COMPANIES ACT, 1956

DEFINITION
A voluntary association of persons. An Association of individual formed for some common purpose. A company can be defined as an "ARTIFICIAL PERSON", invisible, intangible, created by or under Law, with a discrete legal entity, perpetual succession and a common seal.

CHARACTERISTICS OF A COMPANY
Separate legal Entity : Company is in law regarded as an entity separate from its members. It is an independent corporate existence. Company property belong to company not to any shareholder.

Limited liability: A company can be limited by Shares or Guarantee.

Perpetual succession: A companys existence persists irrespective of all change in the composition of membership. Not affected by constant in the membership.

Common seal: As it does not have any existence it must act through its agents.

 Transferability of shares
Shares are freely transferable so that no shareholder is permanently wedded to Company.

Separate property:
Company is the legal person distinct from its members. Although the property are contributed by shareholders, they are not private owner of its property.

Capacity to sue:
A Company can sue and be sued in its corporate name.

Lifting or Piercing the corporate VEIL

The various cases in which corporate veil has been lifted:

Protection of revenue
Prevention of fraud or improper conduct

Determination of character of a company

When the company is a sham Company avoiding legal obligations Company acting as a agent or trustee of the shareholders Avoidance of welfare legislation Protection public policy

Statutory exceptions:
Numbers of members below statutory minimum Failure to refund application money

Misdescription of Companys name

Fraudulent trading Holding and Subsidiary companies

Regulating Act. Mode of creation Legal Status Liability of members Management Transferability of Interest Authority of membership Power Restriction of powers Debts Dissolution Number of members Maintenance of Book

How a Company is distinguished from Partnership.?

COMPANY LAW IN INDIA

The First legislative enactment for Registration of Joint Stock Companies was passed in the year 1850. The principle of limited liabilities was first introduced in England by the Limited Liabilities Act of 1855 under which A COMPANY was entitled to obtain certificate of registration with limited liabilities. Following the English Company Act of 1856 the joint Stock of Companies Act of 1857 was passed in INDIA. The Companies Act of 1866 in India was recast in 1882 to bring upon the Indian Company law in conformity.

 Act of 1913:
The Indian Company Act. 1913 did not take into account few features of Indian trade and commerce and some institute such as managing agency. The Act was highly unsatisfied thus lots of amendments were made in the consecutive years 1914,1915,1920,1926,1930 and 1932.

The Companies Act 1956:

On 25th Oct ,1950 a committee of 12 members under the chairmanship of Mr. H.C. Bhabha was appointed. A Comprehensive report on all aspects of company law in April 1952 was submitted.

After that Amendment Act 2002 brought about some changes in the following areas: Constitution of the National Company Law tribunal in place of Company law board. The sick Industrial Companies Act stands repealed because of revival and winding up of sick Industrial companies.

Introduction of innovative model of a private company called the Producer Company.

Setting up of a Fund known as Revival fund for:

Safeguarding the dues of workers Revival and rehabilitating the sick companies Protection of the assets of sick companies.

BOARD OF COMPANY LAW ADMINISTRATION

CONSTITUTION OF BOARD OF COMPANY LAW ADMINISTRATION: As soon as may be after the commencement of the Companies (Amendment) Act, 1988, the Central Government shall, by notification in the Official Gazette, constitute a Board to be called the Board of Company Law Administration. The Company Law Board shall consist of members, not exceeding nine, and to be appointed by that Government by notification in the Official Gazette :[Provided that the Central Government may, by notification in the Official Gazette, continue the appointment of the chairman or any other member of the Company Law Board functioning as such immediately before the commencement of the Companies (Amendment) Act, 1988, as the chairman or any other member of the Company Law Board, after such commencement for such period not exceeding three years as may be specified in the notification.]

 [(2A) The members of the Company Law Board shall possess such qualifications and experience as may be prescribed.] (3) One of the members shall be appointed by the Central Government to be the chairman of the Company Law Board.

