BE&L UNIT - IV

Unit - III -Companies Act 1956

Meaning:

The word company means an association formed by a number of persons for some
common object. When such an association of persons is registered under the companies act,
it becomes an artificial person with perpetual succession and common seal.

Definition:
According to sec. 3(1) (i) of the company act, 1956: A company is defined as, ‘a
company formed and registered under this act or an existing company.’ An existing
company means ‘a company formed and registered under any of the previous company
laws.’

Characteristics of a Company:

1. Incorporated Association: Under the Companies Act, a company must be

registered or incorporated. The minimum numbers of persons required for
incorporation are seven in case of public company and two in case of private
company.

2. Artificial person: It is an artificial legal person enjoying same rights and owing
same obligation as a nature person.

3. Separate Legal Entity: A company is separate and distinct from the persons who
constitute it.

4. Limited Liability: the liability of its members is limited to the unpaid value of the
shares held by them or guarantee given by them.

5. Transferability of Shares: Shares of the company are freely transferable which

makes the life of the company independent of the lives of its members.

6. Perpetual Existence: A company being an artificial judicial person, it is not

affected by the death, insolvency or retirement of the members. Members may
come and members may go out but the company can go on forever.

7. Common seal: Common seal is the official signature of the company because a

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company cannot sign like a natural person.

8. Company may sue and be sued in its own name: One of the consequences of
separate legal entity is that a company may sue and be sued in its own name.
Kinds of Companies

1. Chartered Company: Before the enactment of the Companies Act, a company would
be formed by means of Royal Charter or Proclamation. That is, the promoters had to
apply to the King through the parliament for necessary sanction and approval of the
company. As such, these companies were called Chartered Companies and they were to
use the word ‘Chartered’, e.g., the East India Company, the Bank of England etc.

2. Registered Company: The companies which are registered and formed under the
Companies Act, 1956, or were registered under any of the earlier Companies Act are
called Registered Company. These are commonly found companies. They were of three
types:

(i) Company Limited by Shares [Sec. 12(2)(a)]: In these companies, the liability of
the shareholders is limited up to the extent of the face value of shares owned by each
of them, i.e., the member is not liable to pay anything more than the fixed value of the
shares, whatever may be the liability of the company.

(ii) Company Limited by Guarantee [Sec. 12(2)(b)]: In these companies, the

liability of the shareholders is limited to a specified amount as provided in the
memorandum, i.e., each member provides to pay a fixed sum of money in the event of
liquidation of the company.

(iii) Unlimited Company [Sec. 12(2)(c)]: In these companies, every shareholder is

liable for all the liabilities of the company like ordinary partnership in proportion to
his interest. According to Sec. 12, any seven or more persons (two or more in case of
private company) may form a company with or without limited liability and a
company without limited liability is actually known as unlimited company.

3. Statutory Company: These companies are created by the Special Act of the
legislature, e.g., the State Bank of India, the Life Insurance Corporation of India, the
Reserve Bank of India, etc. These are actually concerned with public utility services, e.g.,
railways, gas and electric companies, etc. which require special powers to function.

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4. Private Company: According to Sec. 3(1)(iii) of the Indian Companies Act, 1956, a
private company is one which, by its Articles:

(i) Restricts the rights to transfer its shares, if any;

(ii) Limits the number of the members to fifty not including

(a) Persons who are in the employment of the company, and

(b) Persons who, having been formerly in the employment of the

company, were members of the company while in that employment, and
have continued to be members after the employment ceases; and

(iii) Prohibits any invitation to the public to subscribe for any shares in or debentures
of, the company.

5. Public Company: Sec. 3(1)(iv) of the Indian Companies Act, 1956, states that public
companies are “all companies other than private companies.” It is a company of seven or
more persons which offers its shares to the public for subscription. Since its shares are
offered to the public, scope for investment by a large number of- people is possible.

Its Articles do not contain provisions restricting the number of its members or excluding
generally the offer or transfer of shares or debentures to the public.

6. Foreign Company: The companies which are incorporated outside India but which
had a place of business in India prior to commencement of the new Companies Act, 1956,
and continue to have the same or which establishes’ a place of business in India after the
commencement of the Companies Act, 1956, is called a foreign company.

