Meaning Of A Company

Company is a voluntary association of persons formed for the purpose of doing business
having a distinct name and limited liability. It is a juristic person having a separate legal
entity distinct from the members who constitute it, capable of rights and duties of its own
and endowed with the potential of perpetual succession. The Companies Act, 1956, states
that 'company' includes company formed and registered under the Act or an existing
company i.e. a company formed or registered under any of the previous company laws. 

However, company is not a citizen so as to claim fundamental rights granted to citizens.

Company is a 'juristic person' and it can file a suit as an 'indigent person'

An Expression 'person' includes not merely a natural person but also other juridical persons.
A company being a juristic person would be represented before a Court of law or any other
place by a person competent to represent it. It is enough that the person competent to
represent a company presents the application on behalf of the company. Minors, lunatics or
person under any disability are also entitled to file a suit either through guardian or the next
friend. In such a case it is the guardian or next friend who is competent to represent the
petitioner. 

Company is a separate legal entity

Company is separate legal entity distinct from its shareholders. The major constituents of a
company are its members, who are the ultimate owners and its directors. It is an important
feature of the company form of business, that there is a gap between the ownership and
control over the affairs of the company. In real sense the members are the owners of a
company, but it is being managed by the directors who are elected representatives of its
members, because it is absolutely necessary for it to have a human agency called as the
Company's board of directors. The Board of Directors comprises the directors.

Features of a company 

A company registered under the Companies Act has the following features:-

1. Separate legal entity;

2. Incorporated body ;
3. Artificial legal person;
4. Perpetual succession;
5. Limited liability;
6. Common seal;
7. Right to own property;
8. Right to sue;
9. Right to enter in to contracts;
10. Flexibility of investment;
11. Separation of control from the ownership.

Advantages
1. A company is a legal entity, distinct and independent of those persons who from time
to time are its members.

2. The liability of the company’s members can be limited to the extent they have agreed
to contribute towards the capital of the company with reference to the number of
shares and/or the amount of guarantee respectively undertaken by them.

3. As the company is having an independent personality of its own, its members are not
personally liable for any act or omission on the part of the company, unless the law
expressly provides otherwise.

4. The company being a juristic person, distinct from the members constituting it, can
acquire, own, enjoy and alienate property in its own name. As such the property would
be that of the company and no member can make any claim upon it so long as the
company is a going concern.

5. The company being a legal entity can sue and also be sued in its own name.

6. The continuity of the company and its functioning is not effected by the death,
disability or retirement of any its members. The company continues to exist,
irrespective of change in its membership. It is commonly referred to as “perpetual
succession”.

7. Transfer of member’s interest in the company can be readily attained without in any
way adversely affecting its property, business, or existence.

8. Transferability of the company’s shares provides an element of liquidity to the

investors in respect of their investment in the shares of the company and thus facilities
increased investment in the company’s fund without, in any way, adversely affecting its
economic stability.

9. The members of the company equitably share the profit by way of divided and the
company’s assets in the event of its winding up in proportion of the capital respectively
contributed by them. 

10. Shares of small denomination afford an opportunity to the small investors to invest
according to their capacity.

11. Increased investment in the company’s funds is further ensured by permitting large
 number of persons to subscribe to the company’s shares. Incorporation of a company
affords better opportunity for strengthening capital resources, growth and
development of the enterprise.

12. The corporate form of business organisation affords opportunity for professionalisation
of its management and entrusting the administration of its affairs to persons of
professional competence and standing.

13. Arrangements between the company and its members are comparatively similar to
those of other forms of organisation. For example, a company may make a valid and
effective contract with one of its member. It is also possible for person in control of a
company, to be in its employment as an employee, subject to the provisions of the Act.

14. Incorporation of company provides better borrowing facilities as the company can raise
large amount, on comparatively easier terms, by issue of debentures, especially those
secured by a floating charge or by accepting deposits from the public. Even banking and
financial institutions prefer to render financial assistance to incorporated companies.

15. In certain cases, an incorporated company comparatively stands in a better position

from the point of view of taxation on its income.

