The Companies Act, 1956

Prof. Santosh Gopalkrishnan

Meaning of Company
The term company implies an association of a number of persons for some common objective e.g. to carry on a business concern, to promote art, science or culture in the society, to run a sport club etc. Every association, however, may not be a company in the eyes of law as the legal import of the word company is different from its common parlance meaning. In legal terminology its use is restricted to imply an association of persons, registered as a company under the law of the land.

Definitions of Company
Company means a company formed and registered under this Act or an existing company. Existing company means a company formed and registered under the previous company laws. Companies Act 56 S.3(i& ii)

 A joint stock company is an artificial person invisible, intangible and existing only in the eyes of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. Justice Marshall

 A company is an association of many persons who contribute money or moneys worth to a common stock and employ it in some common trade or business and who share the profit or loss arising therefrom. The common stock so contributed is denoted in terms of money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted. Lord Lindley
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 From the above definitions it is clear that a company has a corporate and legal personality. It is an artificial person and exists only in the eyes of law. It has an independent legal entity, a common seal and perpetual succession. Sometimes, the term corporation (a word derived from the Latin word corpus which means body) is also used for a company. At present the companies in India are incorporated under the Companies Act, 1956.
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Characteristics of a Company
1. 2. 3. 4. 5. 6. 7. 8. Artificial Person Independent Corporate Existence Perpetual Existence Separate Property Limited Liability Common Seal Transferability of Shares Capacity to sue and to be sued
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1. Artificial Person
A company is an association of persons who have agreed to form the company and become its members or shareholders with the object of carrying on a lawful business for profit. It comes into existence when it is registered under the Companies Act. The law treats it as a legal person as it can conduct lawful business and enter into contracts with other persons in its own name. It can sell or purchase property. It can sue and be sued in its name. It cannot be regarded as an imaginary person because it has a legal existence. Thus company is an artificial person created by law.
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2. Independent Corporate Existence

A company has a separate independent corporate existence. It is in law a person. Its entity is always separate from its members. The property of the company belongs to it and not to the shareholders. The company cannot be held liable for the acts of the members and the members can not be held liable for the acts or wrongs or misdeeds of the company. Once a company is incorporated, it must be treated like any other independent person. As a consequence of separate legal entity, the company may enter into contracts with its members and vice-versa.
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3. Perpetual Existence
The attribute of separate entity also provides a company a perpetual existence, until dissolved by law. Its life remains unaffected by the lunacy, insolvency or death of its members. The members may come and go but the company can go on for ever. It is created by law and the law alone can dissolve it.

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4. Separate Property
A company, being a legal entity, can buy and own property in its own name. And, being a separate entity, such property belongs to it alone. Its members are not the joint owners of the property even though it is purchased out of funds contributed by them. Consequently, they do not have even insurable interest in the property of the company. The property of the company is not the property of the shareholders; it is the property of the company.
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5. Limited Liability
In the case of companies limited by shares the liability of every member of the company is limited to the amount of shares subscribed by him. If the member has paid full amount of the face value of the shares subscribed by him, his liability shall be nil and he cannot be asked to contribute anything more. Similarly, in the case of a company limited by guarantee, the liability of the members is limited up to the amount guaranteed by a member. The Companies Act, however, permits the formation of companies with unlimited liability. But such companies are very rare.
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6. Common Seal
As a company is devoid of physique, it cant act in person like a human being. Hence it cannot sign any documents personally. It has to act through a human agency known as Directors. Therefore, every company must have a seal with its name engraved on it. The seal of the company is affixed on the documents which require the approval of the company. Two Directors and the Secretary or such other person as the Board may authorize for this purpose, witness the affixation of the seal. Thus, the common seal is the official signature of the company.
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7. Transferability of Shares
The shares of a company are freely transferable and can be sold or purchased through the Stock Exchange. A shareholder can transfer his shares to any person without the consent of other members. Under the articles of association, even a public limited company can put certain restrictions on the transfer of shares but it cannot altogether stop it. A shareholder of a public limited company possessing fully paid up shares is at liberty to transfer his shares to anyone he likes in accordance with the manner provided for in the articles of association of the company. However, private limited company is required to put certain restrictions on transferability of its shares. But any absolute restriction on the right of transfer of shares is void.
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8. Capacity to Sue and to be Sued

A company, being a body corporate, can sue and be sued in its own name.

