Indian Companies Act, 1866

a company can be defined as a group of persons

associated together for the purpose of carrying on a
business, with a view to earn profits, _a company means
a
Company formed and registered under this Act or an
existing company._
_ an existing company means a company formed and
registered under any of the previous companies laws
specified below._
a. any Act or Acts relating to companies in force before
the
Indian Companies Act, 1866 (10 of 1886), and repealed
by
That Act;
b. the Indian Companies Act, 1866 (10 of 1866);
c. the Indian Companies Act, 1882 (6 of 1882);
d. the Indian Companies Act, 1913 (7 of 1913);
e. the Registration of Transferred Companies
Ordinance, 1942
(54 of 1942); and
Characteristics of a Company
Separate Legal Entity
On incorporation under law, a company becomes a
separate legal entity as compared to its members. The
company is different and distinct from its members in
law. It has its own name and its own seal, its assets and
liabilities are separate and distinct from those of its
members. It is capable of owning property, incurring
debt, borrowing money, having a bank account,
employing people, entering into contracts and suing and
being sued separately.
Limited Liability
The liability of the members of the company is limited
to contribution to the assets of the company up to the
face value of shares held by him. A member is liable to
pay only the uncalled money due on shares held by him
when called upon topay and nothing more, even if
liabilities of the company far exceeds its assets.
Perpetual Succession
A company does not die or cease to exist unless it is
specifically wound up or the task for which it was
formed has been completed. Membership of a company
may keep on changing from time to time but that does
not affect life of the company. Death or insolvency of
member does not affect the existence ofthe company.
Separate Property
A company is a distinct legal entity. The company’s
property is its own. A member cannot claim to be owner
of the company_sproperty during the existence of the
company.
Transferability of Shares
Shares in a company are freely transferable, subject to
certain conditions, such that no shareholder is
permanently or necessarily wedded to a company.
When a member transfers his shares to another person,
the transferee steps into the shoes of the transferor and
acquires all the rights of the transferor in respect of
those shares.
Common Seal
A company is a artificial person and does not have a
physical presence. Therefore, it acts through its Board
of Directors for carrying out its activities and entering
into various agreements. Such contracts must be under
the seal of the company. The common seal is the official
signature of the company. The name of the company
must be engraved on the common seal. Any document
not bearing the seal of the company may not be
accepted as authentic and may not have any legal force.
Capacity to Sue and Being Sued
A company can sue or be sued in its own name as
distinct from its members.
Separate Management
A company is administered and managed by its
managerial personnel i.e. the Board of Directors. The
shareholders are simply the holders of the shares in the
company and need not be necessarily the managers of
the company.
One Share-One Vote:
The principle of voting in a company is one share-one
vote. I.e. if a person has 10 shares, he has 10 votes in the
company. Let us try to differentiate between company
and partnership.
Consequences of Non-registration
Law does not recognize an illegal association. An illegal
association cannot enter into any contract, cannot sue
any members or any outsider, and cannot be sued by
any members or outsiders for any of its debts. The
members of the illegal association are personally for the
obligations of the illegal association. A member may be
liable to a fine of Rs. 1000. Any member of an illegal
association cannot sue another member in respect of
any matter connected with the association.
Minimum Number of Members
A public company must have at least 7 members
whereas private company may have only 2 members. If
the number of members falls below the statutory
minimum and the company carries on its business
beyond a period of six months after the number has so
fallen, the reduction of number of members below the
legal minimum is a ground for the winding up ofthe
company.
On the basis of the number of the members, companies
can
be divided in two:
" A Private Company
" A Public Company
Public Company means a company which not a private
company.
Private Company means a company which by its
articles of association: -
a. Restricts the right of members to transfer its shares
b. Limits the number of its members to fifty. In
determining this number of 50, employee-members and
ex-employee members are not to be considered.
c. Prohibits an invitation to the public to subscribe to
any shares in or the debentures of the company.
If a private company contravenes any of the aforesaid
three provisions, it ceases to be private company and
loses all the exemptions and privileges, which a private
company is entitled. Following are some of the
privileges and exemptions of a private limited
company:-
1. Minimum number is members is 2 (7 in case of public
companies)
2. Prohibition of allotment of the shares or debentures
in certain cases unless statement in lieu of prospectus
has been delivered to the Registrar of Companies does
not apply.
