COMPANIES ACT, 1956

A company, in common parlance, means a group of persons associated together for the
attainment of a common end, social or economic. Registered or Incorporated companies are
those companies incorporated under the Companies Act, 1956 or some other Companies Act.
Companies incorporated under the Companies Act, 1956 are mostly business companies but they
may also be formed for promoting art, chart, research, religion, commerce, or any other useful
purpose.
Definition of a Company
A voluntary association of people A company, in broad sense, may mean an association of
individuals formed for some common purpose. It has capital divisible into parts, known as
shares. At the same time it is an artificial person created by a process of law. It has a perpetual
succession and a common seal. It exists only in contemplation of law, i.e., it is regarded by the
law as a person.
An artificial person A company has no body, no soul and no conscience nor is it subject to
imbecilities of the body. It is not visible, save to the eye of the law. These physical disabilities
make a company an artificial person. But then a company really exists and it is not a fictitious
entity.
Characteristics of a Company
1. Separate legal entity
A company is in law regarded as an entity separate from its members. In other words, it has an
independent corporate existence. Any of its members can enter into contracts with it in the same
manner as any other individual can and he cannot be held liable for the acts of the company even
if he holds virtually the entire share capital. The companys money and property belong to the
company and not to the shareholders (although the shareholders own the company).
2. Limited liability
A company may be a company limited by shares or a company limited by guarantee. In a
company limited by shares, the liability of members is limited to the unpaid value of the shares.
For example, if the face value of a share in a company is Rs 10 and a member has already paid
Rs 7 per share, he can be called upon to pay not more than Rs 3 per share during the lifetime of
the company. In a company limited by guarantee, the liability of members is limited to such
amount as the members may undertake to contribute to the assets of the company, in the event of
it being wound up1.

3. Perpetual succession
1

A company limited by a guarantee is usually meant for bon-profit organizations. The company does not have a

share capital or shareholders, but its members give an undertaking to contribute a nominal amount (typically very
small) in the event of winding up of the company.

COMPANIES ACT, 1956

A company is a juristic person with perpetual succession. As such it never dies; nor does its life
depend on the life of its members. It is not in any manner affected by insolvency, mental disorder
or retirement of any of its members. It is created by a process of law and can be put to an end to
only by a process of law. Members may come and go but the company can go on forever (until
dissolved). It continues to exist even if all its human members are dead. Furthermore, a
companys existence persists irrespective of the change in the composition of its members.
4. Common seal
Since a company has no physical existence, it must act through its agents and all such contracts
entered into by its agents must be under the seal of the company. The common seal acts as the
official signature of the company.
5. Transferability of shares
The capital of a company is divided into parts, called shares. These shares are, subject to certain
conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to
company.
6. Separate property
As a company is a legal person distinct from its members, it is capable of owning, enjoying and
disposing of property in its own name. Although its capital and assets are contributed by its
shareholders, they are not private and joint owners of its property. The company is the real
person in which all its property is vested and by which it is controlled, managed and disposed of.
7. Capacity to sue.
A company can sue and be sued in its corporate name. It may also inflict or suffer wrongs. It can
in fact do or have done to it most of the things which may be done by or to a human being.
Lifting or piercing the corporate veil
From the juristic point of view, a company is a legal person distinct from its members. This
principle may be referred to as the veil of incorporation. The effect of this principle is that
there is a fictional veil (and not a wall) between the company and its members. That is, the
company has a corporate personality which is distinct from its members.
Sometimes it becomes necessary for the Courts to break through or lift the corporate veil or
crack the shell of corporate personality and look at the persons behind the company who are the
real beneficiaries of the corporate fiction.
The various cases in which corporate veil have been lifted are as follows:

Protection of revenue
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COMPANIES ACT, 1956

Prevention of fraud or improper conduct

Determination of character of a company whether it is enemy.
Where the company is a sham.
Company avoiding legal obligations.
Company acting as agent or trustee of the shareholders
Avoidance of welfare legislation
Protecting public policy

Kinds of Companies
Classification on the basis of incorporation
1. Statutory companies
These are companies which are created by a special Act of the Legislature, e.g., the Reserve
Bank of India, the Life Insurance Corporation etc. These are mostly concerned with public
utilities, e.g., railways, tramways, gas and electricity companies and enterprises of national
importance. The provisions of the Companies Act, 1956 apply to them, if they are not
inconsistent with the provisions of the special Act under which they were formed.
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. These are by far the most commonly
found companies.
Classification on the basis of liability
1. Companies with limited liability
a. Companies limited by shares
Where the liability of the members of a company is limited to the amount unpaid on the
shares, such a company is known as a company limited by shares. A company limited by
shares can be a public company or a private company.
b. Companies limited by guarantee
Where the liability of the members of a company is limited to a fixed amount which the
members undertake to contribute to the assets of the company in the event of its being wound
up, the company is called a company limited by guarantee. It has a legal personality distinct
from its members.
Companies limited by guarantee are not formed for profit but for the promotion of art,
science, culture, charity, sports, commerce or some other similar purpose. They may or may
not have a share capital.
2. Unlimited companies
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COMPANIES ACT, 1956

