The Companies Act, 1956: Why Study Company Law ?

The Companies Act, 1956
Why study company law ?

 Most popular form of business organisation.
Why……….?
 It provides an organisational framework
it is a means to an end
 A company is a person in Income-tax.
 More than 60% of income-tax revenue
comes from corporate assessees
M E A N IN G O F A C O M P A N Y
A C O M P A N Y IS A N
A S S O C IA T IO N O F P E R S O N S
F O R S O M E C O M M O N P U R P O S E V IZ .
B U S IN E S S , C H A R IT Y , R E S E A R C H E T C .
R E G IS T E R E D O R IN C O R P O R A T E D U N D E R
T H E C O M P A N IE S A C T W H E R E B Y IT A Q U IR E S
C E R T A IN A T T R IB U T E S
S e p a ra te T ra n s fe ra b le
L e g a l E n tity S h a re s
L im ite d S e p a ra te
L ia b ility P ro p e rty
P e rp e tu a l C o m m o n
S u c c e s s io n S e al
Company, according to Lord Justice Lindley
• By a company is meant 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 (as the case may be)
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.
• The proportion of capital to which each member is
entitled is his share.
• The shares are always transferable although the right to
transfer is often more or less restricted. (Lord Justice
Lindley)
• On the basis of its characteristics, a company can
be defined as
“an incorporated association, which is an
artificial person created by law, having a separate
entity, with a perpetual succession and a
common seal”. (Haney)
Characteristic Features
of a Company
Separate Legal entity
Salomon v Salomon &Co.Ltd.
Limited liability of
members
Perpetual Succession
 Separation of ownership from management
 Transferable shares
 Separate Property
 Common Seal
Capacity to sue and being sued
Limitation of action: A company cannot go
beyond the power stated in the memorandum
Disadvantages of a Corporate Form
1. Formalities and Expenses: complex, cumbersome,

and detailed legal formalities.
2. Corporate disclosures
3. Separation of control from ownership
4. Greater social responsibilities
5. Greater tax burden in certain cases
6. Detailed winding up procedure.
Lifting the Corporate Veil
Fictional veil between the company & its members
Lifting the veil means disregarding the corporate
entity and paying regard to the realities behind the
legal form
Under Statutory Provisions
1. Reduction of membership below the statutory

minimum (sec. 45)
2. Misrepresentations in prospectus (sec.62 & 63)
3. Failure to return application money (sec. 69)
4. Misdescription of name (sec. 147)
5. Piercing the veil in holding and subsidiary
company relationships
6. Company under investigation
7. Fraud during winding up
8. For ultra vires Act
9. For violations of the provisions of other

statues
Under judicial decisions
1. Lifting corporate veil in tax matters.

2. Lifting corporate veil where company is used
for evasion of personal and statutory
obligation.
3. Lifting corporate veil for
determination of the enemy
character of the company.
1. Lifting corporate veil where company is
used to avoid welfare legislation.
2. Lifting corporate veil where body
corporate is used to commit fraud or
improper conduct.
3. Lifting corporate veil for determining
technical competence of the company.
Difference between Company &
Body Corporate
 Body Corporate is wider than the term company

 It has three distinct attributes:
 Separate legal personality
 Perpetual succession
 Common seal
According to section 2(7) body corporate or corporation
includes:
- A company formed under the Companies Act, or a
statutory company.
- A company incorporated outside India (foreign
company)
- Public Financial Institutions
- Nationalised Bank,
- Any other association of person declared as a body
corporate by the Central Government. Ex. ONGC
Thus every company is a body corporate but every body
corporate is not a company. The term body corporate
however does not include u/s 2(7) of the Companies Act:
1) A corporation sole: A corporation sole is a single

