Companies’ Act 1956

Companies’ Act 1956 Arun Kumar Davay

Indian companies Act 1956

According to section 3(1) (i) of The Companies Act, 1956, “Company means a company formed and registered under this Act or an existing company”. A "Company" may be defined as a voluntary association of persons who have come together to carry on some business and sharing the profits, there from. It is an artificial person created by law, formed for the purpose of business, registered under law having an independent legal entity, a distinctive name, common seal and perpetual succession Company - “ an association of many persons who contribute money or money’s worth to a common stock and employ it in some common trade or business (for common purpose) and who share the profit or loss arising there from” Meaning of the Company

Incorporated Association An artificial person created by law Separate Legal Entity:: Perpetual Existence /Succession Common Seal Limited Liability : By Shares, By Guarantee Free Transferability of shares One Share-One Vote Capacity to sue and being sued Separate Property Separate Management Characteristics of a Company

i. Collection of huge financial resources ii. Limited liability iii. Free transferability of shares iv. Durability and stability v. Growth and expansion vi. Efficient management vii. Public confidence viii. Social benefits a. Democratization of management b. Dispersal of ownership c. Assumption of social responsibilities Merits of a Company

i. Lengthy and expensive legal procedures ii. Excessive government regulations iii. Lack of incentive iv. Delay in decision making v. Conflict of interest vi. Oligarchic management vii. Speculation viii. Growth of monopolistic tendencies ix. Influence government decisions Limitations of Company Organization

Misrepresentation Investigations Fradulent Conduct Protection of Revenue Economic Offences Improper Uses Mere Sham or Fly by Night Lifting the Corporate Veil

Company Vs Partnership

i. Private Company Ii. Public Company iii. Government Company iv. Holding and Subsidiary companies V. Foreign Companies Types of Companies

1. Basis of incorporation: Chartered company :The royal prerogative has power to create a corporation by the grant of a charter to persons assenting to be incorporated. E.g. Bank of England, East India Company Statutory Company : These are companies created by a special act of the Legislature E.g. Reserve Bank of India, State Bank of India, Life Insurance Corporation -- Registered or Incorporated Company: These are companies which are formed and registered under the companies Act, 1956. Private Company Public Company Types of Companies

2.Based on Liability a company limited by shares a company limited by guarantee an unlimited company 3. On the basis of Number of members 1) Private Limited Company 2) Public Limited Company

4. Based on Control Government Company Foreign Company Holding and Subsidiary Company Multi National Company

Features of Government Company i. Registered under Indian Companies Act ii. Government holding of majority shares iii. Board of Directors representing the Government iv. Relatively free from Government procedures v. Overall control of the Government Government Company

Difference Private Companies Public Companies Min no. of members Minimum number of members in private company is two Minimum number of members in public company is seven Max.no. of members Maximum number of members in private company is 50 No maximum limit of membership in public companies Number of directors Minimum number of directors is two. Minimum number of directors is three Issue of shares to public Not allowed to issue public invitation for investing in the company Public invitation of prospectus and public issue of shares, debentures and deposits allowed. Transferability of shares Private co restricts the transfer of shares. The shares cannot be listed in stock exchanges A public company cannot put any restriction on the transfer of shares. They’re freely transferable Minimum Capital The minimum paid up capital for a private company is Rs.100,000. The minimum paid up capital of a public company is Rs.500,000 Holding director ship Directorships held in private companies are excluded A person cannot hold directorship in more than 20 public companies

Meaning of Promotion Promotion is the first stage in the formation of a company. Promotion involves identification of a business opportunity or idea, analysis of its prospects and taking steps in implement it through the formation of a Company. A company may have more than one promoter. The promoter may be an individual, firm, an association of persons or a body corporate. I. Promotion

To Conceive Business Idea To make Detailed Investigation To Organize the Resources To Obtain the Consent of Persons Willing to Act as First Directors To Decide about the Name of the Company To Get the Necessary Documents Prepared To Arrange for Filling of the Necessary Documents with the Registrar Functions of a Promoter

1) Memorandum of Association: Document that governs the relationship between the company and the outside world a) Name clause:Governed by “ Emblems and Names Act 1950” Seal to be present on all business letters, notices etc b) Domicile clause:Ascertains domicile and nationality of a company c) Objects clause: Explains the utilization of shareholders funds Enables the person dealing with the company to ascertain its powers d) Liability clause:It states the liability of the members of the company is limited e) Capital clause: It must state the authorized of nominal share capital f) Association or Subscription Clause:It specifies the willingness of the subscribers to associate and form a company Violation of MoA: “Doctrine of the ultra-vires” II. Incorporation by Registration