Sn. 12 specifically provides that any 7 or more persons (2 or more in case of a private company)
may form an incorporated company, with or without limited liability. A company without limited
liability is known as an unlimited company. In case of such a company, every member is liable
for the debts of the company.
Classification on the basis of number of members
1. Private company
According to Sec 3(1) (iii), a private company means a company which has a minimum paid up
capital of Rs 100,000 or such higher paid up capital as may be prescribed, and by its Articles
a. Restricts the right to transfer its shares, if any. This restriction is meant to preserve the
private character of the company.
b. Limits the number of its members to 50 (now 200 under the 2013 Act) not including its
employee-members (present or past).
c. Prohibits any invitation to the public to subscribe for any shares in, or debentures of the
company.
d. Prohibits any invitation or acceptance of deposits from persons other than its members,
directors or their relatives.
2. Public company
A public company means a company which
a. Has a minimum paid-up capital of Rs 5 lakh or such higher paid-up capital, as may be
prescribed;
b. Is a private company which is a subsidiary of a company which is not a private company.
Every public company, existing on the commencement of the Companies (Amendment) Act,
2000, with a paid-up Capital of less than Rs 5,00,000 shall, within a period of two years from
such commencement, enhance its paid-up capital to Rs 5,00,000.

Differences between a public company and private company

4

COMPANIES ACT, 1956

1.
2.
3.
4.
5.

Parameter
Minimum paid-up capital
Minimum no. of persons
required to form the co.
Maximum no. of persons
Minimum no. of directors
Restriction on appointment
of directors

6. Restriction on invitation to
subscribe for shares
7. Transferability of
shares/debentures
8. Quorum
9. Managerial remuneration

Public company
Rs 5,00,000
7

Private company
Rs 1,00,000
2

No restrictions
3
The directors must file with
the Registrar a consent to act
as directors or sign an
undertaking for their
qualification shares.
Can invite general public to
subscribe for shares in, or
debentures of the company.
The shares and debentures are
freely transferable.

50
2
Not required

If the Articles do not provide

for a larger quorum, then
minimum is 5 members.
Cannot exceed 11% of net
profits

Such invitation to public is

prohibited.
The right to transfer shares
and debentures is restricted by
the Articles.
Minimum 2 members.
No restriction.

Classification on the basis of Control

1. Holding company: Sec 4(4)
A company is known as the holding company of another company if it has control over that other
company. A company is deemed to be the holding company of another if, but only if, that other
is its subsidiary.
2. Subsidiary company: Sec 4(1)
A company is known as a subsidiary of another company when control is exercised by the latter
(called holding company) over the former called a subsidiary company. According to Sec. 4(1), a
company is deemed to be a subsidiary in the following three cases:

Company controlling composition of Board of Directors

Holding of majority of shares
Subsidiary of another subsidiary

Classification of the basis of ownership

5

COMPANIES ACT, 1956

1. Government company
A Government company means any company in which not less than 51% of the paid-up share
capital is held by
a. The Central Government, or
b. Any State Government or Governments, or
c. Partly by the Central Government and partly by one or more State Governments.
2. Non-Government company
Associations not for profit
A non-profit organization in India can be registered as a Society under the Registrar of Societies,
or as a Trust, by making a Trust Deed. A third option is registering as a section 8 company under
the Companies Act 2013.
According to Sec. 13, the name of a limited company must end with the word Limited in the
case of a public company, and with the words Private Limited in the case of a private company.
Sec. 25 (now section 8) of the Act, however, permits the registration, under a license granted by
the Central Government, of an association not for profit with limited liability without using the
word Limited or the words Private Limited to its name.
The Central Government may grant license to an association where it is proved to the satisfaction
of the Central Government that it
a. Is about to be formed as a limited company for promoting commerce, science, religion,
charity or any other useful object; and
b. Intends to apply its profits, if any, or other income in promoting its objects and to prohibit
the payment of any dividend to its members.
Formation of Company
Before a company is formed, certain preliminary decisions are necessary, e.g., whether it should
be a private company or a public company, what its capital should be, and whether it is
worthwhile forming a new company or taking over the business of an already established
concern. All these decisions are taken b certain persons known as promoters. They do the entire
necessary preliminary work incidental to the formation of a company.
Availability of Name
Sn. 20 of the Companies Act provides that a company cannot be registered by a name, which in
the opinion of the Central Govt., is undesirable. So, it is advisable that promoters find out the
availability of the proposed name of the company for the Registrar of Companies (ROC) of the
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COMPANIES ACT, 1956