3. Restriction contained in Section 81 related to the
rights issues of share capital does not apply. A special
resolution to issue shares to non-members is not
required in case of a private company.
4. Restriction contained in Section 149 on
commencement of business by a company does not
apply. A private company does not need a separate
certificate of commencement of business.
5. Provisions of Section 165 relating to statutory
meeting and submission of statutory report do not
apply.
6. One (if 7 or less members are present) or two
members (if more than 7 members are present) present
in person at a meeting of the company can demand a
poll.
7. In case of a private company which not a subsidiary
of a public limited company or in the case of a private
company of which the entire paid up share capital is
held by the one or more body corporate incorporated
outside India, no person other than the member of the
company concerned shall be entitled to inspect or
obtain the copies of profit and loss account of that
company.
8. Minimum number of directors is only two. (3 in case
of a public company)
The Company Law Board on being satisfied that the
infringe-ment of the aforesaid 3 conditions was
accidental or due to inadvertence or that on other
grounds, it just an equitable to grant relief, may grant
relief to the company from the consequences of such
infringement. The infringement of the aforesaid 3
conditions does not automatically convert a private
company into a public company. It continues to remain
private company; it merely ceases to be entitled to the
privileges
and exemptions available to a private company.
Companies Deemed to be Public Limited Company
A private company will be treated as a deemed public
limitedcompany in any of the following circumstances:-
1. Where at least 25% of the paid up share capital of a
private company is held by one or more bodies
corporate, the private company shall automatically
become the public company on and from the date on
which the aforesaid percentage is so held.
2. Where the annual average turnover of the private
company during the period of three consecutive
financial years is not less than Rs 25 crores, the private
company shall be, irrespective of its paid up share
capital, become a deemed public company.
3. Where not less than 25% of the paid up capital of a
public company limited is held by the private company,
then the private company shall become a public
company on and from the date on which the aforesaid
percentage is so held.
4. Where a private company accepts deposits after the
invitation is made by advertisement or renews deposits
from the public (other than from its members or
directors or their relatives), such companies shall
become public company on and from date such
acceptance or renewal is first made.
On the basis of the liability of the members, a company
canbe classified in
" Limited Companies
" Unlimited Companies
Limited Companies
Companies may be limited or unlimited companies.
Companymay be limited by shares or limited by
guarantee.
a. Company limited by shares In this case, the liability
of members is limited to the amount of uncalled share
capital. No member of company limited by the shares
can be called upon to pay more than the face value of
shares or so much of it as is remaining unpaid.
Members have no liability in case of fully paid up
shares.
b. Company limited by the guarantee A company
limited by guarantee is a registered company having
the liability of its members limited by its memorandum
of association to such amount as the members may
respectively thereby undertake to pay if necessary on
liquidation of the company. The liability of the
members to pay the guaranteed amount arises only
when the company has gone into liquidation and not
when it is a going concern. A guarantee company may
be a company with share capital or without share
capital.
Unlimited Company
The liability of members of an unlimited company is
unlim-ited. Therefore their liability is similar to that of
the liability ofthe partners of a partnership firm. It may
or may not have ashare capital.
Under the Companies Act, 1956, the name of a public
limitedcompany must end with the word _Limited_ and
the name of aprivate limited company must end with
the word _PrivateLimited_. However, under Section 25,
the Central Governmentmay allow companies to
remove the word _Limited / PrivateLimited_ from the
name if the following conditions aresatisfied :-
1. The company is formed for promoting commerce,
science, art, religion, charity or other socially useful
objects
2. The company does not intend to pay dividend to its
members but apply its profits and other income in
promotion of its objects.
On the basis of the control, we can classify company as
Holding and Subsidiary companies
Holding and Subsidiary Companies (Sec 4)
A company shall be deemed to be subsidiary of
anothercompany if: -
1. That other company controls the composition of its
board of directors; or
2. That other company holds more than half in face
value of its equity share capital
3. Where the first mentioned company is subsidiary
company of any company, which that other_s
subsidiary. eg Company B is subsidiary of the
Company A and Company C is subsidiary of Company
B, therefore Company C is subsidiary of Company
A.The control of the composition of the Board of
Directors of
the company means that the holding company has the
power atits discretion to appoint or remove all or
majority of directorsof the subsidiary company without
consent or concurrence ofany other person.
