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Companies’ Act 1956 Arun Kumar Davay. Indian companies Act 1956.

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Presentation on theme: "Companies’ Act 1956 Arun Kumar Davay. Indian companies Act 1956."— Presentation transcript:

1 Companies’ Act 1956 Arun Kumar Davay

2 Indian companies Act 1956

3 Meaning of the Company According to section 3(1) (i) of The Companies Act, 1956, “Company means a company formed and registered under this Act or an existing company”. A "Company" may be defined as a voluntary association of persons who have come together to carry on some business and sharing the profits, there from. It is an artificial person created by law, formed for the purpose of business, registered under law having an independent legal entity, a distinctive name, common seal and perpetual succession Company - “ an association of many persons who contribute money or money’s worth to a common stock and employ it in some common trade or business (for common purpose) and who share the profit or loss arising there from”

4 Characteristics of a Company 1.Incorporated Association 2.An artificial person created by law 3.Separate Legal Entity:: 4.Perpetual Existence /Succession 5.Common Seal 6.Limited Liability : By Shares, By Guarantee 7.Free Transferability of shares 8.One Share-One Vote 9.Capacity to sue and being sued 10.Separate Property 11.Separate Management

5 Merits of a Company i. Collection of huge financial resources ii. Limited liability iii. Free transferability of shares iv. Durability and stability v. Growth and expansion vi. Efficient management vii. Public confidence viii. Social benefits –a. Democratization of management –b. Dispersal of ownership –c. Assumption of social responsibilities

6 Limitations of Company Organization i. Lengthy and expensive legal procedures ii. Excessive government regulations iii. Lack of incentive iv. Delay in decision making v. Conflict of interest vi. Oligarchic management vii. Speculation viii. Growth of monopolistic tendencies ix. Influence government decisions

7 Lifting the Corporate Veil Misrepresentation Investigations Fradulent Conduct Protection of Revenue Economic Offences Improper Uses Mere Sham or Fly by Night

8 Company Vs Partnership CompanyPartnership Regulated under Companies Act 1956 Partnership Act 1932 Exits after registration under Co.Act 1956 Registration not mandatory Managed by Directors, Board of Directors Every partner should take part in the management Property and rights is nontransferable to shareholders Transferable to any or all partners

9 Shares are transferable when the transferee becomes the member Shares cannot be transferred without the consent of all partners Shareholders is not the agent…has no power Each partner is an agent…has power Min-2 Max- banking 10 others 20 Bound by law and audited annuallyNo statutory provisions Only it can be dissolved (Wound by provisions of companies Act 1956) Dissolved by death/ insolvency of partner or wound if it is for fixed period. MembersPublicPvt Min72 MaxNo limit50 Company Vs Partnership

10 Types of Companies i. Private Company Ii. Public Company iii. Government Company iv. Holding and Subsidiary companies V. Foreign Companies

11 Types of Companies 1. Basis of incorporation: –Chartered company :The royal prerogative has power to create a corporation by the grant of a charter to persons assenting to be incorporated. E.g. Bank of England, East India Company –Statutory Company : These are companies created by a special act of the Legislature E.g. Reserve Bank of India, State Bank of India, Life Insurance Corporation -- Registered or Incorporated Company: These are companies which are formed and registered under the companies Act, Private Company Public Company

12 2.Based on Liability –a company limited by shares –a company limited by guarantee –an unlimited company 3. On the basis of Number of members 1) Private Limited Company 2) Public Limited Company

13 4. Based on Control –Government Company –Foreign Company –Holding and Subsidiary Company –Multi National Company

14 Government Company Features of Government Company i. Registered under Indian Companies Act ii. Government holding of majority shares iii. Board of Directors representing the Government iv. Relatively free from Government procedures v. Overall control of the Government