State in which they want to have the proposed company incorporated. ROC is to reply informing
availability of name within 14 days of the receipt of application.
When the ROC informs the promoters of the company that the proposed name is not undesirable,
such name shall be available for adoption by the promoters of the proposed company for six
months from the date of intimation by the Registrar. If the company is not incorporated by this
name within this period, then a fresh application will have to be made.
Documents to be filed with the Registrar
Before a company is registered, it is essential to ascertain from the Registrar of Companies (for
the State in which the registered office of the company is to be situated) if the proposed name of
the company is approved. Then the following documents duly stamped together with the
necessary fees are to be filed with the Registrar:
1. The Memorandum of Association duly signed by the subscribers.
2. The Articles of Association, if any, signed by the subscribers to the Memorandum of
Association. A public company limited by shares need not have its own Articles of
Association. It may instead adopt Table A in Schedule I of the Act.
3. The agreement, if any, which the company proposes to enter into with any individual for
appointment as its managing director or whole-time director or manager.
4. A statement of the nominal capital. It must be ensured that the minimum paid-up capital of
the company is Rs. 5 lakh in case of a public company and Rs. 1 lakh in case of a private
company.
5. A list of the directors who have agreed to become the first directors of the company (this
applies to a public company limited by shares) and their written consent to act as directors
and take up qualification shares.
6. A notice of address of the registerd office of the company.
7. A declaration stating that all the requirements of the Companies Act and other formalities
relating to registration have been complied with.
Certificate of Incorporation
When the requisite documents are field with the Registrar, the Registrar shall satisfy himself that
the statutory requirements regarding registration have been duly complied with. If the Registrar
is satisfied as to the compliance of statutory requirements, he retains and registers the
Memorandum, the Articles and other documents filed with him and issues a certificate of
incorporation, i.e., of the formation of the company. By issuing the certificate of incorporation,
7

COMPANIES ACT, 1956

the Registrar certifies under his hand that the company is incorporated and in the case of a
limited company, that the company is limited.
A certificate of incorporation given by the Registrar in respect of a company is conclusive
evidence that all the requirements of the Companies Act have been complied with in respect of
registration.
Three important consequences follow:
1. The company becomes a distinct legal entity. Its life commences from the date mentioned in
the certificate of incorporation.
2. The company acquires a perpetual succession. The members may come and go, but it goes on
forever, unless it is wound up.
3. The companys property is not the property of the shareholders. The shareholders have a right
to share in the profits of the company when realized and divided. Likewise, any liability of
the company is not the liability of the individual shareholders.
Commencement of Business
A private company may commence its business immediately on incorporation but a public
company cannot commence business immediately after incorporation unless it has obtained a
certificate of commencement from the ROC. A company is bound to commence business within
a year of its incorporation or else it is liable to be wound up by the Government.
Memorandum of Association
The Memorandum of Association is a document of great importance in relation to the proposed
company. It contains the fundamental conditions upon which alone the company is allowed to be
incorporated. It is the charter of the company, and lays down the operation of the company. It
also regulates the external affairs of the company in relation to outsiders. Its purpose is to enable
shareholders and those who deal with the company to know what its permitted range of
enterprise is.
The purpose of the Memorandum is two-fold:
1. The prospective shareholders shall know the field in, or the purpose for, which their money is
going to be used by the company and what risk they are undertaking in making investment.
2. The outsiders dealing with the company shall know with certainty as to what the objects of
the company are and as to whether the contractual relation into which they contemplate to
enter with the company is within the objects of the company.
Contents of Memorandum
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COMPANIES ACT, 1956

The Memorandum of every company shall contain the following clauses:

1. The name of the company, with Limited as the last word of the name in the case of a public
limited company and with Private Limited as the last words of the name in the case of a
private limited company.
2. The State in which the registered office of the company is to be situated.
3. The objects of the company which shall be classified as:
- The main objects of the company to be pursued by the company on its incorporation and
objects incidental or ancillary to the attainment of main objects; and
- Other objects of the company not included in (a).
4. In case of companies (other than trading corporations) with objects not confined to one State,
the States to whose territories the objects extend.
5. Limited liability. The Memorandum of a company limited by shares or by guarantee shall
also state that the liability of its members is limited.
6. Share capital. In the case of a company having a share capital, the amount of share capital
with which the company is to be registered and the division thereof into shares of a fixed
amount. In such a company each subscriber shall take at least one share and shall write
opposite his name the number of shares he takes. The Memorandum of a company limited by
guarantee shall also state that each member undertakes to contribute a certain sum to the
assets of the company, if need be, in the event of being wound up.
Doctrine of Ultra Vires
A company has the power to do all such things as are
1. Authorized to be done by the Companies Act, 1956.
2. Essential to the attainment of the objectives specified in the Memorandum.
3. Reasonably and fairly incidental to its objects.
Everything else is ultra vires the company. Ultra means beyond and vires means powers.
The term ultra vires for a company means that the doing of the act is beyond the legal power and
authority of the company. The purpose of these restrictions is to protect the investors and
creditors of the company.
If an act is ultra vires he company, it does not create any legal relationship. Such an act is
absolutely void and even the whole body of shareholders cannot ratify it and make it binding on
the company.
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COMPANIES ACT, 1956

