Companies Act, 1956

By Subhashree Sahu

Meaning and Definition of a Company

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. Existing Company means a company formed and registered under any of the earlier Company Laws.

Characteristic Features
Separate Legal Entity Case: Salomon v. Salomon & Co. Ltd. Limited Liability However, liability of a company is never limited. Its liability of members only that is limited. Free Transferability of Shares Other Features: Perpetual Succession: Separate property and Common Seal.

Types of Companies
Private Company
Public Company

Private Company [Section 3(1)(iii)]

A private company means a company

which has a minimum paid up capital of one lakh rupees or such higher paid-up capital as may be prescribed and by its articles : (a) restricts the right to transfer its shares, if any; (b) limits the number of its members to 50, not including:

Private Company
(i)

contd.

persons who are in the employment of the company, and

the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased;

(ii) persons who, having been formerly in

(c) prohibits invitation to the public to

subscribe for any shares in or debentures of, the company; and

Private Company

contd.

(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.
Where two or more persons hold one or

more shares in a company jointly, they shall, for the purposes of membership, be treated as a single member.

Public Company [Section 3(1)(iv)]

A public company means a company which:

(a) is not a private company [In other words, it should not have the restrictions of Section 3(1)(iii) in its articles ]; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; and (c) is a private company, which a subsidiary of a company, which is not a private company.

How to form a company?

The whole process of formation of a

company may be divided into four stages, namely:

(i) Promotion (ii) Registration (iii) Floatation/Raising of Capital (iv) Commencement of Business.

Promotion

Who is a Promoter?
The term promoter is a term not of law but of business, usefully summing up, in a single word promotion, a number of business operations familiar to the commercial world by which a company is brought into existence.
However, the persons assisting the promoters by acting in a professional capacity do not thereby become promoters themselves.

Registration/Incorporation
Private Company
Minimum

Number of Members required 2.

Public Company
Minimum

Number of Members required 7.

Steps
1. Application for availability of name: Three names in order of priority conforming to the provisions of the Act and the Guidelines issued by Department of Company Affairs in this regard: Name to end with the word(s) Limited or Private Limited, as the case may be, except:
(i) Section 25 Companies (ii) Govt. Companies (need not use Pvt. Ltd.) (iii)Producer Companies.

Steps
Name

contd.

should not be identical or too similar to the name of an already existing company. Should not include the name of a registered trade mark.

2. Preparation of Memorandum and Articles of Association

Memorandum defines and limits the scope of activities of a company.

Steps
Contents of Memorandum
1.
2. 3.

contd.

Name clause Registered office clause Object clause

Doctrine of ultra-vires

4.

5.

Liability clause Capital clause

Steps

contd.

3. Preparation of other documents

Power of Attorney in favour of a professional to effect registration. Consent of Directors (in case of a Public Company) Particulars of Directors, Manager, Secretary, etc. in the prescribed form. Notice of registered address

To be supplied within 30 days of incorporation.

Steps
Statutory

contd.
Declaration

To the effect that all requirements of law with respect to incorporation have been duly complied with. The declaration to be signed by:
Advocate of Supreme Court or High Court; OR C.A../C.S. practising in India and associated with the formation of the company; OR Director, Manager, Secretary of the company (as named in the Articles)

4. Filing of documents with ROC

Raising of Capital
A company may raise capital

through

Private placement Issue of Prospectus

Private placement means raising of

capital from friends, relatives and through brokers.

Commencement of Business
(Section 149)
Where Company has issued a Prospectus:

a company cannot commence business or exercise borrowing powers unless:

(a) shares up to the amount of the minimum subscription have been allotted by the company; (b) every director of the company has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash,

Commencement of Business
contd.
the same proportion as is payable on application and allotment on the shares, offered for public subscription; (c) no money is, or may become, liable to be repaid to the applicants for shares or debentures offered for public subscription, for failure to obtain permission for the shares to be dealt in on any recognised stock exchange;

Commencement of Business
contd.
(d) there has been filed with the Registrar a duly verified declaration by one of the directors or the secretary or, where the company has not appointed a secretary, a secretary in whole time practice in the prescribed form that clauses (a), (b) and (c) (mentioned above) have been complied with.

Penalty:
Every person at fault may be fined upto

Rs.5,000/- for every day of default.

Memorandum of Association
Every company has to have a Memorandum

of Association. It contains, besides other significant information, the objects for which the company is formed. Object clause defines as well as confines the powers of the company. Anything done beyond these objects is ultravires the company and void.

Contents of Memorandum
1. Name Clause: It contains the name with
which company is proposed to be registered. Companies Act requires that:
(a)

(b)

The name chosen should end with the word Limited or the words Private Limited, as the case may be. The name should not be undesirable i.e., it should not be identical or too similar to the name of an already existing company OR include the name of a registered trade mark unless consent of the owner of the trade mark is obtained.

Contents of Memorandum
2. Registered Office Clause:
This clause states the name of the State in which registered office of the company is to be situated.

3. Objects Clause
This clause is to be divided into:
(a)

(b)

Main objects and objects incidental or ancillary to main objects Other objects

A company cannot commence any business stated under other objects unless special resolution by the shareholders is passed.

Contents of Memorandum
4. Liability Clause 5. Capital Clause
This clause states the authorised capital and the number of shares into which the same shall be divided.

Articles of Association
The articles of association of a company are its bye-

laws or rules and regulations that govern the management of its internal affairs and the conduct of its business. The articles regulate the internal management of the company. They define the powers of its officers. They also establish a contract between the company and the members and between the members inter se. This contract governs the ordinary rights and obligations incidental to membership in the company [Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. (1971)].

Companies which must have Articles

Unlimited Companies:
The

Articles of such a company must state:

Total number of members; and Share capital.

Companies limited by Guarantee:

Articles

of such company must state total number of members.

Companies which must have Articles contd.

Private Companies limited by shares:
must

include requirements of Section 3(1)(iii).

No Article Company
A public limited company having share

capital may be registered without Articles.

Difference
Articles Of Association is the document containing the

rules which governs the INTERNAL organization of a limited company. This must be filed with the Registrar of Companies together with the Memorandum Of Association. The Articles Of Association reflects the following: Organization and control Voting rights Conduct of directors meeting Conduct of shareholders annual general meeting Directors power Rights attached to the different classes of shares

Difference
contd.
The Memorandum Of Association is the document

filed with the Registrar of Companies before a limited company can become incorporated. It defines the EXTERNAL relationship of the company to the outside world. The details included in the Memorandum of Association are: The companys name, address and registered office Share capital The companys objectives

Prospectus
A prospectus, as per Section 2(36), means

any document described or issued as 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 or debentures of a body corporate.

Prospectus

contd.

Thus, a prospectus is not merely an

advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things:
(a) It invites subscription to shares or debentures or invites deposits. (b) The aforesaid invitation is made to the public.

What constitutes Invitation to Public

As per Section 67, Invitation to public

includes:

invitation to any section of the public howsoever selected provided the invitation is made to all the members of that section of public indiscriminately. Invitation calculated to be made available even to those who do not receive the same. Invitation to 50 or more persons.