Company Law

Nature of a company:
A Company, in common parlance
means a group of persons
associated together for the
attainment of a common end.
Definition of a Company

A Company is defined as an
artificial person created by Law
with perpetual succession and a
common seal.
 Characteristics of a Company

1. It is a separate legal entity

2. Limited liability
3. Perpetual succession
4. Common seal
5. Transferability of shares
6. Separate property
7. Capacity to sue
Kinds of Companies
Companies can be classified into various kinds
on the following basis.
1. On the basis of incorporation:-
 Statutory Companies: These are companies created
by a special act of the Legislature

Eg. Reserve Bank of India

State Bank of India
Life Insurance Corporation
Industrial Finance Corporation

 Registered Companies:
These are companies which are formed and
registered under the companies Act 1956.
2. On the basis of liability
1) Companies with liability may be:
a. Companies limited by shares or
b. Companies limited by guarantee

2) Companies with unlimited liability:

1. Where the Liability of the members of a company

is limited to the amount unpaid on the shares, such a
company is known as company limited by shares.

2. Where the liability of the members of a company

is limited to a fixed amount which the members undertake
to contribute to the assets of a company in the event of
its
being wound up, such a company is known as company
limited by a guarantee.

Cont……
d
 3. Unlimited Companies: A Company without
limited liability is known as company with
unlimited liability. In such a company every
member is liable for the debts of the company
as in a partnership is proportion to his interest
in the company.
III On the basis of Number of members.

On the basis of number of members a company can

be:

1) Private Limited Company

2) Public Limited Company

A private company is a company which has a

minimum paid up capital of Rs. One lakh
or such higher paid up capital as may be prescribed
by its articles.
1. Restricts the right to transfer its shares if any. This
restriction is needed to preserve the private character
of a company

2. Restricts the number of members of the company to

a maximum of 50.
3. Prohibit any invitation to the public to subscribe for
any shares or debentures of the company

4. Prohibits any invitations or acceptances of deposits

from persons other than its members, directors or
their relatives.
Public Limited Company:

1. Is not a private company

2. Has a minimum paid up capital of

Rs.5,00,000 or such
higher paid up capital as may be
prescribed.
Distinction between Public Limited Company and
Private Limited Company

1.Minimum number:- The minimum number of

persons required to form a public company is 7. It is
‘2’ in case of a private company.

2.Maximum number:- There is no restriction on

maximum number of member in a public
company, whereas the maximum
number cannot exceed 50 in a private
company.

Cont……d
3.Minimum capital:-
A public company must have a minimum of
Rs. 5, 00,000 as capital.
A private limited company must have a minimum
capital of Rs. 1,00,000/-

4. Number of Directors:-
A public company must have at least 3
directors whereas private directors must have 2
directors.
5. Restriction on appointment on directors:-

In the case of public company the directors

must file wit the Registrar consent to act the directors or sign as

undertaking for their qualification shares. The directors of a private

company need not to do so.

6.Restriction on Invitation to subscribe for shares:-

A public company invites the general public to subscribe for the

shares in or the debentures of the company. A private company by

its articles prohibits any such invitation to the public.

7.Transferability of shares or debentures:-
In a public company the shares and
debentures
are freely transferable. In a private company
the right to transfer shares and debentures is
restricted by the articles.

8.Special privileges:-
A private company enjoys some special
privileges. A public company enjoys no such
privileges.
9.Quorum:-
If the articles of a company do not provide for a
larger Quorum, five members personally present in
the case of Public company is Quorum for a
meeting of the company. It is 2 in the case of
private company.

10.Managerial remuneration:-
Total Managerial Remuneration in a public
company cannot exceed 11% on the net profits. No
such restriction applies to a private company.
IV On the basis of control.

On the basis of control companies can be

classified into:
1. Holding Companies and
2. Subsidiary Companies
Holding Companies:
A company is known as the holding company of
another company if it has control over that other
company.
A company is “deemed to be the holding
company of another if, but only if, that other is
its subsidiary”. Now the question is: what is a
subsidiary company?

Subsidiary company:
A company is known as a subsidiary of another
company
when control is exercised by the latter (called
holding company) over the former called a
subsidiary
company.
V On the Basis of ownership:

On the basis of ownership, a company may be a

Government company , or Non-Government

Company.

