COMPANIES ACT 1956

INTRODUCTION TO COMPANIES ACT 1956

What is a company

A company is an artificial person created by law. A company means a group of persons associated together for the attainment of a common end, social or economic. IT is a voluntary association of persons formed for some common purpose, with capital divisible into parts, known as shares, and with a limited liability. It is a creation of the law and is sometimes known as an artificial person with a perpetual succession and a common seal. IT exists only in the eyes of the law, I.e., it is regarded by the law as person, just as a human being. But it has no physical existence.

According to Sec (1), A company formed and registered under the act. According to Sec (3) of the act, on incorporation a company becomes a body corporate or a corporation with a perpetual succession and a common seal. Lindley says, the company as 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

Definition of a company

CHARACTERISTICS OF A COMPANY
Incorporated Association Artificial person Separate legal entity Limited liability Perpetual succession Common seal Transferability of shares Separate property Capacity to sue

Classification of Company
Companies

On the basis of incorporation

On the basis of liability

On the basis Of no. of members

On the Basis Of control

On the Basis Of ownershi

Cos. With limited liability Ltd. Ltd. Registered companies By By shares guarantee Charter companies Statutory companies Unlimited liability

Private company

Holding company government

Public company

Subsidiary company

Nongovernment

Classification on the basis of incorporation

chartered

companies : chartered companies are also known as Royal charter companies. Such companies are incorporated under the Royal (special) charter granted by the King or the Queen. Such companies as given exclusive powers rights and privileges under the Royal charter. For ex. East India Company

Statutory companies: These are created by special act of the legislature E.g.: The Reserve bank of India The Life Insurance corporation The Unit Trust Of India Registered Companies: These are the companies which are formed and registered under the companies Act, 1956 or were registered under any of the earlier companies act.

Classification on the basis of liability

Companies limited by shares : Companies limited by shares are the most commonly found companies. Section 12 (2) (a) implies that where the liability of the shareholders of a company is limited to the extent of the unpaid amount on the shares held by them, the company is known as a company limited by shares.

Company limited by guarantee : Section 12 (2) (b) states that, a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in any event of its being wound up, such company in this Act is termed as a company limited by

Classification on the basis of number of members Private company

A private company means a company which has a minimum paid up capital of Rs.1,00,000 or such higher paid up capital as may be prescribed , and by articles (a) restricts the right to transfer its shares, if any. This restriction Is meant to preserve the private character of the company (b) limits the number of its members to 50 not including its employee-members ( C) prohibits any invitation to the public to subscribe for any shares in or debentures of the company (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors and their relatives

Public company
A public company means a company which
Has a minimum paid up capital of Rs.5 lakh or such high paid-up capital, as may be prescribed

Classification on the basis of control

Holding company
A company is known as the holding company of another company if it has control over that other company.

Subsidiary company
A company is known as a subsidiary of another company when control is exercised by the latter over the former called a subsidiary company.
Company controlling composition of Board of Directors Holding of majority of shares Subsidiary of another subsidiary

Classification on the basis of ownership

Government company
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 governments or

Partly by the central government and partly by one or more state governments.
E.g.: State Trading Corporation of India Limited Minerals and Metals Trading Corporation of India limited

Non-government company
Foreign companies

FORMATION OF A COMPANY

Formation of a company
The whole process of formation of a company may be roughly divided , for convenience, into three parts. These are(i) Promotion (ii) Registration (iii) Floatation

Explanation-

Before a company is formed, certain preliminary steps are necessary, whether it should be private company or a public company ,what its capital should be , whether it is worthwhile forming a new company or taking over the business of an already established concern. All these steps are taken by certain persons known as Promoters. They do all the necessary preliminary work incidental to the formation of a company

(i) Promotion

(ii) Registration
Before a company is registered , it is desirable to ascertain from the registrar of the companies if the proposed name of the company is approved. Then the following documents duly stamped together with the necessary fees are to be filed with the Registrar:

DOCUMENTS NEEDED

:-

MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION LIST OF THE DIRECTORS CONSENT LETTER FROM DIRECTORS STATEMENT OF CAPITAL STATUTORY DECLARATION

 Memorandum

of association duly signed by the subscribers. The Articles of Association , if any signed by the subscribers to the memorandum of association .