7. Government Company: According to Sec. 617, a Government company is a company

in which not less than 51% of the paid-up share capital is held by the Central Government
and/or any State Government or partly by Central and partly by State Governments. The
subsidiary of a Government company is also a Government company.

8. Holding and Subsidiary Company: According to the Companies Act, 1956, a

holding company may be defined as “any company which directly or indirectly, through
the medium of another company, holds more than half of the equity share capital of other
companies or controls the composition of the board of directors of other companies.

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Moreover, a company becomes a subsidiary of another company in those cases where the
preference shareholders of the latter company are allowed more than half of the voting
power of the company from a date before the commencement of this Act”.

Formation of a company

Formation of a company involves various stages which are as follows:

1. Promotion Stage:

The term ‘promotion’ refers to the sum total of activities by which a business
enterprise is brought into existence. At the promotion stage of a company, the promoters
conceive the idea of promoting a company and the type of activities that it intends to
undertake.

A promoter may be an individual, a group of individuals or one or more companies.

Subsequently, activities related to promoting the company are undertaken. These
activities are as follows:

• Identification of business opportunity and the type of business to be undertaken.

• Undertaking feasibility study to determine technical, economic and legal viability

of the project to be undertaken by the company.

• Deciding the name of the company to be formed and getting this name approved
from the Registrar of Companies.

• Obtaining consent of the persons who will be signatories to documents to be

submitted to the Registrar of Companies for getting the company registered.

• Obtaining consent of the persons who will act as first directors (2 required in the
case of a private company and 3 in the case of a public company).

• Selecting professionals who will prepare various relevant documents required for
registration of the company like Memorandum of Association, Articles of
Association, etc., and the professionals who will work as first auditors of the
company.

• Getting relevant documents prepared.

2. Incorporation Stage:

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Incorporation or registration stage involves putting an application for registering the

company before the concerned Registrar of Companies and getting it registered. In India,
there is an office of the Registrar of Companies in each major State of the country.
Incorporation stage involves the following activities:

• Filing registration application with the Registrar of Companies along with

relevant documents (Memorandum of Association, Articles of Association or
declaration of accepting Table A which is a model set of Articles of Association,
written consent of proposed Directors, certificate of approval of the company’s
name, agreement entered with the proposed Managing Director, statutory
declaration that all legal requirements for registration have been completed and
documentary evidence of payment of registration fees).

• Scrutiny of the application and documents by the Registrar of Companies.

• Registering the company by the Registrar if all requirements are fulfilled and
entering the name of the company in the relevant register.

• Issue of Certificate of Incorporation by the Registrar of Companies.

• On issue of the Certificate of Incorporation, the company comes into existence as

an artificial person.
3. Capital Subscription Stage:

After a company is registered, it proceeds to get money through allotment of share

capital to members. Initially, shares are allotted to persons who are signatories to
documents and have agreed to subscribe to the prescribed number of shares. After this, a
private company may start its business while a public company is required to get the
Certificate of Commencement of Business from the concerned Registrar of Companies.

The procedure for subsequent allotment of shares varies for a private company and a
public company. In a private company, subsequent shares are allotted through personal
contacts. In a public company, shares may be allotted through public issue of shares.

The usual procedure for this is as follows:

• Filing of prospectus with Securities and Exchange Board of India (SEBI).

• Getting approval from SEBI.

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• Appointing managers, underwriters and registrar to the issue.

• Appointing bankers for receiving applications for shares along with money and
brokers for promoting the issue.

• Inviting the general public (including institutions) for share subscription.

On receiving the minimum prescribed subscription, allotting the shares in consultation
with the concerned stock exchange where the shares are to be listed for trading.

4. Commencement of Business Stage: For commencing the business, a public company

has to obtain the Certificate of Commencement of Business from the concerned Registrar
of Companies. For this purpose, the company is required to submit the following
documents:

• A declaration that the shares to be subscribed on cash basis have been allotted.

• A declaration that all the Directors have paid in cash for the shares subscribed by
them.

