8/10/2019 BE Week 4(1)

1/42

THE COMPANIES ACT, 1956

Dhaarna Rathore

8/10/2019 BE Week 4(1)

2/42

Learning Object ives

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 theAct is administered

Comment on the operation of the Act

Point out the salient features of the Amendment Bills, 1993 and 1997.

8/10/2019 BE Week 4(1)

3/42

Object ives of the Ac t

Minimum standard of business integrity and conduct in promotion andmanagement of companies;

Full and fair disclosure of all reasonable information relating to the affairs of thecompany;

Effective participation and control by the shareholders and the protection of theirlegitimate 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 theinterest of the public.

8/10/2019 BE Week 4(1)

4/42

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.

8/10/2019 BE Week 4(1)

5/42

Characteristics of a company

Separate legal entity

Limited liability

Perpetual succession

Common seal

Transferability of shares

Separate property

8/10/2019 BE Week 4(1)

6/42

Types of Companies

Public company;

Private company;

Foreign company;

Company with liability limited by guarantee;

Government company;

Unlimited company; and

Holding and subsidiary companies.

8/10/2019 BE Week 4(1)

7/42

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

8/10/2019 BE Week 4(1)

8/42

Foreign Company: A foreign company is one which is registered outside india and has a placeof 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 andthrough revenue derived from sale of its good and services.

8/10/2019 BE Week 4(1)

9/42

Format ion 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 requirementshave been fulfilled

8/10/2019 BE Week 4(1)

10/42

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

8/10/2019 BE Week 4(1)

11/42

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.

8/10/2019 BE Week 4(1)

12/42

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.

8/10/2019 BE Week 4(1)

13/42

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 bythe 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.

8/10/2019 BE Week 4(1)

14/42

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 ofthe 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

8/10/2019 BE Week 4(1)

15/42

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 asbeneficial owner in the records of the depository.

8/10/2019 BE Week 4(1)

16/42

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. Bysubscribing 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

8/10/2019 BE Week 4(1)

17/42

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.

8/10/2019 BE Week 4(1)

18/42

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.

8/10/2019 BE Week 4(1)

19/42

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 intothe 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.

8/10/2019 BE Week 4(1)

20/42

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)]

8/10/2019 BE Week 4(1)

21/42

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 theamount 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.

8/10/2019 BE Week 4(1)

22/42

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.

8/10/2019 BE Week 4(1)

23/42

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.

8/10/2019 BE Week 4(1)

24/42

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 ofthe 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.

8/10/2019 BE Week 4(1)

25/42

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 thesubscription or purchase of any shares in, or debentures of a body corporate.

An abridged prospectus means a memorandum containing such salient features

8/10/2019 BE Week 4(1)

26/42

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.

8/10/2019 BE Week 4(1)

27/42

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

8/10/2019 BE Week 4(1)

28/42

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.

8/10/2019 BE Week 4(1)

29/42

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 thecompany 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.

8/10/2019 BE Week 4(1)

30/42

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.

8/10/2019 BE Week 4(1)

31/42

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 thecompany. 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 theBoard 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 bedeemed 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.

8/10/2019 BE Week 4(1)

32/42

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 obtainingtheir 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 wherecompany 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.

8/10/2019 BE Week 4(1)

33/42

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.

8/10/2019 BE Week 4(1)

34/42

Appointment of Di rector

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 thesame position as any other director as regards his rights, duties and liabilities as a

director. He acts on his own.

8/10/2019 BE Week 4(1)

35/42

Share qualif ication of Di rector

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.

8/10/2019 BE Week 4(1)

36/42

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 removedif 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 andrecord 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 ofoppression, 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.

8/10/2019 BE Week 4(1)

37/42

Provis ions o f theAmendment Bi l l

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 beopen to a company to modify these 'powers' in its memorandum-the result will bethat now the companies, instead of elaborately setting out the normal and routingpowers, adopt the provisions of Schedule II with such modifications to suit thecompanys particular requirements. This approach is similar to a companyadopting Table-A of the Schedule (with modifications, if so desired) to avoid havingto 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 theapproval of the Company Law Board. This change recognises the rights of theowners of the company, viz., the members, under the Act of 1956. The CompanyLaw Board, while granting approval, stipulates conditions or cuts down the effect ofthe alternation without sometimes appreciating the effect thereof. This will alsoenable the companies to diversify without interference of the Company Law Board.

8/10/2019 BE Week 4(1)

38/42

Provis ions of the Am endm ent Bi l l (con td.)

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 fromcompanies 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 existingones 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.

8/10/2019 BE Week 4(1)

39/42

Provis ions of the AmendmentB i l l (contd .)

6. The unclaimed dividends remaining unpaid for seven years will be transferred toan 'investors protection fund' to be untilised for payment to investors who havelost 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 genuinerelief. What is needed is some kind of insurance cover to be available to the smalldepositors, say upto Rs.10,000. The premium for such insurance can becollected from the companies receiving deposits. A small percentage of theamount of deposits collected by the companies cannot prove an enormous burdenon 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 auditorof the company, nor should an auditor be indebted to the company. This is toensure independence of the auditors.

8/10/2019 BE Week 4(1)

40/42

Provis ions of the Am endm ent Bi l l (con td.)

10. Some of the provisions of the prospectus are made more stringent toensure transparency and to give a fair deal to intending investors inshares 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 thepublished accounts are in conformity with the established accountingstandards.

12. The procedures for liquidation of companies is being simplified, andinstead of the court liquidator, professionals (such as lawyers, auditors)

can be appointed as liquidators. This will expedite the conclusion ofliquidation proceedings, which at present ran into years and years, andin the meantime, the creditors may forget that they have any claim torecover.

13. The companies will now be liberated from the cumbersome procedureof filing various (and sometimes, meaningless) returns with theRegistrar 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 meritsand demerits).

8/10/2019 BE Week 4(1)

41/42

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

Number of Companies Paid-up Capital

(Rs.Cr.)

Year Govt. Private Foreign Govt.Cos. Non-Govt.

Indian Cos.

1950-51 36 28496 26 7491960-61 142 25438 569 547 1272

1970-71 314 29465 543 2064 2439

1980-81 851 64406 300 11443 4914

1988-89 1134 178774 420 42572 15131

1989-90 1160 200499 469 47451 171931990-91 1167 222796 489 54485 20313

1991-92 1180 248674 507 56482 22415

8/10/2019 BE Week 4(1)

42/42

Thank You