16. Once the company is brought in to existence on its incorporation, it can only be
dissolved with the provisions of the law.

Classification Of Companies
Companies under the Companies Act, 1956 may be classified on various grounds as under:
 
I. On the basis of business activities undertaken:
Companies

         
(1)      (2)            (3)             (4)  (5)
Non-Banking Non-profit
Manufacturing Service  Producer
Finance making 
Activities Activities (Section 581 A)
Activities (Section-25)
 
 

II. On the basis of liabilities of the members and directors:

Companies

 
 With Limited liability With unlimited liability
(1) (2)
      
(a) (b) (c)
Limited Limited by Limited by
By shares Guarantee &  Guarantee
having share 
capital
 
 
III. On the basis of membership pattern/size
Companies

     
(1) (2) (3)
Public Private Government
      
(a)   (b) (a)   (b)
Unlisted   Listed  Inde- Subsidiary
pendent   of Public
Co.
 
 
IV. On the basis of place of registration:
Companies

     
(1) (2)
Indian Company Foreign Company
(Incorporated in India) (Company incorporated outside
India but having place of 
business in India)
 
 
V. On the basis of control over the management:
Companies

     
(1) (2)
(Holding Company) (Subsidiary Company)
PRIVATE COMPANY
Section 3(1) (iii) defines a private company as one which—
(a) has a minimum paid-up share capital of Rs.1 Lakh or such higher capital as may be
prescribed;and
   
(b) by its Articles Association:
1. restricts the right of transfer of its share;
2. limits the number of its members to 50 which will not include:-
A. members who are employees of the company; and
B. members who are ex-employees of the company and were members while in
 
such employment and who have continued to be members after ceasing to be
 
employees;
3. prohibits any invitation to the public to subscribe for any shares or debentures of
the company; and
4. Prohibits any invitation or acceptance of deposits from persons other than its
members, directors or their relatives.
 
PUBLIC COMPANY
The Company defined under section 3(1)(iv) of the Companies Act, 1956 is a public company
which-
1. is not a private company;
2. has a minimum paid-up capital of Rs. 5 lakhs or such higher capital as may be
  prescribed;
3. is a private company but subsidiary of a public company.
   
Private Companies deemed to be Public Companies
Certain private companies are deemed to be public companies by virtue of section 43 A, viz.-
1. when 25% or more of its paid-up share capital is held by one or more body corporate;
2. when its average annual turnover (during the last 3 years) exceeds Rs. 25 crores;
  3. when it holds 25% or more of the paid-up share capital of Public Company; or
4. when it accepts or renews deposits from the public after making an invitation by an
advertisement.
BOARD MEETINGS

1. Periodicity of the Board Meetings

Section 285 of the Act provides that every company, private or public, shall hold at least one
meeting of the Board in a period of three months and four meetings in a year. But a
company registered under section 25 of the Companies Act, has privilege that the Board or
the Governing Body may meet at least once in six months.

2. Interval between two Board Meetings

The Expression ‘every three months’occuring in section 285 naturally means three months
taken together. Provisions of section 285 will be fulfilled if the Board of directors meet on
the first of January, or the 31st March or any date in between. Next three months should
naturally comprise April to June. It is open to the Board of directors to meet on any date
during three months from April to June. Similarly, the Board may, at least, meet on a
particular date during July to September and so on. In section 285 there is no scope for
making backward calculation.
 
3. Day of holding meeting
Board meetings are normally held during business hours and on a day, which is not a public
holiday. However, a Board meeting may validly be held on public holiday. Department has
clarified vide Letter No. 8/11(285)/63-PR, dated 2-5-1963 that it would not raise any
objection if an original Board meeting is held on a public holiday for the convenience of the
directors although it considers that an original Board meeting should normally be held only
on a working day.

4. Time of holding Board meetings

Board meetings can be held during business hours or outside business hours. There is no
restriction on that matter under the Act.

5. Place for holding Board Meeting

Board meetings can be held at any place whether it be a company’s registered office or head
office or any other premises and whether or not it is within the same city, town, village or
state in which the registered office of the company is situated. Board meeting can also be
held at places other than these places including abroad.