The latter is controlled and operated by private

capital.
Government Company
A Government company means any
company in which not less than 51 percent
of the paid-up shares capital is held by
a. the Central Government or
b. any state Government or Government ,or
c. Partly by the Central Government and partly
by one or more State Governments. For example,
State Trading Corporation of India Ltd. And Minerals
and Metals Trading. Corporation of India Ltd are
Government companies. The subsidiary of a
Government company is also a Government company.
 Formation of a company

Before a company is formed, certain preliminary steps are

necessary e.g. whether it should be a private company or
a public company, what its capital should be, and whether
it is worthwhile forming a new company or taking over the
business of an already established concern. All these
steps are taken by certain persons known as “Promoters”.
They do all the necessary
preliminary work incidental to the
formation of a company.
Incorporation of company:

Any 7 or more persons (2 or more

in case of a private company) associated for any law
full purpose may form an incorporated company, with
or without limited liability. They shall subscribe their
names to a Memorandum of Association means
signing the Memorandum.
The Memorandum is a token of their agreement to
associate themselves.
A company for the purpose of incorporation shall file
before the Registrar of Companies an application
along with the following documents and necessary
fees.

1.Memorandum of Association duly signed by

the subscribers.

2.Articles of Association duly signed by the

subscribers.
3.Agreement if any which the company
proposes to enter in to with any individual
for appointment as it’s managing or whole
time Director or Manager.

4.A list of the directors who have agreed to become the

First Directors of the company and their written consent to
act as Directors and take up qualifying shares.

5.A declaration stating that all the

requirement of the companies Act and
other formalities relating to registration
have been complied with.
Certificate of Incorporation:

When the requisite documents are filed with the

Registrar, the Registrar shall satisfy himself that statutory
requirement regarding requisition have been duly complied
with.

If the Registrar is satisfied, he retains and registers the

memorandum, the articles and other documents filed with
him and issues a certificate of the incorporation. This is the
proof of the formation of a company.
Memorandum of Association

Memorandum of Association is the charter of the

company and it lays down the area of operation of the
company. It is a document of great importance which
contains the fundamental conditions upon which alone
the company is allowed to be operating.
CONTENTS OF THE MEMORANDUM:
1. The name clause
2. The registered office clause
3. The objects clause
4. The capital clause
5. The liability clause
6. The association clause
7. The declaration clause
 ARTICLES OF ASSOCIATION

Articles of Association are the rules, regulations & bye-laws

for the internal management of the affairs of the company.
They are framed with the object of carrying out the aims &
objects as set out in the memorandum of association.

The article are next in importance to the

memorandum of association. In framing
the articles of a company care must be
taken to see that regulations framed do
not go beyond the powers of the company
itself as contemplated by the
memorandum of association.
 CONTENTS OF THE ARTICLES

1. Share capital, rights of share holders, 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 & proceedings.

Cont……d
11. Voting rights of members, voting & poll, proxies
12. Directors, their appointment, remuneration,
qualifications, powers & proceedings of board of
directors.
13. Manager
14. Secretary
15. Dividends & reserves.
16. Accounts, audit & borrowing powers.
17. Capitalization of profits.
18. Winding up.
Distinction between Memorandum of
Association & Articles of Association

Memorandum of Articles of Association

Association
1. It is the charter of 1. They are the
the company regulations for the
indicating the nature internal
of its capital. It also management of the
defines the company & are
company’s subsidiary to the
relationship with memorandum
outside world.
2. It defines the scope 2. They are the rules
of the activities of for carrying out the
the company, or the objects of the
area beyond which company as set out
the actions of the in the memorandum
company cannot go.
3. It, being the 3. They are subordinate to the
charter of the memorandum. If there is a
company, is the conflict between the articles &
supreme the memorandum, the latter
document prevails.

4. Every company 4. A company limited by shares

must have its own need not have articles of its
memorandum own. In such a case, Table A
applies

5. Any act of the 5. Any act of the company which

company which is is ultra vives the articles (but in
ultra vires the intra vires the memorandum)
memorandum is can be confirmed by the
wholly void & shareholders
cannot be ratified
even by the whole
body of
shareholders
 DOCTRINE OF ULTRAVIRES

A company has the power to do all such things as are:

1. Authorised to be done by the companies act, 1956
2. Essential to the attainment of its objects specified in
the memorandum
3. Reasonably & fairly incidental to its objects; every
thing else is ultravires the company. ‘Ultra’ means
‘beyond’ & ‘Vires’ means ‘Powers’. The term
ultravires a company means that the doing of the act
is beyond the legal power & authority of the
company.
DOCTRINE OF CONSTRUCTIVE
NOTICE

