Unit – 3

Companies Act
Definition of company
A company is a voluntary association of persons. It has a capital
which is divided into small parts known as shares. At the same time it
is an artificial person created by a process of ;aw. It has a perpetual
succession and a common seal. Since it is artificial personnel it has
no body or soul.
Characteristics of a company
1. Separate legal entity
2. Limited stability
3. Perpetual succession
4. Common seal
5. Transferability of shares
6. Separate property
7. Capacity to sue
1. Separate Legal Entity:
In the eyes of the law, a company is regarded as an entity
from separated from its members. In other words, it has an
independent corporate existence, the company’s money and property
belongs to the company and not to the shareholders.
2. Limited Stability:
A company may be limited by shares or limited by
guarantee. In a company limited by shares, the liability of member is
limited to the unpaid value of the shares.
3. Perpetual Succession:
A company has a perceptual succession i.e., it neither dies
nor does its life depend on that of its members. It is not in any manner
affected by insolvency, mental disorder or retirement of any of its
members.
4. Common Seal:
Since a company has no physical existence, it must act
through its agents and all such contracts entered into by its agents must
be under the seal of the company.
5. Transferability of shares :
The capital of a company is divided into parts called shares.
These shares are freely transferable so that no shareholder is permanently
wedded to a company. A private company can impose certain restrictions
on the transfer of its shares.
6. Separate Property:
A company can own separate property in its own name.
although its capital and assets are contributed by its shareholders, they are
not the private and joint owners of its property. The company is the real
person in which all its property is vested and by which it is controlled,
managed and disposed of.
7. Capacity of Sue:
A company can sue and be sued in its corporate name. It may
also inflict or suffer wrongs. It can in fact do or have done most of the
things, which may be done by or to a human being.
 Classification of Companies
A. Classification on the basis of liability
B. Classification on the basis of number of members
C. Classification on the basis of incorporation
D. Classification on the basis of control

Classification on the basis of liability

i. Companies limited by shares.
ii. Companies limited by guarantee.
iii. Unlimited companies.
Classification on the basis of number of members
i. A private company
ii. A public company

Classification on the basis of incorporation

i. Charted companies.
ii. Statutory companies.
iii. Registered companies.

Classification on the basis of control

i. Holding company
ii. Subsidiary company
 Formation of Company
Company comes existence when a number of persons come together
with an intention to do some business. These persons are called
promoters.
The following is the procedure to be followed while incorporating a
company.
Documents to be filed with the registrar
1. The memorandum of association.
2. The articles of association if any, duly signed by the subscribers to
the memorandum of association.
3. A statement of the nominal capital.
4. A list of directors and their consent to act as directors signed by
each.
5. An undertaking in writing signed by each such director to take and
pay for his qualification shares.
6. A declaration that all the requirements of the companies act have
been complied with.
Certification of incorporation

The legal effects of incorporation are as follows:

1. A company becomes a body corporate, distinct from its

members. It becomes a legal person.
2. A company has perceptual succession and common seal, it
remains in existence until it is dissolved by liquidation.
3. A company can sue and be sued in its own name.
4. A company has a right to hold and sell property.
5. Company debts and obligations are liabilities of the company
only and cannot be enforced against the individual share
holders.
 Promoter – Duties and Liabilities

Before a company is formed there must be some persons who have an

intention to form a company and who take necessary steps to carry that
intention into operation, such persons are called promoters. The word
promoter is not, defined anywhere in the companies Act. In fact it is a
short and convenient way of designing those who set in motion the
machinery by which the act enables them to create an incorporated
company.
A promoter is a person who brings the company into existence. A
promoters is one who undertakes to form a company with reference to a
given objects and to set it going and who takes the necessary steps to
accomplish that purpose.
Liability of Promoters

A company can be compelled by the company to hand over any

secret profit which he had made without full disclosures to the
company.
1. Promoter may be held liable for the noncompliance of the
provisions of the act.
2. Promoter is liable for any untrue statement in the prospectus to
a person who has subscribed for any shares or debentures on
the faith of the prospectus.
3. Besides civil liability the promoters are criminally liable for
any other director or office of the company.
4. A company may proceed against a promoter for deceit or
breach of duty, where the promoters has misused or retained
any property of the company or for his quality of misfeasance
or breach of trust.,
Memorandum and Articles of Association