10F. APPEALS AGAINST THE ORDERS OF THE COMPANY LAW

BOARD
Any person aggrieved by any decision or order of the Company Law Board 2[made before the commencement of the Companies (Second Amendment) Act, 2002] may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order :

Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.] 1. Inserted by the Companies (Amendment) Act, 1988 w.e.f. 315-1991. 2. Inserted by the Companies (Second Amendment) Act, 2002.

10FA. DISSOLUTION OF COMPANY LAW BOARD

(1) On and from the commencement of the Companies (Second Amendment) Act, 2002, the Board of Company Law Administration constituted under sub-section (1) of section 10E shall stand dissolved. (2) On the dissolution of the Company Law Board, the persons appointed as Chairman, ViceChairman and members and officers and other employees of that Board and holding office as such immediately before such commencement shall vacate their respective offices and no such Chairman, Vice-Chairman and member and officer and other employee shall be entitled to claim any compensation for the premature termination of the term of his office or of any contract of service : Provided that every officer or other employee, who has been, immediately before the dissolution of the Company Law Board, appointed on deputation basis to that Board, shall, on such dissolution, stand reverted to his parent cadre. regular basis by that Board, shall become, on and from the dissolution of the Board, the officer and employee, respectively, of the Central Government with the same rights and privileges as to pension, gratuity and other like benefits as would have been admissible to him if the rights in relation to that Board had not been transferred to, and vested in, the Central Government and shall continue to do so unless and until his employment in the Central Government is duly terminated or until his remuneration, terms and conditions of employment are duly altered by that Government .

Provided also that notwithstanding anything contained in the Industrial Disputes Act, 1947 (14 of 1947), or in any other law for the time being in force, the transfer of the services of any officer or other employee employed in the Company Law Board, to the Central Government shall not entitle such officer or other employee to any compensation under this Act or under any other law for the time being in force and no such claim shall be entertained by any court, Tribunal (including the Tribunal under this Act) or other authority : Provided also that the Company Law Board has established a provident fund, superannuation fund, welfare fund or other fund for the benefit of the officers and other employees employed in that Board, the monies relatable to the officers and other employees whose services have been transferred by or under this Act to the Central Government shall, out of the monies standing, on the dissolution of the Company Law Board to the credit of such provident fund, superannuation fund, welfare fund or other fund, stand transferred to, and vest in, the Central Government and such monies which stand so transferred shall be dealt with by that Government in such manner as may be prescribed. All matters or proceedings or cases pending before the Company Law Board on or before the constitution of the Tribunal under section 10FB, shall, on such constitution, stand transferred to the National Company Law Tribunal and the said Tribunal shall dispose of such cases in accordance with the provisions of this Act.]. Inserted by the Companies (Second Amendment) Act, 2002

Types of Companies
A. B. C. D. E. A. From the point of view of Incorporation From the point of view of Liability From the viewpoint of Number of Members From the view point of Control From the view point of Ownership From the viewpoint of Nationality

From the point of view of Incorporation

Statutory companies Registered companies

From the viewpoint of Number of Members

Private company Public company

Private Companies
A PRIVATE COMPANY
Means a Company which has a minimum paid-up Capital of Rs. 1.00 lac
AND

1. Number of Members

2. Transfer of Shares

3. Invitation for Public Subscription

4. Invitation or Acceptance of Deposits

Not allowed from persons other than its members, directors or their relatives

Minimum2 Maximum 50

Restricted

No public Offer for Shares or Debentures

Distinction Between Private company & Public Company Minimum capital Minimum number Maximum number Number of Directors Restriction on appointment of Directors

 Restriction on invitation to subscribe for shares Transferability of shares/debentures Special privileges Quorum Managerial remuneration

Special Privileges of a Private Company Over Public Company

1. Can be started with minimum 2 members 2. No need to file a Prospectus or Statement in Lieu of Prospectus. 3. Commence business immediately after getting certificate of incorporation 4. Need not to keep index of members Need not to hold a statutory meeting or file statutory report 5. Provision regarding maximum limit of Directors or Managers remuneration does not apply 6. It can have a minimum of 2 directors