• A declaration, signed either by a Director or Secretary of the company, that the

above requirements have been complied with.
The Registrar of Companies scrutinizes the above documents and issues the
Certificate of Commencement of Business if all requirements are as per the provisions of
the Companies Act.

Company Documents

(1) Memorandum of Association: Memorandum of Association is the most important

and principal document of a company. It has been described as the ‘Charter of the
Company’ as it contains the powers and objectives of the company, defines the scope of
its operations and its relations with the investors and outside world. The company has to
work within the limits laid down in the Memorandum of Association.

Contents of Memorandum of Association:

1. The Name Clause: This clause contains the name of the company with
which the company is to be registered.
2. Registered Office Clause: This clause contains the name of the state, in
which the registered office of the company is proposed to be situated. The

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exact address of the registered office is not required at this stage, but it
must be notified to the Registrar of Companies within 30 days of the
incorporation of the company. This clause is also known as the ‘Situation
Clause’ or ‘Domicile Clause’ or even The ‘Residence of the Company’.
3. Objects Clause: It is the most important clause of the Memorandum of
Association. A company cannot conduct any business which is not
authorized by its object clause.
4. Liability Clause: In case of a company limited by shares, the liability of
the members is limited to the amount unpaid on the shares held by the
members. For example, Amir, a shareholder is holding 1,000 shares of
Rs.10 each on which he has already paid Rs.8 per share. In the event of
losses or company’s failure to pay debts, his liability can be only upto Rs.2
per share i.e., Rs.2,000 (1,000 shares @ Rs.2 unpaid). Beyond this, he
cannot be called upon to bear losses from his private property.
5. Capital Clause: This clause specifies the maximum amount of capital
with which a company is registered, and the division thereof into shares of
a fixed amount and the number of shares which the subscribers to the
Memorandum of Association have agreed to subscribe. The company
cannot issue share capital in excess of the amount mentioned in this clause.
6. Association Clause: In this clause, the signatories to the Memorandum of
Association state their intention to be associated with the company and
also give their consent to purchase qualification shares. The Memorandum
of Association must be signed by at least seven (7) persons in case of a
public company and by two (2) persons in case of a private company.
(2) Articles of Association: The Articles of Association are the rules for the internal
management of the company. These are also called the ‘Bylaws of the Company’. It
defines the powers, duties and rights of the Board of Directors. These are subsidiary to
the Memorandum of Association and hence cannot override the Memorandum.

Therefore, in the event of any conflicting provisions in the two documents, the
provisions of the Memorandum of Association will supersede the provisions of the

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Articles of Association. A public limited company may either have its own Articles of
Association or may adopt. The main contents of articles of association are as follows:

1. Amount of share capital and different classes of shares.

2. Rights of shareholders.

3. Procedure for issue and allotment of shares.

4. Procedure for issuing share certificates.

5. Procedure for transfer of shares.

6. Procedure for forfeiture of shares.

7. Procedure for reissue of shares.

8. Procedure for conducting various meetings.

9. Procedure for appointment of directors.

10. Procedure for removal of directors.

11. Duties, powers and remuneration of directors.

12. Procedure of declaration and payment of dividends.

13. Winding up procedure.

14. Maintenance of accounts and their audit; and

15. Seal of the company.

Alteration in the Articles of Association: A company can change any provision of the
Articles by passing a special resolution subject to following conditions:

• Change should not be against the provision of Memorandum of Association.

• It must not result in breach of contract with outsiders.

• It must be in the interest of the company.

• No increase in the liability of the members.

• In case of a conversion of a public limited company into private limited company,

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approval of Central Government or the Company Law Board should be obtained.

(3)Prospectus: A public company can raise funds from the public by issuing shares and
debentures. For this, it has to issue a prospectus. A public company must issue a prospectus
inviting applications for shares from the public for subscription or purchase of shares or
debentures.

According to section 2(70) of the Companies Act, a prospectus is any document as per
sections 31 and 32 that invites offers from public for the subscription or purchase of shares or
debentures of a body corporate. Generally prospectus includes any document which invites
general public to invest in the securities of a company.

The main elements of a prospectus are as follows:

a. There must be an open invitation to general public.

b. The invitation must be made by the company or on behalf of the company.

c. The invitation must be to subscribe for or to purchase its shares or debentures.

