COMPANIES ACT

2013

BY:-
RAMNIWAS
SHARMA
MODULE –I COMPANY LAW (BALO0106)
Meaning and Definition of a
company
 Section 3(1)(i) of the Companies Act, 1956
defines a company as: “a company formed
and registered under this Act or an
existing Company”.
 ‘Existing Company’ means a company
formed and registered under any of the
earlier Company Laws.
Characteristic Features
 Incorporated association: A company must be
incorporated or registered under the Companies Act.
Minimum number required for the purpose is 7 in case of a
public company and 2 in case of a private company.
 Artificial person: A company is created with the
sanction of law and is not itself a human being, it is,
therefore, called artificial, and since it is clothed with
certain rights and obligations, it is called a person. It
exists in the eyes of law and cannot act on its own. It
has to act through Board of Directors elected by the
shareholders.
 Characteristic Features
 Separate Legal Entity: A company is regarded as an entity
separate from its members. In other words, it has an independent
existence. Any of its member can enter into contracts with it in the
same manner as any other individual can and he cannot be held
liable for the acts of the company even if he holds virtually the entire
share capital.
 Limited liability: A company may be a company limited by shares
or a company limited by guarantee. In a company limited by shares,
the liability of members is limited to the unpaid value of the shares.
In a company limited by guarantee, the liability of members is
limited to such amount as the members may undertake to contribute
to the assets of the company, in the event of its being wound-up.
 Characteristic Features
 Perpetual Existence: A company being an artificial person
cannot be incapacitated by illness and it does not have an
allotted span of life. The death, insolvency or retirement
of its members leaves the company unaffected. Members can
come and go but company can go forever.
 Common seal: A company being an artificial person is not
bestowed with a body of natural being. Therefore, it has to
work through its Directors, officers and other employees.
But, it can be held bound by only those documents which bear
its signature. Common seal is the official signature of a
company.
 Characteristic Features
 Capacity to sue: A company can and be sued in its corporate name.
It may also inflict or suffer wrongs. It can in fact do or have done
to it most of the things which may be done by or to a human
beings.
 Separate Property: As a legal person, a company can own, enjoy
and dispose of any property in its own name. A member does not
even have insurable interest in the company’s property.
 Transferability of shares: The shares of a company are
transferable in the manner provided in the Articles of the
company. However, in a private company, certain restrictions are
placed on such transfer of shares but the right to transfer is not taken
away absolutely.
 Difference Between Company and partnership

Basis of Company Partnership

difference
A company is governed by the A partnership firm is governed
Regulating Act provisions of the Companies Act by the provisions of the Indian
1956 Partnership Act 1932
A firm does not enjoy separate
It has a separate legal existence. A
Legal Entity legal existence. Partners are
company is separate from its
collectively termed as a firm
members.
and individually as partners.
A member is not an agent of the Every partner is an agent of the
Agency other members or of the company, other partners, as well as of the
his actions do not bind others firm
Each partner has unlimited
Liability of its members is limited to
Liability liability and is personally
the extent of the value of shares
liable for all the debts of the
held by them
firm
 A private company may have as In the case of firms carrying on
Number of many as 50 members but not less business other than banking, the
membership than 2 and a public company may number must not exceed 20 and in
have any number of members but case of banks such member must
not less than 7. not exceed 10.
In case of a public company, a A share in a partnership cannot be
Transfer of
shareholder can transfer his shares transferred without the consent of
shares
freely without restrictions all the partners.
The right and control of the
All the partners of the firm are
Management business is vested in the hands of entitled to take part in the
the Board of Directors elected by
management of the business.
the shareholders
Registration A company registration is essential A partnership firm may be or may
not be registered.
No one member can require it to A partnership firm can be wound
Winding-up wound up at will and winding up up at any time by any partner, if it
involves legal formalities is at will, without legal formalities.
 Kinds of Company
On the basis of Incorporation: From the point of view of its
formation, companies are of three kinds:
Chartered Companies: These companies are incorporated under a special
charter by Monarch i.e. King or Queen of England. For Example East India
Company and The Bank of England. Such companies do not exist in India.
Statutory Companies: These companies are incorporated by a special act

passed by the Parliament, i.e. Central or State Legislature. They derive

their powers from the acts constituting them and enjoy certain powers that
companies incorporated under Companies Act have. For Example: RBI, LIC,
SBI, UTI, Industrial Finance Corporation etc.
Registered Companies: These companies are formed under the Companies

