Unit 4

Companies act
Steps and procedure for Incorporation of the company

The incorporation which brings a company into existence as a

separate corporate entity. The promoter has to take the following
preliminary steps in this connection:
i. Ascertainment of availability of the proposed name of the
company
ii. Application for licence.
iii. SEBI’s approval to draft prospectus.
iv. Prepare and finally get printed the company’s memorandum
and articles of association.
v. Fixation of the underwriters, brokers, solicitors, auditors, etc.

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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;

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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, as may be prescribed;
(c) is a private company which is a subsidiary of a company which
is not a private company.
• 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-capital to 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 paid-capital to five lakh rupees.

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Documents Required For Incorporation

• After obtaining Registrar’s approval for the company’s name, the

promoters should prepare the following documents, in the prescribed
manner and form:

• i. Memorandum of Association
• ii. Articles of Association
• iii. Prospectus /Statement in lieu of prospectus is not requires in case of
a private company
• iv. Copy of import agreements.
• v. Statutory declaration in Form I
• vi. Copy of Letter of Register indicating approval of name.
• vii. Power of Attorney.
• These two forms can be field either at the time of incorporation or
within 30 days form the date of incorporation.

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Memorandum of Association
Meaning and Purpose of Memorandum :
An important step in the formation of a company is to prepare a
document called memorandum of association. It is the charter of the
company and is very important document as it contains the basic
conditions on which the company is incorporated.

The Memorandum contains the name, registered office, main and

other objects of the company, liability of the members and the authorized
capital of the company. The main purpose of the memorandum is to limit
the scope of activities and powers of the company. Thus, any act outside
the memorandum is ultra vires the company. Such an act is not
enforceable and directors involve personal liability for it.

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 Company Management
Def : In common parlance company means an association of persons
formed for some common object such as the economic gain of its
members.
in the words of Justice Lindley “A company is an association of
many persons who contribute money or money’s worth to a common
stock and employ it for a common purpose. The common stock so
contributed is denoted in money and is the capital of the company. The
persons who contributed to it or to whom it belongs are its members.
The proportion of capital to which each member is entitled is his
share.”

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Essential characteristics of company

Following are the essential characteristics of a company:ITC VPL

1. Voluntary association
2. Independent legal entity
3. Perpetual existence
4. Common seal
5. Limited liability
6. Transferability of shares

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Voluntary association:
A company as mentioned earlier, is a voluntary association
of persons, i.e., it can neither compel a person to become its
member nor to give up its membership. It is the personal choice
of people and their lust for profit or some other objective of
their own, which inspires them to become members of the
company.

Independent legal entity:

A company is a legal entity quite distinct and separate

from its members. It can hold and deal with any type of
property of which it is the owner, in any way it likes. It can
enter into contracts, open a bank account in its own name,
sue and be sued by its members as well as outsiders.

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Perpetual existence:
A company has a perceptual succession. The mode of
incorporation and dissolution of a company and the right of the
members to transfer shares freely guarantee the continuity of the
existence of the company quite independent of the life of its
members.
the existence of a company can be terminated only by law.
Being an artificial person it cannot die irrespective of the fact
that its members, even the founders or subscribers to the
memorandum, may die or go out of it. More over, in spite of
changes in the membership of the company, it can perform its
contracts and enter into future agreement. Thus, members may
come and go but the company can go on forever.

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Common seal
Though a company has been given an artificial personality.,
yet it acts through human beings, who are called directors. They
act as agents to the company but not to its members. All the act
of the company are authorized by its “common seal”. The
“common seal” is the official signature of the company. A
document not bearing the common seal of the company will not
be binding on the company.

Limited liability
The liability of the members of a company having share
capital is generally limited to the extent of the unpaid on the
shares held by them.

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Transferability of shares

The shares of a join stock company are freely transferable

except in the case of a private limited company. Every number
owning a fully paid-up shares is usually at liberty to dispose it
off according to his choice. Restrictions imposed by the articles
on the absolute right of the members to transfer shares shall be
avoid. In the case of private companies, transfer of shares shall
not be permitted except according to the considerations laid
down in the articles.

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Kinds of company
1. Statutory companies
2. Registered companies
3. Companies deemed to be public
4. Holding and subsidiary companies
5. Government companies
6. Foreign companies
7. One-Man companies or family companies
8. Multinational companies
9. Charitable or non-profit making companies

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Statutory companies
A company formed by a special act passed either by the
central or state legislature is called a statutory company
corporation. Such companies or corporations are governed by
their respective acts, and are not required to have any
memorandum or articles of association.