DIRECTORS

Meaning of Managing Director:

It is a common practice that the Board of Directors appoints one of its members to manage
the affairs of the company as a whole time officer and calls him the Managing Director.

He acts as the chief executive. He occupies a position of dual authority and responsibility. As
a director, he attends the Board meetings and, as a manager, he performs the managerial
functions

Managing Director—as defined by the Companies Act—means a director who—by virtue

of an agreement with the company or of a resolution passed by the company in general
meeting or by its Board of Directors or by virtue of its Memorandum or Articles of
Association—is entrusted with substantial powers of management which would not otherwise
be exercisable by him and includes a director occupying the position of a Managing Director,
by whatever name called.

An analysis of the definition shows that:

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(i) The managing director must be an individual,

(ii) He must be a member of the Board of Directors,

(iii) He must be appointed by virtue of an agreement with the company or of a

resolution passed by the company in general meeting or by its Board of Directors or
by virtue of its Memorandum or Articles of Association,

(iv) He is entrusted with substantial power of management,

(v) He is not entrusted with powers of routine nature, and

(vi) He shall exercise his powers subject to superintendence, control and direction of
its Board of Directors.

Appointment of Managing Director

The appointment of a person as managing director in a public or

its subsidiary private company shall not have effect unless it is approved by the Central Govt.
In case of a new company, the approval must be made within three months of his
appointment.

The Central Govt. shall not accord its approval unless it is satisfied that:

(i) It is the interest of the company to have a managing director

(ii) The proposed incumbent is a fit and proper person for such appointment,

(iii) His appointment is not against public interest,

(iv) The terms and conditions of the appointment of the proposed managing director is
not against public interest.

Powers and Duties of Managing Director:

Managing Director is entrusted with substantial powers of company management

subject to the superintendence, control and direction of the Board of Directors. But he is not
entrusted to do the administrative acts of a routine nature such as the following:

(i) To affix the common seal of the company to any document, or

(ii) To draw and endorse any cheque on account of the company in any bank, or

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(iii) To draw and endorse any negotiable instrument, or

(iv) To sign any certificate of shares, or

(v) To direct registration of transfer of any share.

Company meetings:

A meeting therefore, can be defined as a lawful association or assembly of two or

more persons by previous notice for transacting some business. The meeting must be validly
summoned and convened. Such gatherings of the members of companies are known as
company meetings.

Essentials of Company Meetings

The essential requirements of a company meeting can be summed up as follows:

1. Two or More Persons: To constitute a valid meeting, there must be two or more
persons. However, the articles of association may provide for a larger number of
persons to constitute a valid quorum.

2. Lawful Assembly: The gathering must be for conducting a lawful business. An

unlawful assembly shall not be a meeting in the eye of law.

3. Previous Notice: Previous notice is a condition precedent for a valid meeting. A

meeting, which is purely accidental and not summoned after a due notice, is not at all
a valid meeting in the eye of law.

4. To Transact a Business: The purpose of the meeting is to transact a business. If

the meeting has no definite object or summoned without any predetermined object, it
is not a valid meeting. Some business should be transacted in the meeting but no
decision need be arrived in such meeting.

Kinds of Company Meetings

The meetings of a company can be broadly classified into four kinds.

1. Meetings of the Shareholders.

2. Meetings of the Board of Directors and their Committees.

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3. Meetings of the Debenture Holders.

4. Meetings of the Creditors.

1. Meeting of the Share Holders

The meetings of the shareholders can be further classified into four kinds namely,

1. Statutory Meeting,

2. Annual General Meeting,

3. Extraordinary General Meeting, and

4. Class Meeting.

The chart given below gives a classification of company meetings

1. Statutory Meeting

This is the first meeting of the shareholders conducted after the commencement of
the business of a public company. Companies Act provides that every public company
limited by shares or limited by guarantee and having a share capital should hold a meeting of
the shareholders within 6 months but not earlier than one month from the date of
commencement of business of the company.