Memorandum of association is one of the document which has

to be field with the registrar of companies at the time of
incorporation of the company. The memorandum is an extremely
important document in relation to the affairs of the company.
Purpose of memorandum
1. Potential shareholders shall know the purpose
for which their money will be used.
2. Any one who deals with the company shall
know without reasonable doubt whether the
contract which he is entering into is within the
scope of the company or not.
Contents
Memorandum of every company must contain the following clauses
1. The name of the company with ‘limited’ as the last word of
the name in the case, of public limited company and with
private limited as the word in case of private limited
company.
2. The state in which the registered office of the company is to
be situated.
3. The objects of the company which can be classified into main
objects and other objects.
4. The liability of the members.
5. The share capital of the company.
Articles of Association
Articles means the articles of association of a company as
originally framed or as altered from time to time in pursuance of
this Act. The articles of association are next in importance to the
memorandum of association. It contains the fundamental conditions
upon which alone a company is allowed to be incorporated.
The articles usually contain the following matters,
1. Lien on shares
2. Calls on shares
3. Transfer of shares
4. Transmission of shares
5. Forfeiture of shares
6. Share warrants
7. Alteration of capital
8. Manager
9. Secretary
10.Dividends and reserves
The following companies must have their own articles,
i. Unlimited companies
ii. Companies limited by guarantee
iii. Private companies limited by shares.

There are three alternatives forms in which a public company may

adopt articles.
1. It may adopt table-A in full
2. It may wholly exclude Table-A and set out own articles in full
3. It may frames its own articles and adopt part of table-A
Differences between memorandum of association and articles of
association

Articles of association
1. They are regulations for the internal management of the
company and are subsidiary to the memorandum.
2. They are the rules for carrying out the objects of the company
as set out in the memorandum.
3. They are subordinate to the memorandum. If there is a conflict
between the articles and the memorandum, the latter prevails.
4. A company limited by shares need not have articles of its own.
In such a case, Table-A applies.
5. They can be altered by a special resolution, to any extent
provided they do not conflict with the memorandum and the
companies Act.
6. Any Act of the company which is ultra vires the articles can be
confirmed by the shareholders.
Memorandum of Association
1. It is the charter of the company indicating the nature of its
business, its nationality and its capital. It also defines the
company’s relationship with outside world.
2. It defines the scope of the activities of the company or the areas
beyond which the actions of the company cannot go.
3. It being the charter, is supreme document.
4. Every company must have its own memorandum.
5. There are strict restrictions on its alteration. Some of the
conditions of incorporation contained in it cannot be altered
except with the sanction of the company law broad.
6. Any Act of the company which is ultra vires the memorandum is
wholly void and cannot be ratified even by the whole body of
shareholders.
 Prospectus
In order to finance its activities, a company needs capital which is
raised by a public company by the issues of a prospectus inviting
deposits or offers for shares and debentures from the public. A private
company is prohibited from making any invitation to the public to
subscribe for any shares in, or debentures of the company. Hence it need
not issue a prospectus.
The important contents of the perspectives are,
1. General information of the company
2. Capital structures of the company
3. Terms of the present issue
4. Particulars of the issue
5. Company, management and project
6. Particulars in regard to the company
7. Outstanding litigation pertaining to matters
8. Management perception of risk factors
1.General information of the company:
general information of the company like the name, address
of registered office, names of regional stock exchange and other stock
exchanges where application is made for listing of present issue, rating
from CRISIL or any other rating agency.
2.Capital structure of the company:
a) Authorized issue, subscribed and paid-up capital.
b) Size of present issue giving separate reservations for
preferential allotment to promoters and others.
c) Paid up capital.

3.Terms of the present issue

a) Term of payments
b) Rights of the instruments holders
c) Availability of forms, prospectus and mode of
payments
 4. Particulars of the Issue
a) Objects
b) Project cost
c) Means of financing.
5. Company, management and project
a) History and main objects and present business of the
company.
b) Subsidiary of the company.
c) Promoters.
6. Particulars in regard to the company
particulars in regard to the company and other listed companies
under the same management.
7. Outstanding litigation pertaining to matters
Outstanding litigation pertaining to matters likely to affect operation
and finance of the company including tax liabilities of any nature etc.

8. Management perception of risk factors

management perception of risk factors. Such as sensitivity to
foreign exchange rate fluctuations, difficulty in availability of raw
material or in marketing of products, cost/time over run etc.
Misleading Prospectus-Consequence and Remedies
If there is any misstatement of a material fact in a prospectus or
if the prospectus is wanting in any material fact, it may result in
i. Civil liability
ii. Criminal liability