15 DifferencePrivate CompaniesPublic Companies Min no. of members Minimum number of members in private company is two Minimum number of members in public company is seven Max.no. of members Maximum number of members in private company is 50 No maximum limit of membership in public companies Number of directors Minimum number of directors is two. Minimum number of directors is three Issue of shares to public Not allowed to issue public invitation for investing in the company Public invitation of prospectus and public issue of shares, debentures and deposits allowed. Transfera bility of shares Private co restricts the transfer of shares. The shares cannot be listed in stock exchanges A public company cannot put any restriction on the transfer of shares. They’re freely transferable Minimum Capital The minimum paid up capital for a private company is Rs.100,000. The minimum paid up capital of a public company is Rs.500,000 Holding director ship Directorships held in private companies are excluded A person cannot hold directorship in more than 20 public companies

16 I. Promotion Meaning of Promotion Promotion is the first stage in the formation of a company. Promotion involves identification of a business opportunity or idea, analysis of its prospects and taking steps in implement it through the formation of a Company. A company may have more than one promoter. The promoter may be an individual, firm, an association of persons or a body corporate.

17 Functions of a Promoter 1.To Conceive Business Idea 2. To make Detailed Investigation 3.To Organize the Resources 4.To Obtain the Consent of Persons Willing to Act as First Directors 5.To Decide about the Name of the Company 6.To Get the Necessary Documents Prepared 7.To Arrange for Filling of the Necessary Documents with the Registrar

18 II. Incorporation by Registration 1) Memorandum of Association: Document that governs the relationship between the company and the outside world a) Name clause: Governed by “ Emblems and Names Act 1950” Seal to be present on all business letters, notices etc b) Domicile clause: Ascertains domicile and nationality of a company c) Objects clause: Explains the utilization of shareholders funds Enables the person dealing with the company to ascertain its powers d) Liability clause: It states the liability of the members of the company is limited e) Capital clause: It must state the authorized of nominal share capital f) Association or Subscription Clause: It specifies the willingness of the subscribers to associate and form a company Violation of MoA: “Doctrine of the ultra-vires”

19 Alteration of the Memorandum Change of name Change of registered office Change of the Objects clause  To carry on its business more economically  To attain its main object by new or improved means  To enlarge or change the local area of its operation  To restrict or to abandon any of the objects specified in the memorandum  To sell or dispose of the whole or any part of the undertaking of the company  To amalgamate with any other company or body of persons

20 2) Articles of Association The Articles of Association (AA) contain the rules and regulations of the internal management of the company. 1. Powers, duties, rights and liabilities of Directors and Members 2. Rules for Meetings of the Company 3. Dividends 4. Borrowing powers of the company 5. Calls on shares 6. Transfer & transmission of shares 7. Forfeiture of shares 8. Voting powers of members, etc

21 Contents of Articles 1.The business of the company; 2.The amount of capital issued and the classes of shares into which the capital is divided, the increase and reduction of share capital; 3.The rights of each class of shareholders and the procedure for variation of their rights; 4.The execution or adoption of a preliminary agreement, if any; 5.The allotment of shares; calls and forfeiture of shares for non-payment of calls; 6.Transfer and transmission of shares;

22 Contents of Articles 7.Company’s lien on shares; 8.Exercise of borrowing powers including issue of debentures; 9.General meetings, notices, quorum, proxy, poll, voting, resolution, minutes; 10.Number, appointment and powers of directors; 11.Dividends – interim and final – and general reserves; 12.Accounts and audit; 13.Keeping of books – both statutory and others.

23 Articles of Association Meaning and purpose: Articles of Association of a company and its bye laws are regulations which govern the management of its internal affairs and the conduct of its business. They define the duties, rights, powers and authority of the shareholders and the directors in their respective capacities and of the company is to be carried out. They are framed with the object of carrying out the aims & objects as set out in the memorandum of association.

24 Articles of Association The articles of association of a company have a contractual force between the members inter se in relation to their rights as such members. Articles cannot supersede the objects as setout in the memorandum of association. The articles must be: (i) printed, (ii) divided into paragraphs, numbered consecutively, (iii) signed by subscribers to the memorandum in the presence of at least one witness who shall attest the signatures. Also, articles are to be stamped with requisite stamp and filed along with the memorandum.

