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Companies Act 1956

 Company: A voluntary incorporated association which is an artificial person, created by


law with limited liability having common seal and perpetual succession

Characteristics of Company
 Registration: Companies act 1956 says that a firm has to get itself registered under the
companies act with the ROC otherwise, it will be classified as an illegal association.

 Distinct person- separate legal entity: The Company is different and distinct from its
members in law. It has its own name and its own seal, its assets and liabilities are
separate and distinct from those of its members. It is capable of owning property,
incurring debt, borrowing money, having a bank account, employing people, etc

 Perpetual succession: A company does not die or cease to exist unless it is specifically
wound up or the task for which it was formed has been completed. Membership of a
company may keep on changing from time to time. Death or insolvency of member does
not affect the existence of the company.

 Artificial person but not a citizen


 Transferable shares: Shares in a company are freely transferable, subject to certain
conditions.

 Limited liability: In a joint stock company, the liability of a member is limited to the
amount he has invested. That is, even if there is liquidation of the company, the personal
property of the investor can not be used to pay the debts and he will lose his investment.

 Common seal: A company is an artificial person and does not have a physical presence.
Therefore, it acts through its Board of Directors for carrying out its activities and entering
into various agreements. Such contracts must be under the seal of the company& name of
the company must be engraved on the common seal. Any document not bearing the seal
of the company may not be accepted as authentic and may not have any legal force.

 Separate property: The Company’s property is its own. A member cannot claim to be
owner of the company's property during the existence of the company.
 Capacity to sue and to be sued

Distinction between Partnership and Company


 Registration: A company is incorporated by registration under the Companies Act, 1956.
A partnership is established by agreement which may be expressed or implied from the
conduct of the partners and is subject to the Indian Contract Act, 1872 or the Indian
Partnership Act, 1932.
 Membership: There must be at least 2 members in order to form a partnership firm, the
number of members must not exceed 20 in case of banking business and 10 in other
businesses. A Public company may have as many members as it desires subject to a
minimum of 7 members and two for a private limited company. A Private company
cannot have more than 50 members.
 Legal status: Partnership firm does not have a separate legal entity. The company has a
separate legal entity as soon as it is incorporated under law.

 Property: Property of the firm belongs to the partners and they are collectively entitled
to it. In case of a company, the property belongs to the company and not to its members.

 Management: Members of a company are not entitled to take part in the management of
the company unless they become directors.

 Existence, Death: On the death of any partner, the partnership is dissolved unless there is
provision to the contrary. On the death of the shareholder the company' existence does
not get terminated.

 Liability: Liability of the partners is unlimited. However, the liability of shareholders of


a limited company is limited to the extent of unpaid share or to the tune of the unpaid
amount guaranteed by the shareholder.

 Creditors: Creditors of a company can proceed only against the Co. and not against its
members. Creditors of partnership firm are creditors of individual partners.

 Transfer: Companies shares are ordinarily transferable. Whereas, a partner cannot


transfer his share without the consent of other partner.

 Statutory obligation: Minimum no. of board meeting & all

 Accounts: Accounts of a partnership firm are audited at discretion of the partners. A


company is legally required to have accounts audited annually by a CA.

 Agency: A member of a company is not an agent of the company or that of other


members, and he cannot bind a company by his acts. Each partner is an agent and may
bind the firm by his acts.

Types of Companies
 Royal chartered company: formed for the purpose of trade, exploration, etc e.g. East
India Company
 Statutory companies: A statutory company is a company formed by special Act
of parliament. E.g. State Bank of India, Industrial Finance Corporation of India.
 Registered companies under the Companies Act
 Companies limited by shares: is a "company in which the liability of each
shareholder is limited to the amount individually invested". Member’s personal
assets cannot be called upon for the payment of liabilities of the company.
 Companies limited by guarantee: The liability of the members is limited to a
stipulated sum. The guaranteed amount can be called up at the company on when
it is winding up & if its liabilities exceeds it assets.
 Unlimited company: A company where the liability of members for the debts of
the company are unlimited. Shareholders personal assets can be called upon for
the payment of liabilities of the company.
 Foreign company :
 Government company
 One man company
 Holding company, subsidiary company
 Company registered for promoting commerce, art, science etc.

