THE COMPANIES ACT, 1956

Dhaarna Rathore

Learning Objectives

Trace the evolution of the company form of ownership

Give the meaning of the company
Classify companies into different types
Bring out the main provisions of the Companies Act and describe how the
Act is administered
Comment on the operation of the Act
Point out the salient features of the Amendment Bills, 1993 and 1997.

Objectives of the Act

Minimum standard of business integrity and conduct in promotion and

management of companies;
Full and fair disclosure of all reasonable information relating to the affairs of the
company;
Effective participation and control by the shareholders and the protection of their
legitimate interests;
Enforcement of proper performance of their duties by the company management;
and
Powers of intervention and investigation into the affairs of the companies where
they are managed in a manner prejudicial to the interest of shareholders or to the
interest of the public.

Introduction
WHAT IS 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.
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.

Characteristics of a company
Separate legal entity
Limited liability
Perpetual succession
Common seal
Transferability of shares
Separate property

Types of Companies

Public company;
Private company;
Foreign company;
Company with liability limited by guarantee;
Government company;
Unlimited company; and
Holding and subsidiary companies.

Factors

Public

Private

How many
members

7- no limit

Min-2
Max-50

Transferability of
shares

Yes

No

Members

Public

Family and Friends

Directors

Min- 3

Min-2

Name

Limited

Private Limited

Commencement

Certificate of
Commencement

Incorporation
certificate

Stock Exchange
Lisiting

Yes

No

Foreign Company: A foreign company is one which is registered outside india and has a place
of business in India.
Companies Limited by Guarantee: Here members agree to pay a sum, in addition to the
amount of shares held by them, in the need arises, to pay off the creditors of the company.
Government Company: An enterprise ;
It has most features of private company
The whole of the capital or 51 % is owned by Government
All the directors or majority of them are appointed by the Government
It is created under the provision of companies act, 1956 and ;
Its funds are obtained from government and in some cases, from private shareholders and
through revenue derived from sale of its good and services.

Formation of a Company
1. Name approval
2. Registration
3. Fund Raising
- SEBI clearance
- Listing in stock exchange
- Inviting public
- Share allotment

4.

Business commencement
- declaration that prospectus has been filed
- declaration that minimum subscription has been received
- declaration that directors have taken up minimum shares
- declaration that certificate from secretary that all requirements
have been fulfilled

Memorandum of Association
It is the document which contains the rules regarding constitution and activities or objects
of the company.
It is a fundamental charter of the company.
The company is governed by it.
The company is allowed to work within the framework of it. By it outside world knows the
state of affairs.
It defines the extent and powers of the company.
If the acts of the company are beyond the limits of the MoA, such acts would be void and
ultra vires.
Directors are personally liable to make good the Companys loss if companys money is
spent on an

Contents of MoA [Sec.13]

Name of company with Limited suffixed in case of public company and Private Limited
suffixed for a private company.
Registered office of the company.
Objects of the company.
Liability of the members.
Details of share capital of the company.
Subscription or Association clause.

Articles of Association
Regulations of the company are prescribed by the Articles of Association.
It can be altered at any time according to the wishes of the members.
It is subordinate to the MoA and is under full control of the members.
Members can make their regulations through AoA subject to Companies Act.
It contains rules & regulations for the internal management of the company subject to
provisions of the Companies Act.

Doctrine of Ultra Vires

It means beyond powers. That is, any act done by the company beyond its legal
powers and authority.
Any act done by the company which is neither authorized by its objects nor by
the Act, that act is ultra vires the powers and authority of the company.
Such an act is void and cannot bind the company. And since it is void, it cannot
be ratified by shareholders either.

Doctrine of Ultra Vires

An act ultra vires the powers of Directors but not ultra vires the company can be
ratified by the shareholders.
Similarly and act ultra vires the Articles of the company but within the powers of
the Memorandum can be ratified by altering the articles.
Essentially, an act ultra vires the company is void and cannot be ratified.
Any act ultra vires but intra vires the Memorandum can be ratified, as such an act
is

Membership of a Company
Members (Section 41): A company when incorporated is an artificial person. It is
a constitution of natural persons called members of a company.
Who are the members of a company?
(1) Subscribers to the memorandum of a company and entered as members in the
Register of Members;
(2) Every other person who agrees in writing to become a member of a company
and whose name is entered in its Register of Members;
(3) Every person holding equity share capital and whose name is entered as
beneficial owner in the records of the depository.

How is membership acquired? (In any of the following ways)

1. By subscribing to the MoA before registration.
2. By agreeing in writing and name is entered in the register of members. By
subscribing to the shares.
3. By purchase of shares in his own name and when entered in the register of
members.
4. By succession. On insolvency of a member where official assignee or receiver is
entitled to be member in his place.
5. By allowing his name to appear in register of members. By entry as beneficial
owner in the records of the

How membership ceases? By transfer of shares.