individual constituted as a corporation in respect of
some office held by him or function performed by him.
It enjoys corporate personality and status. For example
the offices of President of India, Governor of State,
constitute a corporation sole. The Crown or a Bishop
under the English Law are examples.
2) A co-operative society:
Is Company a Citizen
• A company has nationality and
domicile and residence
• But it is not a citizen and
therefore cannot be said to have
the fundamental rights expressly
conferred upon citizens only.
• As per the Citizenship Act, 1955,
only the natural persons can be
citizens of India. So a company
cannot be a citizen of India.
Is Company a property of the Shareholder?
• No, the company is not the property of its shareholders.
All the property in the name of the company is its
separate property which is controlled,
managed and disposed of by the company
in its own name.
• Thus the company is the owner of its assets and capital.
• Moreover, the company being a separate legal person, it
cannot be construed as property of the shareholder.
• The decision of the Supreme Court in the case, National
Textile Worker’s Union vs. P. R. Ramkrishnan, AIR 1993
(SC), has set at rest at the debate which was going on
this issue.
Kinds of Companies
A. The Companies not covered by the
Companies Act, 1956.
B. The Companies covered by the
Companies Act, 1956.
Companies not covered

by the Companies Act
i) Statutory companies
ii) Chartered Companies
Companies covered by the Companies Act
a) Private Company - Sec 3 (1) (iii)
b) Public Company - Sec 3(1)(iv)
These companies may be:

v) Companies with liability limited by shares.
vi) Companies with liability limited by guarantee.
iii) Companies with unlimited liabilities
(Unlimited Companies).
COMPANIES
COVERED BY THE NOT COVERED BY

COMPANIES ACT THE COMPANIES ACT
PUBLIC PRIVATE STATUTORY CHARTERED
THESE COMPANIES MAY BE

1. Companies Limited by Shares
2. Companies Limited by Guarantee
3. Unlimited Companies
OTHER COMPANIES
1. Companies not for profit
2. Government Companies, 3. Foreign Companies
4. Holding and Subsidiary Companies
From the point of view of liability, public and
private companies may be organized as
I. Companies not for profit
ii. Government. companies
iii. Foreign companies
iv. Holding and subsidiary companies
Private Company
A private company means a company which has
a minimum paid up capital of one lakh rupees or
such higher paid up capital as may be
prescribed and which by its articles:
– Restricts the rights to transfer its shares
– Limits the number of
members to fifty
– Prohibits any invitation to the
public to subscribe for any share,
debenture of the company
– Prohibits any invitation or
acceptance of deposits from
persons other than its members,
directors or their relatives.
FEATURES OF PRIVATE COMPANIES
A PRIVATE COMPANY
Means a Company which has a minimum paid-up
Capital of Rs. 1.00 lac
AND
1. Number of 2. Transfer of 3. Invitation 4. Invitation or

Members Shares for Public Acceptance of
Subscription Deposits
Minimum 2 Restricted No public Offer N o t a llo w e d f r o m

persons other than
Maximum 50 for Shares or
it s m e m b e r s , d ir e c t o r s
Debentures o r t h e ir r e la t iv e s
FEATURES OF PUBLIC COMPANIES
A PUBLIC COMPANY
means a company which
Is formed by at least
Seven Persons
and
which is not a which has a which is a

a private paid-up pvt company
company capital of & subsidiary of
Rs. 5 lac a public company
Distinction of a Private Company and a Public
Limited Company
 Number of Members
 Number of Directors
 Transfer of Shares
 Public Subscription
 Commencement of
business
 Allotment of Shares
 Statutory Meeting
 Managerial Remuneration
 Index of members
Other Companies
a. Government company [Sec 617]
b. Foreign Companies [Sec 591]
c. Holding and subsidiary Companies [Sec. 4]
d. Companies not for profit (or Association
not for profit) [Sec 25]
e. Public financial institutions
f. Investment company
Government Company [Sec. 617]
A Government company is a company in
which not less than 51% of the share capital is held.
1) by the Central Government , or
2) by one or more State Government, or
3) partly by Central Government
and partly by State Government.
Notes:
1) A Government company may be either a public or private
company. But a government company needs not use the
word 'private' as a part of its name.
2) The auditor of the government Company shall be appointed
by the Central Government on the advice of the
Comptroller and Auditor General of India [Sec. 619(2)].
Holding Company and
Subsidiary Company [Sec. 4]
A holding company is one
which exercises control
over another company,
and a subsidiary
company is one, over
which control is
exercised. Control can
be exercised either
through composition of
Board of directors or
through shareholding in
the subsidiary.
Holding Company is one:
1) Which holds more than half of the nominal value of the
equity share capital of another company (subsidiary
company)
2) Which controls the composition of the board of
directors of another company (subsidiary company).
Control involves the power to appoint all or majority
of the board of directors without the consent of some
other person.
3) A company shall be deemed to be a subsidiary
company of another if it is a subsidiary of a third
company which itself is a subsidiary of the controlling
company. For example, where company S is a subsidiary of
company H and company X is a subsidiary of company S then
company X shall be a subsidiary of company H .
Illegal Association [Sec 11]
An association or partnership is an illegal association if

