Companyies Act, 1956

8/7/2019 Companyies Act, 1956

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COMPANIES ACT, 1956The word company ordinarily means an association of a number ofpersons for some common purpose. In its legal form a company is anartificial person created by law.

Section 3(1) (i) of the companies Act ,1956 defines a company as,A company formed ,and registered under this act or an existing

company. An existing company means a company formed andregistered under any of the former companies Act. This definition doesnot give the meaning of company.

Haneys brief definition bring out clearly many of thecharacteristics of a company. He defines, A company is anincorporated association which is an artificial person created by law,having a separate entity with a perpetual succession and a commonseal.

From the above it could be understood that a company is avoluntary association of person formed for some purpose with capitaldivided into parts known as shares which are freely transferable andwith a limited liability. It is an artificial person created by law withperpetual succession and a common sea.


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ESSENTIAL CHARACYERISTICS

OF A COMPANY Registration and Legal Entity

Limited Liability

Separate Property Perpetual Succession

Common Seal

Transferability of Shares

Capacity to sue and be used


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KINDS OF COMPANIES

I On the Basics of Incorporation

Charted Companies

Statutory Companies Registered Companies

Licenced Companies

Foreign Companies


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II On the Basis of Liability

Companies with Limited Liability

Companies Limited by Guarantee Unlimited Companies


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III On the Basis of Number of Members

Private Company

Public Company


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IV On the Basis of Control

Holding Companies

Subsidiary Companies


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V On the Basis of Ownership

Government Company

Foreign Company


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Privileges & Exemptions

Enjoyed by Private Companies A private company can be registered with a minimum

of two members.

It is entitled to commence business immediately afterincorporation.

It is not required to issue a prospectus It is not required to hold a statutory meeting.

It can processed to allot shares before minimumsubscription is received.

Restrictions on further issue of capital do not apply to

private companies. The minimum number of directors of a private

company is two only.


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It is not necessary for the directors to file a writtenconsent to act as directors, to the Registrar

It is not necessary for directors to take upqualification shares.

It is not required to maintain a separate Index ofMembers. Two members present can form a quorum in any

meeting of a private company. The directors are not liable to retirement by rotation. The restrictions regarding remunerations of directors

are not applicable to the private company. Restrictions regarding appointment of Managing

Director for more than five years at a time are notapplicable.


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INCORPORAYION OF A

COMPANYA company is said to have beenincorporated or registered when itgets the certificate of Incorporationfrom the Registrar of Companies.Certain steps have to be taken andnecessary legal formalities completedfor that purpose. The steps and

formalities required for incorporationof company vary according to thetype of the company concerned.


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Steps for the Incorporation of aPublic Company limited by

Shares Application for approval of name

Preparation of Memorandum of Association

Preparations or Article of Association Printing, Signature and Stamping of

Memorandum and Articles

Preparations of other Documents

Filing of Documents for Registration Certificate of Incorporation


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MEMORANDUM OF

ASSOCIATIONThe Memorandum of Association isthe charter of the company, and

provides the foundation on which thestructure of the companys activitiesas well as its relation with the outsideworld.


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CONTENTS OF THE

MEMORANDUM Name clause

Domicile (or) Situation Clause

Objects Clause Liability Clause

Capital Clause

Association Clause


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DOCTRINE OF ULTRA VIRESUltra means beyond and Vires means power. The term ultra vires acompany means that the doing of the act is beyond the legal powerand authority of the company. The doctrine of ultra vires is importantin defining the limits of the power conferred on the company by itsMemorandum of Association. Under this doctrine, a company haspower to engage in only such activity or enter into such transactions.

Which are essential to the attainment of the objects specified in theMemorandum; Which are reasonably and fairly incidental to the main objects ;and Which are permitted by the provision of the Company Act.

The doctrine of ultra vires was first enunciated in the celebrated caseAshbury Railway Carriage and Iorn CO. Ltd., vs Riche. The companywas registered with the following objects.