Private Limited Company


 Maximum number of members-50
 Restrict the right to transfer its shares
 No deposit from public
 No issue of shares to public

Distinction between Public and Private Company


 Members: Minimum number of members required to form a private company is 2,
whereas a Public Company requires at least 7 members. Maximum number of members
in a Private Company is restricted to 50, there is no restriction of maximum number of
members in a Public Company.
 Transfer of shares: There is complete restriction on the transferability of the shares of a
Private Company through its Articles of Association , whereas there is no restriction on
the transferability of the shares of a Public company
 Public invitation: A Private Company is prohibited from inviting the public for
subscription of its shares, i.e. a Private Company cannot issue Prospectus, whereas a
Public Company is free to invite public for subscription i.e., a Public Company can issue
a Prospectus.
 Name: The last words in the name are required to be "Private Ltd." in the case of a
private company and "Limited" in the case of a Public Company.
 Privileges: A Private Company enjoys some special privileges, which are not available
to a Public Company.
 Number of directors: A Private Company may have 2 directors to manage the affairs of
the company, whereas a Public Company must have at least 3 directors.
 Loans: Provisions restricting loans to directors in public companies.
 Minimum paid up capital: A company to be incorporated as a Private Company must
have a minimum paid-up capital of Rs. 1,00,000, whereas a Public Company must have a
minimum paid-up capital of Rs. 5,00,000.

Companies Act 1956


 Lifting of corporate veil: The corporate law concept of piercing (lifting) the corporate
veil describes a legal decision where a shareholder or director of a corporation is held
liable for the debts or liabilities.
Some people run the company to defraud others. In that case the court treats the
company and shareholders as one entity. The court will refuse to hold the veil of
incorporation where it seems that the company is a clock or sham for the purpose of
defeating or circumventing the law, to defraud creditors or to avoid any legal obligation.

 Certification of incorporation: This document is the birth certificate of the company


and is proof of the existence of the company.
 Certificate of commencement of business: A company limited by shares, has to obtain a
"certificate of commencement" of business from the registrar. Unless it obtains such
certificate, it cannot carry on its business operation.
 Promoter: The persons who conceive the company and invest the initial funds are
known as the promoters of the company. The promoters enter into preliminary contracts
with vendors and make arrangements for the preparation, advertisement and the
circulation of prospectus and placement of capital.
 Preliminary or pre- incorporation contract: The promoters of a company usually enter
into contract to acquire some property or right for the company, which is yet to be
incorporated. Such contracts are called Pre-Incorporation or Preliminary Contracts.

Memorandum of Association
The MOA is designed to communicate to the public the state of affairs of the company and its
purpose of being and operating. This aids various stakeholders of the company (creditors,
suppliers, shareholders, etc.) to evaluate the extent of their risk and also possibilities of the
company to overcome them at a future date.

Contents of MOA
 Name clause: includes name of company & whether it is a private of public company.
 Registered office of the company: should state the name of the State in which the
registered office of the company will be situated. And a notice of exact place registered
office must be given to Registrar within 30 days after the day of incorporation,
 Object clause: Defines the objectives of the company & indicates the sphere of activities
 Capital clause: States the amount of the nominal capital of the company and the number
value of the shares into which it is divided.
 Liability clause: states the nature of liability that members incur.
 Subscription or association clause: Memorandum concludes with the subscription
clause where the subscribers to the memorandum declare that they respectively agree to
take the number of shares in the capital of the company set opposite their respective
names.

 Alteration of MOA: can be made by passing a special resolution.


 Articles of Association: AOA of a company is in pursuance of any previous companies’ law
or of this act. It is a company’s internal regulations, bye-laws or rules that govern the
management of its internal affairs and conduct of its business. It defines the powers of the
officers and also establishes a contract between the company and the members and between
the members inter se.
 Doctrine of Ultra Vires: Any act beyond the scope of the memorandum is ultra vires the
company and hence null & void .The object clause of MOA fixes boundary within which the
company has to act. If the company crosses this limit, it amounts to UV. All UV acts are void
even when such acts are ratified by all the members of the company. E.g. Satyam buying
Maytas Infra.
 Doctrine of Constructive Notice: says that every person who contemplates to enter into a
contract with a company is regarded not only as having read the MOA & AOA (since they
are publically available) but have also understood them to their proper meaning.
Consequently he is presumed to know, not only the exact powers of the company but also the
extent to which these powers have been delegated to the directors, and any limitations placed
upon the exercise of these powers. The DOCN operates against the person who has failed to
inquire.
 Doctrine of Indoor Management: lays down that the persons dealing with the company
having satisfied that the proposed transaction is consistent with the MOA & AOA, are not
bound to inquire into the regularity of the internal proceedings.
The DOIM has its origin in case of Royal British Bank vs. Turquand. The directors of a
company borrowed a sum of money from plaintiff. The article of company provided that the
director might borrow on bonds from time to time, provided it is authorized by a resolution
passed at a general meeting of the company. The directors gave a bond to Turquand without
the authority of any such resolution. It was held that Turquand could sue the company as he
was entitled to assume that the necessary resolution has been passed.