Articles of Association
The Articles of Association are the rules, regulations and bye-laws for the internal management
of the affairs of a company. They are framed with the object of carrying out the aims and objects
as set out in the Memorandum of Association.
The Articles are next in importance to the Memorandum of Association which contains the
fundamental conditions upon which alone a company is allowed to be incorporated. They are as
such subordinate to, and controlled by, the Memorandum.
In framing the Articles of a company care must be taken to see that regulations framed do not go
beyond the powers of the company itself as contemplated by the Memorandum of Association.
Contents of Articles
Articles usually contain provisions relating to the following matters:
1. Share capital, rights of shareholders, variation of these rights, payment of commissions, share
certificates.
2. Lien on shares.
3. Calls on shares.
4. Transfer of shares.
5. Transmission of shares.
6. Forfeiture of shares.
7. Conversion of shares into stock.
8. Share warrants.
9. Alteration of capital.
10. General meetings and proceedings.
11. Voting rights of members, voting and poll, proxies.
12. Directors, their appointment, remuneration, qualifications, powers and proceedings of Board
of Directors.
13. Manager.
14. Secretary.
15. Dividends and reserves.
16. Accounts, audit and borrowing powers.
17. Capitalisation of profits.
18. Winding up.
Alteration of Articles
Companies have been given very wide powers to alter their Articles. The right to alter the
Articles is so important that a company cannot in any manner, either by express provision in the
Articles or by an independent contract, deprive itself of the power to alter its Articles. Any clause
in the Articles that restricts or prohibits alteration of Articles is invalid. If, for example, the

10

COMPANIES ACT, 1956

Article of a company contain any restriction that the company shall not alter its Articles, it will
be contrary to the Companies Act and therefore, inoperative.
Limitation to alteration
1.
2.
3.
4.
5.
6.
7.

Must not be inconsistent with Act.

Must not conflict with the Memorandum.
Must not sanction anything illegal.
Must be for the benefit of the company.
Must not increase liability of members.
Alteration by special resolution only.
Approval of Central Govt. required when a public company is converted into a private
company.
8. Breach of Contract. A company is not prevented from altering its Articles even if such an
alteration would result in breach of some contract. The affected party may, however, file a
suit for damages for the breach of contract.
9. Must not result in expulsion of member. An assumption by the Board of Directors of a
company of any power to expel a member by amending its Articles is illegal and void. Any
provision in the Articles conferring such a power on the Board of Directors is repugnant to
the various provisions in the Companies Act pertaining to the rights of a member in a public
limited company.
10. Alteration may be with retrospective effect.
The Articles are subordinate to the Memorandum. The Articles cannot give powers to a company
which are not conferred by the Memorandum nor can they purport to create rights which are
inconsistent with the Memorandum.
Prospectus
In order to finance its activities, a company needs capital which is raised by a public company by
the issue of a prospectus inviting deposits or offers for shares and debentures from public. A
private company is prohibited from making any invitation to the public to subscribe for any
shares in, or debentures of, the company. Hence it need not issue a prospectus.
The central theme of a prospectus, from the money raising point of view, is that it sets out the
prospects of the company and the purpose for which the capital is required. The prospectus is the
basis on which the prospective investors form their opinion and take decisions as to the worth
and prospects of the company.
Sec, 2 (36) defines a prospectus as 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 the subscription or purchase of any shares in, or debentures
of, a body corporate.
A prospectus must be in writing. Furthermore, a document is not a prospectus unless it is an
invitation to the public to subscribe for shares in, or debentures of a company. Under the proviso
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COMPANIES ACT, 1956

to subsection (3) of sec 67, the offer or invitation to subscribe for shares or debentures made to
fifty persons or more shall be treated as made to the public.
A prospectus can be issued by or on behalf of a company only when a copy thereof has been
delivered to the Registrar for registration. The registration must be made on or before the date of
publication thereof.
Contents of a Prospectus
1.
2.
3.
4.
5.
6.
7.
8.
9.

