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Company Law 1956

Session Objective
Meaning and Nature of a company
Formation and Incorporation of a Company
Memorandum of Association
Articles of Association

What is a Company?
The word Company has no strictly technical or legal
It implies an association of persons for some common
The law relating to companies in India is contained in the
Companies Act, 1956, as amended up to date.
This Act runs into 658 sections and 15 schedules.
The text of the law alone occupies more than 700 pages.
Endeavour is, therefore, to present some aspects of
company law which are relevant for managers.
Definitions of a Company
As per Prof. Haney, A company is an artificial person created by
law, having separate entity, with a perpetual succession and
common seal.
A company is an association of many persons who contribute
money or monies worth to a common stock and employed 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
contribute to it or to whom it pertains are members. The
proportion of capital to which each member is entitled is his
share. The shares are always transferable although the right to
transfer is often more or less restricted.
Characteristics of a Company
Incorporated Association
Artificial Legal Person
Separate Legal Entity:
Perpetual Succession:
Limited Liability:
Transferable Shares:
Common Seal:
Separate Property:
Capacity to Sue and Being Sued:
Kinds of Companies
Companies can be classified on various basis, which are as follows:
a) On the basis of mode of incorporation
i.Chartered Companies:
ii. Statutory Companies:
iii. Registered Companies:
b) On the basis of Liability of Members
iv. Limited by Shares:
v. Limited by Guarantee:
vi. Unlimited:
c) On the basis of Number of Members under Limited by shares
viii. Public:
d) Other types of Companies
i.Government Companies:
ii. Foreign Company:
iii. Holding and Subsidiary Company:
e) Producer Companies
Distinction Between Private and Public Company
Lifting the Corporate Veil
The circumstances under which the courts may lift the corporate veil may broadly be
grouped under the following two heads:
a) Under Statutory Provisions: The advantage of distinct entity
and limited liability may not be allowed in certain circumstances.
Such cases are:
i. Reduction of Membership:
ii. Misrepresentation in Prospectus:
iii. Fraudulent Conduct of Business:
iv. Failure to Return Application Money:
v. Mis-description of Name:
vi. Non-payment of Tax:
vii. Liability of Ultra-vires Acts:
viii. Liability of Promoters For Pre-incorporation Contracts:
ix. Directors With Unlimited Liability:
x. Holding-subsidiary Company:
b) Under Judicial Interpretations: It is difficult to deal with all the
cases in which courts have lifted or might lift the corporate veil.
Some such cases are:

i. For Determining the Enemy Character of a Company:
ii. For the Benefit of Revenue:
iii. For Prevention of Fraud and Improper Conduct:
iv. Others:
Formation and Incorporation of a Company

Stages of Incorporation
The complete process of formation of a company
may be divided into four stages namely:

a) Promotion.
b) Registration/Incorporation.
c) Floatation/Raising of Capital.
d) Commencement of Business.
a) Promotion.
Promotion means the preliminary steps taken for the purpose of
registration and floatation of the company. Gerstenberg has defined
the term promotion as the discovery of business opportunities and
the subsequent organization of fund, property and managerial
ability into a business concern for the purpose of making profits
therefrom. Persons who perform the task of promotion are called
b) Registration/Incorporation.
The promoter of the company will submit the following documents with the
Registrar of Companies for the registration of the company:
a) The memorandum of association.
b) The articles of association.
c) A list of persons who have consented to act as directors of the proposed
d) A statutory declaration of compliance.
e) Any agreement with the relevant persons of the proposed company.

The Registrar of Companies is to allot a Corporate Identity Number (CIN) to each
company registered on or after November 1, 2000. After scrutiny of all these
documents and if they are in order, the Registrar of Companies shall issue a
certificate of incorporation. This certificate of incorporation given by the
Registrar shall be conclusive evidence that all the requirements of the Act have
been complied with.
c) Floatation/Raising of Capital.
A private company is prohibited from inviting public to subscribe to
its share capital. Therefore, when a private company is formed, the
requisite capital is obtained from friends and relatives by making its
own arrangement. A public company can take either of the
following steps:
a) Issue a prospectus in case public is to be invited to subscribe to
its capital,
b) Deliver a statement in lieu of prospectus where the company
has either not issued a prospectus or though it has issued a
prospectus it has not proceeded to allot any of the shares
offered to the public for subscription.
d) Commencement of Business.
Every private company and a company not limited by shares can commence
business immediately on receipt of certificate of incorporation. But a public
company limited by shares is debarred from commencing business or borrowing
money without the certification of commencement of business.
Where the company has issued a prospectus
Where the company has not issued a prospectue
Memorandum of Association
For the formation of a company one of the first steps is to prepare a
document called the memorandum of association.