Conversion of a pvt. co. into a public co. by choice and vice versa:
1. Conversion by default

restriction on transfer of shares; limitation of the number of members to fifty; prohibition of invitation to the public to buy shares or debentures; and prohibition of invitation or acceptance of deposits from the public; The company ceases to enjoy the privileges and exemptions conferred on a private company

2. Conversion by choice
Alter the articles of the company by special resolution to eliminate restrictions of private company. If the number of members is less than 7, it must be raised at least to 7 If the number of directors is less than 3 it must be raised at least to 3. Change the name of the company by a special resolution Obtain Central Government approval File the altered articles with the Registrar within 30 days of the receipt of the approval from the Central Government In case a private company becomes a public company, it shall inform the RoC within three months.

From the view point of Control

Holding companies, and Subsidiary companies

Examples of Holding and Subsidiary

Steel Authority of India (SAIL) Holding company Bhilai Steel Plant Subsidiary company Rourkela Steel Plant Subsidiary company Bokaro Steel Plant Subsidiary company Coal India Ltd.(CIL)- Holding company WCL Subsidiary company BCCL Subsidiary company SCCL Subsidiary company

From the view point of Ownership

Government company Non-Government company

From the viewpoint of Nationality

Foreign Company National company

 One Man company Association not for profit

Companies not for profit

It is formed to promote commerce, art, science, religion, charity or any other useful object. It prohibits payment of any dividend to its members and applies its profits or other income in promoting its objects. It obtains a license from the Central Government to be registered as a limited company without being required to use the word "limited" or private limited to their names.

 Penalty for improper use of words Limited & Private Limited

Formation of company

THE STEPS ARE TO BE FOLLOWED FOR INCORPORATING A COMPANY

Application for availability of name Filing the documents Payment of stamp duty and filing fee The sanction of controller of capital issues if the capital exceeds Rs 1 cr Names and written consent of directors who have agreed to become the first director of the company. Declaration of compliance of Act & rules Certificate of incorporation

Advantages of certificate of incorporation

Corporate existence Liability Transferability of shares Perpetual existence Separate property Capacity to sue and be sued

PROMOTER
A promoter is a person who does the necessary preliminary work incidental to the formation of a company. Functions:
a. The promoter settles the companys name and ascertains that it will be accepted by the registrar of companies. b. He also settles the details of the companys memorandum and articles, the nomination of directors,solicitors,bankers ,auditors etc c. He is responsible for bringing the company into existence .

Fiduciary position of promoter

Not to make any profit at the expense of the company. To give benefit of negotiations to the company. Consequences of non disclosure of interest or profit. Not to make unfair use of position

Remuneration of promoter He may sell his own property at a profit to the company He may be given an option to buy a certain number of shares in company at par. He may take a commission on the shares sold. He may be paid a lump-sum by the company Promoter as regards preliminary contracts Company not bound by preliminary contract Company cannot enforce preliminary contract Promoters personally liable.

Memorandum Of Association

Contents
Memorandum of Association Memorandum Clauses. Alteration of Memorandum. Doctrines of Ultra Vires.

Memorandum Of Association
Why Memorandum?
Share Holders. Creditors.

Definition [Sec. 2(28)]

Memorandum means Memorandum of Association of a Company as originally framed or as altered from time to time in pursuance of any previous Company law or of the Companies Act of 1956. Fundamental charter of the company which defines the reason of existence and regulates the external affairs in relation to outsiders.

Printing and signing of Memorandum

It should be printed Divided into paragraph and numbers consecutively Signed by at least seven persons or two in case of public and private company respectively. The signature should be in the presence of a witness, who will have to attest the signature Members have to take shares and write the number of shares taken with full address

Memorandum Clauses
Name clause
Association Clause Registered Office clause

MOA
Object Clause Liability Clause

Capital Clause

Name Clause [Sec. 13(1)(a)]

Undesirable name to be avoided. Injunction if identical name adopted. Limited or Private limited as the last words of the name. Prohibition of using certain names and symbols. Inadvertent mistake in name can be changed by passing an ordinary resolution and by obtaining written approval of Central Government. Use of certain key words according to authorised capital.