Every outsider dealing with a company is deemed to

have notice of the contents of the Memorandum & the
Articles of Association. These documents, on
registration with the Registrar, assume the character of
public documents. This is known as constructive notice
of Memorandum and Articles.
DOCTRINE OF INDOOR
MANAGEMENT
There is one limitation to the doctrine of constructive notice
of the Memorandum & the Articles of company. The
outsiders dealing with the company are entitled to assume
that as far as the internal proceedings of the company are
concerned, everything has been regularly done. They are
presumed to have read these documents & to see that the
proposed dealing is not inconsistent therewith, but they are
not bound to do more; they need not inquire into the
regularity of the internal proceedings as required by the
memorandum & the Articles. They can presume that all in
being done regularly. This limitation of the doctrine of
constructive notice is known as the “doctrine of indoor
management”.
PROSPECTUS

Prospectus is defined as “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.”
Prospectus must be in writing & it is an invitation
to the public
CONTENTS OF THE PROSPECTUS
1. General information
2. Capital structure of the company
3. Terms of the present issue
4. Particulars of the issue
5. Company, management & project
6. Particulars in regard to the company and other
listed companies under the same management
7. Outstanding litigations
8. Management perception of risk factors

The prospectus should be dated & signed

by the directors.
MISSTATEMENTS IN PROSPECTUS &
THEIR CONSEQUENCES

If there is any misstatement of a material fact in a

prospectus or if the prospectus is wanting in any
material fact, there may arise
1. Civil liability
2. Criminal liability
 Liability for misstatements in prospectus

Civil Liability Criminal Liability

Against the Against the directors,

company promoters, and
experts

Rescission of contract Claim for damages Damages Compensation under Damages for non-
sec. 62 with sec. 56 compliance

For fraudulent For innocent

misrepresentation misrepresentation
COMMENCEMENT OF BUSINESS

A private company can commence business

immediately after its incorporation. A public company
can do so only after it obtains a certificate of
commencement of business.
 SHARE CAPITAL

Share capital means the capital raised by a company by

the issues of shares.
KINDS OF CAPITAL:
1. Authorized / Nominal / Registered capital
2. Issued capital
3. Subscribed capital
4. Called up capital
5. Paid up capital
6. Uncalled capital
7. Reserve capital
KINDS OF SHARES

The company may generally issue 2 kinds of shares.

1. Equity shares
2. Preference shares

Equity share means a share with voting

rights, & differential rights as to dividend.
Preference shares means those shares
which carry preferential rights regarding
payment of dividend & repayment of capital
on winding up.
KINDS OF PREFERENCE SHARES

1. Cumulative preference shares

2. Non-cumulative preference shares
3. Participating preference shares
4. Non-participating preference shares
5. Convertible preference shares
6. Non-convertible preference shares
7. Redeemable preference shares
8. Irredeemable preference shares
 MEMBERSHIP IN A COMPANY
The members or share holders of the company are the
persons who collectively constitute the company as a
corporate entity.
A registered share holder is a member but a registered
member may not be a share holder.
A person who owns a bearer share warrant is a share
holder but he is not a member as his name is struck off
the register of members.
This means that a person can be a holder of shares
without being a member. A member may be a share
holder but a share holder may not be a member.
A legal representative of a deceased member is not a
member until his name is registered. He is however, a
share holder even though his name doesn’t appear in
the register of members
HOW TO BECOME A MEMBER

1. Membership by subscription
2. Membership by application & registration
3. Membership by beneficial ownership
4. Membership by qualification shares
 CESSATION OF MEMBERSHIP

A person may cease to be the member of a

company by –
1. Act of the parties,
2. Operation of law
1. Cessation of membership by act of the parties. A
person may cease to be the member of a company –
1) If he transfers his shares to another person
2) If his shares are forfeited
3) If the company sells his shares under some
provision in its Articles (eg: to enforce a lien)
4) If he rescinds the contract to take shares on the
ground of mis-representation in the prospectus or
on the ground of irregular allotment
5) If redeemable preference shares are redeemed
6) If he surrenders his shares, where surrender is
permitted
7) If share warrants are issued to him in exchange
of fully paid shares
2. Cessation of membership by
operation of law:
This covers the following cases-
1. Insolvency
2. Death
3. Sale of shares in execution of a decree
of a court
4. Winding up of the company
Transfer & Transmission Of Shares
Distinction between transfer & transmission