Usually, the statutory meeting is the first general meeting of the company. It is
conducted only once in the lifetime of the company. A private company or a public company
having no share capital need

2. Annual General Meeting

The Annual General Meeting is one of the important meetings of a company. It is

usually held once in a year. AGM should be conducted by both private and public ltd
companies whether limited by shares or by guarantee; having or not having a share capital.
As the name suggests, the meeting is to be held annually to transact the ordinary business of
the company.

3. Extra-ordinary General Meetings (EOGM)

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Statutory Meeting and Annual General Meetings are called the ordinary meetings of a
company. All other general meetings other than these two are called Extraordinary General
Meetings. As the very name suggests, these meetings are convened to deal with all the
extraordinary matters, which fall outside the usual business of the Annual General Meetings.

EOGMs are generally called for transacting some urgent or special business, which
cannot be postponed till the next Annual General Meeting. Every business transacted at these
meetings is called Special Business.

Persons Authorized to Convene the Meeting

The following persons are authorized to convene an extraordinary general meeting.

1. The Board of Directors.

2. The Requisitionists.

3. The National Company Law Tribunal.

4. Any Director or any two Members.

4. Class Meetings: Class meetings are those meetings, which are held by the shareholders of
a particular class of shares e.g. preference shareholders or debenture holders. Class meetings
are generally conducted when it is proposed to alter, vary or affect the rights of a particular
class of shareholders. Thus, for effecting such changes it is necessary that a separate meeting
of the holders of those shares is to be held and the matter is to be approved at the meeting by
a special resolution.

2. Meetings of the Directors: Meetings of directors are called Board Meetings. These are the
most important as well as the most frequently held meetings of the company. It is only at
these meetings that all important matters relating to the company and its policies are
discussed and decided upon.

3. Meetings of Debenture Holders: The debenture holders of a particular class conduct

these meeting. They are generally conducted when the company wants to vary the terms of
security or to modify their rights or to vary the rate of interest payable etc. Rules and
Regulations regarding the holding of the meetings of the debenture holders are either entered

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in the Trust Deed or endorsed on the Debenture Bond so that they are binding upon the
holders of debentures and upon the company.

4. Meetings of the Creditors: Strictly speaking, these are not meetings of a company. They
are held when the company proposes to make a scheme of arrangements with its creditors.
Companies like individuals may sometimes find it necessary to compromise or make some
arrangements with their creditors, In these circumstances, a meeting of the creditors is
necessary.

Resolution

Meaning of Resolution:

A resolution is the final form of a decision taken at a meeting by voting on a

motion, with or without amendment.

A Resolution must not be confused with a motion:

A motion is considered at a meeting, a resolution is the outcome of the discussion. A

resolution is binding on the organization. It becomes effective when it is passed but minutes
make the evidence of such resolution.

Rules Regarding Resolution:

Every association has to function guided by the resolutions adopted at the meetings at
different levels—resolutions passed at general meetings, at executive meetings and at
committee meetings, if any. In an Assembly or in Parliament proposed Bills are passed in the
forms of resolutions which become the Acts subsequently

Types of Resolutions: Broadly speaking, resolutions are of two types:

(1) Ordinary Resolution:

This type of resolution has the following characteristics:

(a) This can be passed by a simple majority of votes and even by a margin of one vote. It can
be passed (or lost) by the casting vote of the chairman.

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(b) This type of resolution is necessary to take decisions on ordinary matters of the
association.

(c) This is the most common type of resolution.

(d) Formalities for passing such a resolution (unlike a special resolution) are not so strict.

(2) Special Resolution:

According to Sec. 189(2), a special resolution is that which can be passed at a general
meeting, votes being cast by the members present either in person or by proxy and either by
show of hands or by poll, provided that (a) in the agenda it is mentioned that the resolution
shall be passed as a special resolution, (b) a notice has been duly issued and (c) three-fourth
of the votes cast are in favour of the resolution.

(3) Resolution with Special Notice:

According to the Companies Act, certain resolutions require a special notice for their validity.
The resolution itself may be passed as an ordinary resolution. The notice for a members’
meeting is prepared and issued by the Board of Directors (the secretary does it in practice)
and the agenda is included in the notice.

