The Companies Act, 1956

The Companies
Act. 2013
amd.
in Dec
LEGALapproved
ASPECT OF BUSINESS
2014

The Companies Act, 1956

Incorporation of Companies

Memorandum of Association and Articles of

Association

Membership of a Company

Prospectus

Management

The Companies Act

Companies Act, 2013 is an Act of the

Parliament of India which
regulates
incorporation of a company, responsibilities of
a company, directors, dissolution of a company.
The 2013 Act is divided into 29 chapters
containing 470 sections as against 658 Sections
in the Companies Act, 1956 and has 7
schedules.
The Act has replaced The Companies Act, 1956
(in a partial manner) came into force on 12
September 2013

What is a Company

A company registered under the Act or

an existing company is a Company.
It is a form of business organisation, an
association of persons for some
common purpose.

The Characteristic of a Company

1. It requires compulsory registration.

2. It is a distinct person possessing its own identity and
separate legal entity.
3. It has a perpetual succession.
4. It is an artificial person but not a citizen.
5. Its shares are easily transferable, but a private
limited company has restrictions on transferability
of its shares.
6. The liability of the members is limited.
7. It has separate legal existence under its common
seal.
8. The Company is the owner of its property and not
the shareholders.
9. Company can sue and be sued.

Company and Partnership distinguished

Company requires to be registered under the

Companies Act while registration of a firm is
not compulsory.
Company has a separate legal existence of its
own while a firm has not separate legal
status.
The liability of the partners in the firm is
unlimited while the liability of the
shareholders in a company is generally
limited.
Shareholder of a company is not an agent of
the company while every partner is the agent
of the other partner.

Types of Companies

Companies are classified into :

1) Chartered
2) Statutory and
3) Registered Companies.
1)

Chartered Companies :
They are
incorporated under a Special Royal Charter
issued by the King or Queen. They are
governed by the Charter.

Types of Companies

2) Statutory Companies : They are formed under

a Special Statutory Act of the Parliament or
State Legislature. They are governed by
Parliament or by State Legislature.
3) Companies registered under the Act :
Companies registered under the Companies
Act, 2013 or under any previous Companies
Act fall under this category.
These Companies have Memorandum and
Articles of Association for external and internal
regulation.

Types of Companies

The registered companies are further classified:

Companies limited by shares may be public
companies or private companies.
Companies limited by guarantee if having a
share capital may be public companies or
private companies.
In unlimited companies, the liability of its
members is unlimited as in the partnership
firm. If it has a share capital, it may be a public
co. or a private company.

Private / Public Companies

Private
Limited Companies :
has following
restrictions :
1. Restrictions on the right to transfer its shares.
2. Limits the number of its members to 50.
3. Prohibits any invitation to the public to subscribe for
any shares or debentures of the company and
4. Prohibits any invitation or acceptance of deposits
form persons other than its members, directors or
their relatives. Minimum membership is 2 and
maximum 50. Words Private limited have to be
used at the end of the companys name.
Public Limited Companies :
A Company which is not a private company is a
public company. Its minimum membership is 7 and
maximum is unlimited.

Incorporation of Companies

Minimum paid up Capital :

For Private Co. minimum paid up
capital is Rs. 1 lac.
For Public Limited Co. minimum paid
up capital is Rs. 5 lac.

Procedure for converting a Private

Company into a Public Company

By altering its Articles of Association by a

special resolution,
increasing its minimum members 7 and
its directors to minimum 3,
a private company stands altered as a
public company.
The intimation of such alteration is to be
filed with the Registrar within 30 days.

Procedure for converting a Public

Company into a Private Company

By a special resolution authorizing the

conversion and changing its name
followed by
obtaining the Central Government
approval, the public company stands
converted into a private company.
Intimation of alteration to be filed
with the Registrar.

When a private company becomes a public company

1. When it fails to adopt the three restrictions.

2. When it is a subsidiary of another public company.
3. By provisions of law under Section 43A : (deemed
public Ltd. Co. concept under section 43A is now
abolished) :
a) If at least 25% of its paid-up share capital is held by
one or more bodies corporate.
b) Where its average annual turnover is not less than
Rs. 10 crores.
c) When it holds not less than 25% of the paid-up share
capital of a public company.
d) Where it accepts, or after invitation renews deposits
from the public and
e) When it converts itself into a public company.
( may refer the latest book for this heading ).

