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COMPANIES ACT 1956

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  1. COMPANIES ACT 1956 Companies Act 1956

  2. Legal meaning • Sec 3(1) (i); “Company means 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 companies laws” Companies Act 1956

  3. Nature and definition of a company • ‘Literal meaning - Company’ in common parlance means a group of persons associated together for the attainment of a common end, social or economic. • Represents different kinds of associations, both business and otherwise Companies Act 1956

  4. Characteristics of the company • An artificial person created by the law. • A separate Legal entity • Case: Salomon and Salomon &Co ltd • (1897) (AC) (22) • Corporate personality is distinct and different from that of its members individually and collectively Companies Act 1956

  5. Separate Legal Personality (cont.) • The most famous case in this area is Salomon v Salomon & Co • Mr. Salomon was in business as a leather merchant • In 1892, he formed Salomon & Co Ltd • He held most of the shares with his wife and 5 of his children each holding one share as company law at that time required at least 7 shareholders in a company

  6. Separate Legal Personality (cont.) • Unfortunately, the company did not do well and it went into liquidation • A liquidator was appointed to sell the assets of the company and pay its debts

  7. Separate Legal Personality (cont.) • The liquidator claimed that the company was a fake because Mr. Salomon owned 20001 shares and his family owned only 6 altogether • Mr. Salomon was really just running the same business • Therefore, the liquidator argued that Mr. Salomon was liable for all the debts of the company

  8. Separate Legal Personality (cont.) • However, the House of Lords disagreed • The court held that • The fact that some shareholders only held 1 share as a technicality was not relevant • The registration procedure could be used to create a one-man company

  9. Separate Legal Personality (cont.) • A company which is properly formed under the Companies Act is a separate person • As a result the debts of a company were its own and not those of its members

  10. Characteristics of a company • Perpetual existence • Continued existence • Death, insolvency or unsoundness of mind of its members does not in any way affect the existence of the company. • Comes into existence by law and comes to an end by law. Companies Act 1956

  11. Lifting the Veil of Incorporation • Although the general rule is that a company has a separate legal identity from its members, there are exceptions to this rule when a court will not treat a company as a separate entity • This is often referred to as “lifting the veil of incorporation” • Often, this is to prevent abuse of the principle of separate identity

  12. Lifting of corporate veil • Veil of corporate personality used as a cloak for fraud and improper conduct. In such case, the court may disregard the corporate personality. The overlooking of corporate personality or separate entity is known as the phenomenon of lifting the corporate veil Companies Act 1956

  13. Lifting the Veil of Incorporation (cont.) • At common law, the general principle is that the courts will not allow a company to be used for a fraudulent purpose or to avoid a legal duty • For example, in Gilford Motor Co v Horne, a term in an employee’s contract prevented him from approaching former customers after he left Gilford Motor Co

  14. Lifting the Veil of Incorporation (cont.) • Therefore, when he left he formed his own company, and the company approached his former customers • The court held the company was a sham being used to avoid the term in his contract

  15. Lifting of corporate veil • For the protection of revenue. • Where a company is acting as the agent of the shareholders • Where a company has been formed for a fraudulent purpose. Companies Act 1956

  16. Contd- • Where the device is used for some illegal purpose • Where the number of members fall below the statutory minimum • Where the prospectus includes a fraudulent misrepresentation Companies Act 1956

  17. Registration and incorporation • Sec 12: Any seven or more persons or where the company to be formed will be a private company, two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this act in respect of registration, form an incorporated company with or without limited liability. Companies Act 1956

  18. Contd - • Before a company is registered, it is essential to ascertain from the registrar of companies if the proposed name of the company is approved • Then the following documents duly stamped along with the necessary fees are to be filed with the registrar. • Memorandum of association duly signed by the subscribers Companies Act 1956

  19. Contd- • Articles of association duly signed by the subscribers • Agreement which the company proposes to enter into with any individual for appointment as its managing or whole time director or manager. • A list of directors who have agreed to become the first directors of the company. • A declaration stating that all the requirements of the companies act and other formalities relating to registration have been complied with Companies Act 1956