Exceptions to doctrine of Indoor Management


 Ultra vires acts: If the contract has been entered into by an outsider which is UV to the
activities of the company itself.
 Knowledge of irregularity: If the outsider already had the knowledge of the lack of
authority of the person on behalf of the company, but still enters into a contract with the
same person, he cannot seek protection under this doctrine.
 Act of an agent outside the scope of his authority: E.g. a Manager signing important
documents under words he is signing on behalf of company.
 Act outside apparent authority: An outsider cannot enter into a contract with an officer
of a company who ordinarily is not permitted to enter into a contract on behalf of
company (e.g. An accountant entering into a contract to sell property of company)
 Negligence: If a person fails to make an enquiry he is estopped from relying on the Rule.
 Forgery: The director cannot be held responsible for signatures they never made nor can
the company can do anything about it.

Prospectus
Any document described or issued as a prospectus and include any notice, circular,
advertisement, or other document inviting deposits from the public or inviting offer from
public for the subscription or purchase of any shares in or debentures of a body corporate

It is an important document as it is the only communication from the company to the


public inviting them to invest in the company. As such great care has to be taken while
drafting the prospectus. Any wrongful inducement to subscribe to shares/debentures is viewed
seriously. The Companies Act provides a set of regulations intent to protect the investing public
from any victimization.

Contents of Prospectus
 Date: It is necessary because the date of publication is used to determine the various
time limits that are to be met mandatorily under the various provisions of the Act.
 Registration: No prospectus can be issued unless it is registered with the Registrar
(NOTE: date of publication is different from date of issue)
 Experts consent: Section 58 makes it mandatory for the company to seek written
consent of an expert to include his statement in the prospectus. However by consenting to
the issue the expert does not undertake liability in respect of the anything in the
prospectus except, his own statement.
 Delivery for registration: A prospect once registered must be issued within 90 days.
Upon registration it becomes a public document (not too sure about this)

Mis-statements in prospectus
 Untrue statements
 Statement which gives wrong impression
 Mis-leading statement
 Concealment of material facts
 Omission of facts
Who are liable for mis-statement in prospectus
 Director at the time of issue of prospectus
 Every person who has authorized himself to be named in the prospectus
 Promoter of the company
 Any person who has authorized issue of prospectus

Liability for mis-statement in prospectus


 Civil liability: where a prospectus invites persons to subscribe for shares in or
debentures of a company, the following persons shall be liable to pay compensation
to every person who subscribes for any shares or debentures on the faith of the
prospectus for any loss or damage he may have sustained by reason of any untrue
statement included therein.

 Criminal Sec 63(1) & 68


 2yrs & 50,000/- fine or both

Prospectus

 Statement in lieu of prospectus: is to filled in following cases: (1) Prospectus to be


filed by private company on ceasing to be private company (2) Where a company does
not issue a prospectus (3) where it issues a prospectus but has not proceeded to allot any
of the share offered to the public for subscription.
 Shelf Prospectus: Any public financial institution, public sector bank or scheduled
bank whose main object is financing shall file a shelf prospectus. A company filing a
shelf prospectus with the Registrar shall not be required to file prospectus afresh at every
stage of offer of securities by it within a period of validity of such shelf prospectus
(mostly 1 year from the date of opening of first issue of securities)
 Abridged Prospectus: It contains all the salient features of a prospectus. It accompanies
the application form of public issues
 Red hearing Prospectus: 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.

Defenses against civil liability


 Withdrawal of consent before issue
 Issued without knowledge
 Withdrawal of consent after issue but before allotment and public notice was given.
 Reasonable ground to believe that statements were true and believed to be true
 Statement by an expert

Defenses against criminal liability


 The statement was immaterial
 Reasonable ground to believe

Director
 Number of Directors: Companies Act lays down that a public limited company shall
have at least 3 directors. Other companies shave have at least 2 directors.
However PLC having, (1) a paid-up capital of 5 crore or more, (2) 1,000 or more small
shareholders may have a director elected by such small holders in the manner as prescribed.
 First Director: The first Directors of the Company( generally subscribers) will govern
the affairs of the Company until the new Directors are elected.
 Appointment of Director
 In general meeting: 2/3 of total no. of directors is liable to retire by rotation at an
AGM. New director may be appointed in the general meeting.
 In Board meeting
 Casual vacancy ( means any reason except vacancy due to retirement on
rotation)
 Additional director
 Alternate director
 Appointment by Central Government: for the purpose of prevention of oppression and
mismanagement. But this happens only when a petition has been made to the Nation
Company Law Tribunal

 Number of directorship: An individual can hold directorship for up to 15 companies.

 Removal of Directors
 By Shareholders: a company may by ordinary resolution , remove a director
before expiry of his period in office, provided he is not appointed by Central
Government. Special notice shall be required in that case.
 By Central Government: this can be done on the recommendation of NCLT.
However, the CG can also make a reference to NCLT by stating a case against
any person concerned or connected with the conduct & management of the
company.
 By Company Law Board (NCLT): Can be done on the grounds of prevention of
oppression and mismanagement. In such case the person cannot serve any
company in a managerial capacity for a period of 5 years, except with the leave of
NCLT.

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