Minutes
Minutes can be classified into the following three types on the kind of meeting to which they
relate:-
 1. Minutes of Board meetings
2. Minutes of meetings of committee of the Board
3. Minutes of General meetings

Minutes -- Meaning
The term ‘minutes’ though not defined in the Companies Act, 1956, may be considered as a
written record of proceedings of a meeting of any Company duly kept in pursuance of the
law. Minutes contain inter alia a description of the type of meeting to which they relate, its
date, time and venue, mention about persons attended the meeting concerned,
confirmation of minutes of previous meeting as a result of practice, decisions taken, process
at the meeting, discussions held, voting on resolutions, etc.

Minutes may also be defined as the written record of the business transacted at the
meetings. Minutes record what was done at the meeting. i.e. decision taken at the meeting,
therefore, the minutes should contain record of the business transacted at the meeting as a
whole and should exclude any reference to conduct or events which are not themselves
items of transacted business.
 

Directors
“Director” includes any person occupying the position of director, by whatever name
called;
 It is not the name by which a person is called but the position he occupies and the functions
and the duties which he discharges that determine whether in fact he is a director or not.
 An executive of the company, who is designated as executive director, but who is not a
member of the Board, is not a director.

Legal Position Of Directors

 Directors as agents - Directors may correctly be described as agents of the company.
Cairns, LJ observed: "The company itself cannot act in its own person; it can only act
through directors, and the case is, as regards those directors, merely the ordinary case of
principal and agent".
 Directors as trustees - Directors are regarded as trustees of the company's assets, and of the
powers that vest them because they administer those assets and perform duties in the
interest of the company and not for their own personal advantage.
 Directors as managing partners - The persons holding this view consider company as large
partnership, directors being charged with the responsibility of managing the affairs. The
other shareholders are virtually dormant partners. By virtue of the various provisions in the
Memorandum and Articles, they enjoy vast powers of management and act as the supreme
policy and decision-making body.

Constitution of board of directors

Minimum number of directors (Section 252)
 Every public company shall have at least three directors:
 The small shareholders of a public company may elect a director (Small shareholder
Director), —
 a paid-up capital of Rs. 5 Crore or more;
 1,000 or more small shareholders,
“Small shareholders” means a shareholder holding shares of nominal value of Rs. 25,000 or less
in a public company.
 A private limited company shall have at least two directors.

Provisions regarding appointment of directors

Who may be appointed as a Director?

 Only individuals shall be eligible to be appointed as director.

Provision in Articles for number of directors beyond 12
 Increase or reduce the number of directors - a company in general meeting may, by
ordinary resolution, increase or reduce the number of its directors within the limits fixed in
the articles. However, any increase or provision thereof in number of directors beyond 12
 shall require prior approval of Central Government.
 Appointment of directors to be voted on individually.
 Penalty for default - Any increase in the number of directors without approval of Central
Government shall be void.
Appointment of a director other than a retiring director [Section 257]
 A person wishing to stand for holding the office of director liable to retire by rotation
(excludes addition, casual, alternate or nominee director) of a company must signify his
intention, in writing, to do so. A refundable security deposit of Rs. 500/- shall also be
deposit there along. The nomination may be proposed by that person himself or any
member of the company.
 This should be lodged with the company at least 14 days` before the general meeting of the
company. The company shall accordingly inform its members through a newspaper
advertisement published at least 7 days` before the general meeting.
Consent for directorship to act as director [Section 264]

 Every person proposed as a candidate for the office of the director shall sign and file with
the company his consent to act as a director, if appointed.
 Such a person shall also file his consent with the ROC within 30 days of his appointment as
director of the company.
Exception – the consent shall not be required to be filed in the case of

(i) A director reappointed after retirement by rotation or immediately on the expiry of

his term of office;
(ii) An additional or alternate director or a person filing a casual vacancy
(iii) A director named as director of the company under its articles as first registered.
Exempted companies
 Private companies
 Government companies
 Section 25 companies
Share qualification [Section 270]

 Where the Articles of Association of a company prescribe any number of shares as the
minimum qualification for holding the office of directorship in the company, every person
shall hold within 2 months and continue to hold such number of shares of his appointment
as director. If the articles do not require a share qualification, the shareholders may elect as
a director, any person not otherwise disqualified. Or the articles may prescribe that a
technical or finance or other special director need not possess any share qualification.
Exception

 The section does not apply to a private company.