On the basis of the ownership, a company can be
classified as:
" Government Companies
" Non Government Companies
" Foreign Companies
Government Companies
It means any company in which not less than 51% of
the paidup share capital is held by the Central
Government or any StateGovernment or partly by the
Central Government and partly bythe one or more
State Governments and includes a companywhich is a
subsidiary of a government company. Government
Companies are also governed by the provisions of the
Compa-
Private Company / Public Company
Private company means a company which has a
minimum paid-up capital of one lakhrupees or such
higher paid-up capital as may be prescribed, and by its
articles,
(a) restricts the rights to transfer its shares, if any;
(b) limits the number of its members to fifty not
including-
(i) persons who are in the employment of the company,
and
(ii) persons who, having been formerly in the
employment of the company, weremembers of the
company while in that employment and have continued
to be membersafter the employment ceased; and
(c) prohibits any invitation to the public to subscribe for
any shares in, or debentures of,the company ;
(d) prohibits any invitation or acceptance of deposits
from persons other than its member,directors or their
relatives;Provided that where two or more persons hold
one or more shares in a company jointly,they shall, for
the purposes of this definitions, be treated as a single
member;
Public company means a company which -
(a) is not a private company;
(b) has a minimum paid-up capital of five lakh rupees
or such higher paid-up capital, asmay be prescribed;
(c) is a private company which is a subsidiary of a
company which is not a privatecompany.
• Every private company, existing on the
commencement of the Companies(Amendment) Act,
2000, with a paid-up capital of less than one lakh
rupees, shall,within a period of two years from such
commencement, enhance its paid-capitalto one lakh
rupees.
• Every private company, existing on the
commencement of the Companies(Amendment) Act,
2000, with a paid-up capital of less than five lakh
rupees,shall, within a period of two years from such
commencement, enhance its paidcapitalto five lakh
rupees.
• Where a private company or a public company fails to
enhance its paid-up capitalin the manner specified in
sub-section (3) or sub-section (4), such company shallbe
deemed to be a defunct company within the meaning of
section 560 and itsname shall be struck off from the
register by the Registrar.
2
• A company registered under section 25 before or after
the commencement ofCompanies (Amendment) Act,
2000 shall not be required to have minimum
paidupcapital specified in this section.
Formation of a Private Limited Company
A private Company can be formed either by
i. incorporation of a new company for doing a new
business , or
ii. Conversion of existing business of a sole proprietary
concern or partnership firm
into a company.
A sole proprietory or partnership business can be
converted into a company in any of thefollowing ways:
1. By outright sale of the business as a going concern. It
may be a block sale where thefollowing takes over all
the assets and liabilities of the firm or it may be partial
take overof certain assets and liabilities. The
consideration may be based on itemized sale or itmay be
on slump sale basis.
2. A company becoming a partner of the firm which will
be dissolved thereafter bymaking partners of the firms
the only shareholders of the newly incorporated
companyfor which the following steps should be taken:
(i) Form a private company as per the procedure.
(ii) The proprietor of the existing business alongwith
some other persons (generally,family members and
friends) or the partners of the existing firms, are the
subscribers to
the Company Memorandum of Association
(iii) Make the newly formed company a partner with
the sole-proprietor or the partners ofthe existing
business. For this purpose a fresh partnership deed is to
be executed.
(iv) Make a provision in the new partnership deed for
the transfer of all assets andliabilities of the firm to any
one of the partners who will pay off to the other
partners.
(v) Dissolve the partnership with the whole business
going to the company as the solecontinuing partner.
(vi) Every other partner of the firm (or the proprietor)
gets shares in the company in lieuof his interest in the
firm on dissolution.
Name
The name of a corporation is the symbol of its personal
existence. Any suitable namemay be selected subject,
however, to the following instructions:
i. No company can be registered with a name which in
the opinion of the CentralGovernment is undesirable.ii.
The name of the company should not be identical with
or should not too nearly
resemble, the name of another registered company, for
such name may bedeclared undesirable by the Central
Government.