Types of Companies

1.
2.
3.
4.

Holding company and subsidiary company :

When one company controls another company in
any of the following ways, the company which
controls is called the holding company and the other
company is called the subsidiary company.
It controls the composition of the Board of
Directors.
It controls more than half of the total voting power
of other company.
It holds more than half in nominal value of equity
share capital of the other company.
It is a subsidiary of some other company. Holding
company and subsidiary company are separate
companies and possess distinct legal entities.

Types of Companies

One-man Company : Where a single person

holds almost all the shares of the company, it is
called a one-man company.

Companies
registered
for
promoting
commerce, art, science, etc : Under section 25
of the Act, a company which is formed for
promoting, commerce, art, science, religion,
charity or any other useful object may be granted
a licence by the Central Government to be
registered without the use of the words Limited
or Private Limited in its name. These
companies enjoy certain exemptions under the
Act.

Types of Companies

Government Companies : Any company in which not

less than 51% of the paid-up share capital is held by the
Central Govt. or by any State Govt. is called a Govt. Co.
The auditor of a Govt. Co. is appointed by the Central
Govt. on the advice of the Comptroller and Auditor
General. On the Notification issued by the Central Govt.
such notified provision shall not apply to a Govt. Co.

Foreign Companies : A company incorporated outside

India is a foreign company. If not less than 51% of the
paid-up share capital of a company incorporated outside
India and having an established place of business in India
is held by one or more citizens of India or one or more
bodies corporate incorporated in India, such a company
shall comply with the prescribed provisions of the Act as if
it were a company incorporated in India.

Lifting or piercing the corporate veil

As the company is distinct from its members

and is a separate legal entity, there is
therefore, a veil between a company and its
members, keeping them both separate from
each other.
In certain instances it becomes necessary to
lift this veil and find out the realities of the
Company.
The court may investigate the real affairs,
ownership, etc. of the Company.

Procedure for Registration of

Companies

1.
2.

3.

4.

Any two persons in case of a private company and any

seven persons in case of a public company may associate
themselves to register a private or a public company, as the
case may be. The following procedure is to be observed :
Application of availability of name is to be made.
Memorandum and Articles of Association along with the
agreement, if any, with any individual for appointment as its
managing director, whole-time director or manager to be
filed with the Registrar of Companies.
Particulars of situation of the registered office of the
company and particulars of the first directors of the company
to be filed.
Declaration by an advocate of the Supreme Court or High
Court or Secretary or Chartered Accountant or by a person
named in the articles as director, manager or secretary of the
Co. that all requirement have been complied with.

Registration of Companies

In case of a public co., list of persons who

have consented to act as directors,
written consent of the directors and
undertaking of the directors to take up
and pay for the qualification shares to be
filed.
Upon compliance of the above formalities,
a certificate of incorporation is issued.

Advantages of incorporation

1. Liability of the members is limited.

2. Shares are easily transferable.
3. Company obtains a separate legal entity.
4. Company can sue its members.
5. Management of the company can be vested in
professionals.
6. The company can enjoy and dispose off
property in its own name.

Duties and Liabilities of the promoter :

The promoter stands in the fiduciary position

towards the company and cannot make any
profits unless the company consents.
He is liable to compensate for irregular or
misleading statements in the prospectus and
may be sued for damages for breach of his
fiduciary duties.
A promoter has no right to receive
remuneration.
A promoter, may, however, be remunerated
either by commission on the purchase price of
the shares or may be paid an aggregate lump
sum as remuneration.

Memorandum of Association

Memorandum of Association is a document

originally framed by a company.
Amongst other documents the company is
required to file two documents with the
Registrar of Companies. i.e. the MOA and
AOA.
MOA contains the rules regarding the
constitution and activities or objects of the
company.
It is a fundamental charter of the company. The
Co. is governed by the MOA.
It is to work within the framework of the MOA
as otherwise its acts would be ultra vires and
void.

Contents of Memorandum of Association

1. Name of the Company.

2. Registered office of the company.
3. Objects of the company divided into :
a) Main objects,
b) objects incidental to the main objects,
c) other objects.