1. By forfeiture of shares.
2. By surrender of shares.
3. By insolvency.
4. By death; name of deceased member continues till shares are registered in the
name of his legal representative.
5. By rescission of the contract to take shares on the ground of misrepresentation in
the prospectus.
6. By sale of shares by company after it exercises its right of lien on the shares or
in other legal way.

Rights of a Member/Shareholder
To receive notices of all general meetings.
To attend & vote at general meetings, appoint directors & auditors.
To receive copies of accounts of company.
Entitled to a copy of report of a statutory meeting.
To inspect the minutes of proceedings of any general meeting.
To inspect the register, index of members, debenture holders.
To transfer his shares.
Priority to have shares offered if there is increase of capital by the company. To
receive share certificate. To receive dividends in case of preference shares. To
make an application to the Central Government for ordering investigation into the
affairs of the company. To apply to CG to convene the AGM when Board of
Directors fail to convene the same. To present a petition to the Court for winding
up of company.

Rights of a Member/Shareholder
To receive share certificate.
To receive dividends in case of preference shares.
To make an application to the Central Government for ordering investigation into
the affairs of the company.
To apply to CG to convene the AGM when Board of Directors fail to convene the
same.
To present a petition to the Court for winding up of company.

Liabilities & Duties of Member

To pay calls on the shares whenever demanded by the company.
To pay the full nominal value of the shares held by him in case of a company
limited by shares.
To pay all the debts of the company, in case of a company with unlimited liability.
All moneys payable by any member to the company under the Memorandum or
Articles shall be a debt due from him to the company [Sec. 36(2)]

Register of Members
Every company must keep a register of members with the following particulars:
i) Name, address & occupation.
ii) Shares held by each member, distinguishing each share by its number, and the
amount paid on those shares.
iii) Date at which each member was entered in the register.
iv) Date on which any person cease to be member.

Index of Members:
Every company having more than 50 members shall keep an index in the form of a
Card-index of the names of the members of the company.
The index, shall at all times, be kept at the same place as the register of members.
On payment of a fee of Re. 1 for each inspection, any member may make extracts
from any register or acquire a copy of any register.

Foreign Registers:
A company which has a share capital or which has issued debentures may keep in
any State or country outside India a branch register of members or debenture
holders resident in the State or country.
Annual Returns: Every company has to file every year with the Registrar annual
returns containing certain particulars. Shall give the particulars as on the date of
holding the annual general meeting.

Prospectus
A public company invites public to subscribe towards its share capital through the
issue of a Prospectus.
A prospective investor would naturally like to know the financial background of
the company, its activities, future programmes, nature of investment, risk, etc.
Every investor would like to receive reasonable but sure returns. Prospectus of
a company provides this information.

Definition Section 2(36): Prospectus means 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 in, or debentures of a body corporate.
An abridged prospectus means a memorandum containing such salient features

Contents of the Prospectus

Dating of prospectus (Section 55)
Registration of Prospectus (Section 60) With every prospectus shall be attached
the following documents when filed with the Registrar:
1. Experts consent. For e.g., engineer, valuer, lawyer, accountant, etc.
2. Delivery for registration.
Where any prospectus is published as a newspaper advertisement, it shall not be
necessary in the advertisement to specify the contents of the memorandum or the
signatories, or the number of shares subscribed for by them.

Allotment of Shares Rule to be observed

A prospectus shall be filed with Registrar.
No allotment of shares shall be made to public unless the minimum subscription
amount stated in the prospectus is raised and received by the company.
Application for shares should be made in prescribed form.
No allotment shall be made until the beginning of the 5th day after a date on
which prospectus is issued.
Companies intending to offer must make an application to one or more stock
exchanges for permission.
The whole of the application money should have been paid and received by
company in cash.
All moneys received shall be deposited in a Scheduled Bank until the certificate
to commence business is

Transfer of Shares
A share is a movable property, transferable in the manner provided by the articles.
A share holder has a statutory right, in the absence of restrictions in the articles, to
transfer shares to any person without consent of anybody.
A private company with share capital may restrict the right to transfer its shares
by its articles. Transfer of shares is less strict in a public company.

Transmission of Shares
Where shares pass by operation of law from one person to another.
For example, by holders insolvency, or lunacy or by death and inheritance.
The person to whom shares are transmitted shall make an application to the
company for transmission of shares in his name.
In case if the company refuses to register transmission, right of appeal arises in
the same manner as in case of transfer.
No instrument of transfer is required.