3iii. Whatever be the name of the company if the
liability of the members is limitedthe last word of the
name must be ‘Limited’ and in the case of a private
company
‘Private Limited’
iv. Name of the Company must be printed on the
outside of every place where thebusiness of the company
is carried on. Such name including the address of
theregistered office, must also be mentioned on all
business letters and other officialpublications, on all
negotiable instruments issued or endorsed by the
company andon all other orders, receipts, etc.
Application for Availability of Name
• The promoters should select three to five alternative
names, quite distinct fromeach other.
• The names should suggest, as far as possible, the main
objects of the proposedcompany.
• The names should not too closely resemble with the
name of any other registeredcompany.
• The official guidelines issued by the Central
Government should be followedwhile selecting the
names. Besides, the names so selected should not violate
theprovisions of the Emblems and Names (Prevention of
Improper Use) Act, 1950.
• The Deptt. Of Company Affairs has advised the ROCs
to make arrangements forallowing the promoters and
their representatives to ascertain the availability
ofproposed names. This will ensure that the names
applied for would be madeavailable promptly when an
application for this purpose is made subsequently bythe
promoters
• Apply in form 1-A to the Registrar of Companies have
jurisdiction alongwith afiling fee of Rs. 500, to ascertain
which of the selected names is available .The feecan be
deposited in cash at the counter of the office of the
Registrar or by postalorder.
Company to be Registered within 6 Months of Approval
of the Name
• After scrutiny of the application for availability of
name and finding no objectionto the proposed name,
the Register of Companies informs the promoters to
theincorporation of company by that name within 7
days of receipt of application.• The promoters should
complete all other formalities for registration within
6months from the date of approval of name by
Registrar.
• Various documents required for the registration of
company must be filedsufficiently well before the period
of six months so that the company obtains thecertificate
of incorporation on a date which is within 6 months of
approval ofname, after these documents are vetted by
ROC.
4• If, for any reason the formalities cannot be
completed, the promoters should applyfor revalidation
of name by filling Form 1A afresh alongwith a request
letter onplain paper stating the reason together with a
fee of Rs. 500 giving completereference to the letter of
the Registrar.
• If none of the names suggested is available, the
promoters should apply againselecting fresh names, or
removing the objections raised, within a period of
onemonth from the date of the letter.
• If no action is taken within this period, on the rejection
of the name, nameavailability application is to be made
afresh alongwith a fee of Rs. 500 .
The promoters may, however, make representation the
Registrar’s refusal to thefollowing authoritiesnies Act.
However, the Central Government may direct thatcertain
provisions of the Companies Act shall not apply or
shallapply only with such exceptions, modifications and
adaptionsas may be specified to such government
companies.
Non Government Companies
It is controlled and operated by a private capital
Foreign Companies
By this, we mean a company incorporated in a country
outsideIndia under the law of that other country and has
establishedthe place of business in India.
There is another important type of company which is called
as
One Man Company
One man company is a company in which one man
holdspractically the whole of the share capital of the
company, and inorder to meet the statutory requirement of
minimum numberof members, some dummy members who
are mostly hisfriends or relations, hold just 1or 2 shares
each. It is like anyother company is a legal entity distinct
from its members. Thedummy members are usually
nominees of the principalshareholder who is the virtual
owner of the business and who
carries it on with limited liability.
Procedure of Conversion of a Private Company into
a Public Company
A private company must by law include the following
condi-tions in its Articles of Association :-
a. The right to transfer its shares is restricted
b. The number of members cannot be more than fifty. In
calculating such number, employees / ex-employees who
are also shareholders of the company are not to be
considered.
c. The company cannot invite subscriptions from the public
for subscribing to the share capital or debentures of the
company
d. The company cannot invite or accept deposits from any
member of the public other than members, directors and
their relatives
A company which is not a private company is a public
companyand need not be bound by the above restrictions.
In view ofthe restrictive conditions applicable to private
companies, often,it becomes necessary to convert a private
company to a publiccompany. This article aims to give the
procedure for suchconversion.
Following is the procedure to convert a private company
into a
public company :-
" Pass resolution in board meeting approving conversion
" Convene general meeting of members for alteration of
name
clause of Memorandum of Association and Articles of
Association and pass special resolution thereat.