To make ,and sell, or lend on hire, railway carriages and wagons; To carry on the business of mechanical engineers and general

contractors; To purchase, lease, work and sell mines, mineral, land and building.


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Effects of Ultra Vires

TransactionsIf a company enters into transaction which are ultra vires, it will have

the following effects.

Injunction: Whenever a company goes beyond the scope of the clause,any of its members can get an injunction from the court to restrain the

company from undertaking the ultra vires act. Personal Liability of Directors: If the transaction is ultra vires, for

instance, if the found of the company are misapplied, the directors willbe held personally liable.

Ultra vires Contracts: Contracts entered into by a company, which areultra vires, are void ab initio and unenfcrceable.

Property Acquired Ultra vires: if a company acquires any propertyunder an ultra vires transaction, if has the right to hold the propertyand protect it against damage by other persons.

Ultra Vires Torts: A company is not liable for torts committed by itsagents or employees in the course of ultra vires transaction.


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Alteration of Memorandum Alteration of Name Clause

Alteration of Situation Clause

Alteration of Object Clause Alteration of Liability Clause

Alteration of Capital Clause


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Articles of AssociationThe rules and regulations which are

framed for the internal management

of a company are set out in adocument known as the Articles ofAssociation. The articles are framedto enabled the company to carry out

the aims and objects of the companyset out in the Memorandum ofAssociation.


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Contents of Articles Share capital and its subdivisions into different classes of shares,

rights of share holders and their variation The producer for making allotment, call on shares and transfer,

transmission, forfeiture and surrender of shares, including lien onshares.

Alteration and reduction of capital Borrowing powers

Appointment of Manager, Managing Director, Secretary. Declaration of dividend Procedure for convening, holding and conducting different kinds of

meetings, voting rights and methods Maintenance of books of account and their audit

Share Certificates and Share Warrants, conversion of shares intostock Seal of the company Winding up


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Alteration of ArticlesThe Articles of Association can be altered or

added to by passing a special resolution inthe extra-ordinary general meetingprovided.

The alteration is not to the provision of theact

It is not inconsistent with or beyond theprovisions of the Memorandum and

T does not increase the liability of amember without his written consent bycompelling him to take more shares thanhe had held prior to the alteration


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Doctrine of Constructive NoticeThe Memorandum and Articles, on registration

assume the character of public documents.The office of the Registrar is a public office

and documents registered there are openand accessible to the public at large.Therefore, every outsider dealing with thecompany is deemed to have notice of the

contents of the Memorandum and Articles.This is known as Constructive Notice ofMemorandum and Articles


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Doctrine of Indoor ManagementWhen an outsider enters into a contract with the company,

he is presumed to have knowledge of the provisions ofmemorandum and articles as per the doctrine ofconstructive notice. But he is not required to go beyondthat and to enquire whether the internal proceeding

required by these documents have been regularlyfollowed by the company. They need not enquirewhether the necessary meeting was convened and heldproperly or whether necessary resolution was passedproperly. They are entitled to take it for granted that thecompany had gone through all these proceeding in aregular manner. This is known as the Doctrine of Indoor

Management.The Doctrine of Indoor Management was first propounded byLord Hatherlyin the celebrated case Royal British Bankvs. Turquand


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Exceptions to the Doctrine of

Indoor Management Where the person dealing

with the company hasactual or constructive noticeof any irregularity in theinternal proceedings of thecompany

Where a person did not infact consult theMemorandum and Articlesof the company andconsequently did not act onknowledge of thesedocuments

Where a person dealingwith the company wasnegligent and, had he notbeen negligent, could havediscovered the irregularityby proper enquiries

Where a person dealing

with the company reliesupon a forged document or


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The company itself cannot act in itsown person, for it has no person it

can only act through directors, andthe case is , as regards thosedirectors ,merely the ordinary caserof principal and agent


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Definition[sec.2(13)]`Directorincludes any person occupying the

position of director, by whatever namecalled.