Meetings
GENERAL MEETINGS: Such meetings are the meetings of the share holders. i) Statutory
meeting (Sec. 165): Every company within a period not less than 1 month nor more than 6
months from the date at which the company is entitled to commence business, will hold a
general meeting of the members of the company.
ii) Annual general meeting (Sec. 166, 167 & 171): Every company shall in each year hold in
addition to any other meeting an annual general meeting. Such meeting shall be specified in
the notice calling it. Not more than 15 months shall elapse between the date of one general
meeting and that of the next. The directors are responsible for calling a general meeting. A
company may hold its first annual general meeting within 18 months from the date of its
incorporation.

If default is made in holding an AGM, the Company Law Board may, on the
application of any member of the company, call or direct the calling of the
meeting. Such a meeting shall be deemed to be an annual general meeting of the
company. By Companies (Amendment) Act, 2002, this power is conferred on
Central Government instead of Company Law Board. The same power is vested
with a Tribunal in
Proceedings at AGM (Sec. 173): Following business is transacted in the AGM by
passing ordinary resolutions: i) Considerations of accounts, and the reports of the
Board of Directors and the auditors; ii) Appointment of auditors and fixing their
remuneration; iii) Declaration of a dividend; iv) Appointment of directors in place
of those retiring; v) Any other business can be transacted in the AGM as a special
business, by passing a special resolution.
iii) Extraordinary general meeting (Sec. 169): This type of meeting is convened to
transact any urgent or special business. All business transacted at an EGM shall be
deemed special. The EGM may be called by the Board of Directors; or by the same
on the requisition of not less than 1/10th of members holding paid- up capital and
having voting rights; or by the requisitionists themselves.

CLASS MEETINGS: The company may vary the rights attached to the shares of
any class. Such rights can be varied by convening separate meeting of holders of
different classes of shares, whose rights are so proposed to be varied, and obtaining
their consent. Class meetings are held in cases where their rights are sought to be
affected.
MEETINGS OF CREDITORS & DEBENTURE HOLDERS: Such meetings are
generally held in case of winding up of the company; or In case of proposed scheme
of arrangement and compromise to obtain their consent; or By the Court where
company desires to reduce its share capital
BOARD MEETINGS (Sec. 285 & 286): A meeting of the BoDs of every
company must have
It is a right and duty of a director to attend every Board meeting.
Though he may not attend all meetings, it would amount to negligence, if w/o
sufficient cause, he fails to attend the Board meeting.
A Board meeting can be held on a public holiday or outside business hours for the
convenience of the directors. Normally should be held on working days.
Board meeting may be held at the registered office or at any place convenient to
the BODs.

Essentials of a valid meeting

To be convened by Board.
Notice: Contents of notice; Service of notice.
Explanatory Statement
Ordinary business and/or Special business.
Quorum: 5 members from public company and 2 members from any other
company.
Chairman of the meeting.

Appointment of Director
Appointment of Directors Through Board Meetings Casual vacancies: A casual
vacancy arises when the office of any director appointed by the company in a
general meeting is vacated before his term of office expires in the normal course.
Additional directors: BoDs may appoint the same to hold office only upto the date
of the next AGM. However, the number of the directors and additional directors
shall not exceed maximum strength fixed for the Board
Alternative directors: BoDs may, if authorized by the articles, or by a resolution
passed in a general meeting, appoint the same to act for the original director during
his absence for a period not less than 3 months. An alternative director is in the
same position as any other director as regards his rights, duties and liabilities as a
director. He acts on his own.

Share qualification of Director

Share Qualification of a Director
It means the shares to be taken by a director to qualify him as a director of the
company.
It shall be the duty of every director to hold a specified share qualification within
two months after his appointment as director.
The nominal value of the qualification shares shall not exceed Rs.5000.
A failure to acquire the specified share qualification will result in the vacation of
the office of the director.

Removal of Director
Removal of Directors By Shareholders (Sec.284): A company may by ordinary resolution
remove a director before the expiry of his period of office by: i) special notice of any
resolution; ii) on receipt of notice of a resolution, the company shall forthwith send a copy
thereof to the director concerned. Exceptions: Directors cannot be removed if appointed by
Central Government; if director holding office for life in case of private company; or if
appointed by company in
By Central Government (Sec. 388B-388E): The CG may state a case against the director
and refer the same to the Company Law Board with a request to enquire into the case and
record a decision as to whether or not the director is fit or proper to hold office connected with
the conduct and management of any company. The case against the director may be initiated
by the CG under the circumstances of fraud, persistent negligence, defaulting on obligations
and functions, lack of sound business/commercial practices, causing damage to the interest of
trade, industry or
By Company Law Board (Secs. 402 & 407): On application by any member in cases of
oppression, or mismanagement, the CLB may terminate, set aside or modify any agreement
between the company and a director, MD, and the manager. The same whose agreement is so
terminated shall, for a period of 5 years be appointed as director or MD or manager of the
company. Such a director/manager shall not be entitled to any claim for damages or for
compensation for loss of office.

