THE

COMPANIES
ACT - 1956

LEGISLATIVE BACKDROP OF COMPANIES

ACT
The law relating to companies in INDIA is based on British
model.
The first piece of legislation relating to INDIAN companies
in 1850 is based on Joint Stock Companies Act, 1844 of
England.
Companies Amendment Act 1857 provided for registration
of companies with or without liability.
Companies Act,1866 replaced the Amendment Act 1857
After a series of Amendments Companies Act 1956 was
passed
Since 1956 -1988 13 amendments have been made

MEANING AND DEFINITION OF A

COMPANY

Sec 3 (1) of the companies act 1956 defines that a

company means a company formed and registered under
this act or an existing company
A company refers to an association of many persons who
contribute money or moneys worth to a common stock and
employ it in some trade or business and who share the
profit and loss arising there from
- Lord Justice Lindlay
Company is an incorporated association which is an
artificial person created by law, having separate legal
entity with a perpetual succession and common seal
- Henry

Features of a Company
1.
2.
3.
4.
5.
6.
7.
8.
9.

Registration / Incorporated association

Separate legal entity
Common Seal
Perpetuity
Limited Liability
Separation of ownership and mgt
Transferability of shares
Separate property
Capacity to sue and to be sued

LIFTING THE CORPORATE

VEIL
Circumstances under which the courts may lift
the corporate veil
A. Common law exceptions
1.
2.
3.
4.
5.
6.

Determination of character
Where company is a sham
Prevention of fraud or improper conduct
Where the company is acting as the agent of the
s.holders
Protection of revenue
Avoidance of welfare legislation

LIFTING THE
CORPORATE VEIL
B. Statutory exceptions
1.
2.
3.
4.
5.
6.

Number of members fall below statutory minimum

Failure to refund application money
Company not mentioned on a bill of exchange
Group accounts
Investigation into related activities
Fraudulent trading

Company & Partnership

distinguished
On the basis of .
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Registration
Separate legal entity
Right on property
Liability
Shares transferability
Perpetuity
Agent
Interference in affairs
Entering into contact
Powers
Members
Dissolution

Company & HUF

distinguished
On the basis of .
1.
2.
3.
4.
5.

Authority
Number of members
Basis of membership
Position of females
Homogeneous / Heterogeneous

Kinds of companies
Company

Registered co.

Statutory co.

Companies ltd by shares

Companies ltd by guarantee
Unlimited ltd companies
conti

Chartered co.
Public
&
Private

Classification of Registered companies

On the Basis of the Number of Members
a) Private Companies
b) Public Companies
On the Basis of ownership
a) Government Companies
b) Non Government Companies

On the Basis of Nationality

a) Domestic Company and
b) Foreign Company
On the Basis of Control
a) Holding Companies
b) Subsidiary Companies

PUBLIC AND PVT. CO.

DISTINGUISHED
On the basis of
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Formation
End words of the name
Membership
Prospectus
Allotment of shares
MOA and AOA
Preparation of Articles
Public issue of capital
Transfer of shares
Statutory meeting
Share warrant

..

Formation of a
Company
Incorporation
Documents to be filed with the Registrar
1.
2.
3.
4.
5.
6.
7.
8.

Memorandum of Association
Articles of Association
Agreement if any for appointment of M.D
Statement of nominal capital
Address of the Registered Office
List of directors and sign
Undertaking in writing to take and pay for his qualification
shares
Declaration

Memorandum of
Association-MOA
It is document which sets out the constitution of
the company and is the foundation of the
company. It contains the fundamental conditions
upon which the company is allowed to be
incorporated
Various Clauses in MOA-

1.
2.
3.
4.
5.

Name clause
Registered office clause
Objects clause
Liability clause
Capital clause

Alteration of MOA
1.
2.
3.
4.
5.

Change
Change
Change
Change
Change

of name
of Registered office
of Liability clause
in Capital clause
in Objects clause substantive limits
procedural limits

DOCTRINE OF ULTRA VIRES

Articles of AssociationAOA
AOA refers to the rules and regulations of a
company framed for the purpose of internal
management of its affairs.The AOA of a
company are sub-ordinate to and are controlled
by the MOA.
Companies which must have their own articles-

1.
2.
3.

Private companies limited by shares

Companies limited by guarantee
Unlimited companies

Contents of AOA
1.
2.
3.
4.
5.

6.
7.
8.

Number and value of

shares
Allotment of shares
Calls on shares
Lien on shares
Transfer and
transmission of
shares
Forfeiture of shares
Alteration of capital
Share certificates

9.
10.
11.
12.
13.
14.
15.
16.