General information on the company

Capital structure of the company (authorized, issued, subscribed, and paid up capital)
Terms of the present issue
Particulars of the issue (object, project cost, means of financing etc).
Company, management, and project.
Outstanding litigations of the company
Management perception of risk factors.
Financial information report of the auditors and accountants
Statutory and other information.

Misstatements in Prospectus and their Consequences

If there is a misstatement or withholding of material information in a prospectus, and if it has
induced any shareholder to purchase shares, he can
1. Rescind the contract
2. Claim damages from the company whether the statement is fraudulent or an innocent one.
Where a prospectus contains any untrue statement, every person who authorized the issue of the
prospectus is punishable with imprisonment which may extend to 2 years, or with fine which
may extend to Rs 5000 or with both. He will not be liable if he can prove either
1. That the statement was immaterial, or
2. That he had reasonable ground to believe that the statement was true.
Red Herring Prospectus
This is a prospectus which does not have details of either price or number of shares being offered
or the amount of issue. This means that in case price is not disclosed, the number of shares and
the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue
size and the number of shares are determined later.
Statement in lieu of Prospectus
Where a public company does not invite public to subscribe for its shares, but arranges to get
money from private 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 statement in lieu of prospectus,
which shall contain the information required to be disclosed by Schedule III of the Act.

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COMPANIES ACT, 1956

Book building
Book building means a process undertaken by which a demand for the securities proposed to be
issued by a body corporate is elicited and built up and the price for such securities is assessed for
the determination of the quantum of such securities to be issued by means of a notice, circular,
advertisement or offer document.
Bids are collected from investors, at various prices which are above or equal to the floor price
(the minimum price). The final price of the share is determined after the bid closing date, based
on certain evaluation criteria. The bidders can offer their bids during a certain period for which
the IPO will be open.
Price band comes into play when IPOs are done through a book-building process. Price band is
the lower and the upper share price declared by the company in the issue document when it
adopts book-building route.
Book building is a technique used for marketing a public offer of equity shares in a company. In
broad terms, the process is as follows:
1. Decision is taken by the company on the quantum of funds to be raised from the market, by
way of equity shares, and the likely timing;
2. Merchant banker is associated, and a draft prospectus, excepting issue price, is prepared and
placed with SEBI;
3. The draft placed with SEBI also indicates that the issue price is to be decided through the
book-building process;
4. Bids are invited from prospective investors (which is indicative of price range) as to the
likely number of shares that they would be ready to subscribe and the price at which they
will take up subscription;
5. A time-period is determined during which the bids will be received;
6. After expiration of time period, these bids are evaluated and a price is determined;
7. The issue price is then decided and SEBI kept informed;
8. 25% of the total issue is offered to the public
9. The balance 75% can be covered by accepting the bids received at the evaluated price.
The book-building process allows for price and demand discovery.
Members and Shareholders
The members or shareholders are the persons who collectively constitute the company as a
corporate entity. The term member and shareholder and holder of a share are used
interchangeably. They are synonymous in the case of a company limited by shares, a company
limited by guarantee and having a share capital and an unlimited company whose capital is held
in definite shares. But in the case of an unlimited company limited by guarantee, a member may
not be a shareholder, for such a company may not have a share capital.

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COMPANIES ACT, 1956

A registered shareholder is a member but a registered member may not be a shareholder because
the company may not have a share capital.
Any person who is competent to contract (sec. 11 of the Indian Contract Act, 1872) may become
a member of a company.
Share Capital
Share Capital means the capital raised by a company by the issue of shares. The word capital
in connection with a company is used in several senses:
1. Authorised or nominal capital.
This is the nominal value of the shares which a company is authorised to issue by its
Memorandum of Association. In the case of a limited company, the Memorandum shall state the
amount of capital with which the company is proposed to be registered and the division thereof
into shares of the fixed amount. This is the maximum capital which the company will have
during its lifetime unless it is increased.
2. Issued and subscribed capital.
Issued capital is the nominal value of the shares which are offered to the public for subscription.
A company does not normally issue all its capital at once, so that issued capital in such a case is
less than the authorized capital. The issued capital can never exceed the authorized capital; it can
at the most be equal to the authorized capital which is the case when all the shares have been
issued to the public.
3. Called-up capital.
This is that part of the issued capital which has been called up on the shares.
4. Paid-up capital.
This is that part of the issued capital which has been paid up by the shareholders or which is
credited as paid-up on the shares.
5. Uncalled capital.
This is the remainder of the issued capital which has not been called. The company may call this
amount any time but this is subject to the terms of issue of shares and the provisions of the
Articles.