According to Lord Cairns, the memorandum of association of a
company is its charter and defines the limitations of the powers of a
company. It contains the fundamental condition upon which alone
the company is allowed to be incorporated. Thus the memorandum
of association is the charter of the company, but it is not

It has to be printed, divided into paragraphs, numbered
consecutively and signed by at least 7 persons (2 in the case of
private company) in the presence of at least one witness, who will
attest the signature(s). Each of the subscribers shall at least take one
The memorandum of a limited company is to contain the following
a) Name of the Company
b) Registered Office
c) Objects of the Company Stating separately:
i. The main objects.
ii. Incidental or ancillary objects.
iii. Other objects not included in (i) and (ii) above.
d) Liability
e) Capital
f) Association or Subscription

The above clauses of the memorandum are called compulsory
Doctrine of Ultra-vires
Alteration of Memorandum

Alteration of name clause
Change of registered office.
Alteration of objects clause:
Alteration of liability clause:
Alteration of capital clause:
Articles of Association
According to the Act, articles means the articles of association of a company as originally
framed or as altered from time to time in pursuance of any previous company laws or of
this Act....29 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. They define the powers of its officers. They also establish a contract between
the company and the members and between the members inter se.
Contents of Articles
Articles usually contain provisions relating to the following matters like:
a) Different classes of shares and their rights.
b) Procedure of making an issue of share capital and allotment there of.
c) Procedure of issuing share certificates and share warrants.
d) Forfeiture of shares and the procedure of their reissue.
e) Procedure for transfer and transmission of shares.
f) The time lag in between calls on shares, conversion of shares into stock.
g) Directors, their appointment, remuneration, qualifications, etc.
h) Accounts and audit.
i) Lien of shares.
j) Payment of commission on shares and debentures to underwriters.
k) Rules for adoption of preliminary contracts if any.
l) Re-organisation and consolidation of share capital.
m) Alteration of share capital and buyback of shares.
n) Borrowing power of directors.
o) General meeting, proxies and polls.
p) Voting rights of members.
q) Dividend and reserves.
r) Winding up.
Alteration of Articles

a) Procedure for alteration:
i. Passing of a special resolution.
ii. Copy of resolution should be sent to the registrar within 30 days.
iii. Copy of altered articles to be registered within 3 months of passing of
b) Limitations regarding alteration of articles:
i. Alteration should not be inconsistent with the provisions of the Act or any
other statute, and conditions contained in memorandum.
ii. Alteration must not constitute a fraud on the majority.
iii. Alteration must not deprive any person of his rights under a contract.
iv. Alteration must be bonafide for the benefit of the company as a whole.
v. Alteration must not be contrary to the order of National Company Law
vi. An alteration of articles to effect a conversion of a public company into a
company cannot be made without the approval of the central government.
vii. No retrospective operation of articles.
Binding Force of Memorandum and Articles
The following are the legal implications:
a) The company is bound to its members.
b) Each member is bound to the company.
c) Each member is bound to other members so far as rights and duties arising
out of the articles are concerned.
d) Neither the company nor the members are bound to outsiders.
Difference Between Memorandum of Association and Articles of
Doctrine of Constructive Notice
Doctrine of Indoor Management
According to the 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.

Essentials of Definition
The definition of prospectus gives the following essential features:
a) Document.
b) Subscription.
c) Invitation to public.
d) Offer to public. 50 or more persons constitute public as per the
amendment of the Act in 2000.
Necessary Pre-Requisites of Prospectus
a) Prospectus must be Dated:
b) Prospectus must be Signed:
c) Prospectus must be Registered:
Contents of Prospectus
Prospectus is the window through which an investor can
look into the soundness of a companys ventures. It
consists of the following:
a. General Information
b. Reports
c. Details
d. Statement by Experts
Golden Rule of Prospectus
There should be full frank and honest disclosure of all facts in the
prospectus. These facts should be scrupulously accurate. There
should not be any error of commission (mis-statements) nor any
error of omission (non disclosure of relevant facts). Thus the golden
rule of prospectus is that the true nature of the companys venture
to be disclosed.

Mis-statements in Prospectus and Liability
Any mis-statements lead to the following liability:
1. Civil
2. Criminal
Deemed Prospectus
Statement in lieu of Prospectus
Shelf Prospectus and Information Memorandum
Red Herring Prospectus
Services and Exchange Board of India (SEBI) -The Administrative
Important points regarding Prospectus
Persons who collectively constitute the company as a corporate
entity are members or shareholders
a) The subscribers to the memorandum.
b) Who agrees in writing to become member and whose name
appears in the register of
c) Who holds equity share capital and whose name is entered as
beneficial owner in the records of the depository.
Pre-Requisites for Becoming a Member
a) The agreement in writing to take shares of the company.
b) The registration of name in the register of members.
Distinction between Member and Shareholder
Who may become a Member?
Subject to the provisions of the Act, the memorandum and articles
the position of certain persons who may become a member of a
company is as follows:

Partnership Firm
Trade Union and soceity
President of India, Governor of a State or Collector of a District:

Modes of Acquiring Membership
A person may become a member of a company in any of
the following ways:
a) Membership by Subscription:
b) Membership by Application and Registration

A persons name may be registered in any of the following
i. By application and allotment
ii. By transfer
iii. By transmission
Rights of a Member
The various rights of a member can be grouped under the following
a) Statutory -
b) Contractual or otherwise -
Register of Members
A company shall keep a register of members and enter therein the following
a) Name, address and the occupation of each member.
b) Shares held by each member and the amount paid up on those shares.
c) Date at which each person was entered in the register as a member.
d) Date at which any person ceased to be a member.
Index of Members
A company with more than fifty members shall keep an index of members.
Termination of Membership
A persons membership ceases when he/his:
a) Transfers his shares.
b) Shares are forfeited by the company.
c) Surrenders his shares.
d) Shares are sold by the company to enforce its lien.
e) Dies.
f) Is adjudged insolvent.
g) Shares have been redeemed by the company.
h) Rescinds the contract of membership on fraud or
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