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Types of Companies

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Royal or Chartered Companies

These companies are incorporated under a special charter such as the East India Company, the Bank of England. A chartered company is regulated by the charter incorporating it and the Companies Act does not apply to it. These companies are created and regulated by the king or queen in exercise of an ancient prerogative vested in the crown. Such companies are formed in England and do not exist in India.
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Statutory Company
These companies are formed under a special Act of Parliament or the state legislature e.g. the Reserve Bank of India, the State Bank of India, IFCI, Life Insurance Corporation, Unit Trust of India. The powers which are to be exercised by such companies are defined by the Acts constituting them and therefore, they are not required to have a memorandum of association. Although each statutory company is governed by the provisions of its special Act, the provisions of the Companies Act, 1956 also apply to them, in so far as the said provisions are not inconsistent with the provisions of the Special Acts under which these companies are formed. These companies are mostly public undertakings and are formed with the main object of public utilities and not for profit. They also need not use the word limited with their names.

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Registered Companies
A registered company is one which is formed and registered under the Indian Companies Act, 1956 or under any earlier Companies Act in force in India. The two basic types of companies which may be registered under the Act are: (a) Private Companies; (b) Public Companies. These companies may be: (i) Companies limited by shares; (ii) Companies limited by guarantee; (iii) Unlimited companies.
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Cos may also be classified as:

Association not for profit having licence under Section 25 of the Act; Government companies; Foreign companies; Holding and Subsidiary companies.

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Private Company
A Private Company is defined by Section 3(1) (iii) of the Act as a company which, by its articles of association: a) Restricts the right of the members to transfer shares, if any, b) Limits the number of its members to fifty, excluding members who are or were in the employment of the company and c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of the company. Section 26 of the Companies Act, provides that a private limited company must necessarily have articles of its own.

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Public Company
The Companies Act does not provide any positive definition of a Public Company. Section 3(1) (iv) defines it as, A public company means a company which is not a private company. Elaborating the above definition, a Public Company is one which: i) does not have any restriction on the transfer of shares; ii) does not limit the maximum number of members and iii) can invite public for the subscription of its shares and debentures. The minimum number of members required to form a public company is seven. There are no restrictions with regard to the maximum number of members in a public company.
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Companies limited by Shares

When the liability of the members of a company is limited up to the unpaid value of their shares, it is called a limited liability company or a company limited by shares. This liability or unpaid amount may be called up at any time during the life time of the company or at the time of its winding up. Such a company must have share capital since the extent of liability is determined on the basis of the face value of shares. This company may be a public company or a private company.
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Companies limited by Guarantee

The liability of a member in these companies is limited to the amount undertaken to be contributed by him at the time of winding up of the company. The amount of guarantee is mentioned in the memorandum of association. Such companies are formed for non-trading purposes such as charity, promotion of sports, science, art, culture etc. These companies may or may not have any share capital. If these companies do not have any share capital, the members can be required to pay the amount of guarantee undertaken by them and that too in the event of liquidation. But if these companies have any share capital, the members are liable to pay the amount which remains unpaid on their shares together with the amount payable under the guarantee. A company limited by guarantee and having a share capital may be a public company or a private company.
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Unlimited Companies
An unlimited company is that company which has no limit on the liability of its members. It means that its members are liable to contribute to the debts of the Company in proportion to their respective interests. In case a member is unable to contribute his share, his deficiency is shared by the rest of the members in proportion to their capital in the company. If the assets of such a company are not sufficient to pay off its liabilities, the private assets of the members can be utilised for this purpose. Such a company may or may not have share capital. In case, it has a share capital, it can be either a public company or a private company. It is essential for this type of company to have its Articles of Association which must state the number of members with which the company is to be registered. However, under Section 32 of the Act, it is provided that an unlimited company can be converted into a limited company by passing a special resolution for this purpose.

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Holding & Subsidiary Company

A company which controls another company is known as holding company and the company so controlled is termed a subsidiary company.