Conversion of shares
into stock
Voting rights and
proxies
Meetings
Directors and their
appointment
Borrowing powers
Dividends and
reserves
Accounts and audit
Winding up

MOA

&

AOA distinguished

1.

MOA is a charter of the company defines scope and

activities
AOA regulates internal mgt

2.

MOA defines relation to the outside world

AOA deals with rights of the members

3.

MOA is the supreme document of the company

AOA is the subordinate to the memorandum

4.

MOA is necessary for all the companies

AOA is not required for the company limited by shares

5.

MOA cannot be altered except in the manner and

extent provided by the Act
AOA can be altered through a special resolution

PROSPECTUS
Definition
Sec 2(36) defines prospectus 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
Ingredients to be called prospectus 1.
2.
3.
4.

There must be an invitation offering to the public

The invitation must be made by or on behalf of the
company
The invitation must be to subscribe or purchase
The invitation must relate to shares or debentures

Objective of Prospectus

To inform the public about the formation of the

company
To induce the investors to invest in its shares and
debentures
To preserve the authentic record of the terms on which
the investors have been invited and to make the
directors responsible for the statements in the
prospectus

Statement in Lieu of PROSPECTUS

SHARE CAPITAL
The term share capital refers to the amount of
capital raised by a company through the issue of
shares
Features of Share capital:

1.

Share capital can be raised only by companies

limited by shares and registered with share capital.

2.

Share capital can be raised by a company either at

the time of its formation for starting its operations
or later on for further expansion

3.

Share Capital (Except in the case of redeemable

preference shares), once raised , cannot be
returned by the company to the shareholders as
long as it continues to exist.It can be returned only
at the time of the winding up of the company.

Classes of Capital
1.
2.
3.
4.
5.
6.
7.

Nominal,Registered or Authorized Capital

Issued capital
Subscribed capital
Called up capital
Paid up capital
Uncalled capital
Reserve capital

SHARES
Section 2(46) of the companies Act of 1956
defines a share as a share in the share capital
of a company and includes stock except where a
distinction between stock and share is expressed
or implied
According to this definition a share is a fractional
part or unit of the capital of a company.

Capital Structure of Shares

Equity

Cumulative

Preference

Deferred/Founders

Non-Cumulative

Participating
Non-participating
Redeemable
Non-redeemable

Preference & Equity shares

distinguished
On the basis of
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Right of receiving dividend

Right of receiving back their capital
Return
Voting rights
Control of management
Face value
Redeemability
Period of finance
Capital appreciation
Nature of capital
Interest in company

Debentures
The term debenture is derived from Latin term
deber meaning to owe So literally, debenture
means a document acknowledging a debt.
Debenture is an instrument issued by a company
under seal, acknowledging a debt to some person,
and containing an undertaking to repay the debt
after a specified date or on a particular date or at
the option of the company, and in the meantime , to
pay interest at a fixed rate and at regular intervals.
In short, a debenture is an instrument of credit, a
bond of indebtedness, a certificate of loan or an
acknowledgement of debts issued by a company.

Kinds of Debentures

Transferability Security

Registered
Bearer or
Unregistered

Redemption Convertibility

Simple or
unsecured
Mortgage or
Secured

Redeemable Convertible

Priority

First

Irredeemable Non-Convertible Second

Stock and Shares

Rights shares
Bonus shares
Share Certificate
Share Warrant
Forfeiture of shares
Lien of shares
Transfer of shares
Transmission of shares

MEETINGS

General Meetings

Board Meetings

Creditors Meetings

Annual general

Board meetings

Debenture holders

Extraordinary

Committee

Creditors [during

Statutory meeting

general
Class meeting

meetings

winding up]

Provisions of a valid meeting

Proper authority to convene a meeting.
Proper notice of the meeting
Quoram for the meeting
For General meeting U\S 174
2 members personally present in the case of a
private Co,& 5 members personally present in the
case of public co.
For Board meeting
In the absence of specific provisions in the articles
regarding the
quoram. 1\3rd of the total strength of the directors
or at least 2 directors whichever is higher.

Proxy It refers to a person who is authorized by

a member of a co to attend and vote at a meeting
of the co on his behalf.
In other words, a proxy is an agent of a share
holder authorized to attend & vote at a meeting
of the co.

Proper person in the Chair

Agenda of the meeting

Motion :A proposition or proposal put before a

meeting for
consideration & decision.
Method of Voting:a) By show of hands
b) by poll

Resolutions
When motion is passed in a meeting, it becomes a
resolution.
In other words it is the recorded decision of a meeting.
In short, it is the decision of a meeting on a motion.