OTHER DOCUMENTS

LIST OF DIRECTORS :THE LIST OF DIRECTORS WHO HAVE AGREED TO ACT AS A DIRECTORS SHOULD FILED WITH REGISTRAR THEY SHOULD SUBMIT THEIR - NAMES - AGE - OCCUPATION - FULL ADDRESSES IN CASE WHEN THE LIST IS NOT READY

Subscribers of the MEMORANDUM

WILL BE DEEMED TO BE THE DIRECTORS

CONSENT LETTER OF DIRECTORS :

EVERY PERSON WHO IS READY TO ACT AS DIRECTOR MUST GIVE A WRITTEN UNDERTAKING STATING THAT HE IS WILLINGLY AGREED TO ACT AS A DIRECTORS OF THE COMPANY ALONG WITH THE LETTER HE MUST SUBSCRIBE THE QUALIFICATION OF SHARES AS MENTIONED IN ARTICLES OF ASSOCIATION AND HAVE PAID THE AMOUNT ACCORDINGLY

NAME APPROVAL CERTIFICATE :

A COPY OF LETTER FROM THE REGISTRAR ANNOUNCING THAT THE NAME OF COMPANY WAS APPROVED WITHOUT ANY OBJECTION

STATEMENT OF AUTHORISED CAPITAL :THE COMPANY SHOULD PREPARE AND SUBMIT A STATEMENT OF PROPOSED CAPITAL WHICH IS AUTHORISED TO COLLECT FROM THE PUBLIC IT CONTAIN THE NUMBER OF SHARES AND DEBENTURES AND THE AMOUNT OF EACH CATEGORY

A COPY OF STATUTORY DECLARATION SHOULD BE ENCLOSED STATING TO THAT ALL THE FORMALITIES HAVE DULY COMPLIED WITH AS PER THE PROVISIONS OF COMPANIES ACT. IT SHOULD BE SIGNED BY AN ADVOCATE OF HIGH COURT OR THE SUPREME COURT OR A CHARTED ACCOUNTANT OR A DIRECTOR OR A SECRETARY OR MANAGER .

STATUTORY DECLARATION :-

RECEIPT OF REGISTRATION FEE IT IS NECESSARY TO :ATTACH THE RECIPT

OF THE REGISTRATION WHICH IS PAID TO REGISTRAR OFFICE OF WHICH IT IS CALCULATED BASIS ON THE AUTHORISED CAPITAL OF THE COMPANY

ISSUE OF CERTIFICATE OF INCORPORATION

ISSUE OF CERTIFICATE

AFTER THE RECEIPT OF THE ALL THE DOCUMENTS , THE REGISTRAR WILL SCRUITANISE THE DOCUMENTS . AFTER EVERYTHING IS SATISFIED , THE REGISTRAR WIL ISSUE THE CERTIFICATE OF INCORPORATION WITH THIS CERTIFICATE, THE COMPANY GETS ITS RECOGNITION AS A BODY OF CORPORATE.

A PRIVATE COMPANY CAN START ITS OPERATIONS IMMEDIATELY AFTER OBTAINING THE CERTIFICATE OF INCORPORATION

BUT A PUBLIC COMPANY HAS TO WAIT TILL IT GETS CERTIFICATE OF COMMENCEMENT OF BUSINESS . THIS CERTIFICATE SHOULD BE OBTAINED WITHIN ONE YEAR OF ITS INCORPORATION FAILING WHICH THE COURT CAN PASS AN ORDER FOR ITS CLOSURE.

(iii) Floatation
When a company has been registered and has been received its certificate of incorporation,it is ready for floatation , that is to say it can go ahead with raising capital sufficient to commence business and to carry it on satisfactorily.

MEMORANDUM OF ASSOCIATION

IT IS AN IMPORTANT DOCUMENT WHICH DEFINES OBJECTIVES, POWERS, SCOPES AND RELATIONS WITH OUTSIDERS It is the charter which contains the fundamental conditions upon which alone the company can be incorporated. SOME OF THE IMPORTANT CLAUSES OF MEMORANDUM OF ASSOCIATION ARE AS FOLLOWS

NAME CLAUSE:The company is free to choose any suitable name for the company provided COMPANY should not use any objectionable or identical with too nearly resembles the name by which a company is already registered. THE WORDS PRIVATE LIMITED IN CASE OF PRIVATE AND LIMITED IN CASE OF PUBLIC COMPANY AT THE END. In the opinion of the central govt. the name chosen is not undesirable.

SITUATION CLAUSE /Registered Office clause:Every company shall have the registered office from the day on which it begins to carry on business., or the 30th day after the date of its incorporation, which ever is earlier. Notice of such situation of the company must be given to the registrar within 30 day after the date of incorporation.