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Government Company
The Companies Act defines a government company as a company in which not less than 51 percent of the paid up share capital is held by: (a) The Central Government; or (b) Any State Government; or (c) Partly by the Central Government and partly by one or more State Government. A company which is a subsidiary of a government company shall be considered a government company.
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Foreign Companies
Foreign companies are those companies which are incorporated outside India but which have a place of business within India. Place of business here means an identifiable place where it carries on business such as office, store house, godown, etc. If 50 percent or more of the paid up share capital of a foreign company is held by Indian citizens and or by companies incorporated in India whether singly or jointly, it shall be treated as an Indian company in respect of its business in India. It means that such a company has to comply with the provisions of the Companies Act as if it were an Indian Company.
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Licensed Companies / Associations not for Profit

The Companies Act permits the registration under a licence granted by the Central Government of an association not for profit with limited liability. However, such a company can not use the word Ltd. or the words Pvt. Ltd. with its name. This type of association or company is formed for the promotion of charity, science, commerce, sports, art or culture etc. Naturally, such associations are not of a commercial nature and do not aim at earning profits.
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Formation of a Company
The process of formation of a company can be divided and discussed under the following four stages: Promotion; Incorporation or Registration; Capital subscription; Commencement of business. Of these stages only the first two are necessary for the formation of a private company and of a public company not having any share capital. They may commence business immediately after they have received a certificate of incorporation. But a public company having a share capital has to pass through all the four stages mentioned above before it can commence business or exercise any borrowing powers.
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Stage 1: Promotion
Before a company can be formed, there must be some persons who intend to form a company and who take the necessary steps to carry that intention into operation. Such persons are called promoters. It is they who conceive the idea of forming the company and it is they who take the necessary steps to incorporate it by registration. The promotion of a company is comprehensive term denoting that process by which a company is incorporated and floated or established financially as a joint concern by the issue of a prospectus. The promotion is the first stage in the formation of a company. Promotion may be defined as the discovery of business opportunities and the subsequent organisation of funds, property and managerial ability into a business concern for the purpose of making profits therefrom.
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The Promoter
The promoter of a company is a person who does the necessary preliminary work incidental to the formation of a company. The word promoter has not been defined anywhere in the Companies Act. Palmer has defined a promoter as a person who originates a scheme for the formation of the company, has the memorandum and articles prepared, executed and registered and finds the first directors and settles the terms of the preliminary contracts and prospectus (if any) and making arrangement for advertising and circulating the prospectus and placing the capitals is a promoter.
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Stage 2: Incorporation of a Co.

Any seven or more persons in case of a public company or any two or more persons where the company to be formed will be a private company, associated for any lawful purpose may, by subscribing their name to a memorandum of associations and otherwise complying with the requirement of this Act in respect of registration, form an incorporated company, with or without limited liability.
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Documents to be filed for Registration

After ascertaining the availability of name, the promoter should proceed to prepare the following documents and file with the Registrar of companies: Memorandum of Association Articles of Association Copy of Proposed Agreement Consent of Directors
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Memorandum of Association
The memorandum of association is the charter of the company. This includes its objectives, its name, the address of its registered office, the capital which the company is authorised by law, the nature of liability of members as well as the names, addresses and agreement of people who agree to form a company.
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Articles of Association
The other important document is the articles of association which contains the rules and regulations relating to the internal management of the company. However, it is not necessary for a public company limited by shares to file the Articles of Association. If such public company does not file Articles of Association, it is deemed to have adopted Table A of schedule I of the Act.
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Copy of Proposed Agreement

If a company proposes to enter into an agreement with any individual for appointment as a Managing Director, or a whole-time director or manager, a copy of such an agreement should also be filed with the Registrar of companies.

