Chapter 1

Unit 1: INTRODUCTION TO COMPANY

(12 Hours)
Meaning, definition and Characteristics of a company, Amended Companies Act, 2013 – Short
title, extent, commencement, application and types of companies. Formation of companies –
stages in the formation; documents to be filed for Registration; Memorandum of Association:
Meaning, Significance and contents. Articles of Association: Meaning, Significance and
Contents. Doctrine of Constructive Notice – Doctrine of Indoor Management – exceptions;
Prospectus – meaning, importance and contents. Information Memorandum and Red-Herring
prospectus – meaning and contents, Book Building – meaning and process.

Introduction of companies act of 2013

The companies act of 1956 was enacted with a view to consolidate and
amend earlier laws introduced by the company law of England which was
related to companies and certain other associations. This act of 1956, came into
existence in India on 1st April 1956.; Thereafter series of amendments were
made till the year 2003 which approximately consisted of 658 sections and 15
schedules.
After 2003, the government of India decided to amend the act in order to
achieve global competitiveness in the fast-changing economy. A concept paper
was commonly called as a Bill was exposed for public opinions but also suggest
formulation on various aspects of company law. On the basis of the responses a
committee was formed in 2004 under chairmanship of JJ Rani director of TATA
Sons.
After considering the recommendations of the Irani committee, the
government had detailed discussions with various stakeholders and a draft bill
of 2009 was Introduced in Lok Sabha.

Definition and characteristics of a Joint Company stock

Section 2 (20) of the companies act of 2013, a company is defined as
“A company incorporated under this act of 2013 or under any previous
company law”

According to lord of justice Lindely, has defined company as

“An association of many persons who contribute money or money’s worth to
a common stock and employ it in some trade or business and to share the
profits and loss arising there from.”
According to Prof- Haney
“A company is an artificial person created by laws having separate entity
with a perpetual success and a common seal.”

Characteristics or features of a joint stock company

1. Voluntary association
2. Incorporated association
3. Specific objective to be mentioned In the MOA of the company
4. Artificial person exists only in the eyes of the law
5. Company is not a citizen
6. Separate legal entity: as per section 9 this characteristic is also considered
as giving an identity as per law of its existence.
Case Solomon V/s Solomon company ltd.
7. The company has the right to purchase property in its own name
8. Perpetual succession
9. Capacity to sue and to be sued
10.Common seal
11.Limited liability limited by shares or by guarantee
12.Transferability of shares
13.Large membership Min :2 (pvt) 7- (public)
Max; 20 (pvt) 50- (banking)
14.Limitation of action- not to go beyond the powers stated in the MOA.
15.Separate and professional management the company elects the
representatives are directors on the BOD forum to perform corporate and
professional service
Lifting of corporate Veil
The term lifting of corporate Veil means having an exemption to accepting
completely the characteristics of separate legal entity of the company.to uphold
this exception. The case of Sir Dinshaw Manakjee Petil v/s Income tax officer
1972 is referred.
 On the basis of
liability
incorporation

chatered company companies limited by shares

statutary company companies limited by guarantee
registered company unlimited company

No of Members
control
holding companies
private companies
subsidary comp anuies
public companies

nationality
ownership
government companies domestic companies
non government companies foreign companies

on the basis of other kinds

one person company
small company
dormant company
associate company
prodcuser company
investment company
nidhi company
associate NFP company
family company
 A. On the basis of incorporation
Chattered companies: owned and managed by the Royalty
Statutory companies: Incorporated by law
Registered companies

B. On the basis of liability of a member

Limited by share – sec 4 (d)(I)
Limited by guarantee – sec 4 (1) d(II)
Unlimited companies – sec 3 (2)

C. On the basis of number of Members

Private companies: sec 2 Minimum 1 or 2
Maximum – 20, Banking -50

If employees are giving the share in a private company, then the membership
is limited to 200 members.
Public company: Minimizes up to 2, Maximum – unlimited

D. On the basis of control

- Holding company -sec 2(87)
A company which holds more than 50% of total shares of another company
- Subsidiary company A company controlled by holding company where
more than 50% of their shares are held by another company

E. On the Basis of Ownership

- Government companies – sec 3(45)
Government holds 51% of the paid-up share capital
- Non-governmental companies: there is a private investment

F. On the basis of nationality

✓ Domestic companies- sec 2 (42)
- Registered within the country
- Which has operations within the country

✓ Foreign companies
- Place of business in India but registered outside India

G. Other kinds of companies

✓ One person company
This company is formed by one person for a lawful purpose by subscribing his
only name in MOA.