25 Distinction between Memorandum of Association & Articles of Association Memorandum of AssociationArticles of Association 1.It is the charter of the company indicating the nature of its capital. It also defines the company’s relationship with outside world. 1.They are the regulations for the internal management of the company & are subsidiary to the memorandum 2.It defines the scope of the activities of the company, or the area beyond which the actions of the company cannot go. 2.They are the rules for carrying out the objects of the company as set out in the memorandum

26 Distinction between Memorandum of Association & Articles of Association 3.It, being the charter of the company, is the supreme document 3.They are subordinate to the memorandum. If there is a conflict between the articles & the memorandum, the latter prevails. 4.Every company must have its own memorandum 4.A company limited by shares need not have articles of its own. In such a case, Table A applies of sch I, sec Any act of the company which is ultra vires the memorandum is wholly void & cannot be ratified even by the whole body of shareholders 5.Any act of the company which is ultra vires the articles (but in intra vires the memorandum) can be confirmed by the shareholders

27 Inspection and copies of the Articles A company shall, on being so required by a member, send to him within seven days of the requirement, on payment of five rupees, a copy of the articles. if a company makes default, the company and every officer of the company, who is in default, shall be punishable with fine up to Rs 5000 (s.39).

28 Alteration of Articles. Section 31 provides that subject to the provisions of the Act and to the conditions contained in its memorandum, a company may, by special resolution alter or add to its articles must be filed with the Registrar within 30 days of the passing of the special resolution.

29 Limitation on power to alter Articles 1.Must not exceed the powers given by the memorandum or conflict with the other provisions of the memorandum. 2.Must not be inconsistent with any provision of the companies Act or any other statue. 3.Must not include anything which is illegal, or opposed to public policy or unlawful. 4.The alteration must be bona fide for the benefit of the company as a whole. The alteration will not be bad merely because it inflicts hardship on an individual shareholder.

30 Limitation on power to alter Articles 5.There cannot be alteration of the articles so as to compel the existing members to take or subscribe for more shares or in any way to contribute to the share capital, unless they given their consent in writing 6.The amended regulation in the Articles of Association cannot operate retrospectively, but only from the date of amendment.

31 Doctrine of Constructive Notice Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum & the Articles of Association. These documents, on registration with the Registrar, assume the character of public documents. This is known as constructive notice of Memorandum and Articles

32 Doctrine of Indoor Management There is one limitation to the doctrine of constructive notice of the Memorandum & the Articles of company. The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned, everything has been regularly done. They are presumed to have read these documents & to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum & the Articles. They can presume that all in being done regularly. This limitation of the doctrine of constructive notice is known as the “doctrine of indoor management”.

33 III. Registration of the Company IV. Certificate of Incorporation V. Commencement of Business Prospectus Statement In Lieu of Prospectus

34 Types of shares 1.Equity shares 2.Preference Shares Types of Preference Shares 1.Cumulative or Non-cumulative 2.Redeemable and Non- Redeemable 3.Participating Preference Share or non-participating preference shares

35 S.N o Basis of distinction Preference shareEquity Share 1.Voting rightsThe holder of these shares do not enjoy any voting right except at their class meeting Generally equity share holders enjoy voting rights. 2.Payment of dividend The holders of these shares have the preference right as to the payment of dividend Equity share holders get the dividend, after the payment to preference share holders. 3.Repayment of capital The holders of these shares have the preference right as to the repayment of preference share capital Repayment of equity share capital is made after making repayment to profaner share holder. 4.Rate of dividend The rate of dividend is fixedThe rate of dividend may vary year to year 5.ConvertibilityPreference shares can be converted into equity shares The equity shares are non convertible 6.Redemption The preference are redeemable during the life time of the company The equity shares are not redeemable during the life time of the company

36 Prospectus – Red Herring Prospectus Buy-back of shares Rights Issue Issue of Bonus shares Sweat Equity and Employee Stock Options Share certificate