Registered Office Clause [Sec 3(1)(b)]

Every company should have its Fixed Office. Notice of the situation of the Office within 30 days of incorporation.

Object Clause [13(1)(c)(d)]

Main objects of the company to be pursued by the company on its incorporation. Object both defines and confines the powers of Company.
Enable subscribers to the memorandum to know the uses to which their money is put. To enable creditors and persons dealing with the company to know what its permitted range of enterprise or activities.

Useful for both Share holders and Creditors.

The Capital Clause[Sec 13(4)(a)]

Fixed share capital with which the Company is to be installed. Fixed capital with which it is registered is called Registered Capital Authorized or Nominal. Shares issued can be only equity or preferential shares.

The Liability Clause [Sec. 13(2)]

Company limited by Shares or by Guarantee shall also state the liability of its members. If the number of members falls below the statutory minimum, then the members who are a part of the company are responsible for the debts.

The Association Clause [13(4)(c)]

We the persons whose names and addresses are incorporated in the Memorandum, agree to take the number of Shares in the Capital. Each member has to take minimum of 1 share. At least 7 subscribers should be there and 2 for private companies.

Alteration Of Memorandum Of Association

Change Of Name. Change of Registered Office. Alteration of Objects. Change in Liability Clause. Change in capital.

Doctrine of Ultra Vires

Ultra = Beyond & Vires = Power. The powers exercisable by the company are to be confined to the objects specified in the MOA. So it is better to define and include the provisions regarding the acquiring of business, sharing of profits, promoting company and other financial, gifts , political party funds etc If the company acts beyond the powers or the objects of the company that is specified in the MOA, the acts are considered to be of ultra vires. Even if it is ratified by the all the members, the action is considered to be ineffective. Even the charitable contributions have to be based on the object clause.

The consequences of the ultra vires transactions are as follows

Injunction Directors personal liability. If a property has been purchased and it is an ultra vires act, the company can have a right over that property. The doctrine to be used exclusively for the companies interest. But the others cannot use this doctrine as a tool to attack the company

Articles Of Association

Articles of Association
Articles are rules ,regulations and bye-laws for the internal management of the affairs of the company. Framed with the objective of carrying out the aims and objects as set out in the MoA. It also includes regulation contained in Table A of Schedule I.

Properties of AOA
Next important to Memorandum of Association Must not violate the Memorandum and the Act . Subordinate to, and controlled by MoA. Must be printed, divided into paragraphs, numbered consecutively, stamped adequately, signed by each subscriber of the Memorandum in the presence of at least 1 witness who attests the signature.

 Unlimited Companies, Companies Limited By Guarantee and Private Companies must have their own Articles of Associations. A Public Company may have its own AoA. If it does not have its own AoA, it may adopt Table A given in Schedule 1 to the Act.

CONTENT OF ARTICLES
Share Capital &Variation of rights. Lien of Company on Shares. Calls on shares Share Certificate Transfer of Shares Transmission Forfeiture of Shares Conversion of Shares with Stocks Share warrants Alteration of Share Capital General Meeting Proceedings at general meetings. Notes by members. Board of Directors and their Powers. Capitalization. Winding Up.

REGULATIONS
Unlimited Company a) the number of members with which the company is to be registered b) if it has a share capital, the amount of share capital with which the company is to be registered
Company Limited With Guarantee The articles shall state the number of members with which the company is to be registered.

Private Company The articles should: I. Restrict the right to transfer shares II. Limit the no. of its members to 50 III. Prohibition of invitation to public for subscribing in any shares of the company

Alteration Of Articles
Must not be inconsistent with the Act. Must not Conflict with Memorandum Must not sanction anything illegal. Must be beneficial for the company. Must not increase Liability of Members. Alteration by Special resolution.

