Lecture

on
THE COMPANIES ACT, 2013

Presented By:
VIVEK SAURAV
Assistant Professor of Law
 DEFINITION OF “COMPANY”

The word ‗company‘ is derived from the Latin word (COM = with or together;

PANY =bread), and it originally referred to an association of persons who took

their meals together.

In the legal sense, a company is an association of both natural and artificial

persons (and is incorporated under the existing law of a country).

According to Section 2(20) of the Companies Act, 2013 ―company‖ means a

company incorporated under this Act or under any previous company law.
Lord Justice Lindley has defined a company as ―an association of many
persons who contribute money or money‘s worth to a common stock and
employ it in some trade or business and who share the profit and loss
arising there from.‖
The common stock so contributed is denoted in money and is the capital of the
company. The persons who contributed in it or form it, or to whom it belongs,
are members. The proportion of capital to which each member is entitled is his
―share‖.
 NATURE AND CHARACTERISTICS OF A
COMPANY
A company is the creation of law, it is not a human being, it is an artificial
juridical person (i.e. created by law); it is clothed with many rights, obligations,
powers and duties prescribed by law; it is called a ‗person‘. Being the creation of
law, it possesses only the powers conferred upon it by its Memorandum of
Association which is the charter/constitution of the company.
The most striking characteristics of a company are:
 Corporate personality  Capacity to Sue and Be Sued
 Limited Liability  Contractual Rights
 Perpetual Succession  Limitation of Action
 Separate Property  Administration & Management
 Transferability of Shares  Common Seal
 CORPORATE PERSONALITY
It is a different ‗person‘ from the members who compose it. Therefore it is
capable of owning property, incurring debts, borrowing money, having a bank
account, employing people, entering into contracts and suing or being sued in the
same manner as an individual.
SALOMON V. SALOMON & CO.LTD. (1897) AC 22.

PERPETUAL SUCCESSION
An incorporated company never dies, except when it is wound up as per law. A
company, being a separate legal person is unaffected by death or departure of any
member and it remains the same entity, despite total change in the membership.
A company‘s life is determined by the terms of its Memorandum of Association.
 LIMITED LIABILITY
The company, being a separate person, is the owner of its assets and bound by its
liabilities. The liability of a member as shareholder, extends to the contribution to
the capital of the company up to the nominal value of the shares held by him. In
other words, a shareholder is liable to pay the balance, if any, due on the shares
held by him, when called upon to pay and nothing more, even if the liabilities of
the company far exceed its assets.
Exceptions to the rule of Limited Liability:
 Unlimited Company
Incorporation by furnishing False Information
Misleading Prospectus
Acceptance of deposits with the intent to defraud the depositors
Liability for fraudulent conduct of the business.
 SEPARATE PROPERTY
A company being a legal person and entirely distinct from its members, is capable
of owning, enjoying and disposing of property in its own name. The company is
the real person in which all its property is vested, and by which it is controlled,
managed and disposed off.

TRANSFERABILITY OF SHARES
The capital of a company is divided into parts, called shares. The shares are said
to be movable property and, subject to certain conditions, freely transferable, so
that no shareholder remains permanently or necessarily associated to a company.
A member may sell his shares in the open market and realise the money invested
by him. The Stock Exchanges provide adequate facilities for the sale and
purchase of shares.
 COMMON SEAL
Upon incorporation, a company becomes a legal entity with perpetual succession
and a common seal. Since the company has no physical existence, it must act
through its agents and all contracts entered into by its agents must be under the
seal of the company. The Common Seal acts as the official signature of a company.
The name of the company must be engraved on its common seal.

CAPACITY TO SUE AND BE SUED

A company being a body corporate, can sue and be sued in its own name. To sue,
means to institute legal proceedings against (a person) or to bring a suit in a court
of law. All legal proceedings against the company are to be instituted in its name.
Similarly, the company may bring an action against anyone in its own name.
 CONTRACTUAL RIGHTS
A company, being a legal entity different from its members, can enter into
contracts for the conduct of the business in its own name.
LIMITATION OF ACTION
A company cannot go beyond the power stated in its Memorandum of
Association. The Memorandum of Association of the company regulates the
powers and fixes the objects of the company and provides the edifice upon which
the entire structure of the company rests.
ADMINISTRATION & MANAGEMENT
Companies can not control their administration or management works on its own
and therefore Directors are appointed to conduct the corporate functions. In other
words, the company is administered and managed by its managerial personnel.
 LIFTING OF CORPORATE VEIL

[A] JUDICIAL GROUNDS FOR LIFTING OF VEIL:

 Prevention of Fraud or Improper Conduct
 Tax evasion
 Avoidance of Welfare Legislation
 Determination of the Character of a company

[B] STATUTORY GROUND OF LIFTING OF CORPORATE VEIL:

DEALING WITH FRAUD
 Wrongful gain (Sec. 447)
 Mis-description of company (Sec. 12)
 Misrepresentation in Prospectus (Sec. 34)
 Failure to return application money
 TYPES OF COMPANY
I. CLASSIFICATION ON THE BASIS OF INCORPORATION:
a) STATUTORY COMPANIES: These are constituted by a special Act of
Parliament or State Legislature. The provisions of the Companies Act, 2013
do not apply to them. Examples of these types of companies are Reserve Bank
of India, Life Insurance Corporation of India, etc.
b) REGISTERED COMPANIES: The companies which are incorporated
under the Companies Act, 2013 or under any previous company law, with
ROC fall under this category.
 II. CLASSIFICATION ON THE BASIS OF LIABILITY:

UNLIMITED LIMITED
LIABILITY LIABILITY
COMPANY COMPANY

LIMITED BY LIMITED BY
SHARE GURANTEE
 II. CLASSIFICATION ON THE BASIS OF LIABILITY:

(a) UNLIMITED LIABILITY COMPANIES: In this type of company, the

members are liable for the company's debts in proportion to their respective
interests in the company and their liability is unlimited. Such companies may
or may not have share capital. They may be either a public company or a
private company.
(a) COMPANIES LIMITED BY GUARANTEE: A company that has the
liability of its members limited to such amount as the members may
respectively undertake, by the memorandum, to contribute to the assets of the
company in the event of its being wound-up, is known as a company limited by
guarantee. The members of a guarantee company are, in effect, placed in the
position of guarantors of the company's debts up to the agreed amount.
(b) COMPANIES LIMITED BY SHARES: A company that has the liability of
its members limited by the memorandum to the amount, if any, unpaid on the
shares respectively held by them is termed as a company limited by shares.
For example, a shareholder who has paid Rs.75 on a share of face value Rs.100
can be called upon to pay the balance of Rs. 25 only. Companies limited by
shares are by far the most common and may be either public or private.
III. CLASSIFICATION ON THE BASIS OF NUMBER OF
MEMBERS

PRIVATE COMPANY

Vs.

PUBLIC COMPANY
 PRIVATE COMPANY PUBLIC COMPNAY

MINIMUM PAID UP 1 lakh 5 lakh

CAPITAL

LIMIT ON THE Maximum no. of members No limit.

MAXIMUM NO OF 200.
MEMBERS.

MINIMUM NO. OF Minimum No. 2 Minimum No. 7

MEMBERS

INVITATION TO THE It prohibits any invitation It can invite the public to

PUBLIC FOR to the public to subscribe subscribe for any
SUBSCRIPTION OF for any security of the securities of the company.
SECURITIES company.

MINIMUM NO. OF Must have at least 2 Must have at least 3

DIRECTORS Directors Directors
TRANSERFER OF Complete restriction on the There is no restriction on
SHARES transferability of the the transferability of the
shares, through its Articles shares
of Association

COMMENCEMENT Can commence its business Cannot start its business

OF BUSINESS immediately after its until a Certificate to
incorporation commencement of
business is issued to it.

QUORAM FOR 2 members personally 5 if members <= 1000;

MEETINGS present 15 if members >1000 &
<=5000;
30 if members > 5000

INDEPENDENT Not required Mandatory

DIRECTORS
 HOLDING COMPANY

A holding company is a parent company that owns enough voting stock (more
than 50%) in a subsidiary to make management decisions , influence and
control the company's board of directors

SUBSIDIARY COMPANY
Subsidiary company or subsidiary, in relation to any other company (that is to
say the holding company), means a company in which the holding company—
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one-half of the total share capital either at its
own or together with one or more of its subsidiary companies
 ASSOCIATE COMPANY

Associate company, in relation to another company, means a company in

which that other company has a significant influence, but which is not a
subsidiary company but includes joint ventures.
In accounting and business valuation is a company in which another company
owns a significant portion of voting shares, usually 20–50%.
 FOREIGN COMPANY
As per Section 2(42), of the Companies Act, 2013 a “foreign company‖ means any
company or body corporate incorporated outside India which —

a) has a place of business in India whether by itself or through an agent,

physically or through electronic mode; and
b) conducts any business activity in India in any other manner

