COMPANIES ACT, 1956

Introduction

A company is a form of business organization. The definition of the term varies by country. In
general, a company is same as a corporation.

Which is a union of natural persons that has its own legal status that is independent from the
persons involved. It is a "creature" of statute; i.e., it is like a person created by law. Because it is
recognized by governments as such (as a separate creature) it must file tax returns and pay taxes
and conform to state and federal law. This separation of persons and corporation gives it special
powers. Its status and capacity is determined by the law of the place of incorporation.

A corporation is defined as a legal entity or structure created under the authority of a state's laws,
consisting of a person or group of persons who become shareholders.

The entity's existence is considered separate and distinct from that of its members.

Like a real person, a corporation can enter into contracts, can sue and can be sued, can pay taxes
separately from its owners and do the other things necessary to conduct business.

Features:

1. Independent corporate existence

2. Perpetual succession

3. Limited liability

4. Transferable shares

5. Separate property

6. Power to sue / sued

7. Common seal

8. Separate management

Types of Companies:

1. Private company

2. Public company

3. Limited Company:

A) Limited by shares

B) Limited by guarantee
4. Unlimited companies

5. Association not for profits

6. Government companies

7. Holding companies

8. Subsidiary companies

1. Private Company:

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

2. Public Company:

Public company means which is

a) is not a private company;

b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be
prescribed;

c) is a private company which is a subsidiary of a company which is not a private company.

3. Limited Company:

A) Company Limited by Guarantee:

Commonly used where companies are formed for non-commercial purposes, such as clubs or
charities. The members guarantee the payment of certain (usually nominal) amounts if the company
goes into insolvent liquidation, but otherwise they have no economic rights in relation to the
company. This type of company is common in England.
B) Company Limited by Shares:

The most common form of company used for business ventures. Specifically, a limited company is a
"company in which the liability of each shareholder is limited to the amount individually invested"
with corporations being "the most common example of a limited company .This type of company is
common in England.

Limited Liability Company:

"A company—statutorily authorized in certain states—that is characterized by limited liability,

management by members or managers, and limitations on ownership transfer",

An unlimited liability company. A company where the liability of members for the debts of the
company are unlimited. Today these are only seen in rare and unusual circumstances.

Incorporation of a Company:

The incorporation of a Company is governed by the Companies Act 1956. The Companies Act is an
Act to consolidate and amend the law relating to companies and certain other associations. It
extends to the whole of India. Chapters I and II deal with the incorporation of a company and
matters incidental thereto.

Advantages:

1. Limited Liability: One of the key reasons for forming a corporation is the limited liability protection
provided to its owners. Because a corporation is considered a separate legal entity, the shareholders
have limited liability for the corporation's debts. The personal assets of shareholders are not at risk
for satisfying corporate debts or liabilities.

2. Corporate Person: Since a corporation is a separate legal entity, it pays taxes separate and apart
from its owners (at least in the typical C corporation). Owners of a corporation only pay taxes on
corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays
taxes, at the corporate rate, on any profits.

3. Attractive Investment: The built-in stock structure of a corporation makes it attractive to

investors.

A) Capital incentive.

B) Flexibility & autonomy

C) Capacity to sue

4. Operational Structure: Corporations have a set management structure. The owners of a

corporation are shareholders, who elect a Board of Directors, which then elects the officers. Other
than the election of directors, shareholders do not participate in the operations of the corporation.
The Board of Directors is responsible for managing and exercising the rights and responsibilities of
the corporation. The Board sets corporate policy and the strategy for the corporation.

5. Perpetual Existence: A corporation continues to exist until the shareholders decide to dissolve it
or merge with another business.

6. Freely Transerable Shares: Shares of corporations are freely transferable, because as a separate
entity, the existence of a corporation is not dependent upon who the owners or investors are at any
one time. A corporation continues to exist as a separate entity, and is not terminated or dissolved
even when shareholders die or sell their shares.

Disadvantage of incorporation:

1. Formalities ,expenses

2. Corporate disclosure

3. Divorce of control

4. Increased social responsibility

5. Greater tax burden

Case:

Salomon v. Salomon & Co. Ltd is a foundational decision of the House of Lords in the area of
company law

Background:

Aron Salomon was a successful leather merchant who specialized in manufacturing leather boots.
For many years he ran his business as a sole proprietor. By 1892, his sons had become interested in
taking part in the business. Salomon decided to incorporate his business as a Limited company,
Salomon & Co. Ltd.

At the time the legal requirement for incorporation was that at least seven persons subscribe as
members of a company i.e. as shareholders. The shareholders were Mr. Salomon, his wife, daughter
and four sons. Two of his sons became directors; Mr. Salomon himself was managing director. Mr.
Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared individually
between the other six shareholders. Mr. Salomon sold his business to the new corporation for
almost £39,000, of which £10,000 was a debt to him. He was thus simultaneously the company's
principal shareholder and its principal creditor.

When the company went into liquidation, the liquidator argued that the debentures used by Mr.
Salomon as security for the debt were invalid, on the grounds of fraud.
HELD: J.V. Williams J. accepted this argument, ruling that since Mr. Salomon had created the
company solely to transfer his business to it, the company was in reality his agent and he as principal
was liable for debts to unsecured creditors.