✓ Small Companies Sec 2(85)

- With a limit of share capital which does not exceed 50 lakhs in paid up
share and not more than 50 crores as authorized capital
- Turnover should not exceed 2 crores

✓ Dormant companies’ sec 455

- Formed for a future project or which holds intellectual property with no
significant accounting transaction

✓ Associative company
- A company in which the other company has a significant influence but
not subsidiary company
- It may not be a joint venture company
- 20% of the total share capital is with the other company who takes the
business decision under an agreement
✓ Producers company sec 45(1)
This company is a body corporate having objects or activities specified in sec
581(b) of companies act 1956.
They themselves are primarily producers basically producing agricultural
products.
✓ Investment company SEC 186

- It is a company who undertakes business consisting of acquiring, holding

and dealing I shares and securities. They also earn their income by
dealing in brokerage activities.

✓ Nidhi companies (sec 406)

- These companies are incorporated with an objective of cultivating the

habit of thrift and savings amongst its members. They Mainly receive
deposits and lend them to their members only. They will comply to rules
prescribed by the central government for all regulations under the
banking act \
- The name should end by (Nidhi LTD)

✓ Associations Not for profit Companies (sec 8)

- These companies are formed basically to promote science, commerce,

sports, social, welfare, charity or any other project that prohibits
payment of dividend or other incomes to its members.
- These companies mainly run on the basis of licenses granted by the
central govt
- Such a company cannot alter its MOA or AOA without the approval of
the central govt.

✓ Family companies
- In this type of a company inn which practically entire shares are held by
a single member. The only difference us a few members of the family are
 included only to meet the statutory requirement of minimum number of
members in a company.

Formation of a company
I. Promotion
- Bringing an entity into existence
- Promotion is defined, “the discovery of business opportunities and the
subsequent organizations of funds property and managerial ability into a
business concern for the purpose of making profit there from.”

- Promoter is a person who does the necessary preliminary work required

for the formation of the company. More than one promoter involved in
promotion of business, are known as company promoters, also known as
syndicate.

- u/s (69) of the companies act 2013 defines the term promoters

- “A person who have been named in the prospectus, has control over the
affairs of the company and in accordance with those advice and
directions or instructions the Board of directors are customed to act.

Legal position of a Promoter: -

The promoter has a fiduciary position which means relationship of trust and
confidence in relationship to the company that the promotes.

Functions of a promoter
• What business to concede the business idea
• To make detail investigation to find out the strength and weakness
about the project
• To organize the resources
 • To decide upon naming of the company
• Obtain consent of the person willing to act as first directors
• To prepare necessary documents
• To verify and file the documents with the registrar of the companies
• To draft the prospectus, enter into preliminary contracts
• Agreement with financial institutions
• Negotiations with business associates

II. Incorporation stage (registration)

This stage comes into existence when the company gets its itself registered
under the companies act of 2013.
Procedure for registration
Application for availability of name u\s 4(4) by filing a form, titled INC-1
Preparation of MOA & AOA as per section (1) A
Filing of documents and information with registrar

Requirements

i. Application for registration

ii. Copy of MOA
iii. Declaration from professional like an advocate or any person mentioned
in the MOA
iv. Affidavit of subscribers and first directors
v. Proof of address for correspondence
vi. Particulars of subscribers
vii. Particular of first directors
viii. Consent to act as directors
ix. Power of autonomy by promoters.

Registration by Registrar
 When the application of registration along with required fee and necessary
documents are received by the registrar, it will be verified and it satisfied the
name of the company will be written in a book or a document known as
registrar of companies U\s 7(2)

Issue of certificate of registration

- contents
- Name of the company
CIN (corporate Identity Number)
Address of the correspondence
Validity if any

III. Raising of capital (STAGE)

The law permits the member of the company to raise capital in the name
of the company through various resources
It also allows to register to be indexed in the stock exchanges
IV. Commencement of Business
Within 30 days of raising capital the company is entitled to commence its
business as per objectives mentioned in MOA.

MOA (Memorandum of Association)

Meaning: It is a document referred as a constitution of a company

Definition: u/s 2(56) of the companies act of 2013
MOA means MOA of a company has originally framed on as altered from time
to time in pursuance of any previous company law on this act.
MOA - Life giving Document.

