Company Law

Company
 Company means company registered under
the Companies Act, 1956.
 Characteristics of a company :
1. It is an association of persons. In the case
of private limited company, there must
be at least two members and maximum
fifty. In case of public limited company,
there must be at least 7 members.
2. According to Sec. 11 of the Partnership
Act, 1932, a concern with banking
business cannot have more than 10
members and for any other business,
cannot have more than 20 members. Such
association with more than 10 or 20
members can carry on business provided
that is registered under the Companies
Act.
3. A Company must be registered under the
Companies Act, 1956.
4. It is an artificial person.
5. An incorporated company have its separate
existence and the law recognises it as a legal
person distinct from its members.
6. Perpetual Existence – Members may
come and go, but company is in existence
unless it is wound up.
7. It Can sue and be sued in its own name.
8. It can hold and dispose property – The
property of the company is not the property
of individual shareholders.
 Formation of a Company
1. The formation is generally done by a
promoter : He is the person who takes all steps
necessary to form a company. He generates
ideas for forming a business set up and for this
he can consult, contract persons.
2. Registration and Incorporation : For this
purpose, the following documents are to be filed
with the Registrar of Companies of the State in
which the Registered Office of the Company is
situated:
a) Memorandum of Association containing the
constitution and the formation of the company.
b) Articles of Association of the Company containing
the rules and regulations.
c) A declaration by an Advocate or Chartered
Accountant or Director of the Company that the
requirements of the Act have been complied
with relating to registration.
d) List of persons who have consented to become
Directors of the Company and their consent
letter.
 If approved by Registrar, he will issue a
Certificate of Incorporation, it shall be conclusive
evidence that all the requirements of the Act
have been complied with respect to registration
and matters incidental thereto.
 Certificate of Commencement of
Business.
After getting incorporation certificate, a
private limited company can commence
business but a public limited company
requires another certificate before starting
business i.e., Certificate of
Commencement of Business.
 Types of Companies
1. Chartered Company : It is regulated by
the government charter. E.g., East India
British Company.
2. Registered Company : A registered
Company is a company registered under
the Companies Act, 1956.
3. Statutory Company : A company which
is created by a special Act of legislature
and is governed by the provisions of that
Act.
4. Company with limited Liability :
(1) 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. If the shares
are fully paid, the liability of the members
holding such shares is nil.
(2) 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.
5. Company with unlimited 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.
6. Private Company – Private company can
be formed by two or more persons by
submitting Memorandum of Association
and Articles of Association. But
i. Must prohibit an invitation to public to
subscribe.
ii. Restrict rights of members to transfer
shares.
A Public Company may or may not invite public
to subscribe to its share capital.
Privileges for a Private Company are
1) Minimum 2 persons are required.
2) A private company can proceed to allot shares.
3) It need not issue prospectus.
4) It need not offer further shares to the existing
shareholders.
5) It can issue any kind of shares.
6) It can commence business immediately.
7) It need not hold statutory meeting.
8) It should have two directors.
9) There is no restriction on managerial
remuneration.
7. Holding and Subsidiary Companies –
Where a company has control over
another company, it is known as the
holding company and the company over
which control is exercised is called the
subsidiary company.
 A company is deemed to be under the
control of another if
1) The parent co. controls the composition
of Board of Directors or
2) The parent co. holds more than half in
nominal value of its equity shares.
3) Both of the above.
8. Government Company – It means any
co. in which not less than 51% of the
paid up share capital is held by
1) Central Govt.
2) By any state Govt.
3) Partly by both.
The subsidiary of a Govt. Co. shall also be a
Govt. Co.
9. Joint Stock Company – A co. having
Share capital held as transferable as stock
or dividend and formed for its members,
the shareholders.
 It has a legal entity distinct from its
members.
 Shareholders are not liable for debts of
the company.
 It has perpetual Succession.
 The shareholders are the part owners of
the joint stock company, yet the
management is entrusted with the
selected directors.
 It has common seal.
 Memorandum of Association
 It is very important document of the
company.
 According to Doctrine of Constructive notice,
anybody dealing with the company shall be
deemed to have knowledge of the
documents.
 The documents- Memorandum of Association
(MOA) & Articles of Association (AOA) are
filed with Registrar of Companies.
 The preparation of MOA is an important
step in the formation of a company.