6. Reserve capital.

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COMPANIES ACT, 1956

This is that part of the uncalled capital of a company which can be called only in the event of its
winding up. A limited company may, by a special resolution, determine that a portion of its
uncalled capital shall not be called up, except in the event and for the purpose of the company
being wound up (sec. 99); and such capital is known as reserve capital. Reserve capital cannot
be turned into uncalled capital without the leave of the Court. It is available only for the creditors
on the winding up of the company. The company can neither charge reserve capital nor cancel it
in a reduction of capital.
Kinds of Share Capital
The share capital of a company shall be of two kinds only, namely
1. Equity share capital
a. With voting rights, or
b. With differential rights as to dividend, voting or otherwise in accordance with such rules
and subject to such conditions as may be prescribed.
All shares which are not preferential shares are equity shares. Equity shareholders have the
residual right of the company. An equity shareholder of a company limited by shares has a right
to vote on every resolution placed before it.
2. Preference share capital
A preference share carries a preferential right as to the payment of dividend at a fixed rate. In the
event of winding up, there must be a preferential right to the payment of the paid up capital. A
preference shareholder has a right to vote on those resolutions which directly affect his rights.
Any resolution for winding up the company or for repayment or reduction of its share capital is
deemed directly to affect the rights of the preference shareholders.
Shares
A share is the interest of a shareholder in a company. The capital of a company is divided into
certain indivisible units of a fixed amount. These units are called shares.
A share is evidenced by a share certificate issued by a company under its common seal. It
specifies the shares held by a member and is prima facie evidence of the title of the member of
the shares.
Stocks and Shares
Stock is the aggregate of fully paid-up shares, consolidated and divided, for the purpose of
convenient holding into different parts. It may be transferred or split up into fractions of any
amount, without regard to the original face value of the share. It also denotes
1. that a company has recognized the fact of complete payment of the shares, and
2. that they can be assigned in fragments which could not be done before.
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COMPANIES ACT, 1956

Stocks can validly be issued only when the shares are fully paid-up. The issue of partly paid-up
stock is a nullity. This, in other words, means that only fully paid-up shares can be converted into
stock.
A company may, by ordinary resolution, convert any paid-up shares into stock; and reconvert any
stock into paid-up shares of any denomination.
The important points of distinction between shares and stocks are as follows:
1. A share has a nominal value, whereas stock has no nominal value.
2. Stock is always fully paid-up, while shares may not be so.
3. Stock is transferable in small fractions while shares can only be transferred in round
numbers.
4. All shares are of equal denomination. Stock may be of unequal amounts.
5. The faction or parts of stock do not bear any distinctive numbers while shares always bear
distinctive numbers.
6. Shares can directly be issued to the public whereas stock cannot be issued directly. Only fully
paid-up shares can be converted into stock.
As regards voting rights, the holders of the stock can vote in the same way as if the stock
represented a definite number of shares of corresponding amount taken at their nominal value.
Types of Shares
Under the Companies Act, 1956, a company can issue two types of shares preference shares
and equity shares.
1. Preference shares these have a preferential right to be paid dividend during the lifetime of
the company; and they have a preferential right to the return of capital when the company
goes into liquidation.
Cumulative preference shares are shares on which dividend goes on accumulating till it is fully
paid off. The arrears of any years dividend are carried forward as a charge upon the subsequent
years profit. For non-cumulative preference shares, the dividend does not go on accumulating.
Convertible preference shares are the shares which entitle their holder to convert them into
equity shares within a certain period. No-convertible preference shares do not confer on their
holder any such rights.
2. Equity shares are those shares which are not preference shares.
Sweat equity shares these are equity shares issued at a discount or for consideration other than
cash for providing know-how or making available rights in the nature of intellectual property
rights or value additions by whatever name called.

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COMPANIES ACT, 1956

Lien on shares
A lien is the right to retain possession of a thing until a claim is satisfied. In the case of a
company lien on shares means that the member would not be permitted to transfer his shares
unless he pays his debt to the company. A lien on shares is a contractual lien originating from the
contract contained in the memorandum and articles of association.
The articles generally provide that the company shall have a first and paramount lien on the
shares of each member for his debts and liabilities to the company. The right of lien is not
inherent but must be clearly provided for in the articles.
Buy back of shares
Sections 77A, 77AA and 77B inserted by the Companies (Amendment) Act 1999 and the
guidelines issued by SEBI have allowed Companies to purchase their own shares or other
securities subject to certain conditions.
Section 77A allows a company to buy its own shares and other securities out of:
1. Its free reserves;
2. the securities premium account;
3. the proceeds of an earlier issue other than fresh issue made specifically for buy-back
purposes.
The buy-back will have to be authorized by the companys articles, and a special resolution will
have to be passed in the general meeting of the company authorizing the buy-back. The buy-back
should be less than 25% of the total paid-up capital and free reserves of the company, and should
be in accordance with SEBI regulations.
Borrowing Powers
A company needs money to finance its activities from time to time. A part of this requirement as
already seen is met by the issue of shares; for the rest, the company has to resort to borrowing.
Every trading company, unless prohibited by its Memorandum or Articles, has implied power to
borrow money for the purpose of its business. It has also the power to give security for the loan
by creating a mortgage or charge on its property. The ground for the rule is that the exigencies
of commerce render such power necessary. A non-trading company has no implied power to
borrow. It requires express power to do so. This power, in case of such a company, must be taken
in the Memorandum or the Articles.
When a company has express or implied power to borrow, it can borrow subject to the limits set
by the Memorandum or the Articles.
A public company having a share capital cannot exercise borrowing power unless certificate of
commencement of business is obtained by it.
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COMPANIES ACT, 1956