(4) Resolution by Circulation:

The Board of Directors of a Company (or the members of a committee appointed out of the
directors of a company) may pass a resolution without holding a meeting. This can be done
by circulating a draft of the resolution together with necessary papers, if any, to all the
directors (or the members of the committee) at their usual address in India, and who are in
India

(5) Resolutions to be filed:

Copies of some resolutions, e.g., as resolution on change of any clause of any document, have
to be filed with the Registrar (Sec. 192).

Auditors:

An auditor is a person authorized to review and verify the accuracy of financial records and
ensure that companies comply with tax laws. They protect businesses from fraud, point out

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discrepancies in accounting methods and, on occasion, work on a consultancy basis, helping

organizations to spot ways to boost operational efficiency. Auditors work in various
capacities within different industries.

People who oversee the financial part of company are auditors. As per The Companies Act,
2013 a person shall be eligible for appointment as an auditor of a company only if he is a
chartered accountant and a member of Institute of Chartered Accountant of India.

What are duties of auditor?

The auditor shall make a report to the members of the company on the accounts examined by
him and on every financial statement which are required by or under this Act to be laid before
the company in general meeting. The auditor’s report shall also state—

 Whether he has sought and obtained all the information and explanations which to the
best of his knowledge and belief were necessary for the purpose of his audit and if
not, the details thereof and the effect of such information on the financial statements;
 whether, in his opinion, proper books of account as required by law have been kept by
the company so far as appears from his examination of those books and proper returns
adequate for the purposes of his audit have been received from branches not visited by
him;
 whether the report on the accounts of any branch office of the company audited by a
person other than the company’s auditor has been sent to him under the proviso to that
sub-section and the manner in which he has dealt with it in preparing his report;
 Whether the company’s balance sheet and profit and loss account dealt with in the
report are in agreement with the books of account and returns;
 Whether, in his opinion, the financial statements comply with the accounting
standards
 The observations or comments of the auditors on financial transactions or matters
which have any adverse effect on the functioning of the company;
 Whether any director is disqualified from being appointed as a director
 Any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith;
 Whether the company has adequate internal financial controls with reference to
financial statements in place and the operating effectiveness of such controls

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MODES OF WINDING-UP OF A COMPANY:

1. Compulsory Winding Up by the Court:

Winding up of a Company by an order of the court is called the compulsory winding

up. Section 433 of the Companies Act lays down the circumstances under which a Company
may be compulsorily wound up.

(a) If the Company has by special resolution, resolved that the Company may be
wound up by the court.

(b) If default is made in delivering the statutory report to the Registrar or in holding
the statutory meeting.

(c) If the Company does not commence its business within a year from its
incorporation or suspends it for a whole year.

(d) If the number of members is reduced, in the case of a public Company below
seven, and in the case of a private company below two.

2. Voluntary Winding Up: A voluntary winding up occurs without the intervention of the
court. Here the Company and its creditors mutually settle their affairs without going to the
court.

This mode of winding up takes place on:

(a) The expiry of the prefixed duration of the Company, or the occurrence of event
whereby the Company is to be dissolved, and adoption by the Company in general
meeting of an ordinary resolution to wind up voluntarily; or

(b) The passing of a special resolution by the Company to wind up voluntarily.

Section 488 provides for two types of voluntary winding up;

(a) Member’s voluntary winding up and

(b) Creditor’s voluntary winding up.

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(a) Member’s Voluntary Winding Up: This type of winding up occurs only when
the Company is solvent. It requires a declaration of the Company’s solvency at the
meeting of Board of Directors.

(b) Creditor’s Voluntary Winding Up: It occurs in the absence of declaration of

solvency i.e., when the company is insolvent. Hence, the Act empowers the creditors
of dominate over the members in this mode of winding up so as to effectively protect
their interest.

3. Winding Up Subject to Supervision of the Court: Windings up with the intervention of

the court are ordered where the voluntary winding up has already commenced. As a matter of
fact, it is the voluntary winding up but under the supervision of the court

The court will issue such an order only under the following circumstances:

(a) If the resolution for winding up was obtained by fraud by the company; or

(b) If the rules pertaining to winding up are not being properly adhered to; or

(c) If the liquidator is found to be prejudicial or is negligent in releasing the assets of

the company.

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