OBJECTIVE CLAUSE :

HERE THE COMPANY SHOULD MENTION ITS

MAIN OBJECTIVES of the company to be pursued by the company on its incorporation Objects incidental or ancilliary to the attainment of the main objects. OTHER OBJECTIVES

LIABILITY CLAUSE :

THE EXTENT AND NATURE OF THE LIABILITY OF SHARESHOLDERS SHOULD BE STATED LIKE
LIMITED LIABILITY LIMITED BY GAURANTEE UNLIMITED

CAPITAL CLAUSE

:-

DIVISION OF CAPITAL INTO SHARES OF DIFFERENT DOMINATIONS THE EXTENT OF EACH CAPITAL SHOULD BE SPECIFIED THE AUTHORISED CAPITAL SHOULD BE MENTIONED A COMPANY IS NOT AUTHORISED TO ISSUE ABOVE AUTHORISED CAPITAL

ASSOCIATION CLAUSE:

THIS CLAUSE CONTAINS DECLARATION OF MEMBERS THE NAMES, ADDRESSESS AND OCCUPATIONS OF THE SUBSCRIBERS SHOULD BE MENTIONED THE SIGNATURES ARE TO BE ATTESTED BY PROPER WITNESS

ARTICLES OF ASSOCIATION

ARTICLES OF ASSOCIATION :CERTAIN RULES AND REGULATIONS Bye laws that are necessary for the internal management of the affairs of a company are listed in the articles of association EVERY COMPANY HAS TO PREPARE ITS OWN ARTICLES

CONTENTS OF AOA :

DIFFERENT KINDS OF SHARES TO ISSUE CALLS ON SHARES Transfer of SHARE Transmission OF SHARES Forfeiture SHARES Conversion of shares into stock Share warrants Alteration of capital

CONTENTS OF AOA :

DIVIDEND & Reserves METHOD TO APPROPRIATION OF PROFITS General meetings and proceedings Voting rights of members Directors their appointment, remuneration ,qualification,, etc. Manager

CONTENTS OF AOA:

Accounts & audit Capitalization of Profits. WINDING PROCEDURE OF THE COMPANY ETC.

Secretary

Articles & Memorandum -Distinction

MOA It is the charter of the company. It defines the scope of the activities of the company. It being the charter of the company , is the supreme document. There are strict restrictions on its alterations.

AOA They are the regulations for the internal management of the company. They are the rules for carrying out the objects of the company. It is subordinate document of the company. They can be altered by a special resolution to any extent,

Prospectus
In order to finance its activities , a company needs capital which is raised by a public company by the issue of a prospectus inviting deposits or offers for shares and debentures from the public. Any document described or issued as a 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 any body corporate.

Meetings and its Types

Meeting may be defined as assembly of people for a lawful purpose . A company meeting may be defined as a concurrence or coming together of at least a quorum of members in order to transact either the ordinary or special business of the company. It is at these meetings that matters relating to the business of the company are decided .In this context meeting of the shareholders and directors become necessary.

Types of Meetings
Statutory Meetings 2. Annual general meeting (AGM) 3. Extra-ordinary general meeting 4. Class meeting
1.

STATUTORY MEETING
The first meeting of the share holders of the company is known as Statutory Meeting It is required to be held only by a public company having a share capital. It must be held within a period of not less than one month and not more than six months from the date at which the company is entitled to commence business. At least 21 days before the day of meeting a notice of the meeting is to be sent to every member stating it to be statutory meeting.

Statutory Report- The board of directors should also get a report, called the statutory report sent to each member along with the notice of the meeting. The members present at the meeting may discuss any matter relating to the formation of the company or arising out of the statutory report. is required to be held only once in the lifetime of a public company having a share capital. If default is made in complying with the provisions A. every director or other officer of the company who is in default shall be punishable with fine up to Rs. 5000

Annualthis is an annualMeeting General meeting of a As the name signifies

company. The purpose of this meeting is to give full information to members of progress made by the company during the year. Every company whether public or private , having a share capital or not, limited or unlimited must hold this meeting. Time interval between AGMs- the meeting must be held in each calendar year and not for more than 15 months shall elapse between two meetings . The first AGM may be held within 18 months from the date of its incorporation and if such general meeting is held within that period , it need not hold any such meeting in the year of its incorporation.

the maximum gap between two such meetings may be extended by three months by taking permission of the registrar of companies. Day and hour of meeting-The meeting must be held i) on a day which is not a public holiday ii) During business hours iii) At the registered office of the company or at some other place within a city , town or village in which the registered office is situated. The business to be transacted at such a meeting may comprise of ordinary business and special business.

The company must give 21 days notice to all members of the company and the auditor .the notice must specify the place and day and hour of the meeting. If default is made in holding the meeting , the company law board may, on the application of any member of the company, call or direct the calling of the meeting. If the company fails to hold the meeting either originally or when directed to do so by the company law board, then the company and every officer of the company who is in default shall be punishable with fine up to Rs. 50000 and in case of continuing default , with a further fine of Rs. 2500 per day during the continuance of default.