 Sec. 2(28) of the Companies Act, 1956

defines MOA as origionally framed or as
altered from time to time in accordance
with the provisions of the act.
 As per Sec.13, there are Six Clauses in
the Memorandum Of Association (MOA):
1) Name Clause
2) Situation Clause
3) Object Clause
4) Liability Clause
5) Capital Clause
6) Association Clause
 1) Name Clause
1) Choose a name – seeking existing similar
names avoiding misleading public.
2) The Company cannot use any name such
as World Health Organisation, the name
of Government, etc.
3) Cannot choose any name of the character
of a national flag or the independent
state.
4) The last word should have appropriate,
limited, private limited, etc.

If the company is formed to promote art,

commerce, science, etc., it may take
sanction from government to drop the
word ‘limited’.
 2) Situation Clause
The place and address of the Registered
Office should be there – to identify the
region, authorities, etc. The purpose is to
facilitate communication of notices, etc.
and to determine the domicile of the
Company and the jurisdiction of the Court
for the purpose of filing suits, etc.
They should display address for public.
 3) Object Clause
 It states what the company intends to
carry on in the near future. It helps to
enable the company to carry on its
business more economically or more
efficiently.
 4) Liability Clause
It states the nature of liability of the members
of the company. A company is not entitled to
alter the memorandum so as to increase the
liability of the members except in two
conditions:
i. When members agree in writing.
ii. Where company is association and requires
frequent increase in member’s subscription
rate.
 5) Capital Clause
It should state the exact state of capital,
amount of share capital, number of
shares.
Company Law Board sanction required to
increase share capital or for any alteration
in share value, etc.
 6) Subscription Clause
The MOA shall be signed by each
subscriber.
 In Private Co. at least by two persons and
in Public Co. at least by seven persons.
 Each subscriber to sign before at least one
witness.
 Any person who is competent to contract
may be the subscriber of MOA.
 Ultra Vires
 The object clause should state the purpose
of the company. Exactly what it wants to do,
raw material, nature of production, disposal,
etc.
 It determines the field of operation within
which the corporate will operate.
 Any act of Company outside the object
clause, is Ultra-vires & beyond its
powers.
An alteration of MOA is allowed only when it
is necessary –
1) To enable company on its business more
economically or more efficiently.
2) To attain its object by new and improved
means.
3) To enlarge the local of the company
operation.
4) To diversify or enlarge in similar field.
5) It should be consistent with the present
object.
6) To enable company to sell or dispose any
part.
7) To amalgamate with any other company.
 Articles of Association
1) They are documents containing rules,
regulations for the internal management
and affairs of the company.
2) They define duty, rights and powers of
the governing body in between
themselves and the company.
3) Defines the mode and form in which the
business of the company is to be carried
on and also the mode in which changes in
the internal regulations of the company
may from time to time be made.
 In private limited companies, articles may
contain
a) Right to transfer share
b) Limitation of the members to 50
c) Prohibiting any invitation to the public to
subscribe for shares or debentures of the
company.
 In Public Limited Company
1) Number and value of shares.
2) Rules as to share certificate, allotment,
forfeiture, re-issue, lien, transfer.
3) General Meeting, dividends, winding up
rules, etc.
 Alteration of Articles
1) Special resolution has to be passed in a
general meeting.
2) When a public limited co. is to be
converted into a private limited co., the
approval of Central govt. is necessary.
3) Alteration must be consistent with the
companies Act.
4) It should be in accordance with MOA.
5) It must be for the benefit of the
company.
 Binding force of MOA & AOA (Sec. 26)
i.) A person becoming a member of the
company will be bound by the articles even
if he was ignorant of them at the time when
he purchases the shares. Where a member
of the company commits a breach of the
provisions of the MOA, the company can
bring an action in the court for injunction to
restraint the member to commit the breach.
ii.) Not only the members are bound to the
company, but also the company is bound
to the individual members in respect of
their rights as members.
 Constructive Notice
 The MOA and AOA are registered with the
Registrar of Companies and thereby become
public documents.
 They are open for public inspection.
 Every person contracting with the company must
acquaint himself with their contents and must
make sure that his contract is consistent with
them, otherwise he cannot sue the company.
Doctrine of Indoor Management
 According to it, a person dealing with the
company is bound to read only the public
documents. He will not be affected by any
irregularity in the internal management of
the company.
 Exceptions
1. Knowledge of irregularity – Where
a person dealing with a company has
actual or constructive notice of the
irregularity as regards internal
management, he cannot claim the benefit
under the rule of indoor management. He
may in some cases, be himself a part of
the internal procedure.
2. Negligence – Where a person dealing
with a company could discover the irregularity
if he had made proper inquiries, he cannot
claim the benefit of the rule of indoor
management. The protection of the rule is
also not available where the circumstances
surrounding the contract are so suspicious as
to invite inquiry, and the outsider dealing with
the company does not make proper inquiry.
3. Forgery – A company can never be held
bound for forgeries committed by its
officers.
4. Acts outside the scope of apparent
authority – If an officer of a company
enters into a contract with a third party and
if the act of the officer is beyond the scope
of his authority, the company is not bound.
 Member - Shareholder
 The provisions of Sec. 41 makes it clear –