37 Forfeiture of Shares Demat Accounts Listing and Delisting Shareholder and Stakeholder Quorum Proxy NBFCs

38 Kinds of Meetings Statutory Meeting Annual General Body Meeting Extraordinary General Body Meeting Board Meetings Meetings of Creditors Meetings of Debenture Holders Meetings of the Committees of the Board

39 MEETINGS Meetings of share holders: General meetings Extra ordinary meetings Annual general meetings Statutory meetings Class meetings Meetings of directors Meetings of creditors and debenture – holders

40 Meetings of Shareholders. Statutory Meeting (Section 165) Statutory meeting is the first meeting of the shareholders of a company. This meeting is held only once in the life time of the company. Objectives: To approve the preliminary contracts specified in the prospectus of the company with modification if any. To discuss the success of floating the project of the company. Provisions: 1. Time: Every company, shall, within a period of not less than ONE month and not more than SIX months from the date on which the company is entitled to commence the business, hold the Statutory meeting

41 2.Notice: The company must give notice to its member at least 21 clear days before holding the statutory meeting stating time, date and place of meeting. 3.Statutory Report: The Directors of the co., are required to send a report called statutory report to every member of the company along with the notice of the meeting at least 21 days before the date of the meeting. CONTENTS: 1. Allotment of Shares: The total number of share allotted, distinguishing fully paid or partly paid up and the extent to which they are so paid up, shares issued otherwise than for cash. 2.Cash Received: Total amount of cash received by the company in respect of all the shares allotted. 3. Abstract of Receipt and Payment Account 4.Names, addresses and occupations of the company’s Directors, Auditors and all other managerial personnel. 5.To approve the preliminary contracts specified in the prospectus of the company with modification if any. 6.The extent to which the Underwriting Contracts has been carried out and the reasons thereof. 7.The calls in arrears, if any, due from any Director and the Managers of the co. 8.Commission and brokerage paid to any Director or Manager on the issue of shares or debentures of the company.

42 4) Certification of Statutory report: By not less than two directors, one of whom shall be the Managing Director. The Auditor of the co shall certify the particulars regarding the issue of shares, receipts and payment etc. And a copy of certified statutory report must be sent to the Registrar of company immediately after it is sent to the members of the company. 5. Penalty: Maximum of Rs. 5000/-

43 Quorum For A Meeting Dictionary – least number of members required to carry on a meeting or for doing business. Minimum number of members required in order to consider a meeting valid. Generally, Articles provide for larger quorum. But not smaller than statutory minimum,i.e., Five members personally present in case of Public Limited and two for a Private limited.

44 Resolutions Questions which generally come for consideration at the general meeting of a company are presented in the form of proposals called Motions. A motion proposed by the chairman of the meeting/any other member. After discussions put to vote, final result accepted becomes Resolutions. Kinds of resolutions: a)Ordinary resolution[sec.189(1)].., b)Special resolution[sec189(2)].., c)Resolutions requiring special notice[sec190].

45 When is an Ordinary resolution required? Is passed in a general meeting by a simple majority of votes. Votes cast in person/by proxy, and required notice of resolution duly given. It is required for.., matters concerning with Name Clause…, Capital Clause.., for appointing auditors and fixation of their remuneration…., appointing of first directors who are liable to retire by rotation….., for increasing/decreasing in number of directors….., appointment of managing director, removal of a director …, for winding up of a company voluntarily in certain events…, appointing and fixing of remuneration of liquidators

46 Special resolutions Is required for changing the place of registered office from one state to another.., for alterations of ‘Objects clause’…,omission/addition of ‘private’ from name.., alteration of Articles.., conversion of any portion uncalled capital into reserved capital.., for payment of interest out of capital.., applying to Central Govt for an inspector to investigate in company affairs.., for applying in court to wind up., for authorizing a liquidator to accept shares as consideration for transfer of its assets.., and for disposal of books and papers of a company in voluntary winding up after completion of the process.