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Consent of the Directors

According to Section 266, in the case of a public limited company having share capital, a person cannot be appointed as a Director by the Articles of Association unless, he has, before the registration of the articles, either himself or through his agent, signed and filed, with the Registrar his consent in writing to act as Director.
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Stage 3: Share Capital

After having obtained the Certificate of Incorporation, the promoters of a public company will have to take steps to raise the necessary capital for the company. A public company may invite the public to subscribe to its shares or debentures. For this purpose, a document known as prospectus has to be issued. A document containing detailed information about the company and an invitation to the public for subscribing to the share capital and debentures issued is called prospectus. According to Section 2(36) of the Companies Act, prospectus means any document described or issued as a 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 in or debentures of a body corporate.
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Stage 3: Share Capital

The term capital usually means a particular amount of money with which business is started. In relation to a company limited by shares, the word capital means share capital. In fact the amount required by the company for its business activities is raised by the issue of shares. The amount so raised is called the share capital of the company. The persons contributing towards the share capital are known as shareholders. The share capital of a company may be classified as follows:
Authorised Capital Issued Capital Subscribed Capital Called-Up Capital Paid-Up Capital Reserve Capital

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1. Authorised Capital
It is the capital which is stated in companys memorandum of association with which the company intends to be registered. It is called the nominal or registered capital. It is the maximum amount of share capital which a company is authorised to raise by issuing the shares. The amount of nominal capital is determined on the basis of present and future capital need of the company. The authorised capital may be increased or reduced by the company by passing an ordinary resolution.
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2. Issued Capital
It is that part of the authorised capital which is actually offered (issued) to the public for subscription. Therefore, the issued capital can never be more than the authorised capital. It can at the most be equal to the nominal capital. The balance of nominal capital remaining to be issued is called unissued capital.
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3. Subscribed Capital
It is that part of the issued capital which has been actually subscribed by the public. The amount of subscribed capital cannot exceed the amount of issued capital. This is so, because the company cannot accept for subscription an amount greater than the issued amount.

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4. Called-Up Capital
It is that part of nominal value of issued capital which has been called-up or demanded on the shares by the company. Normally, a company does not collect the full amount on shares it has allotted. It collects it in installments known as application money, allotment money, first call, second call and so on. The amount of installments which have been demanded for the time being are termed as called-up capital and the amount not yet demanded is termed as uncalled capital and the shareholders continue to be liable to pay this amount as and when called.
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5. Paid-Up Capital
It is that part of the called-up capital which has actually been received from the shareholders.

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6. Reserve Capital
It is part of the uncalled capital which cannot be called by the company except in the event of its winding up. The company may, by a special resolution, determine that a portion of its uncalled capital shall be called-up: (i) in the event of winding up, (ii) for the purposes of winding up.

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Stage 4: Certificate of Commencement of Business

A private company can commence business immediately after incorporation. However, in the case of companies other than the private company and a company having no share capital, further requirement is to be complied with, namely, obtaining a certificate of commencement of business before it can commence its business.
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Memorandum of Association
Section 2(28) defines it as The Memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies or of this Act. It sets out the constitution of the company and defines the scope of the activities of the company. It is the foundation on which the structure of the company depends. It also defines the relationship of the company with the public. As the interests of the shareholders, creditors and other members of the public are to be protected by law, this document cannot be altered easily. It was regarded as an unalterable charter of a company in England, until the year 1980, when the Act was amended to allow alterations in certain cases and to a certain extent. Section 16 of the Indian Companies Act lays down that the conditions in the memorandum cannot be altered except in the cases and in the manner and to the extent provided in the Act.
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Importance of MoA
Memorandum of Association of a company is its charter and defines the limitations of the powers of the company, established under the Act. The Memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. The Memorandum of Association is the most important document with regard to its constitution. It is the foundation on which the whole super structure of company is built-up. Its purpose is two fold. The first is the prospective inventor knows within what field his money is to be risked. Secondly, outsiders also know the nature of the activities of the company and their rights against the company in times of breach of contracts. The memorandum is the basis of the company on which is existence depends.
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Importance of MoA
Section 9 lays down that the memorandum cannot contain anything contrary to the provisions of the Act. The memorandum must be signed at least by seven members in the case of a public company and two members in the case of a private company. It is to be divided into paragraphs, numbered consecutively and printed. It must be dated and duly stamped.
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Contents of Memorandum
The following are the contents of the Memorandum of Association (S.13):
Name Clause Location / Situation Clause Objects Clause Liability Clause Capital Clause Association and Subscription Clause
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i. Name Clause
A company may have any name which is not undesirable in the view of the Central Government. For example, the name cannot be identical or similar to the name of another existing company. It must contain at its end, the word Limited if it is a public limited company or the words Private Limited if it is a private limited company. But companies formed for the promotion of art, science, etc., may be exempted from adding words Limited or Private Limited as the case may be, by means of general or special order granted by the Central Government under Section 25. Section 147(1) lays down that the name must appear on the outside of every office or place of business in a conspicuous manner and on all bills, notices, etc., of the company.
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ii. Location Clause

It shows the State in which the Registered Office of the Company is situated.