1) The subscribers of the memorandum of a

company shall be deemed to have agreed
to become members of the company and
on its registration shall be entered as
members in its register of members.
2) Every other person who agrees in writing
to become a member of a company and
whose name is entered in its register of
members shall be members of the
company.
 Company and Members
 Any member can sue the company so as to
prevent any breach of articles which is likely to
effect his right as a member of the company.
Thus, an individual member can file a suit
against the company to enforce his individual
rights, e.g., right to contest election for
directorship of the company, right to receive a
share wrongfully forfeited, right to receive a
share certificate, share warrants to bearer or
notice of general meetings, etc.
Relationship between company
and the outsiders
 Neither the company nor the members are
bound by the articles to the outsiders
since they constitute a contract between
members, inter-se and the outsiders is not
a party to the articles.
 Member - Shareholder
 The term member and shareholder are
synonymous in the case of a company
limited by shares, company limited by
guarantee and having as share capital and
also in respect of an unlimited company
whose capital is held in definite shares.
 In case of a company limited by guarantee
and having no share capital and in the
case of an unlimited company where there
are no definite shares a member is not a
shareholder as there is no share to hold.
 In the following situations, a distinction could be
drawn between member and shareholder:
1) In the event of sale of shares, till the time the
documents for transfer of shares are lodged with
the company and the company registers the same,
the transferor name will continue to be in the
register of members and he will be recognised as
member of the company notwithstanding he has
sold the shares. The buyer though has purchased
the shares in the eyes of law is not a member of
the company only a shareholder.
2) In the case of a company having no
share capital, there will be members only.
3) When the company issues share warrant,
the person who is the holder of the
warrant will be a shareholder but not a
member, as his name will be struck off
from the register of members.
4) As per Sec. 41, subscriber to
memorandum of association will be
members of incorporation notwithstanding
shares are not allotted to him, under such
a situation, the subscribers are members
but not shareholders.
 Prospectus
 As per Sec. 2(36), any document
described or issued as prospectus and
includes any notice, circular,
advertisement or other document inviting
offers from the public for the subscription
or purchase of shares in or debentures of
a body corporate. Thus, this is not only an
advertisement but may be a circular or
information.
 The criteria are
1) There should be invitation to subscribe for
shares, debentures or deposits.
2) It should be made to the public.
3) The prospectus must be dated and that
date is deemed to be the date of
publication of the prospectus.
 The prospectus normally contains three
parts-
A. General Information
1) Name, address, declarations, date of
issue, etc.
2) Capital Structure of the company –
authorised, issued, size, paid up, etc.
3) Terms of present issue.
4) Particulars of the issue – object – project
cost, etc.
5) Company Management and project –
Details of main object, growth, present
stage, location, promoters, stock market
details.
6) Particulars, litigations, risk perception,
etc.
B. Detailed information
1) Director, Auditors, Managers to issue and
their consent, etc.
2) Procedure, time schedule for allotment,
issue, etc.
3) Name and address of company, Secretary,
legal Advisor, Lead Managers, Auditors,
Bankers, Brokers, etc.
4) Report of Auditors of the company with
respect to its profit and losses and assets
and liabilities and dividends paid earlier.
5) Report of Accountants.
6) Minimum subscription, underwriting
aspects.
7) Place and time where documents may be
inspected.
C. Explanations of terms used
Expert’s consent to the issue of prospectus –
this expert may be an engineer,
accountant, valuer, etc. but they should be
unconnected with the formation or
management of the company.
The expert should give his consent to publish
in the prospectus – the analysis, etc.