47 Resolutions requiring Special Notice Its only a different kind of ordinary resolutions of which notice of the intention to move a resolution has to be given. Notice shall be given not less than 14days before the meeting to the members as notice of meeting is given/by advertisement. Is required for appointment of an auditor other than retiring ones.., to re-appoint the retiring auditor…, for removal of a director before expiry of his period.., for appointment of a director in place of who is removed. Passing of Resolutions by Postal Ballot[sec.192-A]a listed company may conduct it by postal ballot. It has send a notice along with a draft resolution explaining the reasons, which should be returned within a period of 30days from the date of posting of the ballot.

48 CLB – Company Law Board RoC – Registrar of Companies SEBI – Securities and Exchange Board of India Sensex, Nifty, BSE, NSE Price Band Minimum Subscription Over Subscription

49 Features of Debentures The rates of interest payable on debentures is fixed. The rates of interest payable on the face value of the debentures. The debenture holders do not have any voting right to participate in management. The holder of debentures are paid interest before the payment of profit to preference share holder. Debentures may be convertible

50 Types of Debentures Bearer Debentures Registered Debentures Redeemable Debentures Non-redeemable Debentures Secured Debentures Unsecured Debentures (Naked Debentures) Convertible Debentures Non- convertible Debentures

51 S. No Basis of distinctionSharesDebentures 1.Capital Vs LoanA share is a part of owner' fundA Debenture constitutes a loan 2.Status of holderShareholder are ownersDebenture holders are creditors 3.Right to voteShares carry the right to voteDebentures did not carry the right to vote 4.Charge on AssetsShares are not secured against any charge Non convertible debenture issued for a period exceeding 18 months are always have a charge 5.ReturnNo fixed dividend payable despite profits Fixed rate of interest payable even in the absence of profit 6.Repayment of capital Principal amount is repayable after debenture holder Principal amount is repayable before Preference share 7.Reward for Investment Reward is the payment of dividend Reward is the payment of interest 8.ConvertibilityEquity shares can not be convertibleDebentures can be convertible 9.Restriction on issue at discount Section 79, of the companies Act 1956, imposes certain restriction on issue of shares at discount The is no restriction imposed on issue of debentures at discount. 10Trust deed Share Trust Deed is not required to be executed Debentures Trust Deed is required to be executed.

52 Kinds of Directors Appointment by First Directors Appointment at General Body Meetings Appointment by Board Of Directors Appointment by Financial Institutions Appointment by Government –Whole Time Directors and Independent Directors

53 Winding Up of Companies Meaning of Winding Up: Process of putting an end to the life of a company. In the course of such a dissolution, its assets are collected and debts are paid off. Winding up is the prior stage and dissolution is the next. Types of Winding Up: Compulsory Voluntary (Members or Creditors)

54 Circumstances for Winding Up On passing of a special resolution. Failure to hold statutory meeting. Failure of the company to commence business. Reduction in number of members below minimum. Company acting against the interest of sovereignty and integrity of India. When sick industrial company is unable to make its networth exceed its accumulated losses within a reasonable time.

55 Winding Up of the Company Special Resolutions Default in holding statutory meeting Failure to Commence Business Reduction in Membership Inability to Pay Debts Just and Equitable

56 Petition(439) “It’s an application to wind up the company.” Who Can File Winding Up Petition? Company Creditors Contributory Registrar of Companies Central Government

57 Official Liquidator A member from the panel of the professional firms of chartered accountants, advocates, company secretaries, cost and work accountants which the central government may constitute. Body corporate approved by central government. Whole-time or part-time officer appointed by the central government.

58 Duties of Liquidator To submit preliminary report To takeover company’s assets To convene meetings of creditors and contributories To keep proper books To submit accounts To submit information in pending liquidation

59 Powers Of Liquidator To be exercised by sanction of court ( 457.1) Institute and defend suits, prosecutions in the name and on behalf of the company Carry on business for the beneficial winding up Sell movable & immovable property by public action or private contract Raise money on the security of any asset of the company Do all other acts necessary to wind up & to distribute assets

60 Powers Of Liquidator To be exercised without the sanction of the court(457.2) Do all acts & execute in the name of the company all deeds, receipts and documents Inspect records & returns on the files of the Registrar Draw, accept, make & endorse bill of exchange To appoint agents where necessary


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