Borrowing which is ultra vires the company

If a company borrows money beyond its express or implied powers, the borrowing is ultra vires
the company and is void. No debt is created and the securities given in respect thereof are
inoperative and void, and no ratification can render the debt valid.
Where a borrowing is ultra vires a company, the lender of money has no legal or equitable debt
against the company. As such he can have no rights against the company for the recovery of the
loan. The lender may, however, get an injunction from Court to restrain the company from
parting with the money.
If the money borrowed ultra vires has been used to pay off legitimate debts of the company
(whether incurred before or after the money was borrowed), the lender is entitled to treat his loan
as intra-vires to the extent to which the money was so applied. He can sue the company by virtue
of principle of subrogation. Here subrogation is allowed for the simple reason that when a
company which borrows to pay off existing debts, does not thereby, increase its general
indebtedness because there is merely replacement of one debt by another of the same amount.
Debentures
The most usual form of borrowing by a company is by the issue of debentures. According to Sec.
2(12), debenture includes debenture stock, bonds, and any other securities of a company,
whether constituting a charge on the assets of the company or not.
The characteristic features of a debenture are as follows:
1. It is issued by a company and is usually in the form of a certificate which is an
acknowledgement of indebtedness.
2. It is issued under the companys seal. It need not, however, be necessary under the companys
seal.
3. It is one of a series issued to a number of lenders. But a single debenture is also not
uncommon. Thus a mortgage of a companys property to a single individual as security for a
loan is a debenture within the definition given earlier.
4. It usually specifies a particular period or date as the date of repayment. It also provides for
the payment of a special principal and interest at the specified date. But a company is not
debarred from issuing perpetual or irredeemable debentures.
5. It generally creates a charge on the undertaking of the company or some parts of the
property; but there may be debentures without any such charge.
6. A debenture-holder does not have any right to vote in the company meetings.
Appointment of Director
According to Sec. 2 (13) of the Companys Act, 1956, director includes any person occupying
the position of director by whatever name called. A director may be defined as an individual who
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COMPANIES ACT, 1956

directs, controls, manages or superintends the affairs of a company. As a body, they frame the
general policy of the company, direct its affairs, appoint the companys officers, ensure that they
carry out their duties and recommend to the shareholders regarding distribution of dividend. The
directors of a company are collectively referred to as the Board of directors or Board.
Directors are, in the eyes of the law, agents of the company for which they act. The general
principles of the law of agency apply to the company and its directors. The company itself cannot
in its own person for it has no person; it can only act through directors and the case is as regards
those directors merely the ordinary case of principal and agent. Wherever an agent is liable those
directors would be liable; where the liability would attach to the principal and principal only, the
liability is the liability of the company.
Sec. 252 provides that every public company must have at least 3 directors and every private
company must have at least 2 directors.
Directors may be appointed in the following ways:
1. First Director. The first directors are usually named in the articles. The articles may also
provide that both the number and the names of the first directors shall be determined in
writing by the subscribers to the memorandum or a majority of them. Where the company
has no articles or the articles are silent regarding the appointment of directors, the subscribers
to the memorandum who are individuals shall be deemed to be the first directors of the
company.
2. Appointment by company. Appointment of subsequent directors is made at every annual
general meeting of the company. Section 255 provides that not less than two third of the total
number of directors of a public company, or of a private company which is subsidiary of a
public company must be appointed by the company in general meeting. These directors must
be subject to retirement by rotation.
Example: A company has six directors. It can appoint only 2 directors (1/3rd of six) as
permanent directors if it wants to do so. The remaining four directors shall be liable to retire
by rotation.
The object of Section 255 is to prevent the mischief of self perpetuating management.
At every subsequent annual general meeting one third of the directors of a public company or a
private company which is not a subsidiary of a public company are liable to retire by rotation. If
the number is not three or a multiple of three, then the number nearest to one third must retire
from office.
The directors to retire by rotation at every annual general meeting must be those who have been
longest in office since their last appointment. As between persons who become directors on the
same day, those who are to retire will, subject to any agreement among themselves, be
determined by lot.

