COMPANY LAW(Companies Act, 1956)

RAKESH SINGAMSETTI 09102008

Company vs. Corporation

There is no solid difference between Company and Corporation. But , these days Corporation word is mostly used in finance area because this word is most popular in USA economy . All features of Company like a separate legal entity having its own rights, own property , sign binding contracts , privileges, and liabilities distinct from those of its members can be seen in Corporation .

Characteristics of the company

Separate legal entity Limited Liability Separate Property Transferability of Shares: Perpetual Succession Common Seal Right to Sue

Kinds of Companies
Basis of incorporation (i) Statutory (ii) Registered Public Participation (i) Public (ii) Private

Limitation of Liability (i) Limited Co. (ii) Unlimited Co.

Country of formation (i) Domestic Co. (ii) Foreign Company

Conti..
Participation Of Govt. (i) Govt. Co. (ii) Non Govt. Co. Control over Management (i) Holding co. (ii) Subsidiary Co. Listing in Stock Exchange (i) Listed (ii) Unlisted

Types of Companies
Private Company Public Company

Private Company [Section 3(1)(iii)]

A private company means a company which has a minimum paid up capital of one lakh rupees or such higher paid-up capital as may be prescribed and by its articles : (a) restricts the right to transfer its shares, if any; (b) limits the number of its members to 50, not including:

i) persons who are in the employment of the

company

Private Company
contd.
ii) Persons who, having been formerly in the
employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased (C) Prohibits 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

 (a) is not a private company [In other words, it should not have the restrictions of Section 3(1)(iii) in its articles ] (b) Has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; and (c) is a private company, which a subsidiary of a company, which is not a private company.

Public Company [Section 3(1)(iv)] A public company means a company which:

Formation of the Company

The whole process of formation of a company may be divided into four stages, namely:
(i) Promotion (ii) Registration (iii) Floatation/Raising of Capital (iv) Commencement of Business

Promotion
Who is a Promoter?

Persons who intiate promotion of the company are known as promoters.

All persons who take steps for the registration of a company like those who associated with the preparation of the Prospectus or in drawing up the Memorandum of Association and assisting in its registration are regarded as promoters.

Registration/Incorporation
Private Company
Minimum Number of Members required 2.
Public Company

Minimum Number of Members required 7.

Steps For Registration

Lawful purpose Applying for the name Documents to be filed Subscribing their names Commencement of business Statement in Lieu of Prospectus Certificate of incorporation Effect of registration

Lawful purpose .
The essence of validly incorporated company is that it must consist of a particular number of persons and be an association for a lawful purpose. Where the purpose is not lawful i.e where any of the objects is illegal, the registrar may refuse to register. Case; {Bowman vs. Secular Society Ltd. 1917(Ac)}

Applying for the name

The promoters 0f the company should decide upon atleast three suitable names in order of preference to afford flexibility to the Registrar to decide the availability of the name. In case of the public company the name must end with the word LIMITED and in case of private company , with the words PRIVATE LIMITED. The registrar shall ordinarily inform availability or otherwise of the name with in 14days from the date of submission of the application.

Documents to be filed
After getting name approved, the following documents along with the application and prescribed fees, are to be filled with the registrar; Memorandum of Association(sec33(1)(a)). Articles of Association(sec33(1)(b)). The agreement,if any,which the company proposed to enter into with any individual for appointment as its managing or whole time director or manager (sec33(1)(c)). A declaration that is requirements of the Act which is required to be signed by an advocate of the Supreme Court or High Court or an attorney or a pleder having the right to appear before High Court or a secretary, or a chartered accountant in whole time pratice in india who is engaged in the formation of the company,or by a person named in the articles as a director, manager or secretary of the company (sec33(2)).

 Subscribing names means signing the names. Section 15 stipulates that each subscriber who should add his address,description and occupation in the presence of one witness should sign the Memorandum. In case of the company having share capital ,the subscribers to the memorandum should take atleast one share each and state clearly the number and nature of taken by them. In the same way the Articles of Association should be signed.

Subscribing their names

Statement in Lieu of Prospectus

If the public company does not issue a prospectus invitiung the public to purchase its shares then the company must file with the registrar a statement in lieu of prospectus before it allots the shares or debentures to the applicants. This statement contains almost all those particulars which are given in the prospectus,but it must be in same form as is given in schedule III. In aby case such statement can be filed atleast three days before the allotment is made. In case of private limited company its not required to issue either a prospectus or statement in lieu of prospectus.

 On the registration of the memorandum of the company, the registrar shall clarify under his hand that the company is incorporated and in the case of limited company , that the company is limited. From the date of incorporation mentioned in the certificate,the company becomes a legal person separate from the corporators and there comes into existence a binding contract between the company and its members as evidenced by the memorandum and articles of association.