Piercing Corporate Veil

Ultra vires is a Latin phrase that literally means "beyond the powers". Its inverse is called intra vires,
meaning "within the powers". It is used as a legal term in a number of common law contexts. In
corporate law, ultra vires describes acts attempted by a corporation that are beyond the scope of
powers granted by the corporation's Charter or in a clause in its ; in the laws authorizing its
formation, or similar founding documents. Acts attempted by a corporation that are beyond the
scope of its charter are void or voidable.

The corporate law concept of piercing (lifting) the corporate veil describes a legal decision where a
shareholder or director of a corporation is held liable for the debts or liabilities .

Piercing the corporate veil is not the only means by which a director or officer of a corporation can
be held liable for the actions of the corporation. Liability can be established through conventional
theories of contract, agency, or tort law. For example, in situations where a director or officer acting
on behalf of a corporation personally commits a tort, he and the corporation are jointly liable and it
is unnecessary to discuss the issue of piercing the corporate veil. The doctrine is often used in cases
where liability is found, but the corporation is insolvent.

Factors for piercing the veil

1. Absence or inaccuracy of corporate records;

2. Concealment or misrepresentation of members;

3. Failure to maintain arm's length relationships with related entities;

4. Failure to observe corporate formalities in terms of behavior and documentation;

5. Failure to pay dividends;

6. Intermingling of assets of the corporation and of the shareholder;

7. Manipulation of assets or liabilities to concentrate the assets or liabilities;

8. Non-functioning corporate officers and/or directors;

9. Other factors the court finds relevant

Formation of Company:

Promotion
Preparation of memorandum of association

Preparation of articles of association

Preliminary Contract

Registration of company

Issue of prospectus

PromotionPromotion of company is the process of conceiving an idea and developing it into

concrete proposition or project.

Memorandum of associationThe memorandum of association of a company, often simply called the

memorandum (and then often capitalised as an abbreviation for the official name, which is a proper
noun and usually includes other words), is the document that governs the relationship between the
company and the outside world

A memorandum of association is required to state the name of the company, the type of company
(such as public limited company or private company limited by shares), the objectives of the
company, its authorised share capital, and the subscribers (the original shareholders of the
company). A company may alter particular parts of its memorandum at any time by a special
resolution of its shareholders, provided that the amendment complies with company law .

THERE ARE DIFFERENT CLAUSES TO BE MENTIONED IN THE MOA :

NAME CLAUSE

REGISTERED OFFICE CLAUSE

OBJECT CLAUSE

LIABILITY CLAUSE CAPITAL CLAUSE

Purpose

The MOA is designed to communicate to the public the state of affairs of the company and its
purpose of being and operating. This aids various stakeholders of the company (creditors, suppliers,
shareholders, etc.) to evaluate the extent of their risk and also possibilities of the company to
overcome them at a future date.

Articles of associationThe articles of association of a company, often simply referred to as the

articles, are the regulations governing the relationships between the shareholders and directors of
the company

EFFECT OF MEMORANDUM AND ARTICLES.

(1) Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind
the company and the members thereof to the same extent as if they respectively had been signed by
the company and by each members, and contained covenants on its and his part to observe all the
provisions of the memorandum and of the articles.
(2) All money payable by any member to the company under the memorandum or articles shall be a
debt due from him to the company

Incorporation by registration

(1) Any seven or more persons, or where the company to be formed will be a private company, any
two or more persons, associated for any lawful purpose may, by subscribing their names to a
memorandum of association and otherwise complying with the requirements of this Act in respect
of registration, form an incorporated company, with or without limited liability.

(2) Such a company may be either -

(a) a company having the liability of its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them (in this Act termed "a company limited by shares");

(b) a company having the liability of its members limited by the memorandum to such amount as the
members may respectively undertake by the memorandum to contribute to the assets of the
company in the event of its being wound up (in this Act termed "a company limited by guarantee");
or

(c) a company not having any limit on the liability of its members (in this Act termed "an unlimited
company

Prospectus

A prospectus is a legal document that institutions and businesses use to describe the share &
securities they are offering for participants and buyers. A prospectus commonly provides investors
with material information about mutual funds, stocks, bonds and other investments, such as a
description of the company's business, financial statements, biographies of officers and directors,
detailed information about their compensation, any litigation that is taking place, a list of material
properties and any other material information. In the context of an individual securities offering,
such as an initial public offering, a prospectus is distributed by underwriters or brokerages to
potential investors.

Share CapitalThe issued share capital of a company is the total nominal value of the shares of a
company which have been issued to shareholders and which remain outstanding .These shares,
along with the share premium account, represent the capital invested by the shareholders in the
company. The issued share capital may be less than the authorised share capital, the latter being the
total value of the shares that are available for issue by the company.

ShareholderOne who owns shares of stock in a corporation or mutual fund. For corporations, along
with the ownership comes a right to declared dividends and the right to vote on certain company
matters, including the board of directors. also called stockholder

TYPES OF SHARES
A company may have as many different types of shares as it wishes, all with different conditions
attached to them. Generally share types are divided into the following categories:

Ordinary Shares

As the name suggests these are the ordinary shares of the company with no special rights or
restrictions. They may be divided into classes of different value.

Preference Shares

These shares normally carry a right that any annual dividends available for distribution will be paid
preferentially on these shares before other classes.

Cumulative preference

These shares carry a right that, if the dividend cannot be paid in one year, it will be carried forward
to successive years.

Redeemable Shares

These shares are issued with an agreement that the company will buy them back at the option of the
company or the shareholder after a certain period, or on a fixed date. A company cannot issue
redeemable shares only.