The Companies Act, 2013 lays down that every foreign company which establishes
a place of business in India must, within 30 days of the establishment of such place
of business, file with the Registrar of Companies for registration:

 A certified copy of the charter or Memorandum and Articles, of the company;

 The full address of the registered or principal office of the company;

 A list of the directors;

 The name and address of one or more persons resident in India authorised to
accept on behalf of the company service of process and any notices or other
documents required to be served on the company;

 The full address of the office of the company in India which is deemed to be
its principal place of business in India;

Every foreign company has to ensure that the name of the company, the country
of incorporation, the fact of limited liability of members is exhibited in the
specified places or documents.
 DORMANT COMPANY
According to Section 455 of the Companies Act, 2013, where a company is formed
and registered under this Act for a future project or to hold an asset or intellectual
property and has no significant accounting transaction, such a company or an
inactive company may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.

GOVERNMENT COMPANY

Section 2(45) defines a ―Government Company‖ as any company in which not less
than fifty one per cent of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a company
which is a subsidiary company of such a Government company.
 SMALL COMPANY

As per section 2(85) ‗‗small company‘‘ means a company, other than a public
company,—
i. Paid-up share capital of which does not exceed fifty lakh rupees or such
higher amount as may be prescribed which shall not be more than five crore
rupees; or
ii. Turnover of which as per its last profit and loss account does not exceed two
crore rupees or such higher amount as may be prescribed which shall not be
more than twenty crore rupees:
 PRODUCER COMPANY
According to the Companies Act, a Producer Company is a body corporate
having objects or activities specified in as:

a) production, harvesting, procurement, grading, pooling, handling, marketing,

selling, export of primary produce of the members or import of goods or
services, for their benefit.
b) processing including preserving, drying, distilling and packaging of the
produce of its members.
c) manufacturing, sale or supply of machinery and equipment to its members.
d) providing education on the mutual assistance principles to its members
e) rendering technical services, consultancy services, training, research and
development for the promotion of the interests of its members.
f) insurance of producers or their primary produce.
 ONE PERSON COPANY

As per section 2(62) of the Companies Act, 2013, ―One Person Company‖ means a

company which has only one person as a member.

 Only a natural person who is an Indian citizen and resident in India-

a) shall be eligible to incorporate a One Person Company;

b) shall be a nominee for the sole member of a One Person Company.

 No person shall be eligible to incorporate more than a One Person Company or

become nominee in more than one such company.

 No minor shall become member or nominee of the One Person Company or

can hold share with beneficial interest.
 Such Company cannot carry out Non-Banking Financial Investment activities
including investment in securities of any body corporates.

 No such company can convert voluntarily into any kind of company unless
two years have expired from the date of incorporation of One Person
Company, except threshold limit (paid up share capital) is increased beyond
fifty lakh rupees or its average annual turnover during the relevant
period exceeds two crore rupees.
 MEMORANDUM OF ASSOCIATION

According to PALMER:
‗Memorandum Of Association‘ contains the object for which the company is
formed, and therefore identifies the possible scope of its operations beyond
which its action cannot go. It defines as well as confines the power of the
company. If anything is done beyond these powers, that will be ultra vires the
company and therefore void.
 MOA as a „PUBLIC DOCUMENT‟
 MOA is a public document, whereby, everyone dealing with the company is
presumed to know its content.
 A company shall, on being so requested by a member, send to him within
seven days of the request and subject to the payment of such fees as may be
prescribed.
 If a company makes any default in complying with the provisions of this
section, the company and every officer of the company who is in default
shall be liable for each default, to a penalty of one thousand rupees for each
day during which such default continues or one lakh rupees, whichever is
less.
 CONTENTS OF MOA
1. Name Clause
2. Situation or Registered Office Clause
3. Object Clause
4. Liability Clause
5. Capital Clause, in case company having a share capital
6. Association or Subscription Clause
7. Nomination Clause, in case of One Person Company.
 NAME CLAUSE
 The name stated in the MOA shall not be identical with a resemblance too nearly
to the name of an existing company.
 The name shall not be such that its use by the company will constitute an offence
under any law for the time being in force.
 The name shall not be undesirable in the opinion of the Central Government.
 A company shall not be registered with a name which contains any word or
expression which is likely to give an impression that the company is in any way
connected with, or having the patronage of, the central government, or any state
government or any local authority, corporation or body constituted by the
Central Government or any State Government under any law for the time being
in force.
 REGISTERED OFFICE CLAUSE