Contents of MOA
1. Name clause
2. Registered office clause
3. Object’s clause
4. Liability clause
5. Capital clause
6. Association or subscription clause (declaration clause)

1. Name clause:
this clause is written in the MOA as per section 4(1) the legal implications
to be followed while selecting the name of the company are as follows;
• The registered name must be made known to the public along with
address of its registered office displayed in all the business letters
negotiable instruments, orders, receipts, politics and any other
notifications.
• The name should not be undesirable as per the opinion of the
central government
• It should not be identical
• It should not constitute any offense under any law of the country
• It should not be prohibited as per the Emblems and names act of
1950.
• The name should end with the words LTD or PVT LTD or UNLIMITED.
2. Registered office clause/ Situation clause - sec 4(B)
This clause contains the name of the state or place which the registered
office is situated. This determine the domicile of the company. All
important documents and books (original) are to be maintained or kept
in the office.

3. Objects clause: - sec 4(1) c

This clause contains the objectives for which the company has been formed.
Some of the objectives could be
 - The purpose of incorporation
- Type of business
- Vision and mission of the company
- Declarations that the objectives are legal and not against public policy or
against provisions of companies act or against provisions of companies
act or against general law of the country.

➢ Public policy
Entering contract with minor
Trading with alien enemies
Dealing illegal activities
Dealing with a person of unsound mind
Unfair trade practices

4) Liability clause: - sec 4 (1) D

This clause will state the liability of members of the company whether it
is limited by shares, limited by guarantee or unlimited to the extend of
assets declared or shares owned or purchased.

5) Capital clause: sec 4(1) E

This clause states that the amount of capital with which the
company is to be registered. The structure of capital has to be
mentioned interms of registered capital nominal capital or authorized
capital.
6) Association or subscription clause: - sec 4 (1) F
This clause contains the names of the persons who signed the Memorandum
and giving a declaration that they are willing to form themselves as a company.
These persons are known as subscribers to Memorandum.

AOA - Articles of Association sec 5 (5)

This document will contain the rules and regulations and by laws for Internal
management to take care of the affairs of the company.
Definition: According to sec 2(5) of the companies act of 2013, “articles mean
The Articles of association of the company as originally framed or as Altered
from time to time or applied in pursuance of any previous company law of this
act.”

Contents are: -
There are around 32 contents in the AOA

I. Regulations of Mgt of a company

1. Adoption of preliminary contracts
2. Number and value of shares
3. Issue of preference shares
4. Allotment
5. Calls on shares
6. Lien on shares (liability)
7. Transfer and transmission of shares
8. Nomination of directors on important position holders
9. Forfeiture of shares
10.Alteration of capital
11.Buyback of shares
12.Share certificates
13. Dematerialization
14.Conversion of shares into stock
15.Voting rights and proxies
16.Meetings and rule regarding committees
17.Directors, their appointment and delegation of powers
18.Nominee director
19.Issue of debentures and stocks
20.Audit committee
21.Managing Director (MD) Full-time directors, Managers, Secretaries
22.Additional directors
23.Common seal
24.Remuneration of directors
25.General Meeting
26.Directors meeting
27.Borrowing Powers
 28.Dividends and reserves
29. Accounts and Audit
30. Winding up
31.Indemnity
32. Capitalization of reserves

II. Matters as maybe prescribed by the rules made by the central

government.
III. Any additional matters as per section 5(2) which are necessary for
management of the company
IV. Provision of entrenchment (Alteration) as per sec 5(3)
Enrichment law can be made according to the provisions with regards
to formation, amendment in articles in agreement by all members in case
of private companies and by special resolution in case of public
companies.

Doctrine of constructive notice

The term constructive notice means the presumption of notice in certain

circumstances. It means every outsider dealing with the company is deemed to
have a notice of the contents of MOA &AOA. These 2 documents become public
documents as soon as they are registered in ROC.
According to this doctrine. It is presumed that an investor has read this
document and has knowledge about the contents of this document this doctrine
protects the company from outsiders.
Doctrine of Indoor Management
According to this doctrine a person dealing with the company cannot be
assumed to have knowledge of internal proceeding like the resolutions passed
during meetings it is generally assumed that Internal formalities are dually
complied or followed as per the regulations mentioned in AOA. This doctrine
protects the outsiders against the company and upholds the principals of justice
and public convenience.
To Backup this doctrine of indoor Management the case of
 Royal British Bank v/s Mr. Turquent (1865
In this case, the directors of the company, royal British bank had issued bonds
to turquent. They had the powers under the articles of association to issue
such bonds provided they were authorizes by a resolution, passed by the
shareholders at the general meeting of the company. When turquent
approached the bank for refund of bonds, the was rejected under their grounds
that resolution was not passed in the companies meeting.
Mr. turquent approached the court saying that, he had assumes that the
resolution had been passed and it was an Internal matter. It was thus held that
Turquent could recover the amount paid on the bonds from the company on the
doctrine of or on the basis of indoor management which assumes the
resolutions passed in the meetings need not to be known by the outsiders.