Appointment of directors
 Directors may be appointed in the following manner: -
 By the Articles - The first directors are usually appointed by name in the articles or in
the manner provided therein. Where the articles are silent, the subscribers to the
memorandum, who are individuals, shall be deemed to be the first directors of the
company. They shall hold office until the first directors pursuant to Sec 255 are
appointed.
 By the Board of Directors
1. Additional director – if the Articles authroise, the Board may appoint additional
directors. Such directors together with other directors should not exceed the
maximum number of directors fixed by the articles. Additional directors hold the
office only upto the date of the next AGM.
2. Filling up casual vacancies – the Board may fill casual vacancies in the case of a
public company. A casual vacancy is one that arises due to the resignation, death,
removal or disqualification of the office of a director. The Casual director holds such
office upto the original director would have other wise held that office demitted.
3. Alternative director - the Board if so authrorised by the articles or by a resolution
passed by the company in general may appoint an alternate director. Alternate
director may be appointed in place of a director during the absence of original
director for a period of not less than 3 months from the State in which meetings of
the Board are ordinarily held. The alternate director merely fills a temporary
vacancy. Such a director is accordingly not counted toward maximum number of
directors, which a person can hold, nor of the limit prescribed under articles of the
company.
 By the Shareholders
1. Directors liable to retire by rotation – a public limited company shall atleast 2/3rd
directors whose office shall be liable to determination by rotation (Sec. 255). Sec.
256 provides that 1/3rd of such directors (2/3rd) shall retire at an AGM. Those
directors who have been longest in the office shall retire first. The vacancies caused
by the retiring directors should be filed at the same AGM or at an adjourned
meeting. If it is not so done, the retiring director shall be deemed to have been
appointed at the adjourned AGM. There are however, certain exceptions to such
automatic appoint.
2. By proportional representation – if the articles so provide, all the directors may be
appointed through a single transferable vote by way of proportionate
representation on the Board.
 By the Central Government /Tribunal
Where the Tribunal comes to the conclusion that the affairs of the company are
being conducted in a manner prejudicial to the interest of the company or public
interest, it may direct the Central Government to appoint director. Such directors
are called Special Director and hold office at the pleasure of the Central
Government.
 By third parties (Nominee director)
There may be certain contractual obligations on the part of a company to appoint a
director. It may arise due to term loan agreement with a financial institution/bank
 or joint venture partner.

Disqualification of directors (section 274)

 A person shall not be capable of being appointed director of a company, if a person is
—
(a) found to be of unsound mind by a Court and the finding is in force;
(b) undischarged insolvent;
(c) applied to be adjudicated as an insolvent and his application is pending;
(d) convicted by a Court of any offence involving moral turpitude and sentenced to
imprisonment for more than six months, and a period of five years has not elapsed
from the date of expiry of the sentence;
(e) not paid any call in respect of shares of the company and six months have elapsed from
the last day fixed for the payment of the call;
Exception
 The Central Government may, by notification in the Official Gazette, remove any
disqualification mentioned in clause (d) and (e).
 A private company may in its articles provide for additional grounds for
disqualification
(f) disqualified by a Court order and is in force, exception where he has been so permitted
by the court to continue or
(g) a person shall not be qualified to be appointed as a director of any other public
company (second company) for a period 5 years in case he is a director of a public
company (first company) and the first public company has :-
(A) not filed the Annual accounts and Annual returns for 3 continuous financial
years (commencing from 1st April 1999); or
(B) failed to repay its deposit or interest thereon on due date or redeem its
debentures on due date or pay dividend and such failure continues for one
year or more:
 The Central Government has issued Companies (Disqualification Of Directors Under Section
274(1)(G) of the Companies Act, 1956) Rules, 2003. Accordingly, it shall be the duty of
 Statutory auditor of the appointing company as well as disqualifying company to mention
in their Report about compliance of this section.
 The defaulting company as well as its Directors have to immediately submit prescribed
return to ROC for the purpose
 The name of the defaulting company and Directors shall be displayed on the web site of
the DCA.
 Exemption - Nominee Directors appointed by FI/Banks in Sick Industrial undertakings.
Restrictions on number of directorships
 No person shall hold office of director in more than 15 companies at the same time.
Exemption – persons holding the office of director in the following companies/capacity shall be
excluded
(a) a private company;
(b) an unlimited company;
(c) Section 25 companies;
(d) an alternate director.