Act, 1956 or were registered under the Companies Act passed earlier to this.
Such companies come into existence only when they are registered under the
Act and a certificate of incorporation has been issued by the Registrar of
Companies.
 On the basis of liability: There are three kinds of companies:

 Companies Limited by Shares: when the liability of the

members of a company is limited by the Memorandum to the
amount, if any, unpaid on the shares, such a company is called a
company limited by shares.
 Companies limited by guarantee: A company in which the
liability of its members is limited to the extent of the amount
guaranteed is known as the company limited by guarantee. The
liability of its members is limited.
 Unlimited Companies: section 12 gives choice to the promoters
to form a company with or without limited liability. A company
not having any limit on the liability of its members is called an
unlimited company.
 On the basis of Number of members: From the point of view of
number of members, company may be of two types:

 Private Company: A private company is one which restricts the right of

the members to transfer shares, limit the number of members to 50 and
prohibit any invitation from public to subscribe for its shares or
debentures.
 Public Company: : A public company is one which does not restricts
the right of the members to transfer shares, limit the number of its
members and prohibit any invitation from public to subscribe for its shares
or debentures of the company.
 One Man Company: This is a company in which one man holds
practically the whole share capital of the company, and in order to meet
the statutory requirement of minimum number of members, some dummy
members, who are mostly his relatives or friends, hold one or two share.
 On the basis of control: From the point of view of
control, there are two kinds of companies:

 Holding Company: A company is known as the holding

company of another company if it has control over that
other company. According to Section 4(4), “A company is
deemed to be the holding company of another, but if only,
that other company is its subsidiary.
 Subsidiary Company: A company is known as a subsidiary
company of another company when control is exercised by
the latter (called holding company) over the former, called a
subsidiary company.
 On the basis of ownership: From the point of view of
ownership, there are two kinds of companies:

 Government Company: A government company means

any company in which at least 51% of paid up share
capital is held by the central government or state
government, or partly by central and partly by the state
government.
 Foreign Company: Foreign company means any
company which is incorporated outside India which has an
established place in India
Promotion and Incorporation of Companies

 A company is a separate legal entity which is formed

and registered under the Companies Act. There are
four steps in the formation of a company:
 Promotion Stage: It is the first and foremost stage of
company formation. According to Gerestenberg;
“Promotion of the company is the discovering of
business opportunities and the subsequent organization
of funds, property, and management ability into
business concern for the purpose of making profits
there from.
 Those who make a decision about these
aspects are known as promoters.
 Steps in Promotion Stage:

 Discovery of a Business Opportunity

 Conduct of Preliminary investigation
 Assembling and
 Financing
 Incorporation Stage: Incorporation is the second
stage of the company’s formation. It is the
registration of the company as a body corporate
under the Companies Act, 1956.
 An incorporated association receives recognition as
a legal entity separate from its members. It has all
the powers of an individual and is legally able to do
things in its own name, such as own land, sign a
lease, sue or to be sued etc.
 Steps to be followed for incorporation:
 
 Availability and Approval of the Name: A company is identified
by the name with which it is registered. The Memorandum of
Association of the company should states the name of the
company. The promoters should decide upon at least 5suitable
names apart from one main name, in the order of preference to
afford flexibility to the registrar to ascertain the availability.
 Filling of Documents: Then the following documents duly stamped
together with the necessary fees are to be filed with the Registrar
for Incorporation:
 Memorandum of Association
 Articles of Association
 Notice
 Agreements
  Listof Directors
 Written consent of the Directors
 Statutory Declaration
 Undertaking of a Director to take and pay for
qualification Shares with necessary stamp duty
 Payment of Fee
 Registration: The Registration of Companies will
carefully scrutinize the documents and if satisfied
with compliance of legal formalities regarding
registration, he enters the name of the company in his
register.
 Certificate of Incorporation: When the requisite
documents are filed with the Registrar, the Registrar
shall satisfy himself that the statutory requirements
regarding registration have been duly complied with. If
the Registrar is satisfied as to the compliance of
statutory requirements, he retains and registers the
Memorandum, the Articles and other documents filed
with him and issues a “certificate of incorporation”,
i.e. of the formation of the company.
 Memorandum of Association