Ordinary Resolution:- As per Sec 189(1) of co Act an

ordinary ordinary resolution is one which is passed by

a simple majority of votes of members present in
person or by proxy at a properly constituted &
convened general meeting.

Special Resolution:- Sec 189 (2) of the Co. Act, a

special Resolution is one which is passed by at least

3/4th majority of votes of members present in person
or proxy at a properly constituted & convened G.M.

Minutes of Meetings
Literally, minutes refer to a note to preserve the
memory of anything.
The minutes of a meeting are the written record
of the business transacted and decisions arrived
at a meeting.
U/S 193 of Co Act provides that every company
must keep minutes containing a fair and correct
summary of the proceedings.

Objectives ,Uses or Value of

Minutes
1.

Clear, concise and accurate record

2.

Permanent record of the proceedings and the

decisions reached at a meeting.

3.

Reminder of The subjects previously dealt with

and the conclusion reached.

4.

They are accepted in a court of law as a

evidence of the proceedings of a meeting.

5.

Information to the absentee members.

Statutory Meeting
Statutory meeting is the first official general Meeting
of the shareholders of public co ltd by shares or a
public co ltd by guarantee & having share capital.
Provisions
1.

Notice.

2.

Statutory Report.

3.

A certified copy of the Statutory report must be filed

with the registrar of companies.

4.

At the meeting , a list showing the names, addresses &

occupations of the members & the number of share
held by them must be placed by the board of directors.

5.

Default.

Statutory Report
This is a report drafted by directors and certified as
correct by at least 2 of them including the managing
director.
U/S
165 (3) of the Companies Act of 1956, the
statutory report must contain the following matters:
1.

Total no of shares allotted.

2.

An abstract of Receipts and payments.

3.

Particulars of directors, managing directors etc.

4.

Underwriting contracts.

5.

Calls in arrears.

6.

Commission or brokerage.

Objects of Statutory meeting.

1.

To know the progress of the Co.

2.

To discuss the finances of the Co.

3.

To help the members to know one another.

Annual General Meeting

Annual General meeting is a meeting of the share
holders which is held every year.

Provisions
1.

U/S 166 every co public or private , must hold an

annual G.M of shareholders every year.

2.

The first A.G.M. of a co. must be held within 18

months from the date of its incorporation.

3.

Every subsequent A.G.M must be held each year

within 6 months after the closing of the financial year.
Of the co & within 15 months from the date of the
previous A.G.M.

4.

The meeting must be held on a working day during

the business hours at the Registered office of the co.

5.

Notice.

WINDING UP OF
COMPANIES
Modes of Winding Up
By the Court Compulsory winding up

1.

i.
ii.
iii.
iv.
v.
vi.

Special resolution
Default in filing statutory report or holding
statutory meeting
Failure to commence business with in time
Reduction of membership
Inability to pay debts
Just and equitable clause of the court

2. Voluntary winding up
i.
ii.

Members voluntary w. up (declaration of

solvency)
Creditors voluntary winding up

3. Winding up under the supervision of the court

Petition for Winding Up

1.
2.
3.
4.
5.

The company
Any creditor or creditors including any
contingent or prospective creditor or creditors
Any contributor or contributories
The Registrar
Any person authorized by the central
government

The Largest Public Company

Bankruptcies - 2002
Company

Bankruptcy Date

Assets

WorldCom,Inc.

7/21/2002

$103,900,000,000

Conseco, Inc.

12/18/2002

$61,392,300,000

Global Crossing, Ltd.

1/28/2002

$30,185,000,000

UAL Corp. (United Airlines, Inc. parent)

12/9/2002

$25,197,000,000

Adelphia Communications Corp.

6/25/2002

$21,499,480,000

Kmart Corp.

1/22/2002

$14,630,000,000

5/8/2002

$13,026,100,000

U.S. Airways, Inc.

8/11/2002

$7,941,000,000

XO Communications, Inc.

6/17/2002

$7,930,470,000

Williams Communications Group, Inc.

4/22/2002

$5,992,030,000

McLeodUSA, Inc.

1/30/2002

$4,755,100,000

Budget Group, Inc.

7/29/2002

$4,469,500,000

National Century Financial Enterprises, Inc.

11/18/2002

$3,800,000,000

Asia Global Crossing, Ltd.

11/18/2002

$3,632,540,000

2/12/2002

$3,364,300,000

NTL, Inc.

Kaiser Aluminum Corp.

Source: www.bankruptcydata.com

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