Alteration of the Memorandum Change of name Change of registered office Change of the Objects clause To carry on its business more economically To attain its main object by new or improved means To enlarge or change the local area of its operation To restrict or to abandon any of the objects specified in the memorandum To sell or dispose of the whole or any part of the undertaking of the company To amalgamate with any other company or body of persons

The Articles of Association (AA) contain the rules and regulations of the internal management of the company. 1.Powers, duties, rights and liabilities of Directors and Members 2.Rules for Meetings of the Company 3.Dividends 4.Borrowing powers of the company 5.Calls on shares 6.Transfer & transmission of shares 7.Forfeiture of shares 8.Voting powers of members, etc 2) Articles of Association

Contents of Articles The business of the company; The amount of capital issued and the classes of shares into which the capital is divided, the increase and reduction of share capital; The rights of each class of shareholders and the procedure for variation of their rights; The execution or adoption of a preliminary agreement, if any; The allotment of shares; calls and forfeiture of shares for non-payment of calls; Transfer and transmission of shares;

Contents of Articles Company’s lien on shares; Exercise of borrowing powers including issue of debentures; General meetings, notices, quorum, proxy, poll, voting, resolution, minutes; Number, appointment and powers of directors; Dividends – interim and final – and general reserves; Accounts and audit; Keeping of books – both statutory and others.

Articles of Association Meaning and purpose: Articles of Association of a company and its bye laws are regulations which govern the management of its internal affairs and the conduct of its business. They define the duties, rights, powers and authority of the shareholders and the directors in their respective capacities and of the company is to be carried out. They are framed with the object of carrying out the aims & objects as set out in the memorandum of association.

Articles of Association The articles of association of a company have a contractual force between the members inter se in relation to their rights as such members. Articles cannot supersede the objects as setout in the memorandum of association. The articles must be: (i) printed, (ii) divided into paragraphs, numbered consecutively, (iii) signed by subscribers to the memorandum in the presence of at least one witness who shall attest the signatures. Also, articles are to be stamped with requisite stamp and filed along with the memorandum.

Distinction between Memorandum of Association & Articles of Association

Inspection and copies of the Articles A company shall, on being so required by a member, send to him within seven days of the requirement, on payment of five rupees, a copy of the articles. if a company makes default, the company and every officer of the company, who is in default, shall be punishable with fine up to Rs 5000 (s.39).

Alteration of Articles. Section 31 provides that subject to the provisions of the Act and to the conditions contained in its memorandum, a company may, by special resolution alter or add to its articles must be filed with the Registrar within 30 days of the passing of the special resolution.

Limitation on power to alter Articles Must not exceed the powers given by the memorandum or conflict with the other provisions of the memorandum. Must not be inconsistent with any provision of the companies Act or any other statue. Must not include anything which is illegal, or opposed to public policy or unlawful. The alteration must be bona fide for the benefit of the company as a whole. The alteration will not be bad merely because it inflicts hardship on an individual shareholder.

Limitation on power to alter Articles There cannot be alteration of the articles so as to compel the existing members to take or subscribe for more shares or in any way to contribute to the share capital, unless they given their consent in writing The amended regulation in the Articles of Association cannot operate retrospectively, but only from the date of amendment.

Doctrine of Constructive Notice Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum & the Articles of Association. These documents, on registration with the Registrar, assume the character of public documents. This is known as constructive notice of Memorandum and Articles

Doctrine of Indoor Management There is one limitation to the doctrine of constructive notice of the Memorandum & the Articles of company. The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned, everything has been regularly done. They are presumed to have read these documents & to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum & the Articles. They can presume that all in being done regularly. This limitation of the doctrine of constructive notice is known as the “doctrine of indoor management”.

III. Registration of the CompanyIV. Certificate of Incorporation V. Commencement of BusinessProspectus Statement In Lieu of Prospectus

1.Equity shares 2.Preference Shares Types of Preference Shares1.Cumulative or Non-cumulative 2.Redeemable and Non- Redeemable 3.Participating Preference Share or non-participating preference shares Types of shares

Prospectus – Red Herring Prospectus Buy-back of shares Rights Issue Issue of Bonus shares Sweat Equity and Employee Stock Options Share certificate

Forfeiture of Shares Demat Accounts Listing and Delisting Shareholder and Stakeholder Quorum Proxy NBFCs

Statutory Meeting Annual General Body Meeting Extraordinary General Body Meeting Board Meetings Meetings of Creditors Meetings of Debenture Holders Meetings of the Committees of the Board Kinds of Meetings

Statutory Meeting (Section 165) Statutory meeting is the first meeting of the shareholders of a company. This meeting is held only once in the life time of the company. Objectives: To approve the preliminary contracts specified in the prospectus of the company with modification if any. To discuss the success of floating the project of the company. Provisions: 1. Time: Every company , shall , within a period of not less than ONE month and not more than SIX months from the date on which the company is entitled to commence the business, hold the Statutory meeting Meetings of Shareholders.