Alteration Of Articles
Approval of Government when Public Company is converted into Private company. Breach of Contract Must not result in the expulsion of a member No power of the Court to amend Articles Alteration may be with retrospective effect

RELATION BETWEEN ARTICLES AND MEMORANDUM

1. The Articles are subordinate to Memorandum 2. The Memorandum must be read in conjunction with Articles 3. The terms of Memorandum cannot be modified or controlled by the Article

MOA
1. 2. 3. 4. It is the Charter of the company indicating the nature of its Business. It defines the Scope of the Activities of the Company. It being the Charter of the Company is the Supreme Document Every Company Must have its own Memorandum. There are strict Restrictions on its alteration. Ultra wires the Memorandum is wholly void. 1.

AOA
2.
3. They are regulations for the internal management of the Company. They are the rules for carrying out the Objects of the company. They are Subordinate to the Memorandum.

4.
5.

5. 6.

6.

A company limited by shares need not have Articles of its own. Table A Can be altered by Special resolution. Ultra Vires the Articles (but intra vires the Memorandum)can be confirmed.

Prospectus
"Any document described or issued as a prospectus and includes any notice, circular, advertisement, or other document inviting deposits from the public or for the subscription or purchase of any shares in, or debenture of a body corporate." [(Section 2(36)]

A document shall be called prospectus if it satisfies 2 things: 1. It invites subscription to shares, debentures or deposits 2. The invitation of the prospectus should be made to the public
What constitutes an offer to public? (According to Section 67) a) An invitation to the public shall include an invitation to any section of the public, whether selected as members or debenture holders of the company or clients of the person issuing the prospectus or in any other manner b) An invitation shall not be an invitation to public if it cannot be calculated to result directly or indirectly , in the shares or debentures becoming available for subscription or purchase by person other than those receiving the invitation. c) Invitation made to a small circle of directors friends is not an offer. d) An offer to the shareholders of an existing company of shares in a company in exchange for existing shares is not an offer to public Prospectus should be in writing

Dating of Prospectus: (Section 55)

A prospectus is issued by or in relation to the intended company, must be dated and that date is taken as the date of publication of the prospectus.

Signing of prospectus:
When the prospectus is issued by an intended company, it has to be signed by the proposed directors of the company or by their agents authorized in writing.

Registration of Prospectus:
It should be made on or before the date of publication . The copy must be signed by all the directors and should be sent to the Registrar for registration The prospectus should be issued within 90 days of date on which it is delivered for registration, if not then it is deemed to be a prospectus whose copy is not been delivered to Registrar Penalty for non- registration: Every person who is knowingly a party to the issue of prospectus shall be punishable with a fine upto Rs 50,000

Objects of Registration of Prospectus: 1. To keep a record of the terms and conditions of issue of the shares or debentures 2. To pinpoint the responsibility of the persons issuing the prospectus.

Information Memorandum (Sec 60B)

"Information Memorandum means a process undertaken prior to the filling of a prospectus by which a demand for the securities proposed to be issued is elicited and the price and terms of issue is assessed by means of a notice, circular, advertisement or document. Companies intend to issue securities may circulate Information Memorandum to public. Offer a Red-Herring prospectus 3 days before the opening of offer. "Red-herring prospectus means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered."

Important contents of the prospectus: Part 1 of schedule 2

1. 2. 3. 4. 5. 6. General Information Capital Structure of the Company Terms of the present issue Particulars of the issue Company management and project Particulars in regard to the company and other listed companies 7. Outstanding Litigation 8. Management perception of risk factors

Part 2 of Schedule 2
1. General Information- consent of directors, auditors, registrar,
managers. Expert opinion, authority and details of resolution passed for issue, procedure and time schedule . 2. Financial Information- reported by the auditors and accountants.

3. Statutory Information- minimum subscription, expenses for the fees ,

details of the directors, members voting rights, revaluation of assets, inspection of documents

Part 3 of Schedule 2: This gives explanation of the provisions under part 1 and part 2.