  20. Contd- • Certificate of incorporation is issued by the registrar after due examination of the documents. From the date of issue of the certificate the company becomes a separate legal entity • Certificate of commencement of business. –A conclusive evidence that the company is entitled to do business Companies Act 1956

  21. Classification of Companies Companies may be classified as : Incorporated Companies A company formed for the purpose of carrying on a business and is incorporated under the Company’s Act,1956. Unincorporated Companies These companies are large partnerships, not regarded as distinct entities separate from the members constituting them. In such companies the liability of members is unlimited. Companies Act 1956

  22. Classification of Companies Companies on the basis of Incorporation 1. Chartered Companies: If a company is incorporated by a charter granted by a monarch, it is called a chartered company. Ex: East India Company. 2.Statutory Companies : These are companies which are created by a special Act of the Legislature, e.g. LIC,SBI,UTI. The provisions of the Company’s Act ,1956 apply to them , if they are not inconsistent with the provisions of the special Act under which they are formed. Companies Act 1956

  23. Classification of Companies 2. 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 Acts. Companies Act 1956

  24. Classification of Companies Companies on the basis of Number of Members • Private Company : • Company which has a minimum paid up capital of Rs 1,00,000. • Minimum members: 2 - 50 • Public company: • Minimum paid up capital: 5 lakhs • Minimum no of members: 7 Companies Act 1956

  25. Classification of Companies Companies on the basis of Liability Companies with limited liability • Companies limited by shares: It is a registered company with the liability of members limited by the memorandum of association to the amount, if any, unpaid on the shares respectively held by them. Companies Act 1956

  26. Classification of companies Company limited by guarantee: A company having the liability of its members limited by the memorandum to such an amount as the members may respectively undertake by the memorandum to contribute to the assets of the company. Companies Act 1956

  27. Classification of Companies • Unlimited company: • It is a company in which the liability of the members is not limited by its memorandum. • The members of such companies may be required to pay the losses from their personal property. • Because such companies have separate legal entity, its creditors cannot file a suit against the members directly. Companies Act 1956

  28. Classification of Companies • Classification based on control • 1. Government company: 51% of the paid up shares held by the government. • 2. Non-government Company: • 3. Foreign Company: Company which is incorporated in a country outside India under the law of that country. • 4. Domestic company: Company which cannot be termed as a foreign company • 5. Holding and subsidiary company: If one company controls another company Companies Act 1956

  29. Classification of Companies The controlling company is called the holding company and the company so controlled may be called the subsidiary company. 5. Public financial Institutions: LIC, UTI etc 6. One-man company: A member may hold virtually the entire share capital of a company. Companies Act 1956

  30. Classification of Companies Non-trading company or association not for profit – company formed for promoting the objects of art, science , religion –a license is granted by the central government. Investment company –A company whose principal business is the acquisition of shares, stock, debentures etc. Companies Act 1956

  31. Classification of Companies Producer Company – Cooperative societies can be made companies under the Companies Act. a company formed and registered under theses provisions shall be known as producer companies. Multinational Companies – companies operating in more than one country – ex: Coca Cola, LG Companies Act 1956

  32. Classification of Companies Illegal Association: According to sec 11 No company, association or partnership consisting of more than 10 persons for the purpose of carrying on the business of banking and more than 20 persons for the purpose of carrying on another business shall be formed unless it is a registered as a company under this Act or is formed in pursuance of some other Indian Law. Companies Act 1956

  33. Promoter Who is a promoter? A promoter is one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose. Companies Act 1956

  34. PRE-INCORPORATION CONTRACT • A contract made by promoters on behalf of the company before its incorporation is termed as pre-incorporation contract. It is correct to say that a company can’t ratify PIC.A company gets its legal status only after incorporation.Therefore,the only remedy open to the company after incorporation is to enter into a fresh contract. Companies Act 1956

  35. Legal position of pre-incorporation contracts The promoters while entering into preliminary contracts are treated as agents of the company that is about to be formed. The legal position is that for a valid contract two consenting parties are necessary and a company before incorporation is a non-entity. A pre-incorporation contract which is purported to be made by the company which does not exist, is a nullity . Thus when the company comes into existence it can neither sue nor be sued on that contract Companies Act 1956