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COMPANIES ACT, 1956

Winding Up and Dissolution of Companies
A company is brought into existence by a legal process and when for any reason, it is desired to
end its existence, it must again be by the process of law. Winding up of a company is a process of
putting an end to the life of a company. It is a proceeding by means of which a company is
dissolved and in the course of such a dissolution its assets are collected, its debts paid off out of
the assets of the company or from contributions by its members, if necessary. If any surplus is
left, it is distributed among the members in accordance with their rights. During the process of
winding up the company still exists and has corporate powers until dissolution. Till dissolution
the property of the company remains vested in the company.
It is worth noting that the company is not dissolved immediately on the commencement of the
winding up proceedings. As a matter of fact, the winding up of a company precedes its
dissolution i.e. the winding up is the prior stage and the dissolution, next. On the dissolution, the
company is no more in existence, and its name is struck off by the Registrar from the register of
companies.
Winding up by Tribunal
A company may be wound up by an order of the Tribunal. This is called compulsory winding up.
The Tribunal will make an order for winding up on an application by any person enlisted in
section 439.
Section 433 lays down the following grounds where a company may be wound up by a Tribunal:
1. Special resolution.
If the company has by a special resolution resolved that it may be wound up by the Tribunal, the
Tribunal may pass a winding up orders. The powers of the Tribunal in such a case is
discretionary and should be exercised only where a bona fide case is made out. The Tribunal may
refuse to order winding up where it is opposed to public or companys interest.
2. Default in filing statutory report, or holding statutory meeting.
The company must hold the statutory meeting within 6 months from the date on which the
company is entitled to commence its business. And before the holding of the meeting, the
statutory report by the directors must also be delivered to the Registrar for registration. If a
company makes a default in delivering the statutory report to the registrar or in holding the
statutory meeting, the Tribunal may order winding up of the company either on the petition of
the Registrar or on the petition of the contributory.
3. Failure to commence business with time.
Where a company does not commence its business within a year from its incorporation, or
suspends its business for a whole year, the Tribunal may order for its winding up.
4. Reduction of membership.
Where the number of members is reduced to below 7 in the case of public company and below 2
in case of a private company, the Tribunal may order the winding up of the company.
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COMPANIES ACT, 1956

5. Inability to pay debts.

6. Just and equitable.
The Tribunal can order the winding up of a company when the Tribunal is of the opinion that it is
just and equitable that the company should be wound up.
7. Default in filing P/L account B/S or Annual Return.
8. Acted against Sovereignty & Integrity of India.
9. Sick Industrial Company u/s 424G.
Petition for Winding Up
The Tribunal does not choose to wind up a company of its own motion. It has to be petitioned.
Section 439 of the Companies Act enumerates the persons who can file a petition to the Tribunal:
1.
2.
3.
4.
5.
6.

The company.
Any creditor or creditors including any contingent or prospective creditor or creditors.
Any contributory2 or contributories.
All or any of the aforesaid parties, together or separately.
The Registrar.
Any person authorized by the central government under section 234.

Companies Act 2013 Highlights

1. One person company (OPC) The 2013 Act introduces a new entity, the OPC, which is a
private company with only one member and at least one Director. There is no compulsion to
hold an AGM. Conversion of existing private company with paid up capital up to Rs 50 lakhs
and turnover up to Rs 2 cr. into OPC is permitted.
2. Woman director Every listed company / public company with paid up capital of Rs. 100 cr.
or more / public co. with turnover of Rs. 300 cr. or more shall have at least one woman
director.
3. Financial year Under the new Act, all companies have to follow a uniform financial year,
i.e. 1st April to 31st March. Thos companies which follow a different financial year have to
align their accounting year to 1st April to 31st March within 2 years.
4. Private company The 2013 Act introduces a change in the definition for a private company,
inter-alia, the new requirement increase the limit of the number of members from 50 to 200.

The term contributory means every person liable to contribute to the assets of a company in the event of its being
wound up. It includes the holders of any shares which are fully paid up and includes any person alleged to be a
contributory.

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COMPANIES ACT, 1956

5. CSR The 2013 Act makes an effort to introduce the culture of corporate social
responsibility in Indian corporates by requiring companies to formulate a CSR policy and at
least incur a given minimum expenditure on social activities.
6. The 2013 Act introduces a new concept of class action suits which can be initiated by
shareholders against the company and auditors.
7. National Company Law Tribunal (NCLT) The erstwhile Company Law Board was an
independent quasi-judicial body which had the power to review the beahvior of companies
within the Company Law. The CLB has been succeeded by the NCLT which will govern all
companies under the Companies Act 2013. NCLT will combine the powers of the Companies
Law Board (issues related to oppression and mismanagement), Board for Industrial and
Financial Reconstruction BIFR (revival of sick cos.) and powers related to winding up of
companies (High Courts).

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