4. Liability of the members.

5. Share capital of the company.
6. Subscription or Association clause.

Articles of Association

Is a document originally framed by a

company.
The Article contain rules and
regulations for the internal management of
the company subject to provisions of the
Companies Act.

The Articles shall state the number of

members with which the company is to be
registered.

It shall state the share capital in case the

company is to be registered with a share
capital.

Contents Articles of Association

AOA contain particulars regarding the

alteration of capital,
transfer, lien,
transmission, forfeiture, etc, of shares, right of
shareholders,
meetings of the companies,
appointment, remuneration, qualifications,
powers, etc. of the Board of Directors,
accounts and audit,
dividends,
indemnity,
winding-up.

Effects of Memorandum and Articles

The Memorandum and Articles of the company shall

bind the company and the members to the same
extent as if they had been respectively signed by the
company and by each member.
Articles constitute a binding contract. They also bind
the members between themselves.
No member can act in his individual capacity.
All outsiders dealing with the company are assumed
to have read the AOA of the company and are bound
by the same.
The MOA is a charter of the company, while the
AOA contain rules and regulations regarding the
internal management of the company.

Constructive notice of Memorandum

and AOA

Memorandum and AOA are public

documents.
They are prerequisite for registration of
a company.
These documents are open for
inspection.
Every person shall be presumed to
know the contents of these documents..

Doctrine of Indoor Management

Though every person is bound to read the Articles

and Memorandum of the company, it is not bound
to enquire into the internal management of the
company whether they are being conducted
according to the Articles of the company or not.
An outsider is entitled to presume that the
directors are acting lawfully in all respects.

Doctrine of Indoor Management

1. Where the act is ultra vires the Memorandum it is

void abinitio.
2. Where the third person has actual or constructive
notice regarding non-compliance and irregularity
of internal procedure.
3. Where the act of an agent falls outside his
authority.
4. Where an act of an official of the company is
apparently outside his authority.
5. Where there is irregularity in the affairs of the
company which could be discovered. In these
case, the doctrine of indoor management cannot
be applied.

Membership of a Company

Who is a Member :
1. Subscribers to the Memorandum of the Company.
2. Every other person who agrees in writing to become a
member.
3. Every person holding equity share capital and whose
name is entered as beneficial owner in the records of
the depository.

The term member and shareholder are synonymous.

Only in case of a company limited by guarantee and in
case of an unlimited company not having a share
capital, the two terms differ. In these types of
companies they are not shareholders but members. A
shareholder is a member, but a member may not be a
shareholder.

How is a membership acquired

Membership in a company is acquired by

subscribing to the Memorandum by
agreeing in writing to become a member,
by purchase of shares,
by succession,
by estoppels,
by entry as beneficial owner in the records
of the depository.

How membership ceases

Membership ceases in the following events :

By transfer,
forfeiture,
surrender,
sale of shares,
insolvency,
death rescission of the contract,
when company redeems its redeemable
preference shares on issue of share warrants
on winding-up of the company.

Who can be a member

Any person competent to contract or a body

corporate can be a member.
A minor cannot be a member, but a guardian
can hold shares on behalf of a minor.
Company can be a shareholder.
Trust cannot be a shareholder.
Partnership firm cannot hold shares.
A non-resident can be a shareholder only
with permission of the Reserve Bank.
A registered society can hold shares in a
company.

Rights, Duties and Liabilities of a Member

The members of the company enjoy

various rights and also have various
liabilities, duties and obligations to be
discharged.
The member becomes a contributory to
the extent of the unpaid amount on the
shares when the company is being
wound up.

Depositories

The depositories came into effect from

20.09.1995. They were established to record
ownership details of every person holding equity
shares in the share capital of the company in the
book entry form.
A depository is a company formed and registered
under the act and under the Securities and
Exchange Board of India Act, 1992.
The participant avails services of the depository
relating to allotment or transfer of securities.
The issuer substitutes the name of the depository
as its registered owner.
The depository enters the name of the person in
its record as the beneficiary owner.

Prospectus

Any invitation to the public to subscribe for

shares or debentures of the company is a
prospectus.
A public co. inviting public to subscribe towards
its share capital shall do so through a prospectus.
This is done in order that the prospective
investor shall know the financial background of
the company.
Provisions of prospectus do not apply to a
private company.
Any document containing offer of shares or
debentures for sale shall be deemed to be
prospectus.