Vacation of office by directors (section 283)

 The office of a director shall become vacant (automatic vacation) if—
(a) fails to obtain within two months or at any time thereafter ceases to hold, the share
qualification, if any, required of him by the articles of the company;

(b) found to be of unsound mind by a Court of competent jurisdiction;

(c) applies to be adjudicated an insolvent;
(d) adjudged an insolvent;
(e) convicted by a Court of any offence involving moral turpitude and sentenced in respect
thereof to imprisonment for not less than six months;
(f) fails to pay any call in respect of shares of the company held by him, within six months
from the last date fixed for the payment of the call;
(g) absents himself from three consecutive meetings of the Board of directors, or from all
meetings of the Board for a continuous period of three months, whichever is longer,
without obtaining leave of absence from the Board;
(h) he (whether by himself or by any person for his benefit or on his account), or any firm in
which he is a partner or any private company of which he is a director, accepts a loan, or
any guarantee or security for a loan, from the company in contravention of section 295;
(i) does not disclose his interest in any contract entered into by the company (contravention
of section 299);
(j) becomes disqualified by an order of Court;
(k) he is removed by the shareholders (section 284); or
(l) having been appointed a director by virtue of his holding any office or other employment
in the company, he ceases to hold such office or other employment in the company
 In addition to the above grounds, a director may also be removed by the Central
Government and Tribunal directions. The disqualifications in clauses (d), (e) and (j) shall not
take effect for 30days from the date of the adjudication, sentence or order or pendency of
any appeal. A private company may, by its articles, provide for additional grounds for
vacation of office of director.
 Compensation for loss of office - An ordinary director may not be entitled to compensation
for loss of office for the remaining term. Managing Director if removed may however be
entitled for compensation.
Resignation by a director

 There is nothing in the Companies Act as to whether, and by what procedure, a director can
resign. The Act, however, indirectly recognises the right of resignation. Notice may be
written or oral. The resignation will become effective from the date the director intends to
 resign.
 Articles of association usually provide for resignation by a director by giving written notice
to the company.

Appointment and remuneration of managing/whole time director

 The management of the affairs of the company are vested with the Board of Directors. In
actual practice, the substantial powers of the Board are vested with the managing director
or manager or whole time directors who are responsible for day-to-day activities of the
company.
Managing director - “a director who by virtue of an agreement with the company or of a
resolution passed by the company in the general meeting or by its Board of Directors or by
virtue of its memorandum or articles of association, is entrusted with substantial powers of
the Board which would otherwise be not exercisable by him.

Manager - an individual who subject to the superintendence, control and direction of the Board
of Directors, has the management of the whole, or substantially the whole, of the affairs of the
company, and includes a director or any other person occupying the position of a manager, by
whatever name called and whether under a contract of service or not.

Whole time director - A director who is in the whole time employment of the company.

 Every company having a paid up capital of more than Rs. 5 Crores shall appoint a managing
director or manager or whole-time director. The managing director may be appointed for a
maximum period of 5 years subject to re-appointment for a further period of 5 years at a
time.
 Simultaneous appointment of managing director and manager is not permissible.
 The appointment and remuneration of a managing director or manager or whole-time
director shall be in accordance with the conditions specified in Schedule XIII. Otherwise, the
approval of Central Government should be obtained for the appointment.