The second clause must specify the State in which the registered office of the
company is to be situated. This is important for two reasons:
1. Firstly, the registered office is necessary for fixing the domicile of the company.
The High Court of that State has jurisdiction in which the registered office of the
company is situated.
2. Secondly, the Companies Act, 2013 provides that every company shall prepare
and keep at its registered office, financial statements along with books of
account and other relevant books and papers for every financial year.
3. A company shall, on and from the fifteenth day of its incorporation and at all
times thereafter, have a registered office capable of receiving and acknowledging
all communications and notices as may be addressed to it
 OBJECT CLAUSE

The third compulsory clause in the memorandum sets out the objects for which the
company has been formed. Under the Companies Act, 2013, all companies must
state in their memorandum the objects for which the company is proposed to be
incorporated and any matter considered necessary in furtherance thereof.
 It indicates and determines the purpose for which the company has been set up
and its actual capability and capacity.
 It states affirmatively the ambit and extent of powers of the company and, states
negatively, that nothing should be done beyond that ambit and that no attempt
shall be made to use the company for any other purpose than that which is
specified.
 Protection of Investors/Creditors: it protects the investors and creditors in the
company so that they may know the objects in which their money is to be
employed, and ensures that the company‘s funds, to which they must look for
payment, are dissipated in any unauthorized activities
 LIABILITY CLAUSE
The Companies Act, states that the memorandum shall state the liability of members
of the company, whether limited or unlimited.
i. In the case of a company limited by shares, that liability of its members is
limited to the amount unpaid, if any, on the shares held by them; and
ii. In the case of a company limited by guarantee, the amount up to which each
member undertakes to contribute—
 to the assets of the company in the event of its being wound-up while he is a
member; and
 to the costs, and expenses of winding-up.
 CAPITAL CLAUSE
This is the fifth compulsory clause which must state the amount of the capital with
which the company is to be registered and the division thereof into shares of fixed
value or amount and the number of shares which the subscribers to the
memorandum agree to subscribe; and the number of shares each subscriber to the
memorandum intends to take, indicated opposite his name.

NOMINATION CLAUSE
The Memorandum of a company shall state that in case of one person company,
the name of the person who, in the event of death of the subscriber (that One
Person) shall become the member of the company.
 ASSOCIATION OR SUBSCRIPTION CLAUSE

Lastly, the Memorandum contains a declaration that the person subscribing their
signatures to the memorandum are desirous of forming themselves into an
association in pursuance to the memorandum. Each of the subscriber must sign
the MOA in presence of at least one witness who shall attest the signature.
 ARTICLES OF ASSOCIATION

 The articles of association of a company are its bye-laws or rules and

regulations that govern the management of its internal affairs and the
conduct of its business. The articles play a very important role in the
affairs of a company. It deals with the rights of the members of the
company inter se.
 They are subordinate to and are controlled by the memorandum of
association.
CONTENTS OF ARTICLES
1. Number and value of shares. delegations of powers.
2. Issue of preference shares. 14. Issue of Debentures and stocks.
3. Allotment of shares. 15. Audit committee.
4. Calls on shares. 16. Managing director, Whole-time
5. Transfer of shares. director, Manager, Secretary.
6. Nomination. 17. Additional directors.
7. Forfeiture of shares. 18. Seal.
8. Alteration of capital. 19. Remuneration of directors.
9. Buy back. 20. General meetings.
10. Share certificates. 21. Directors meetings.
11. Voting rights and proxies. 22. Borrowing powers.
12. Meetings and rules regarding 23. Dividends and reserves.
committees. 24. Accounts and audit.
13. Directors, their appointment and 25. Winding up.
 RELATIONSHIP BETWEEN
MEMORANDUM OF ASSOCIATION AND
ARTICLE OF ASSOCIATION

1. Articles are subsidiary to memorandum.

2. The memorandum and articles must be read together, but the
terms of the memorandum cannot be modified or controlled by the
article of association.
3. The power of alteration of articles is subject only to what is
prohibited by the memorandum expressly or impliedly.
 MEMORANDUM ARTICLE
MEANING It is the charter of the company, Articles of Association is a
i.e., it contains the fundamental document containing all the rules
conditions upon which the and regulations that governs the
company has been incorporated. company.
PURPOSE It defines and confines the scope Being subsidiary to the
of activities of the company. Memorandum, it defines the ways
for carrying out the objects of the
company, legally.