It refers to the nature of the office.

If he performs the functions of adirector he would be termed a directorin the eyes of law.

He is a person having control over thedirection, conduct, management orsuperintendence of affairs of acompany.

Any person in accordance with whose


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Only individuals can becomedirectors.

Companies act does not specify anyqualification.

Share qualification.

Disqualification.

A person of unsound mind.

An undischarged insolvent

A person convicted by any offence.


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It is very difficult to state the legalposition of directors in the company

Directors as agents. Directors as employees.

Directors as officers.

Directors as trustees


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Only individuals can bedirectors(sec.253)

Public company shall have at least 3directors

A paid-up capital of 5crore or moreand one thousand or more small

shareholders.

Shall have at least one directorelected by such small shareholder.

Private company at least 2 directors.


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First directors.

Appointment of directors by the

company. Appointment of directors by

directors.

Appointment of directors by thirdparties.

Appointment by proportionalrepresentation.

Appointment of directors by the


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General powers of the Board.

Powers to be exercised at board

meetings. Powers to be exercised with the

approval of company in generalmeetings.


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Fiduciary duties.

Exercise powers.

Not place in position with conflict. Duties of care, skill and diligence.

Standard of care.

Other duties of directors.


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M

eaning & definition Meaning:Meaning:

The person or representatives elected by theThe person or representatives elected by theshareholders to mange or direct the dayshareholders to mange or direct the day--toto--day affairsday affairsof the company are individually known asof the company are individually known as

DIRECTORSDIRECTORS.. Definition:Definition:

Acc to sec 2(13) of the companies act of 1956 aAcc to sec 2(13) of the companies act of 1956 adirector is director is any person occupying the position ofany person occupying the position ofdirector, by whatever name is called.director, by whatever name is called.

In general he is a person who is responsible forIn general he is a person who is responsible fordirecting ,conducting, & controlling the affairs of thedirecting ,conducting, & controlling the affairs of thecompany.company.


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Number of directors As per sec 252 of the companies act

of 1956, every public company (other

than a private co. which has becomea public co. by virtue of sec 43A ofcomp. act) must have at least 3directors,& private co. (whether it is

an independent private co. which is asubsidiary of a public company) musthave at least 2 directors.


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R

emuneration Part time directors:

1% of net profit with co. having whole timedirector & 3% of net profit without whole

time director.

Whole time directors:

If only one director then 5% & if more thanone 10% of net profit.

Managers:

5% of net profit.


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Contd ..

Total managerial remuneration to alldirectors:

11% of the net profit. Minimum remuneration payable in

case of inadequacy or absence ofprofits:

Rs.50000 (with the previous approvalof central govt.)


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Appointment

Different ways of appointment are

i. By the promoters

ii. By board of directorsiii. By third parties

iv. By proportional representation

v. By central govt.


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Appointment of first directors by

promoters at the time of the formation of

company, the promoters of the o.select & secure the consent of some

prominent persons to act as thedirectors of the co. & also mentiontheir names in articles of association ofco. (section 254 & clause 64 of tableA)


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Appointment by board of directors:

1. Additional directors: they may beappointed by b.o.d under sec 260 ofcompanies act. Considering theseprovisions:

a. The no. of directors + additionaldirector must not exceed the strengthfixed for the board by the articles.

b. He will hold office only up to the dateof the next annual general meeting ofthe company.


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Contd

1. Directors in casual vacancy

a. Under sec262 in case of public or pvt co.which is a subsidiary of a public co. ,if the

office of any director appointed by themembers in an due to the death ,resignation ,or failure of an electeddirector to accept the office or due to any

other reason.b. He will hold office only up to the date upto

which the previous director would haveheld office.


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Contd

3. Alternate director:

a. Under sec 313 if authorized by A/A

b.o.d of comp. through a resolutionpassed at board meeting mayappoint an alternate director to actfor the original director during his

absence for period of more than 3months from the state in which themeetings of the board are ordinarilyheld.