Transfer of shares Transmission of shares

1. It is effected by a 1. It takes place by
voluntary act of the operation of law, eg:
parties due to death,
2. It takes place for insolvency or lunacy
consideration of a member
3. The transferor has to 2. No consideration is
execute a valid involved
instrument of 3. There is no
transfer prescribed
4. As soon as the instrument of
transfer is complete, transfer
the liability of the 4. Share continue to be
transferor ceases. subject to the
original liabilities
 MANAGEMENT AND ADMINISTRATION

OF A COMPANY
MEETINGS AND PROCEEDINGS:
The various meetings of a company may be classified as
follows
I. Meetings of share holders. These meetings may be:
1. General meetings which include –
1) Statutory meetings
2) Annual general meetings &
3) Extra ordinary meetings
2. Class meetings of share holders
II. Meetings of creditors and debenture – holders
III. Meetings of directors
 QUORUM FOR
MEETING
‘Quorum’ means the minimum number of members who must
be present in order to constitute a valid meeting and transact
business threat. The quorum in generally fixed by the Articles. If
the Articles of a company do not provide for a longer quorum,
the following rules apply:
1)5 members personally present in the case of a public
company (other than a deemed public company), & 2 in the
case of any other company, shall be the quorum for a meeting
of the company. For the purpose of quorum a person may be
counted as 2 or more members if he holds shares in different
capacities. eg: as a trustee and also in his own right.
 Company Management
 The directors are the brain of a company:-

 ‘Director’ includes any person occupying the position of

director, by whatever name called. The important factor to
determine whether a person is or is not a director is to
refer to the nature of the office and its duties.

 Only individuals can be directors:-

Number of directors:-
Minimum number:-
 Public limited company shall have at least 3
directors and a private limited company shall have
at least 2 directors
Maximum number:-
 Articles of Association of a company may prescribe the maximum
and minimum number of directors for its Board. The number so fixed
may be increased or reduced within the limits prescribed by the
Articles by an ordinary resolution of the company in general meeting.
 Any increase in number of directors beyond the
maximum permitted by the Articles shall be approved
by the Central Government. But where the increase in
number does not make the total number of directors
more than 12, no approval of the Central Government is
needed.
Position of Directors:-

 Directors as agents:-

 Directors are not employees:-

 Directors are not prevented from being employees by entering into a contract
of employment with the company.

 For certain matters under the Companies Act, the directors are treated as
officers of the company.

 Directors are treated as trustees.

 True position is that directors are in a fiduciary

relationship.

 No person to be a director of more than 15

companies.
Removal of Directors:-

Directors may be removed by –

 The shareholders,

 The Central Government,

 The Company Law Board,

Managerial Remuneration:-

The total managerial remuneration of the directors

and the manager in respect of any financial year shall
not exceed 11 per cent of the net profit of the
company for that financial year.
 Winding up of a
company

Winding up of a company is a process of putting an

end to the life of the company. It is a proceeding by
means of which a company is dissolved and in the
course of such dissolution, its assets are collected, its
debts are paid off out of the assets of the company and
if any surplus is left, it is distributed among the
members in accordance with their rights
 Modes of Winding up
Compulsory winding up by court
A company may be wound up by an order of court
under following grounds,
• If the company has by a special resolution
resolved that it may be wound up by the court.
• Default in delivering statutory report
• Failure to commence business within a year of
incorporation
• If the number of members is reduced below 7 in
case of a public Ltd company and below 2 in case
of a Pvt Ltd company
• Failure to repay its debts
• On just and equitable grounds.
 Voluntary Winding up

The object of a voluntary winding up is that the

company and its creditors are left to settle their
affairs without going to the court, but they may apply to the
court for any directions or orders if and when necessary.
It may be :
Members voluntary winding up
This type of winding up takes place only when the company is
in a position to pay its debts. Declaration of solvency is made
by the director. A meeting of members is called and a
liquidator is appointed. No committee of inspection is formed.
The liquidator can exercise some powers with the
sanction of a special resolution of the company.
The meeting of members is again called on the
completion of the proceedings of winding up.

Cont……d
 Voluntary Winding up

Creditor’s voluntary winding up.

This type of winding up takes place only if the
company is not in a position to pay off its debts. Here
the meeting of the members and the creditors is called.
The liquidator is appointed by the creditors and the
remuneration is fixed by the committee of inspection.
The liquidator exercises power with sanction of the
court.
 Winding up subject to
supervision of the
court
At any time after a company has passed a
resolution for voluntary winding up, the court may
make an order that the voluntary winding up will
continue, but subject to the supervision of the
court and with such liberty of creditors,
contributors and others to apply to the court on
such terms and conditions as the court thinks fit.