Provisions of the
Amendment Bill
The provisions of the Bill are as follows:
1. The procedure for incorporating a company has been simplified. Some of the
'inherent powers' of a company are set out in a schedule (Schedule II), so that
these may not be set out at length in the memorandum of association. It will be
open to a company to modify these 'powers' in its memorandum-the result will be
that now the companies, instead of elaborately setting out the normal and routing
powers, adopt the provisions of Schedule II with such modifications to suit the
companys particular requirements. This approach is similar to a company
adopting Table-A of the Schedule (with modifications, if so desired) to avoid having
to print lengthy articles of association.
2. If a company wishes to alter its clause of the memorandum, all that is required to
do is pass a special resolution, at a meeting of the members and not seek the
approval of the Company Law Board. This change recognises the rights of the
owners of the company, viz., the members, under the Act of 1956. The Company
Law Board, while granting approval, stipulates conditions or cuts down the effect of
the alternation without sometimes appreciating the effect thereof. This will also
enable the companies to diversify without interference of the Company Law Board.

Provisions of the Amendment Bill (contd.)

3. Now the Debenture Trust Deeds will be uniform, according to the prescribed
format. The company will be under an obligation to ensure the execution thereof
within the statutory period. It will also spell out the functions and duties of the
debenture trustees.
Very often, depositors do not receive interest from
companies in time, either because of postal delays, or the companies deliberately
delaying posting of interest. To overcome this situation, it is suggested that along
with the deposit receipt, companies must be asked to send post-dated interest as
in case of IDBI bonds.
4. The companies which have defaulted in the repayment of deposits and interest
thereon, will no longer be allowed to accept fresh deposits or to renew the existing
ones and moreover, they will not be able to lend monies to other companies.
5. The depositors will now be able to nominate a person of their choice to receive
the repayment of deposits in case of death, thus avoiding the need for obtaining
legal representation to the estate of the deceased.

Provisions of the Amendment

Bill (contd.)
6. The unclaimed dividends remaining unpaid for seven years will be transferred to
an 'investors protection fund' to be untilised for payment to investors who have
lost their deposits due to inability of the company to repay their deposits. This
change appears to be more a populist move rather than a measure of genuine
relief. What is needed is some kind of insurance cover to be available to the small
depositors, say upto Rs.10,000. The premium for such insurance can be
collected from the companies receiving deposits. A small percentage of the
amount of deposits collected by the companies cannot prove an enormous burden
on the resources of the companies.
7. The rights of companies to refuse transfer of shares and debentures are restricted
to only specified grounds.
8. Private companies will not become 'deemed public companies' only on the ground
of turnover.
9. Under the new dispensation a 'relative' of a director cannot be appointed auditor
of the company, nor should an auditor be indebted to the company. This is to
ensure independence of the auditors.

Provisions of the Amendment Bill (contd.)

10. Some of the provisions of the prospectus are made more stringent to
ensure transparency and to give a fair deal to intending investors in
shares and debentures of a company, and a format of 'abridged
prospectus' is being prescribed to ensure all material disclosure.
11. The companies will be required to disclose in their annual account,
significant accounting policies and to make a statement that the
published accounts are in conformity with the established accounting
standards.
12. The procedures for liquidation of companies is being simplified, and
instead of the court liquidator, professionals (such as lawyers, auditors)
can be appointed as liquidators. This will expedite the conclusion of
liquidation proceedings, which at present ran into years and years, and
in the meantime, the creditors may forget that they have any claim to
recover.
13. The companies will now be liberated from the cumbersome procedure
of filing various (and sometimes, meaningless) returns with the
Registrar of Companies. Instead of over 80 returns now required to be
filed, only two or three returns will now be filed (See Box 16.2 for merits
and demerits).

Number of Companies and their Paid-up Capital: 1950-51 to 1991-92

Number of Companies

Paid-up Capital

(Rs.Cr.)
Year

Govt.

Private

1950-51
1960-61
1970-71
1980-81
1988-89
1989-90
1990-91
1991-92

36
142
314
851
1134
1160
1167
1180

28496
25438
29465
64406
178774
200499
222796
248674

Foreign
Indian
569
543
300
420
469
489
507

Govt.Cos. Non-Govt.
Cos.
26
547
2064
11443
42572
47451
54485
56482

749
1272
2439
4914
15131
17193
20313
22415

Thank You