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Appointment by third parties:

The article of association of companyauthorize the debenture holders orother creditors like banks or otherfinancial corporations , which have

advanced loans to the company toappoint their nominees to the board ofdirectors.

Provisions to note under this are: No. of directors should not exceed

1/3rd of total strength of board.

Such directors are not to retire by


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Appointment by principle of

proportional representation: acc to sec 265 allows a public company

or pvt comp. which is a subsidiary ofpublic comp. to provide in its A/A for

the appointment of not less than 2/3rdof the total number of directors.

This will help minority shareholders to

have some of their nominees on theboard of directors.


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Appointment by the centralgovernment:

central government may appoint thedirectors of the company where thecompany law board decides that itsnecessary to safeguard the interests ofthe company or shareholders or thepublic.

Provision to be noted

Directors appointed may or may not beshareholders of company

They can hold office for max 3yrs atany one time & can be removed any

time & some other person may be


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Position of directorsPosition of directors Directors as agents:

A company as an artificial person acts

through directors who are the electedrepresentatives of shareholders. Theyare in the eyes of law the agents ofthe company for which they act & the

relationship betn director n companyis like principal & agent in generallaw.


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Directors as employees:

Although the directors of company are itsagents they are not its employees forbeing entitled to benefits which aregranted under the companies act.

But there is nothing to prevent themfrom being a employee of the companybecause the company at itself indicatesmany situations where a director may

be in employment of company.


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Directors as officers:

For certain under companies act thedirector is treated as officers of thecompany under sec 2(30). They are

also liable to penalties if the provisionsof the company are not complied with.


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Directors as trustees:

Of companys money & property:

It means that they must account for allthe companys money & property overwhich they exercise control. they have

also to refund money/property ifimproperly transferred

Of powers entrusted to them;

Means they exercise their powers

honestly & in the interest of thecompany & the shareholders.

Case: (Alexander Vs. automatictelephone co)


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Duties of directors

The statutory duties of directors are: Fiduciary duties

Exercise their powers with honesty & for thebenefit of the company as a whole.

Not to place themselves in a positions wherethere is conflict betn their duties to thecompany & personal interest.

Fiduciary duties are owed to company & notto individual shareholders. Leading case (Percival Vs Wright)


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Duties of care , skill ,& diligence:

Standard of care skill & diligence dependsupon the nature of companys business& circumstances of case.

Type & nature of work.

Division of power between director &other officer.

General usage & custom in that type ofbusiness.

Whether directors work graciously orremuneratively.


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General duties

They must manage the affairs of thecompany efficiently.

They must act in good faith & in theinterest of company.

To attend all board meetings unlessphysically impossible.

They must not be negligent in the

discharge of their duties.


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Liabilities of directors

1. Liability to third parties: this mayarise

Under the act:

Independently of the act:

Directors as agents are not personallyliable on contracts entered into asagents on behalf of com. exception to

this rule if a director fails to excludepersonal liability. Eg: signing ofnegotiable instrument without comp.name &on behalf of comp.


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2.Liabilities to the company

Ultra vires act:

Negligence

Breach of trust misfeasance


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3. Liability for breach of statutoryduties

There are numerous statutory dutiesof directors.

Most of these relate to maintenanceof proper accounts, filing of returnsetc.

If fails to perform these duties then

he is liable for penalties.


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4.Liability for acts of co-directors

A director is not liable for the act ofhis co directors provided he has noknowledge.

His co directors are not his agentswho can by their acts impose liabilityon him.


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Validity of directors

Acts done by person shall be valid,notwithstanding that it mayafterwards be discovered that his

appointment was invalid by reason ofdefect or terminated by virtue of ayprovision contained in articles.

A director who is not duly appointed

but acts as director is known as DEFACTO .

A properly appointed director is calledDE JURE.


