Company Law

• Features of the Company act of 1956

Company act of 1956 states that,

• The Company Act came into force from 1 April 1956.

• The Act was based upon the recommendation of company law committee appointed
under the chairmanship of Mr. C. H. Bhaba on 25th October, 1950.

• The committee submitted its report in 1952. The Indian company act extends to the
whole India.

• DEFINITION AND NATURE OF A COMPANY

Company’s Act of 1956 defines

Ø a group of persons associated together for the purpose of carrying on a business, with a view to
earn profits.

Ø The word ‘Company’ is an amalgamation (combination) of the Latin word ‘Com’ meaning
“with or together” and ‘Pains’ meaning “bread”.

Ø a group of persons who have come together or who have contributed money for some common
person and thus have incorporated themselves into a distinct legal entity in the form of a
company.

Section 3(1) (i) & (ii) of the Companies Act, 1956 defines a company as:

“A company formed and registered under this Act or an existing Company”.

An ‘Existing Company’ means a company formed and registered under any of the earlier
Company Laws.

• Characteristics of a Company

The principal characteristics of an incorporated company can be summarised as follows:

1. Registration

2. Voluntary association

3. Legal personality

4. Contractual capacity

5. Management

6. Capital

7. Permanent existence
 8. Registered Office

9. Common Seal

10. Limited liability

11. Transferability

12. Statutory Obligation

13. Not a citizen

14. Residence

15. No fundamental rights

11. 16. Social Objectives

17. Centrally administered

18. Lifting the veil

Types of companies Registered under company act 1956

• Types of companies Registered under company act 1956

• OWNERSHIP

Government Company (Sec 617) :

A government company means any company in which at least 51% of the paid up share capital
is held by the central government or by any state government or partly by one or more state
Government.

• COMPANY WITH LIABILITY

Limited by Share[sec12(2)a]: Companies in which the liability of its members is limited to the
extent of the amount unpaid on the shares held by a particular member.
 Company limited by Guarantee: The liability of members is limited to a fixed amount which
members undertake to contribute to the assets of the company in case of its winding up.

Unlimited Liability: Wherein members are liable for the debts of the company irrespective of
their interest in the company

• NUMBER OF MEMBERS

Private Companies[Sec 3(1)(iii)]:

A private company is one which, by its Article of association

§ restricts the right to transfer its share, if any

§ limits the maximum number of its member to fifty

§ prohibits any invitation to the public to subscribe for any share or debenture of the company.

Public Company[SEC 3(1)(iv)]:

A public company means a company which is not a private company. In other words, a public
company, means a company which by its article does not-

§ limit the number of its member.

§ prohibit any invitation to the public to subscribe for any share in, or debentures, of the
company.

• COMPANIES ACCORDING TO CONTROL

Holding Company:

Where a company has control over another company, it is known as the holding company.

Subsidiary Company:

The company over which control is exercised is called the subsidiary company.

• INCORPORATED COMPANIES

1. Chartered Companies: These companies are incorporated under a special charter such as the
east India company. The bank of England. the company act does not apply to it.

2. Statutory Companies: These companies are incorporated by special act of legislature (Act of
parliament or state legislature) eg. RBI, UTI, LIC.

3. Registered Companies: Companies which are registered under the Indian Companies Act,
1956 are called registered companies. To become a registered company one has to take the
certification of incorporation from the registrar.

• Memorandum of Association

“Memorandum of Association of a company charter & defines the limitations of the powers of a
company. It contains the fundamental condition upon which alone the company is allowed to be
incorporated” - Lord Cairns

According to Sec 2 (28) of the Act,

 “Memorandum of Association of a company as originally framed or as altered from time to
time in pursuance of any previous companies law or of this Act”.

Lord Macmillan stated that “The purpose of Memorandum of Association is to enable the share
holders, creditors and those who deal with the company to know what its permitted range of
enterprise is.”

• Memorandum of Association

§ The first step in the formation of the company is to prepare memorandum of

association. It is one of the documents which has to be filed with registrar of the
companies at the time of incorporation of a company.

§ It is vital document, tell about the object of the company’s formation ,the power of the
company as well as the boundaries beyond which the action of the company can not go.

• Importance of memorandum

The memorandum shows the range of the enterprise. It is an important part of company
formation due to the following points:

• It defines the rights and liabilities of the members.

• It shows the capital structure of the company.

• It shows the object of the company.

• It specifies the state in which the registered office of the company is situated.

• It shows the constitution of the company.

• It specify the conditions under which the company has been incorporated.

Contents of Memorandum of Association

Contents of Memorandum of Association

Name Clause:

The name of the company with the word “Limited” at the end of a public company and “Private
Limited” at the end of a private company.

It also helps to Avoid Undesirable Names

• Too similar to the name of another company

• Misleading

• Prohibition of use of certain names

• Ex: Name, emblem or official seal of UNO, WHO Central & State government,
President & Governor

• If the company is promoting art, science, religion etc Limited and Private Limited can be
avoided with the permission of the central government.

Situation / Registered office Clause:

It pinpoints the name of the state or place where the registered office of the company is
situated.

§ Exact location of registered office should be intimated within 30 days or

§ Otherwise there is a fine.

Object Clause:

In a memorandum of association this is the section that describes the objectives for which the
firm was formed. If the firm's activities fall outside of these objectives, the firm is said to
be acting ultra vires (beyond its powers). Thus ,

• we should clearly divide the main objects

• Company should commence its business with the main object

• In case of non-trading companies ,state to which the objects extend should also be mentioned

• In case of trading companies, this need not be mentioned

Area of Operation Clause:

Except in the case of trading corporations, the state or the states to whose territories the object
extend.

Liability Clause:

The nature of the liability of the members-

• Limited by shares or

• Limited by guarantee
 Capital Clause:

In the case of a company having share capital- unless the company is an unlimited company,
the memorandum shall state the amount of share capital and the division thereof into shares of a
fixed amount. In other words:

§ Share capital amount should be specified

§ Cannot issue more shares for the time being

§ Equity or Preference shares

§ Private company can issue any type of shares

Association or Subscription Clause:

This clause states that:

• Subscriber’s name, address should be mentioned in the MOA

• Each subscriber must take at least 1 share

• MOA should be signed by

ü At least 7 subscriber for Public company

ü At least 2 subscriber for Private company

• Attested by at least 1 witness

Articles of Association

‘Article’ means the Articles of Association of a company, as originally framed or as altered

from time to time in pursuance of any previous companies laws or of this Act’ Sec.2 (2)

The articles proceed to define the duties, the right and the powers of the governing body as between
themselves and the company at large and the mode and form in which the business of the company
is to be carried on and the mode and form in which changes in the internal regulations of the
company may from time to time be made.

• Contents of the Articles

In short,

1. Powers, duties, rights and liabilities of Directors

2. Powers, duties, rights and liabilities of members

3. Rules for Meetings of the Company

4. Dividends

5. Borrowing powers of the company

6. Calls on shares
 7. Transfer of shares

8. Forfeiture of shares

9. Voting powers of member

10. Appointment of directors and their qualifications

• Certificate Of Incorporation

Certificate of Incorporation is the document issued by the registrar of incorporations certifying

the registration of memorandum and article of incorporation of the proposed body corporate on
due compiling of the statutory provisions required for incorporation

• Once all the above documents have been filed and they are found to be in order, the Registrar
of Companies will issue Certificate of Incorporation of the Company.

• This document is the birth certificate of the company and is proof of the existence of the
company. Once, this certificate is issued, the company cannot cease its existence unless it is
dissolved by order of the Court.