Registered companies
Companies formed by registration under the companies act
are known as registered companies. The working of such
companies is regulated by the provisions of the companies act,
memorandum of association and articles of association.

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Companies deemed to be public

Section 43 A added by the companies(amendment) act, 1960

introduced a new class of companies knows as “companies
deemed to be public” to take the problem posed by companies,
which were private in the form but public in content.
According to the section 43A, a private limited company
will de deemed to be a public company in each of the following
circumstances:
i. If 25% or more of its paid up share capital is held by one or
more bodies corporate.
ii. If it holds 25% or more of the paid up share capital of a
public company.
iii. If it invites or renews deposits from the public, other than its
members, directors or their relatives.

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Holding and subsidiary companies

A company which controls another company is known as

holding company and the company so controlled is termed as
subsidiary company.

Government companies

A company, of which not less than 51% of the paid up share

capital is held by the central government or by the state
government or by any two or more of them together shall be a
government company.

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Foreign companies
A company incorporated outside India but (a) which had a place
of business in India prior to the commencement of the companies
act, 1956 and continues to have the same, or (b) which establishes a
place of business in India shall be known as a foreign company.

One-Man companies or family companies

A company can be formed with two members and a public
company with seven. A man may only one other person with him
to constitute the minimum number required in a private company
or six other so as to constitute the required seven in a public
company. He may keep with himself a substantial number of
shares so as to have controlling power over the company.

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Multinational companies

Multinational corporation refers to an organization which is

having its headquarters in one country and have business
operations in other countries.

Charitable or non-profit making companies

A company may be formed for a charitable or non-profit

making objective under section 25 of the companies act. Such a
company may be registered with a limited liability without
requirement of using the words ‘limited’ or ‘private limited’ as
a part of its name.

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Appointment of directors

The appointment of directors may be made in the following manner:

• Appointment of directors by promoters
• Appointment of directors by members
• Appointment of directors by the board
• Appointment of directors by third parties
• Appointment of directors by the central government

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Appointment of directors by promoters
The first directors of the company are usually appointed
by the promoters in the manner laid down by the company’s
articles. their names are usually given in the company’s
articles.

Appointment of directors by members

Subsequent appointment of directors in the case of a
public company has to be done by the members in the
general meeting. Section 255 provides that unless the
articles provide for the retirement of all directors at every
annual general meeting, at least two-thirds of the total
number of directors of a public company shall be persons
who shall be subject to retirement by rotation and must be
appointed by the company in general meeting.

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Appointment of directors by the board
The board of directors may appoint a director as an
additional director, or to fill in a casual vacancy or as an
alternate director.
• Additional or co-opted directors
• Casual vacancy
• Alternate directors

Appointment of directors by third parties

A company may give, by its articles, power to debenture-

holders, a banking company or financial corporation who has
advanced loans to the company to appoint their nominees on
the board. The number of such directors should not exceed one
third of the total strength of the board. These directors are not
required to retire by rotation.

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Appointment of directors by the central government
The central government may appoint such number of
persons as the national company law tribunal may by order
specify as additional directors for a period of not more than
three years on any one occasion, not being liable to retire by
rotation. The tribunal may do so on a reference being made to it
by the central government or on the application of 100 members
or members holding ten percent or more members holding ten
percent or more of the total voting power.
A person appointed as a director by the central government
in pursuance of the above provisions shall not be
i. Required to hold qualification shares
ii. Required to retire by rotation
iii. Considered for the purpose of recounting two-thirds or
any other proposition of the total number of directors
of the company.
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Powers of Directors
Section 291 of the companies act declares that subject to the
provisions of the act, the board of directors of a company shall be
entitled to exercise all such powers and to do all such acts and
things as the company is authorized to exercise and do. Thus, the
power of the board of directors are as those of the company itself.
There are, however, two limitations upon the powers of the board:
1. The board cannot those powers which the act, or
memorandum or articles required to be exercised by the
shareholders in the general meeting.
2. In the exercise of their powers, the directors are subject to
the provisions of the act, memorandum and articles and
other regulations, not inconsistent therewith, made by the
company in the general meeting.