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Qualifications

The nominal or face value of thequalification share of a director fixedby articles must not exceed rs.5000

It must acquired by a person electedas directors within two months of hisappointment

The qualification shares of director

must be disclosed in the prospectus.


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contd

For the purpose of calculation ofqualification shares only the sharesincluded in the share certificate in thename of a director are taken intoaccount & not from share warrant.

Every director must within 2 months

after appointment file with theregistrar a declaration in writingspecifying therein the qualificationshares held by him.


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Disqualifications

A person of unsound mind

An undischarged insolvent

A person who has to be adjudicatedas an insolvent & his application ispending.

A person who is disqualified forappointment as director by antribunal under sec203 on the groundof fraud in relation to company.


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Vacation of office by director

Under sec 283 office of director shallbecome vacant if:

He fails to qualification share within 2

months of his appointment as director. When he found to be of unsound mindby court

When he fails to disclose the nature of

his interest in any contract with thecomp. before the board.


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contd

When he is removed from office forpreventio n of mismanagement by thecourt.

When he is removed from office forfraud breach of trust etc by centralgovernment

When he fails to pay the calls on his

shares within 6 months from datewhen it fell due.

When the period for which he isappointed is expired.


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Powers of directors

General powers to board undersec(291)

Powers to be exercised by boardmeetings under sec(292)

Powers to be exercised with theapproval of company in general

meeting under sec(293) Political contributions sec(293-A)


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2nd Type of voluntary winding upieCreditor's voluntary winding up .

A voluntary winding up of a company inwhich a declaration of its solvency is notmade is referred to as a creditor's voluntarywinding up


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Provisions applicable to creditorsvoluntary winding up

Secs.500 to 509 shall apply in relation tocreditors voluntary winding up(sec 499).the

provisions of these sections are asfollows:


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1]. Meetings of creditors (sec500):

The company shall call a meeting ofthe creditors of the company on the day onwhich there is to be held the generalmeeting of the company at which theresolution for voluntary winding up is to beproposed, or on the next day. It shall sendnotices of the meeting to the creditors bypost simultaneously with the sending of the

notices of meeting of the company.


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2].Notice of resolution to be given to

Register(sec501).

Notice of any resolutionpassed as a creditors meeting shall begiven by the company to the Registerwithin 10 days of the passing thereof


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3].Appointment of liquidator (sec502).

The creditors & the members at

their respective meetings may nominatethe liquidator.

If they nominate different persons, the

creditors nominee shall be the liquidator.The application shall be made to theTribunal within 7 days after the date onwhich the nomination was made by the

creditors .If no person is nominated bythe creditors the person nominated bythe members shall be the liquidator.

4]Appointment of committee of


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4]Appointment of committee ofinspection (sec503).

The creditors at their meetingmay, if they think fit, appoint acommittee of inspection consisting of

not more than 5 persons .

5].Liquidators remuneration (sec504).5].Liquidators remuneration (sec504).

The committee of inspection,The committee of inspection, oror if there is no suchif there is no suchcommittee, the creditors, may fix the remuneration ofcommittee, the creditors, may fix the remuneration of

the liquidator. The remuneration shall not bethe liquidator. The remuneration shall not be

increased in any circumstances.increased in any circumstances.


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6].Power to fill vacancy in office ofliquidator(sec506)

If a vacancy occurs by death,resignation or otherwise, in the office ofa liquidator, the creditors in general

meeting may fill the vacancy.

7].Power of liquidator to acceptshares etc , as consideration forsale of property (sec507).

The provisions of sec494 shall apply in thecase of a creditors voluntary wounding

up.


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8].Duty of liquidator to call meeting atthe end of each year( sec508).

The liquidator shall call a general meetingof the company & a meeting of thecreditors every year, within 3 monthsfrom the close of every year. This willbe so if the winding up continues formore than 1 year.


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Consequences of winding up

Consequences as toshareholders/members.Consequences as to servants & officers.Consequences as to servants & officers.