ALTERATION Both by special resolution and by By passing special resolution.

the approval of the Central
Government or Tribunal/Court
also.
RATIFICATION Any act which is ultra vires the Anything done by the company in
company is void and cannot be contravention of the Articles is
ratified even by the unanimous only ‗irregular‘ and can be ratified
consent of the share holders. by the shareholders.
COMPULSORY Required Not required
FILING AT THE
TIME OF
INCORPORATION
FORMATION OF THE COMPANY

PROMOTION

INCORPORATION/
REGISTRATION

COMMENCEMENT
 PROMOTION
 It is the first stage of formation and means to conceive and idea of
forming a company and taking all necessary steps, in this regard, namely
organising funds, property and managerial ability.
 The person who discovers business opportunities and takes the above
mentioned steps is called a ‘PROMOTER’.

PROMOTER

A promoter is a person who undertakes to form a company with reference to

a given project and set it going and takes the necessary steps to accomplish
that purpose.
 LEGAL POSITION OF A PROMOTER
A promoter is neither an agent of, nor a trustee for, the company because it is not
in existence. But he occupies a fiduciary position in relation to the company and
therefore requires to make full disclosure of the relevant facts, including any
profit made by him

DUTIES OF A PROMOTER
 A promoter cannot make either directly or indirectly, any profit at the
expense of the company he promotes, without the knowledge and consent of
the company and that if he does so, in disregard of this rule, the company can
compel him to account for it.
 Duty to disclose all material facts at the time of promotion.
 LIABILITY OF THE PROMOTERS
 Incorporation of company by furnishing false information
 For omission in the prospectus, about the matters to be stated and
information to be given in the prospectus.
 Criminal liability for mis-statement in the prospectus.
 Civil liability for mis-statement in prospectus.
 Punishment for fraudulently inducing persons to invest money.
 For non – disclosure of secret profit.
 Failure to cooperate with Company Liquidator during winding up
 REMUNERATION OF PROMOTER
The company may pay the promoter in the following ways:
1. A ‗Lump-sum‘ for the service rendered.
2. The profit in the transactions of the company which are disclosed by the
promoter can be considered as remuneration.

LEGAL STATUS OF CONTRACTS

The contracts which the promoters enter into for the company may be for
Before Incorporation i.e. Pre-Incorporation Contracts: Not legally binding
upon the company before incorporation company remains a non legal entity
therefore cannot enter into a contract. It can also not sue the other party.
Post- Incorporation contracts: Not binding on the company until it is entitle to
commence business, becomes binding on the company from the date it is
entitled to commence the business( Certificate of commencement)
 PROSPECTUS

The Companies Act, 2013 defines a prospectus as ―any document described or

issued as a prospectus and includes:
 any notice, circular, advertisement or other document inviting offers from
the public for the subscription or purchase of any securities of a body
corporate.‖

On the basis of aforesaid definition, it may be said that a document should have following
ingredients to constitute a prospectus:
a) There must be an invitation to the public;
b) The invitation must be made ―by or on behalf of the company or in relation to an
intended company‖;
c) The invitation must be ―to subscribe or purchase‖;
d) The invitation must relate to any securities of the company.
 TYPES

 RED HERRING PROSPECTUS

 SHELF PROSPECTUS
 DEEMED PROSPECTUS
 ABRIDGED PROSPECTUS
 RED HERRING PROSPECTUS:
 Another name for preliminary prospectus. A company proposing to make an
offer of securities may issue a red herring prospectus prior to the issue of a
prospectus.
 This is the offering document printed by the issuer containing a description of
the business, discussion of strategy, presentation of historical finance
statements, explanation of recent financial results etc.
 It 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.
 SHELF PROSPECTUS:
 A company filing a shelf prospectus with the ROC shall not be required to
file prospectus afresh or again at every stage of offer of securities by it within
the period of validity of such self prospectus.
 A company filing a shelf prospectus shall be required to file an information
memorandum containing all material facts relating to new, changes in the
financial position of the company as have occurred between the first offer of
securities or the previous offer of securities and the succeeding offer of
securities
 ABRIDGED PROSPECTUS:
A company cannot issue applications for the issue of share or debentures, if it
does not contain the salient features of the prospectus of the memorandum. This
is known as ‗abridged prospectus‘. In other words ‗abridged prospectus‘ is a one
that contains the salient features of the memorandum of the prospectus.
 HOW TO INCORPORATE A COMPANY
UNDER THE COMPANIES ACT 2013

Apply to ROC for the availability of Names

The Registrar may reserve the name for 60 days

from the date of application

FILING OF DOCUMENTS WITH ROC

i.e. MOA & AOA
ISSUE OF CERTIFICATE OF INCORPORATION
BY THE REGISTRAR

ALLOTMENT OF CORPORATE IDENTITY

NUMBER