Prospectus

Contents of the prospectus : Prospectus must

state the matters specified in Part I of Schedule II
and reports specified in Part II of Schedule II
subject to the provisions contained in Part III of
Schedule II. The prospectus shall be dated and that
date shall be taken as the date of the publication.
Copy of the prospectus shall be registered with the
Registrar of Companies.
The prospectus shall be attached with a consent to
the issue of the prospectus from any person as an
expert. It shall also have the required documents
when it is delivered for registration.
It shall be issued with 90 days of the delivery of the
copy for registration.

Statement in lieu of prospectus

A co. having a share capital and not issuing

a prospectus or a co. which has issued a
prospectus but has not proceeded to allot
any of its shares shall not allot its shares
unless at least three days before the
allotment of shares or debentures it has
filed with the Registrar of Companies, a
statement in lieu of prospectus.

Shelf Prospectus

A prospectus issued by any financial institution

or bank for one or more issues of the securities
is Shelf Prospectus.

A financial institution or bank whose main

object is financing shall file a shelf prospectus
with information memorandum.

Red-Herring Prospectus :

Red-herring prospectus
prospectus which does
complete particulars on
and quantum of the
offered.

means a
not have
the price
securities

Any variation between information

memorandum and red-herring
prospects shall be highlighted.

Certificate of Commencement of business

A private company can commence

business
immediately
on
its
incorporation.
A public company has to however
comply with certain additional
formalities before it commence
business.
The Registrar issues a certificate of
commencement of business after the
applicable formalities are complied
with.

Management
Constitution of Board of Directors

The company carries on its business through

individuals called directors. Collectively
they are called Board of Directors.
Every public company shall have at least
three directors.
Every other company shall have at least two
directors.
A public co. having a paid up capital of five
corers rupees or more, one thousand or more
small shareholders shall have at least one
director elected by such small shareholders.

Management
Constitution of Board of Directors

The maximum number of directors shall be

twelve. Any increase beyond twelve
requires the Central Government approval.
Subscribers to the memorandum of the
company shall be deemed to be the first
directors of the company.
Every director shall obtain Director
Identification Number (DIN) and intimate
the same to the company.

Audit Committee

Every public company having a paid up capital

of not less than five crores of rupees shall
constitute a committee of the Board known as
Audit Committee .

Audit Committee shall act in accordance with

the references specified by the Board.

The recommendations of the Audit Committee

shall be binding on the Board.

Powers, rights, restriction, duties, liabilities

and disabilities of directors

The B.O.D.s derive their powers from the

Companies Act, Articles, Board resolutions,
resolutions in general meetings and
agreements, or contracts with the company.
The Board shall exercise the power of making
calls on the shareholders, power of issuing
debentures, power to borrow moneys, power to
invest the funds of the company and power to
make loans, by means of resolutions passed at
the meetings of the Board.
However, certain powers of the B.O.D.s cannot
be exercised except with the consent of the
company in a general meeting.

Powers, rights, restriction, duties, liabilities

and disabilities of directors

The directors also enjoy certain rights and have

certain duties to be performed towards the
company.

They may be held liable to pay compensation

for damages suffered by the company in case
of breach of their duties.

They suffer also from certain disabilities.

The memorandum of the company may provide

for unlimited liability of any director in a Ltd.
Co.

Position of Directors

The directors are referred to in various

capacities.
Sometimes as agents, as trustees, as managing
persons and as employees.
He is a person who controls the Cos affairs and
stands in a fiduciary position towards the Co. It
is, however, not easy to explain the position
which the director occupies, but he is a
professional man who manages the affairs of the
company to the best possible interests of the
shareholders.
They are commercial men and manage the Co.
for the benefit of themselves and of other
shareholders in it.

Secretary

Means a Co. Secretary and includes any

individual
possessing
the
prescribed
qualifications and appointed to perform the
duties under the Act and any other ministerial
or administrative duties.
Every company having Pd-up sh. Cap. Of Rs.
50 lacs and above shall have a whole time
secretary.
Co. having pd-up sh. Cap. of Rs. 10 lacs or
more shall file with the Registrar, a certificate
from a secretary as to whether the Co. has
complied with all the provisions of the Act.

Thank You