 Every company has to have a Memorandum of

Association.
 It contains, besides other significant
information, the objects for which the
company is formed.
 ‘Object clause’ defines as well as confines the
powers of the company.
 Anything done beyond these objects is ultra- vires
the company and void.
 Contents of Memorandum
1. Name Clause: It contains the name with
which company is proposed to be
registered. Companies Act requires
that:
(a) The name chosen should end with the
word ‘Limited’ or the words ‘Private
Limited’, as the case may be.
(b) The name should not be undesirable i.e., it
should not be identical or too similar to
the name of an already existing company
OR include the name of a registered trade
mark unless consent of the owner of the
trade mark is obtained.
 Contents of Memorandum
2. Registered Office Clause:
This clause states the name of the State in
which registered office of the company is to be
situated.
3. Objects Clause
This clause is to be divided into:
(a) Main objects and objects incidental or ancillary to
main objects
(b) Other objects
A company cannot commence any business
stated under other objects unless ‘special
resolution’ by the shareholders is passed.
 Doctrine of Ultra-Vires
Case Law: Ashbury Rly. Carriage Co.
v. Riche.
Effects of Ultra-vires transactions
(iii) void-ab-initio
(iv) Injunction
(v) Personal liability of directors
 towards the company
 towards the
outsiders
 Contents of Memorandum
4. Liability Clause
5. Capital Clause
This clause states the authorised capital
and the number of shares into which
the same shall be divided.
Alteration of Memorandum
 Various clauses of memorandum of
association can be altered by following
the procedure laid down in the Act.
Different requirements are prescribed for
different clauses:
1. Name Clause: can be altered
by:
(a) Passing a special resolution; and
(b) Obtaining the approval of the Central
Govt.
 Alteration of Memorandum
2. Registered Office Clause: may be
shifted:
(a) within the same city by passing Directors’
Resolution;
(b) From one city to another city within the
same State:
 by passing special resolution only, if no
change in jurisdiction of Regional Director
 by passing special resolution, and
 Obtaining the approval of Regional
Director.
 Alteration of Memorandum
3. Objects Clause
 Special Resolution
 Only on Grounds stated in Sec.17(1).
4. Liability Clause
 Cannot be increased without written
consent of each and every
 member.
Can
 by be reduced:
passing special resolution
 Confirmation of court
 Alteration of Memorandum
5. Capital Clause
 Authorised capital may be
increased by passing an ordinary
resolution at a meeting of the
shareholders.
 Articles of Association
 The articles of association of a company are its bye-
laws or rules and regulations that govern the
management of its internal affairs and the conduct of
its business.
 The articles regulate the internal management of the
company. They define the powers of its officers. They
also establish a contract between the company and
the members and between the members inter se.
This contract governs the ordinary rights and
obligations incidental to membership in the company
[Naresh Chandra Sanyal v. Calcutta Stock Exchange
Association Ltd. (1971)].
Companies which must have Articles

 Unlimited Companies:
 The Articles of such a company must
state:
 Total number of members; and
 Share capital.

 Companies limited by Guarantee:

 Articlesof such company must state
total number of members.
Companies which must have Articles
…contd.
 Private Companies limited by shares:
 must include requirements of
Section 3(1)(iii).
No Article Company
 A public limited company having share
capital may be registered without
Articles.
Alteration of Articles
 Articles may be altered by a company
by passing special resolution at a
general body meeting of shareholders.
 However, where alteration has the
effect of converting a public company
into a private company (i.e., introduction
of restrictive clauses of Section 3(1)(iii),
approval of Central Government must
be obtained.
 Doctrine of Constructive Notice
 According to Section 610, every person
dealing with the company is deemed to
have read M/A and A/A and understood the
contents thereof in the correct perspective.
 Doctrine of Indoor Management
 The rule was first laid down in Royal British
Bank v. Turquand.
 Rule of Indoor Management is an exception
to the Doctrine of Constructive notice.
Exceptions of Indoor Management

1. Knowledge of irregularity : Case: Howard

v. Patent Ivory Co.
2. Negligence : Case: Anand Behari Lal v.
Dinshaw & Co. (Bankers) Ltd.
3. Forgery : Case: Ruben v. Great Fingal
Consolidated [Secy. Forged signatures of two
directors]
4. No knowledge of articles : Case: Rama
Corporation v. Proved Tin & General
Investment Co.
 Prospectus
A prospectus, as per Section 2(36), means any document described or
issued as prospectus and includes any notice, circular, advertisement
or other document inviting deposits from the public or inviting offers
from the public for the subscription or purchase of any shares or
debentures of a body corporate.