Statements by Experts:
1. Experts to be unconnected with the formation or management of the company( section 57) 2. Experts consent to issue of prospectus containing statement by him( section 58) 3. Penalty( section 59)

Offer for Sale:

Shares are allotted to the Issuing House which are then offered to the public. It should follow the conditions: Offer to be made within 6 months after the allotment agreement to offer to Issuing House That the date when the offer was made, the whole consideration to be received by the company in respect of shares or debentures had not been received by it.

Shelf Prospectus
Concept introduced by Amendment Act 2000 by the insertion of Section 60A. A prospectus issued by any financial institution or bank for one or more issues of securities. Public Financial Institutes, public sector banks or scheduled banks whose main object is financing shall file a shelf prospectus. Not required to file prospectus afresh at every stage of offer by it within the period of validity of such prospectus.

Amendments:
Section 60(3) in The Companies Act, 1956 (3) 1[ The Registrar shall not register a prospectus unless the requirements of sections 55, 56, 57 and 58 and sub- sections (1) and (2) of this section have been complied with and the prospectus is accompanied by the consent in writing of the person, if any, named therein as the auditor, legal adviser, attorney, solicitor, banker or broker of the company or intended company, to act in that capacity.] Section56(3) : prospectus shall be accompanied with a memorandum.

MISSTATEMENT IN PROSPECTUS & THEIR CONSEQUENCES

The Golden rule for framing the prospectus was laid down by V.C Kindersly. If there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material fact there may arise : Civil liability Criminal liability

Liability for misstatements in prospectus

Civil liability Criminal liability

Against the company

Against the directors, promoters, and experts

Rescission of contract

Claim for damages damages Damages for non compliance Compensation under sec.62 with sec55damages

For fraudulent misrepresentation

For innocent misrepresentation

Civil Liability
Remedies against the company If there is a misstatement or withholding of a material information in a prospectus and if it has induced any shareholder to purchase shares he can: Rescind the contract (misrepresentation, induced, untrue, misleading )& Claim damages from the company(the person is liable to sue the company for the damages)

Remedies against the directors, promoters & experts

The person who are liable to pay compensation for any loss or damage to subscribers for any shares on the faith of a prospectus containing untrue statement are the: Directors at the time of the issue of the prospectus . Persons who have authorised themselves to be named as directors in the prospectus Promoters & Persons who have authorised the issue of the prospectus.

Liability for the damages for misstatement in prospectus

Every director, promoter and the person who authorise the issue of the prospectus is liable to pay compensation to the aggrieved party for the loss or damages he may have incurred by reason of any untrue statement in the prospectus. Withdrawal of consent Absent of consent Ignorance of untrue statement Reasonable ground for belief Statement of expert Right of contribution

Liability for damages for non compliance with sec 56

The omission from the prospectus of a matter required to be included by sec.56 may give rise to an action for damages at the instance of a subscriber who has suffered loss.

Liability under the general law

under this law a share holder can hold any of the person responsible for the issue of prospectus liable for misstatement or fraud on their or his part if he was actually deceived by reason of his having acted on the faith of the misstatement in the prospectus.

Criminal liability
Where a prospectus contains any untrue statement, every person who authorised the issue of prospectus is punishable with imprisonment or with fine which may extend to 50,000. he will not be liable if he proves either : That the statement was immaterial, or That he had reasonable ground to believe that the statement was true.

Issue and allotment of shares in fictitious names

A person shall be punishable with imprisonment for a term which may extend for 5 yrs if: Makes in a fictitious name an application to a company for acquiring any shares therein, or Otherwise induces a company to allot, or register any transfer of shares therein to him.

Statement in lieu of prospectus

Where a public company does not invite public to subscribe for its shares, but arranges to get money from pvt. Sources. It need not issue a prospectus to the public. In such a case the promoters are required to prepare a draft prospectus known as a statement in lieu of prospectus.

Commencement of business
A private company can commence business immediately after its incorporation. A public company can do so only after it obtains a certificate of commencement of business. Restrictions on commencement of business public company issuing a prospectus public company not issuing a prospectus