all the following conditions are satisfied :
(a) The number of persons carrying on business exceeds
20 (10 persons in case of banking business).
(b) It is formed for the purpose of earning profits.
(c) It is not registered under the Companies Act or
formed under any other Indian law (e.g. Cooperative
Societies Act ,Trust Act).
(d) It is not a Joint Hindu Family
(i.e., an HUF is not an illegal association
even if he number of members exceed
20 or 10, as the case may be).
Exceptions to Illegal Association
1. Associations ‘not for profit-making’

2. Joint Hindu Family
Effects of an Illegal Association
1) In the eyes of law it has no legal existence.
2) Every member is personally liable
for all liabilities incurred in the business.
3) Members are punishable with fine, which may extend
upto Rs. 10,000.
4) Such an association cannot sue any of its members or
any outsider, not even if the association is
subsequently registered as a company.
5) The illegality of an illegal association cannot be cured
by subsequent reduction in the number of its members
(Kumar Swami Chettiar v. M.S.M. Chinnathambi Chetteiar).
6) The profits made by an illegal association are, however,
liable to assessment to income tax (Gopalji Co. v.
Conversion of private company
into a public company
1. Conversion by default [Sec. 43]

Where a private company makes default in
complying with any of the four restrictive
conditions it will be deemed as if it is not a private
company.
2. Conversion by operation of law
3. Conversion by choice [Sec. 44]
Conversion of a Public company into a
Private company
1) Special resolution for insertion
of restrictions of private company
2) Changing the name
3) Obtaining the approval of the Central
Government as required by Sec. 31
4) Filing of Altered Articles of
Association with ROC
5) Obtain fresh
certificate of incorporation
Defunct Company
1) A company which has stopped carrying on any business
or which is not in operation is termed as a defaunt
company.
2) The Registrar of companies may strike off company’s
name from the registrar of companies.
3) When the name of company is struck off the registrar of
companies, the company stands dissolved.
4) Thus, a defunct company
can be dissolved without resorting
to the winding up procedure.
Administration of Companies
Act - I
CENTRAL GOVERNMENT
(Ministry of Corporate Affairs)
REGIONAL DIRECTOR
REGISTRAR OF COMPANIES
Jurisdiction of Courts
S u p re m e C o u rt
N a tio n a l C o m p a n y L a w
A p p e lla t e T r i b u n a l
N a tio n a l C o m p a n y L a w T rib u n a l

The Companies Act, 1956: Why Study Company Law ?

Uploaded by

Copyright:

Available Formats

The Companies Act, 1956: Why Study Company Law ?

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Companies Act, 1956: Why Study Company Law ?

Uploaded by

Copyright:

Available Formats

The Companies Act, 1956

Why study company law ?

1. Formalities and Expenses: complex, cumbersome,

Under Statutory Provisions

1. Reduction of membership below the statutory

6. Company under investigation

7. Fraud during winding up

8. For ultra vires Act

9. For violations of the provisions of other

1. Lifting corporate veil in tax matters.

 Body Corporate is wider than the term company

1) A corporation sole: A corporation sole is a single

Companies not covered

These companies may be:

COVERED BY THE NOT COVERED BY

PUBLIC PRIVATE STATUTORY CHARTERED

THESE COMPANIES MAY BE

1. Number of 2. Transfer of 3. Invitation 4. Invitation or

Minimum 2 Restricted No public Offer N o t a llo w e d f r o m

which is not a which has a which is a

An association or partnership is an illegal association if

1. Associations ‘not for profit-making’

1. Conversion by default [Sec. 43]

You might also like