" Make application to the Registrar of Companies (RoC)
for approving conversion to public company. The
application must be accompanied with the following
documents :-
i. Form No.23 (with requisite filing fees) for special
resolution
passed for conversion of Private Company into Public
Company u/s 44 of the Companies Act, 1956 and for
altering the Articles of Association u/s 31 of the
Companies
Procedure of Conversion of Public Company into
Private Company
A public company is subject to several legal provisions
which aprivate company is not required to comply with.
Since privatecompanies are generally owned by fewer
people and are closelyheld, several relaxations in law have
been made available toprivate companies. As a result, the
management may be of the
opinion that it would be preferable to convert a public
companyinto a private company. This article aims to give a
broadoverview of the procedure involved.
Following is the procedure to convert a public company
into a
private company :-
" Pass resolution in board meeting approving conversion
" Convenegeneral meeting of members for alteration of
name clause of Memorandum of Association and Articles
of
Association and pass special resolution thereat." Make
application u/s 31 of the Companies Act, 1956 to the
Registrar of Companies (RoC) for approving conversion to
public company. The application must be accompanied
with the following documents :-
i. Form No. 23 (with requisite filing fees) in respect of
special
resolution passed u/s 31 of the Companies Act, 1956 for
 alteration of Articles for converting Public Company into
Private Company along with a copy each of (a) Notice
calling

The process of forming a company can be divided into four

distinct stages:
a. Promotion
b. Registration or incorporation
c. Capital Subscription
d. Commencement of Business.
As regards a private company, it needs to go through the
firsttwo stages only. As soon as it receives the certificate of
incorpo-ration, it can commence business. This is so
because it cannotinvite the public to subscribe to its shares
and must arrange toraise the capital privately. But Public
Company has to go
through all of the four stages.
We shall now discuss each of these four stages.
Promotion
This is the first stage in the formation of a company. It
refers tothe entire process by which a company is brought
into existence.It starts with the conceptualization of the
birth of a companyand determination of the purpose for
which it is to be formed.Do you know what we mean by
promoters?
Promoters
The persons who conceive the company and invest the
initialfunds are known as the promoters of the company.
Thepromoters enter into preliminary contracts with vendors
andmake arrangements for the preparation, advertisement
and thecirculation of prospectus and placement of capital.
However, aperson who merely acts in his professional
capacity on behalf ofthe promoter (e.g. lawyer, CA, etc) for
drawing up the agree-ment or other documents or prepares
the figures on behalf of
the promoter but the person to whom the promoter pays
isnot a promoter.

Pre-Incorporation or Preliminary
Contracts
The promoters of a company usually enter
into contract toacquire some property or
right for the company, which is yet to be
incorporated. Such contracts are called Pre-
Incorporation orPreliminary Contracts
Registration of the Company
Once the documents have been prepared, vetted, stamped
andsigned, they must be filed with the Registrar of
Companies forincorporating the Company. The following
documents must be
filed in this connection: -
1. The Memorandum of Association duly signed by
subscribers and the Articles of Association, if any signed
by subscribers to the Memorandum of Association
2. An agreement, if any, which the company proposes to
enter into with any individual for appointment as its
managing director or whole-time director or manager.
3. In addition to the above, in case of a public company,
the following documents must also be filed: -
1. Written consent of directors in Form 29 to agree to
act as directors and their written consent to act as
directors and take up qualification shares.
2. The complete address of the registered office of the
company in Form 18.
3. Details of the directors, managing director and
manager of the company in Form 32.
4. A statutory declaration in Form 1 by an advocate,
attorney or pleader entitled to appear before the High
Court or a company secretary or Chartered Accountant
in whole - time practice in India who is engaged in the
formation of the company or by a person who is named
as a director or manager or secretary of the company
that the requirements of the Companies Act have been
complied with in respect of the registration of the
company and matters precedent and incidental thereto.
Certificate of Incorporation
Once all the above documents have been filed and they
arefound to be in order, the Registrar of Companies will
issueCertificate of Incorporation of the Company. This
document isthe birth certificate of the company and is proof
of theexistence of the company. Once, this certificate is
issued, thecompany cannot cease its existence unless it is
dissolved byorder of the Court.