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 Duties of directors

A part from the statutory duties there are duties of a general nature
imposed upon the directors by common law. These duties are as
follows:
1. Duty of good faith
2. Duty of reasonable care
3. Duty to attend board meetings
4. Personal attendance
5. Duty to disclose interest

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 Liabilities of Directors:

Directors have many roles in their capacity. Various case laws held
that they are :
• Agents of the Company
• Trustees of the Company
• Employees of the Company (MD, WTD, Executive Director,
Functional Director etc.)
• Accordingly, their roles and responsibilities are combined in their
legal position.

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 Company meetings
A meeting is coming together of two or more persons face to
face so as to be in each other’s presence or company

Kinds of meetings
•Shareholders meeting
•Creditors meeting
•Directors meeting
•Statutory meeting
•Annual general meeting
•Extraordinary general meeting
•Class meetings

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Meetings of shareholders
•Statutory meeting u/s 165
•Annual General Meeting u/s 166
•Extra Ordinary General Meeting (Articles)
•Extra Ordinary General Meeting (u/s 169)
•Class of shareholders (preference shareholders)

Creditors’ meeting
•Debenture holders
•Creditors for purpose of other than winding up
•Creditors for purpose of winding up

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Directors meeting
The meetings of the directors are more frequent than the
meetings of the Shareholders since they are the persons who
are responsible for the administration and management of the
company.

Statutory meeting

A statuary meeting is a general meeting of the company

which is held to provide an earlier opportunity to the
members for discussing all matters relating to the formation
of the company. It is the first meeting of the shareholders of a
public company.

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Annual General Meeting

Annual general meeting is a regular meeting of the

members of a company held annually for the purpose of
transacting company’s ordinary business. Annual general
meeting of the members is called by the company for
a) The passing of the annual accounts,
b) Declaration of dividends,
c) Election of directors in place of those who are
retiring by rotation
d) Appointment and the fixation of the remuneration
of auditors etc.

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Extraordinary General Meeting

All general meetings other than the statutory meeting and

the annual general meetings shall be known as extraordinary
general meetings. All the general meetings of the members held
between two annual general meetings are called extraordinary
general meetings.

Class Meetings

Where share capital of the company consists of different

classes of shares, meetings of different classes of shareholders
may have to be called in order to discuss matters affecting
them.

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 Resolutions
A proposal, when passed and accepted by the members becomes a
resolution.
Types of resolutions
1. Ordinary resolution.
2. Special resolution.

Ordinary resolution
i. A simple majority of votes at a general meting
ii. Which notice required by section 171 of the companies act
has been duly given.
an ordinary resolution is required to pass the annual
accounts, to declare dividends, to hold elections of directors,
to appoint auditors, to issue shares at a discount, etc.

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Special resolution

1. It must be passed by a majority of three-fourth of the

votes in person or by proxy. In other words the votes cast
in favour of the resolution must not be less than three
times the number of votes cast against the resolution.
2. The intention to propose the resolution as a special
resolution must specially be mentioned in the notice
issued for calling the meeting. It must be accompanied by
an explanatory statement. It must be passed exactly in the
notice for the meeting.

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 Winding-Up of a Company

Winding up is the process by which a company is dissolved and

its properties are administered for the benefit of its creditors and
members. It involves realization of a company’s assets, payment of its
liabilities and return of money back to the members in proportion to
the contribution made by them to the capital of the company.

Modes of winding up
1. Winding up by the national company law tribunal.
2. Voluntary winding up.

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WINDING UP BY THE TRIBUNAL

According to section 433, the Tribunal may order for the winding up
of a company on a petition submitted to it on any of the following
grounds:
1. Passing of special resolution for the winding up
2. Default in filling the statutory report or holding statutory meeting
3. Failure to commence business
4. Reduction in membership
5. Inability to pay debts
6. Just and equitable
7. Default in filling financial statements
8. Acting against the state
9. Non-viable sick industrial company

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VOLUNTARY WINDING UP

Provisions applicable to members voluntary winding up

1. Appointment of liquidators
2. Managerial personnel’s powers to cease on the appointment of
liquidator
3. Power to fill up vacancy in the office of the liquidator
4. Notice of appointment of liquidator to be given to the registrar
5. Power of the liquidator to accept shares
6. Duty of liquidator to call creditors meeting in the case of
insolvency
7. Duty of liquidator to call general meeting at the end of each year
8. Final meeting and dissolution

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