arrangements for the preparation,

advertisement and the circulation of prospectus and

placement of capital.

Pre incorporation and provisional contracts

A pre incorporation contract never binds a company since a

person cannot contract before its existence.

Provisional contracts are contracts entered into by public

company after obtaining the certificate of incorporation, but before getting the certificate to commence business. Such contracts are not binding on the company until the company is entitled to commence business.

Incorporation /Registration
The promoters must make a decision regarding the type of company i.e. a public company or a private company and accordingly prepare the documents for incorporation of the company. Memorandum and Articles of Association (MA & AA) are crucial documents to be prepared.

Memorandum of Association
Memorandum of Association of a company is the

constitution or charter of the company and contains the powers of the company.
No company can be registered under the Companies Act,

1956, without the memorandum of association.

The memorandum of association should be in any of the one

form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956.

Schedule 1 to the Companies Act

Form in Table B is applicable in case of companies limited by the shares , form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital whereas form in table E is applicable to unlimited companies.

Purpose and Importance of MoA

It is a fundamental document It is an unalterable document It defines the limitation of the companys

operations It form the basis of relationship It contains clauses that give information about the company

important

Contents of Memorandum :
Name clause Domicile clause- Place or Location Objects clause Liability clause

Capital clause
Association clause

Name Clause
The name must not be undesirable in the opinion of the

Central Government (Section 20) The name must not be prohibited under Emblems and Name (Prevention of Improper Use) Act, 1950 The name must end with words Limited or Private Limited. A license may be granted by the central government by which, it shall not be necessary for a body to which a license is so granted to use the word limited or the words private limited as a part of its name The name of the company must be presented and published.

Situation Clause
This clause describes the address, city and state in
which the companys registered office will be

located. On the basis of this information only it is

possible to establish the domicile of the company and determine its nationality and the local laws that will govern its operations.

Object Clause
Object should not be Immoral

Illegal
Opposed to Public Policy Violation of Indian Companies Act

Doctrine of the ultra-vires

Any transaction which is outside the scope of the

powers specified in the objects clause of the Memorandum is ultra-vires the company and therefore void. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if every member agrees to it.

Consequences of an ultra vires transactions

The company cannot sue any person for enforcement of any of its rights under such transactions. No person can sue the company for enforcement of its/his rights under an ultra vires transaction. The directors of the company may be held personally liable to outsiders for an ultra vires action.

Doctrine of ultra-vires does not apply

If an act is ultra-vires of powers the directors, but intravires of company. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum. If an act is within the powers of the company but is irregularly done, consent of the shareholders will validate it. The lender of the money to a company under the ultravires contract has a right to make directors personally liable.

Articles of Association
The Articles of Association (AA) contain the rules and regulations for

internal management The AA is a contract between the company and its members and also between the members themselves. It specifies the rights and duties of the members and directors. The provisions of the A A must not be in conflict with the provisions of the MA. In case such a conflict arises, the MA will prevail.

The model AA
Normally, every company has its own AA. if a company does not have its own AA, the

model AA specified in Schedule I - Table A will apply. The articles of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956.

Schedule I - Table A
Form in Table B is applicable in case of companies limited by

the shares , form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital whereas form in table E is applicable to unlimited companies. A private company must have its own AA.

Doctrine of Constructive Notice

The Memorandum and Articles when registered become

public documents and they can be inspected by anyone on payment of a nominal fee. Every person dealing with the company is presumed to have read these documents and understood them in their true perspective. This is known as Doctrine of Constructive Notice.

Doctrine of Indoor Management

The doctrine of indoor management allows all those who deal

with the company to assume that the provisions of the articles have been observed by the officers of the company. An outsider is not expected to see that the company carries out the internal regulations.

Exceptions to the Doctrine of Indoor management

Knowledge of irregularity No knowledge of the Articles. Void or illegal transactions.

Registration of a Company
The following documents must be filed The MA & AA vetted, stamped and signed. Proposed agreement, if any, for appointment as its managing director. A statutory declaration in Form 1 Written consent of directors in Form 29 to agree to act as directors The complete address of the registered office of the company in Form 18 Details of the directors, managing director and manager of the company in Form 32.

Certificate of Incorporation
Once all the above documents have been filed and they are found to be in order, the Registrar of Companies will issue Certificate of Incorporation. This document is the birth certificate of the company and is proof of the existence of the company. Once, this certificate is issued, the company cannot cease its existence unless it is dissolved by order of the Court.

Commencement of Business
A private company is exempted from obtaining a certificate to

commence business. When a company has issued a prospectus, it shall not commence business unless; shares up to minimum subscription have been allotted; every director has paid to the company on each of the shares taken by him; permission for shares to be dealt in on any stock exchange ; and a duly verified declaration is filed with the Registrar.

End of the Session