The company must give 21 days notice to all members of the company and the auditor .the notice must specify the place and day and hour of the meeting. If default is made in holding the meeting , the company law board may, on the application of any member of the company, call or direct the calling of the meeting. If the company fails to hold the meeting either originally or when directed to do so by the company law board, then the company and every officer of the company who is in default shall be punishable with fine up to Rs. 50000 and in case of continuing default , with a further fine of Rs. 2500 per day during the continuance of default.

Class Meetings
When it is proposed to alter , vary or affect the rights of particular class of shareholders and it is not possible to obtain the consent in writing, of the holders of 3/4th of the issued shares of that class a meeting of the holders of those shares may be called. Such a meeting is known as class meeting.

RESOLUTIONS
Resolution may be defined as the formal expression of decision of a meeting on that particular matter. Ordinary resolution Special Resolution Resolution requiring special notice

Ordinary Resolution
When a motion is passed by simple majority of the members voting at a general meeting, it is said to have been passed by an ordinary resolution. In other words a resolution shall be an ordinary resolution where the votes cast in favour of the resolution are more than the votes cast against the resolution.

Special Resolution
A resolution is a special resolution in regard to which The intention to propose the resolution as a special resolution has been specifically mentioned in the notice calling the general meeting; 21 days notice has been duly given for calling the meeting; The no. of votes cast in favour of the resolution is three times the number cast against it. Some of the cases in which a special resolution is necessary are: alteration of objects clause;change of registered office from one state to another; alteration of articles of association ,changes in the name of the company;

Resolution Requiring Special Notice

The object of special notice is to give the members sufficient time to consider the proposed resolution, and also to give the Board Of Directors an opportunity to indicate views, on the resolution if it is not proposed by them but by some other shareholders. a notice of the intention to move the resolution should be given to the company not less than 14 days before the meeting at which it is proposed to move. The company on receipt of such notice will give the notice of the resolution to the members at least 7 days before the meeting.

MANAGEMENT OF COMPANY

Management Of A Company
A company is an artificial person created by law. The person through whom it acts and by whom the business of the company is conducted are known as directors. The directors of the company are collectively known as the Board of Directors or the Board. any person occupying the position of director, by whatever name called. In reality directors are the persons who direct , conduct , manage or superintend a company's affairs.

Number of Directors- Every public company must have at least 3 directors. Every private company whether it is a subsidiary of a public company or not must have at least two directors.
Within the limits prescribed by the articles , the company may increase or reduce the number of its directors by an ordinary resolution in general meeting.

Appointment Of Directors
The appointment of directors are classified as
1.Appointment of first directors 2.Appointment of Subsequent directors 3.Appointment of directors by Board of Directors Additional Directors Filling Up the Casual Vacancies Alternate Directors 4.Appointment of directors by Third Parties etc. 5.Appointment of directors by the central government

Appointment of First Directors

The first directors are usually named in the articles of a company. The articles may , however instead of naming the first directors , confer power on the subscribers, or majority of them to appoint the directors. If the articles neither contain the names of the directors nor any provision for appointing them , subscribers of the memorandum who are individuals shall be deemed to be the directors of the company. They shall hold office until directors are duly appointed in the first annual general meeting.

Appointment Of Subsequent Directors

Section 255 provides that subsequent directors shall be appointed by the company in general meeting . In case of public company , at least two- third of the total number of directors shall be those who shall retire by rotation. This means that of the total number of directors only one-third can hold permanent directorships.

The BOD can exercise the power to appoint directors in the following three casesAdditional Directors (ii) Filling up the casual vacancies (iii) Alternate Directors
(i)

Appointment By Board Of Directors

Additional Directors- If permitted by the articles ,the BOD may appoint additional directors. Such additional directors shall hold office only up to the date of the company's next annual general meeting. Casual Vacancies- If the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may be filled by the board of directors at a meeting of the board Any person so appointed shall hold office till director in whose place he is appointed would have held office , had it not been vacated. Alternate Directors- If authorized by its articles or by a resolution passed by the company in general meeting , the board of directors may appoint an alternate director where the original director is likely to be absent for a period of not less than 3 months from the state in which the meetings of the board are ordinarily held..

Appointment By Third Parties The third parties may be empowered by the articles to nominate directors. Such third parties may be lenders of money- i.e. financial institutions, debenture holders.

Appointment by the Central Govt.- Section 408

empowers the central Govt. to appoint directors on the board of a company on the recommendation of company law board that it is necessary to appoint government directors to effectively safeguard the interests of the company or its shareholders or the public interest in case of oppression or mismanagement.

Accounts & Audit

It provides that every public company having paid up capital of Rs. 5 crore or more shall constitute a committee of the board of directors known as Audit committee .It will consist of three or more directors as decided by the board . The committee shall discuss the companys internal control system, scope of audit , auditors observations and review of the half yearly and annual financial statements before submission to the board. The recommendations of eh committee relating to financial management including the audit report shall be binding on eh board.