Consequences as to proceedings againstConsequences as to proceedings against

the company.the company.Consequence as to cost.Consequence as to cost.

Consequences as to creditors.Consequences as to creditors.


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Voluntary Winding Up

(Secs. 484 to 520)

Voluntary winding up means windingup by the members or creditors of acompany without interference by the

Tribunal.


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Types ofVoluntary Winding Up

1. Members voluntary windingup.

2. Creditors voluntary windingup.


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Provisions applicable to a membersvoluntary winding up:

1.1. Appointment and remuneration ofAppointment and remuneration ofliquidators (sec. 490):liquidators (sec. 490):

The company in generalThe company in generalmeeting shall appoint one or moremeeting shall appoint one or moreliquidators for the purpose of windingliquidators for the purpose of windingup its affairs and distributing itsup its affairs and distributing its

assets.assets.


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2.2.Boards powers to cease onBoards powers to cease onappointment of a liquidator (sec.appointment of a liquidator (sec.491):491):

On the appointment of aOn the appointment of aliquidator, all the powers of the Boardliquidator, all the powers of the Boardof directors, the managing or wholeof directors, the managing or whole--

time directors, and manager, shalltime directors, and manager, shallcease except when the company incease except when the company ingeneral meeting or the liquidatorgeneral meeting or the liquidatormay sanction them to continue.may sanction them to continue.


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3.3.Power to fill vacancy in office ofPower to fill vacancy in office ofliquidator (sec. 492):liquidator (sec. 492):

If a vacancy occurs by death,If a vacancy occurs by death,resignation or otherwise in the officeresignation or otherwise in the officeof any liquidator appointed by theof any liquidator appointed by thecompany in general meeting may fillcompany in general meeting may fill

the vacancy.the vacancy.


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4.4.Notice of appointment of liquidator toNotice of appointment of liquidator tobe given to Registrar (sec. 493):be given to Registrar (sec. 493):

The company shall give notice toThe company shall give notice tothe Registrar of the appointment of athe Registrar of the appointment of aliquidator or liquidators.liquidator or liquidators.


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5.5. Power of liquidator to acceptPower of liquidator to acceptshares, etc. as the considerationshares, etc. as the considerationfor sale of property (sec.494):for sale of property (sec.494):


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6.6. Duty of liquidator to callDuty of liquidator to callcreditors meeting in case ofcreditors meeting in case ofinsolvency (sec.495):insolvency (sec.495):

If the liquidator is at anyIf the liquidator is at anytime of opinion that the companytime of opinion that the companywill not be able to pay its debts inwill not be able to pay its debts in

full within the period stated infull within the period stated inthe declaration, he shallthe declaration, he shallforthwith summon a meeting offorthwith summon a meeting ofthe creditors.the creditors.


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7.7.Duty to call general meeting atDuty to call general meeting atthe end of each year (sec.496):the end of each year (sec.496):

In the event of the windingIn the event of the windingup continuing for more then 1up continuing for more then 1year, the liquidator shall call ayear, the liquidator shall call ageneral meeting of the companygeneral meeting of the company

at the end of the 1 year from theat the end of the 1 year from thecommencement of the windingcommencement of the windingup.up.


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8.8. Final meeting and dissolutionFinal meeting and dissolution(sec.497):(sec.497):

As soon as the affairs of theAs soon as the affairs of thecompany are fully wound up, thecompany are fully wound up, theliquidator shall make up an accountliquidator shall make up an accountof the winding up.of the winding up.


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9.9. Provisions as to annual and finalProvisions as to annual and finalmeeting in case of insolvencymeeting in case of insolvency(sec.498):(sec.498):

If in the case of aIf in the case of amembers voluntary winding up, themembers voluntary winding up, theliquidator finds that the company isliquidator finds that the company is

insolvent.insolvent.

Companyies Act, 1956

Documents

Transcript of Companyies Act, 1956