Effect of registration

Memorandum of association
Every company has to have a Memorandum of Association. It contains, besides other significant information, the objects for which the company is formed. Object clause defines as well as confines the powers of the company. Anything done beyond these objects is ultravires the company and void.

Contents of Memorandum
Name Clause
It contains the name with which company is proposed to be registered. Companies Act requires that:
(a) The name chosen should end with the word Limited or the words Private Limited, as the case may be. (b) The name should not be undesirable i.e., it should not be identical or too similar to the name of an already existing company or include the name of a registered trade mark unless consent of the owner of the trade mark is obtained

Contents of Memorandum
Registered Office Clause This clause states the name of the State in which registered office of the company is to be situated. Objects Clause
This clause is to be divided into:
(a) Main objects and objects incidental or ancillary to main objects (b) Other objects

A company cannot commence any business stated under other objects unless special resolution by the shareholders is passed.

Liability Clause A declaration that the liability of members is limited Capital Clause This clause states the authorised capital and the number of shares into which the same shall be divided.

Doctrine of Ultra-Vires
Effects of Ultra-vires transactions void-ab-initio Injunction Personal liability of directors
towards the company towards the outsiders

DOCTRINE OF ULTRA VIRES:

The term ultra vires 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 protect1. Investors in the company. 2. Creditors.

ALTERATION OF MEMORANDUM:
1.CHANGE OF NAME:

Procedure of alterationi. by special resolution ii. by ordinary resolution

2. CHANGE OF REGISTERED OFFICE: a. change within the city b. change within the state c. change from one state to another

 Procedure of alterationi. Special resolution ii. Confirmation by the NCLT(National Company Law Tribunal) iii. Notice to affected parties iv. Notice to Registrar v. Power of the Tribunal to confirm change discretionary vi. Rights and interests of members and creditors to be taken care of. vii. Copy of special resolution and the order of the Tribunal to be filed with the registrar.

ARTICLES OF ASSSOCIATION

DEFINITION
The Articles of Association or just Articles 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 in 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 thereat.

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. Capitalization of profits. 18. Winding up.

COMPANIES WHICH MUST HAVE THEIR OWN ARTICLES

According to Sec.26 the following companies shall have their own articles, namely, a. unlimited companies, b. companies limited by guarantee, c. private companies limited by shares.

FORM AND SIGNATURE OF ARTICLES

The form shall bea. printed, b. divided into paragraphs, and c. signed by the each subscriber of the memorandum.

ALTERATION OF ARTICLES:
Companies have been given very wide powers to alter their articles. The right to alter the articles is so imp 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.

For example, the articles of the company contain any restriction that the company shall not alter its articles, it will be contrary to the Companies Act and, therefore, inoperative.

 Must not be inconsistent with the 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 government when a public company is converted into a private company. Breach of contract Must not result in expulsion of a member. No power of the Tribunal to amend Articles. Alteration may be with retrospective effect.

ARTICLES AND MEMORANDUM THEIR RELATION

1. The Articles are subordinate to Memorandum. 2. The Memorandum must be read in conjunction with Articles. 3. The terms of the Memorandum cannot be modified or controlled by the Articles.

1.

DISTINCTION BETWEEN MEMORANDUM AND ARTICLES They are the regulation for internal It is the charter of the company 1.
indicating the nature of its business, its nationality, and its capital. It also defines the companys relationship with outside world. It defines the scope of the activities of the company, or the area beyond which the actions of the company cannot go. It, being the charter of the company, is the supreme document. Every company must have its own Memorandum. There are strict restrictions on its alteration. Some of the conditions of incorporation contained in it cannot be altered except with the sanction of the NCLT. Any Act of the company which is ultra vires the Memorandum is wholly void and cannot be ratified even by the whole body of shareholders.
2.

2.

3.

3. 4. 5.

4. 5.

management of the company and are subsidiary to the Memorandum. They are the rules for carrying out the objects of the company as set out in the Memorandum. They are subordinate to the Memorandum. If there is a conflict between the Articles and the Memorandum, the latter prevails. A company limited by shares need not have articles of its own. They can be altered by a special resolution, to any extent, provided they do not conflict with the Memorandum and the Companies Act. Any Act of the company which is ultra vires the Articles (but is ultra vires the Memorandum) can be confirmed by the share

6.

6.

Prospectus
A prospectus, as per Section 2(36), means any document

described or issued as 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 or debentures of a body corporate. Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things:

(a) It invites subscription to shares or debentures or invites deposits. (b) The aforesaid invitation is made to the public.

Mis-statement in a Prospectus and its consequences

What is Mis-statement? According to Section 65(1) of the Act:
(a) a statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included; and (b) where the omission from a prospectus of any matter is calculated to mislead, the prospectus shall be deemed in respect of such omission, to be a prospectus in which an untrue statement is included. Case: Rex v. Kylsant