i. Civil Liability
A person who has been induced to subscribe for shares on the
faith of a misleading prospectus has remedies against the company,
and the directors, promoters and experts.
The remedies available against the company are,
a) To Rescind the Contract: Any person who takes shares
on the faith of statement of fact contained in a
prospectus can apply to the court for rescission of the
contract, if those statements are false or fraudulent or
if some material information has been withheld.
b) Claim for damages: Any person induced by a
fraudulent statement in a prospectus to take shares is
entitled to sue the company for damages.
ii. Criminal Liability
where a prospectus contains any untrue statement, every person
who authorizes the issue of the prospectus is punishable with
imprisonment which may extend to two years or with fine which may
extend to Rs.500 or with both. He will not be liable if he proves
1. That the statement was immaterial or
2. That he had reasonable ground to believe that the
statement was true
 Share holders meetings
As per the companies Act, the meetings of a company are classified as,
a) Statutory meeting
b) Annual General Meeting(AGM)
c) Extraordinary General Meeting(EGM)
d) Class meeting
Statutory meeting
Every company limited by shares and company limited by
guarantee and having a share capital shall within a period of not
less than one month and not more than six months from the date at
which the company is entitled to commence business, hold a
general meeting of the members of the company.
The following companies are not required to hold a statutory
meeting.
i. A private company
ii. An unlimited company
iii. A company limited by guarantee and not having a
share capital.
Annual General Meeting (AGM)

Every company shall in each year hold in addition to any other

meeting a general meeting as its annual general meeting. The
annual general meeting is to be held in addition to any other
general meeting that must have been held in a year.
The first annual general meeting must be held within 18
months from the date of incorporation. In that case the company is
not required to hold an annual general meeting in the year
incorporation or in the following year.
Every annual general meeting shall be called during business
hours on a day that is not a public holiday, shall be held either at
the registered office of a company or some other place within the
city, town or village in which the registered office of the company
is situated.
Extraordinary General Meeting(EGM)
A statutory meeting and annual general meeting of a company
are called ordinary meetings. All general meetings other than these
are called extraordinary general meetings. This meetings are
generally held for the purpose of dealing with any extraordinary
matter which cannot be postponed till the next annual general
meeting.
An extraordinary general meeting may be convened by any one
of the following,
1. The Board of Directors
2. Any directors or any two members
3. Requisitionists
4. Company law board.
Class Meeting
Class meetings of various kinds of shareholders and creditors are held
under different circumstances.
Similarly where a scheme of arrangement is proposed, meetings of the
several classes of share holders and creditors are required to be held. At
the time of winding up also, the meetings of creditors and members, for
certain purposes, are held.
Board meetings
Directors of a company exercise most of their powers at the
meetings of the board. The companies Act contains the following
provisions relating to board meeting.
1. Number of Meetings: In the case of every company a
meeting of its board of directors shall be held at least once in
every 3 months and at least 4 such meetings shall be held in
every year.
2. Notice of Meetings: Notice of every meeting of the
board of directors of a company shall be given in
writing to every director for the time being in India and
at his usual address in India.
3. Quorum of Meetings: The quorum of the board shall be
1/3 of its strength or two directors which ever is higher.
Power of company law board to order meeting
If for any reason it is impracticable for a company to call, hold
or conduct an extraordinary general meeting, either on its own or on
the application of any director of the company, or of any member of
the company who would be entitled to vote at the meeting.

Procedure and requisites of a valid meeting

The person responsible for calling and conducting the meeting must
observe the following rules of procedure.
1. Proper Authority
2. Notice of Meeting
3. Quorum for Meeting
4. Chairman of the Meeting
5. Minutes of the Meeting
6. Proxies
7. Place of meeting
8. Voting and Poll
1. Proper authority: The authority to call a meeting lies with the
board of directors. If the directors do not call the meeting, the
members or the company law board may call the meeting.
2. Notice of Meeting: A proper notice should be given to the
members and all others who are entitled to attend the meeting.
Notice means bringing a thing to the knowledge of the other
party.
3. Quorum for Meeting: Minimum number of members required to
consists a valid meeting and to transact business legally therein
is called ‘quorum’.
4. Chairman of the Meeting: The members personally present at
the meeting shall elect one of themselves to be chairman thereof
an a show of hands. So, every meeting is presided over by a
chairman. The regulates, and supervisor the proper conduct of
the business at a meeting.
5. Minutes of the Meeting
These are a record of what the company and directors do in
meetings.
Minutes of proceedings of meetings every company shall keep
a record of proceeding of all every general meeting and its
proceedings.
Minutes Book: book in which record of the proceeding of a
meeting is kept.
6. Proxies:
A member entitled to attend and note at a meeting may vote
either in person or by proxy. A proxy is an authority used both for,
 The person authorized to Act or voice for another at a
meeting of the company.
 As the instrument by which a person appointed to Act for
another at a meeting of the company.
7. Place of Meeting:
May be at the registered office of company or some other place in
same city, town or village where registered office of company is located.
8. Voting and Poll:
The motions proposed in a meeting are decided on the votes of
members of the company. Evert holder of equity shares has a right to vote,
while preference shareholders has a right to vote only on resolutions
directly affecting the rights attached to his preference shares.
Resolutions
A proposal when passes and accepted by the members becomes
resolution. Three kinds of resolutions are recognized by the
companies Act.
1. Ordinary resolution
2. Special resolution
3. Resolution requiring a special notice.