Thus, a prospectus is not merely an advertisement; it may be a circular

or even a notice. A document shall be called a prospectus if it satisfied
two things:
1. It invites subscription to share or debentures or invites deposits.
2. The aforesaid invitation is made to the public.
Objective of Prospectus
The main objects of a prospectus are as follows:

 To bring to the notice of public that a new company

has been formed.
 To preserve an automatic record of the terms of
allotment on which the public have been invited to
but its shares or debentures.
 This secure that the Directors of the company
accept responsibility of the statement in the
prospectus.
 Types of Prospectus
The different types of prospectus are as follows: 

 Offer Document: It means prospectus in case of a public issue or offer for sale
and Letter of Offer in case of a right issue which is filed with Registrar of
Companies (ROC) and Stock Exchanges (SE).
 Draft Offer Document: It means the offer document in draft state. The Draft offer
documents are filed with SEBI at least 21days prior to the filing of the Offer
Document with ROC/SE.
 Red Herring Prospectus: it is a prospectus which does not have details of either
price or number of shares being offered or the amount of issue.
 Abridged Prospectus: It means the Memorandum as prescribed in Form 2A under
sub- section (3) of Section 56 of the Companies Act, 1956. It contains all the
salient features of a prospectus. It accompanies the application form of the public
issue.
 Shelf Prospectus: Section 60 A of the Companies Act, 1956 permits any financial
institution or bank to file a shelf prospectus covering one or more issue of
securities or class of securities specified in the prospectus with the ROC.
 Requirements Regarding Issue of Prospectus

 The relevant requirement regarding issue of prospectus is given below:

 Issue of Incorporation: Section 55 of the Act permits issue of

prospectus in relation to an intended company. A prospectus may be

issued by or on behalf of the company.
 By a person interested or engaged in the formation company or
 Through an offer for sale by a person to whom the company has allotted shares.
 Dating of Prospectus: A prospectus issued by a company shall be
dated and that date shall be taken as the date of publication of the
prospectus. Date of issue of the prospectus may be different from the
date of publication.
 Registration: A prospectus can be issued by or on behalf of a company

or in relation to an intended company when a copy thereof has been

delivered to the Registrar for registration.
REMEDIES FOR MISSTATEMENT IN
PROSPECTUS

 If the prospectus contains a misleading statement,

the liability of the company, the directors,
promoters and others who authorized the issue can
be classified into three kinds viz.,
 Civil Liability,
 Criminal Liability, and
 Liability under the Law of Contract.
 1. Civil Liability
An aggrieved shareholder who purchased shares by placing
reliance on the misleading prospectus has
 remedies against the company, and

 remedies against the directors, promoters and experts.

Remedies Against the Company

The aggrieved shareholder has two remedies against the
company. They are
 Rescission of the Contract, and

 Damages for fraud.

 Remedies against the Promoters, Directors,
Experts, and Persons authorized the issue of the
Prospectus
1. Damages for Misstatement
2. Damages for Non-disclosure of Material Facts
2. Criminal Liability
 1. If a prospectus contains any untrue statement, every

person who authorized the issue are punishable with

fine up to Rs.50,000 or with imprisonment up to 2
years or with both.
 2. Anyone who fraudulently (knowingly) makes any

misstatement in the prospectus to induce persons to

invest money in the company is punishable with
imprisonment up to 5 years or with fine up to
Rs.1,00,000 or with both.
3. Liability under General Law of Contract
 Under the general law, the aggrieved shareholder

can recover damages from all or any of the persons

responsible for the issue of the prospectus. The
necessary thing is to prove that there is a fraudulent
misstatement or non-disclosure.
 nk
ha
T u BY:-
y o RAMNIWA
S SHARMA