2. Notice: The company must give notice to its member at least 21 clear days before holding the statutory meeting stating time, date and place of meeting. Statutory Report: The Directors of the co., are required to send a report called statutory report to every member of the company along with the notice of the meeting at least 21 days before the date of the meeting. CONTENTS: Allotment of Shares: The total number of share allotted, distinguishing fully paid or partly paid up and the extent to which they are so paid up, shares issued otherwise than for cash. Cash Received: Total amount of cash received by the company in respect of all the shares allotted. Abstract of Receipt and Payment Account Names, addresses and occupations of the company’s Directors, Auditors and all other managerial personnel. To approve the preliminary contracts specified in the prospectus of the company with modification if any. The extent to which the Underwriting Contracts has been carried out and the reasons thereof. The calls in arrears, if any, due from any Director and the Managers of the co. Commission and brokerage paid to any Director or Manager on the issue of shares or debentures of the company.

4) Certification of Statutory report: By not less than two directors , one of whom shall be the Managing Director. The Auditor of the co shall certify the particulars regarding the issue of shares, receipts and payment etc. And a copy of certified statutory report must be sent to the Registrar of company immediately after it is sent to the members of the company. 5. Penalty: Maximum of Rs. 5000/-

Dictionary – least number of members required to carry on a meeting or for doing business. Minimum number of members required in order to consider a meeting valid. Generally, Articles provide for larger quorum. But not smaller than statutory minimum ,i.e., Five members personally present in case of Public Limited and two for a Private limited. Quorum For A Meeting

Resolutions Questions which generally come for consideration at the general meeting of a company are presented in the form of proposals called Motions. A motion proposed by the chairman of the meeting/any other member . After discussions put to vote, final result accepted becomes Resolutions. Kinds of resolutions: a)Ordinary resolution[sec.189(1)].., b)Special resolution[sec189(2)].., c)Resolutions requiring special notice[sec190].

Is passed in a general meeting by a simple majority of votes. Votes cast in person/by proxy , and required notice of resolution duly given. It is required for.., matters concerning with Name Clause…, Capital Clause.., for appointing auditors and fixation of their remuneration…., appointing of first directors who are liable to retire by rotation….., for increasing/decreasing in number of directors….., appointment of managing director, removal of a director …, for winding up of a company voluntarily in certain events…, appointing and fixing of remuneration of liquidators When is an Ordinary resolution required?

Is required for changing the place of registered office from one state to another.., for alterations of ‘Objects clause’…,omission/addition of ‘private’ from name.., alteration of Articles.., conversion of any portion uncalled capital into reserved capital.., for payment of interest out of capital.., applying to Central Govt for an inspector to investigate in company affairs.., for applying in court to wind up., for authorizing a liquidator to accept shares as consideration for transfer of its assets.., and for disposal of books and papers of a company in voluntary winding up after completion of the process. Special resolutions

Its only a different kind of ordinary resolutions of which notice of the intention to move a resolution has to be given. Notice shall be given not less than 14days before the meeting to the members as notice of meeting is given/by advertisement. Is required for appointment of an auditor other than retiring ones.., to re-appoint the retiring auditor…, for removal of a director before expiry of his period.., for appointment of a director in place of who is removed. Passing of Resolutions by Postal Ballot[sec.192-A]a listed company may conduct it by postal ballot. It has send a notice along with a draft resolution explaining the reasons, which should be returned within a period of 30days from the date of posting of the ballot. Resolutions requiring Special Notice

CLB – Company Law Board RoC – Registrar of Companies SEBI – Securities and Exchange Board of India Sensex, Nifty, BSE, NSE Price Band Minimum Subscription Over Subscription

The rates of interest payable on debentures is fixed. The rates of interest payable on the face value of the debentures. The debenture holders do not have any voting right to participate in management. The holder of debentures are paid interest before the payment of profit to preference share holder. Debentures may be convertible Features of Debentures

Bearer Debentures Registered Debentures Redeemable Debentures Non-redeemable Debentures Secured Debentures Unsecured Debentures (Naked Debentures) Convertible Debentures Non- convertible Debentures Types of Debentures

Companies’ Act 1956