Exceptions to the rule of doctrine of indoor management

I. Knowledge of irregularity
If a person or outsider is aware of the internal irregulations
then this doctorate cannot be applied.
II. Suspicion of irregularity
When a person dealing with the company had ample opportunities
to discover the irregularity, he cannot claim benefit under this doctrine.
III. Forgery:
This doctrine does not apply if a person relies upon a forged
document prepared by the company
IV. No Knowledge of AOA
Where the principal of estoppel does not apply.

Prospectus
Definition of prospectus:
According to section 2(70) of the companies act of 2103, the prospectus
is defined as “any document described of issued has a prospectus and
includes a shelf prospectus referred to in sec 31 or red herring prospectus
referred to in sec 32 or any notice, circular, advertisement or any other
document inviting offers from the public for the subscriptions or purchase
of any securities of a body corporate.
 Contents of prospectus

1) Invitation
2) Make on behalf of the company
3) Invitation to subscribe or purchase shares or debentures
4) It should be related to the information of securities of the company

Importance (significance of the prospectus)

i. It informs the public about the formation of a new company
ii. It provides complete, accurate and reliable information
iii. Helps the public to make an educated decision or a logical decision
before investing.
iv. It includes public offer to subscribe or apply for shares and debentures.
v. It creates confidence in the public as prospectus displace the names of
the director, promotes and other experts who are associated with the
company
vi. It serves as an authentic record of the terms and conditions on where
the share of debentures are issued.

Contents of a Prospectus
As per section 26 of the companies act of 2013

I. General information: - sec 26(1)

i. Name and addresses if the company

ii. Name of important or key personal
iii. Date of opening and closing of the issue
iv. Statement by the BOD, by the BOD about bank a\cs showing
transactions related to preliminary expenses.
v. Written consent by the directors
vi. Procedure and time for allotment
vii. Issue of securities
 viii. Capital structure
ix. Main objectives
x. Particular related to the project
xi. Minimum subscription
xii. Remuneration of directors and auditors and any other disclosures
prescribed by the act.

II. Reports on financial information – sec 36 (1) b

i. Reports with respect to P&L, assets and liabilities
ii. Bank statement related to initial expenditure and borrowings.
If the company already exist then reports of 5 financial years
preceding the issue of securities should be displayed/published.

III. Declaration of compliance sec 26(1) c

i. The statement declaring that nothing in the prospectus is against
the provisions of the act
ii. Securities contract act of 1956
iii. SEBI act of 1992 should be published.

IV. Matters of reports as prescribed by the central government and

company law board sec 26 (1) d

I. Liability for misstatement in prospectus

II. Remedies for such misstatements
III. The two types of liabilities are considered mainly
➢ Civil liability
➢ Criminal liability
IV. Remedies for such liability are: -
➢ If it is against the company then the contract is resigned
(cancelled) and claiming damages for fraud.
➢ In case of criminal liability sec 34 and 447 is applicable according
to this section any person who is found guilty shall be punishable
with the imprisonment not less than 6 months and extent up to
10 years or with the fine not less than the amount involved
which may also extend to 3 times of the amount. This may
happen if the prospectus claims untrue or misleading
statements or omission of any statutory matter.
 Types of prospectuses
(1) Information memorandum
(2) Red herring prospectus
(3) Shelf prospectus

1) Information prospectus
This prospectus means a process undertaken prior to filing of a prospectus by
which demand for the proposal issue of securities by a company is found out
and thereby the price and terms of issue of such securities is published by way
of notice, circular, advertisement or a document. It is a kind of advance
communication send to the market

2) Red herring prospectus

It is a prospectus which does not have complete particulars regarding the
price and quantity of securities offered. It usually filed along with information
memorandum before issuing the shares into security market
3) Shelf prospectus
It means a prospectus issued by a financial institution or a bank whose main
objective is financing. this prospectus issue securities or class of securities which
is not mentioned by prospectus of other companies.