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iii. Objects Clause

It states separately (1) the main objects and objects ancillary or incidental to the main objects to be pursued by the company and (2) other objects. It defines the powers of the company beyond which, the company cannot act. But it cannot contain the objects or powers which are contrary to the provisions of the Act.
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iv. Liability Clause

It states whether the liability of the members is limited to the extent of the nominal value of the shares or the extent of the amount guaranteed by the members or unlimited.

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v. Capital Clause
It states the amount of the capital and the way in which it is to be divided into shares.

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vi. Association or Subscription Clause

All the signatories of the memorandum make a declaration that they are desirous of forming themselves into a company and that they agree to take the number of shares mentioned against their respective names given therein, with their addresses and occupations.

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Articles of Association
They are the rules, regulations and bye-laws for the internal management of the company. They bind the company and its members. They also bind the members inter-se. But they do not constitute a contract between the company and the public. Articles of association are filed with the Registrar for the incorporation of a company. Where they are not filed, the rules contained in Table A of the Companies Act shall apply. In the case of companies with unlimited liability or with liability limited to the guarantee and a private company limited by shares, the articles of association are compulsory.
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Articles of Association
The usual contents of the articles of association relate to the following:
Share capital and variation of rights. The companys lien on the shares. Calls on shares. Transfer and transmission of shares. Forfeiture and re-issue of forfeited shares. Conversion of shares into stock and re-conversion of stock into shares. Rules regarding the holding and conducting of the general meetings and board meetings. Rules regarding the appointment of directors, managing agents, secretaries and treasurers, Managing Director and secretary their remuneration, powers and duties etc.
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Articles of Association
Alteration of share capital. Borrowing powers. Accounts and audit. The common seal etc. List of persons who act as directors. The consent of directors in writing to act as such. Directors undertaking to take up and pay for qualification shares. This undertaking is to be given by all the Directors jointly or individually and signed by each one of them and should contain their names, occupations, etc.

The articles are subservient to the memorandum. It must not contain anything inconsistent with the memorandum. It defines the relationship between the company and members as well members inter se. The memorandum defines the relation of the company with the public. An act ultra vires the articles but intra vires the memorandum can be ratified by the company. But an act ultra vires the memorandum cannot be ratified. 60

Prospectus
It is issued by only public limited companies after the incorporation of the company. It gives information to the public regarding the position & prospects of the company. It is also an appeal to the public to purchase the shares and is a summary of MoA. According to Section 2(36) of the Companies Act, prospectus means any document described or issued as a 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 in or debentures of a body corporate.
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Prospectus: Important Points

Prospectus can be issued only by Public Cos. It must be dated and signed by the directors. It must be issued within 90 days from the date of filing with the Registrar of Companies A copy of the Prospectus should be filed with the Registrar The copy with the Registrar and that issued to the General Public should be the same.
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Contents of Prospectus
Companies name & Address of its registered office. Particulars about its capital structure. Information about its appointed directors , bankers , brokers , solicitors Objects & prospects of the company Location of the factory , machinery & equipment, nature of the business Underwriting contracts , brokerage and commission & preliminary expenses of the company Directors & management of the company Rights , privileges & restrictions attach to shares Borrowing powers
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Statement in lieu of Prospectus

Where a public company does not invite public to subscribe for its shares but arranges to get money from private sources(friends), it need not issue a prospectus to the public. In such cases the promoters are required to prepare a draft prospectus known as a Statement in lieu of prospectus. This Prospectus must be filed with the Registrar within 3 days before allotment of shares & debentures and should be signed by every director and proposed director. The contents and conditions are similar to that of the Prospectus.
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