  36. Provisional contracts Provisional Contracts Provisional contracts refer to the contracts entered into by the public company after its incorporation but before it is issued certificate to commence business. According to sec 149(4), any contract made by a company before the date at which it is entitled to commence business shall be provisional only, and shall not be binding on the company until that date, and on that date it shall become binding Companies Act 1956

  37. The Constitution of the Company The company’s constitution essentially consists of two documents: the memorandum of association the articles of association These are essential documents as they: set out the nature and character of the company outline the powers of directors define the relationship between directors and shareholders

  38. Memorandum of Association It is a fundamental document . It contains the fundamental condition on which alone the company is allowed to be incorporated. It lays down the area of operation of the company. It regulates the internal affairs of the company in relation to the outsiders. It has to be printed, divided into paragraphs, numbered consecutively and signed by at least 7 persons

  39. Memorandum of Association The memorandum – is essentially for external consumption as it sets out the names of the promoters, the share capital and the purpose (objects) of the company This is useful information for potential customers and investors

  40. Contents • The name clause • The registered office clause • The objects clause • Liability clause • Capital Clause • Association clause

  41. Memorandum of Association 3. Object Clause (Sec 13 (1)) The objects of the company shall be clearly set forth in the Memorandum. It defines and confines the scope of the Company’s Powers. The object clause in the Memorandum must State a) Main Objects of the company to be pursued by the company on its incorporation and objects incidental to it. b) Other objects not included above.

  42. Memorandum of Association Purpose of the Main objects: To enable subscribers to the Memorandum to know the uses to which their money may be put. To enable creditors and persons dealing with the company to know what its permitted range of enterprise or activities is. The narrower the objects expressed in the Memorandum the less is the subscriber’s risk.

  43. Doctrine of Ultra Vires • A company cannot go beyond its objects mentioned in its memorandum. The company’s activities are confined strictly to the objects mentioned in the memorandum and if they go beyond these objects, then such acts will be ultra vires • The object of declaring such an act as ultra vires is to protect the interests of shareholders and all others who deal with the company

  44. Alteration of Memorandum To Alter the Memorandum the provisions of the memorandum can be divided into 2 : Conditions : Are the main provisions included in the Memorandum. They can be altered as per the express provisions laid down in the company’s Act. Other Provisions : Can be altered by passing a special resolution.

  45. Doctrine of Ultra Vires • Company exists only for the objects which are expressly stated in its objects clause or which are incidental to or consequential upon these specified objects • Any act done outside the express or implied objects is ultra vires • The ultra vires acts are null and void ab intio. The company is not bound by these acts and neither the company nor the other contracting party can sue upon it

  46. Doctrine of Ultra Vires • In case a company is about to undertake an ultra vires act the members of a company (even a single member) can get an order of injunction from the court restraining the company • If the directors have exceeded their authority and done something then such matter can be ratified by the general body of the shareholders, provided the company has the capacity to do so by its memorandum of association.

  47. Doctrine of Ultra Vires • Any property acquired by a company under an ultra vires transaction may be protected by the company against damage by third persons • Directors and other officers can be held liable to compensate the company for any loss occasioned to it by an ultra vires act. • Directors and other officers shall be personally accountable to the third parties

  48. Doctrine of Ultra Vires • Money or property gained through an ultra vires transaction available in specie or capable of being identified shall be restituted (restored) to the other party. • In case an ultra vires loan taken by a company is used for the payment of its intra vires debts the lender of the ultra vires loan is substituted in place of the creditor who has been paid off and as such can recover money

  49. Articles of association • Sec 2(2) – AOA of a company as originally framed or as altered from time to time in pursuance of any previous companies law or act. • They are the bye-laws of the company according to which director and other officers are required to perform their functions as regards the management of the company, its accounts and audit. • Subordinate to the memorandum • They can be easily altered by passing a special resolution. Companies Act 1956

  50. Articles of Association Contents of Articles • Different classes of shares and rights of shareholders • Procedure for making an issue of share capital and allotment thereof. • Procedure for issue of share certificates and share warrants. • Forfeiture of shares and the procedure for their reissue. • Procedure for transfer and transmission of shares.