Companies Act, 1956

Companies Act, 1956
MEANING AND DEFINITION

OF A COMPANY
Section 3(1) of the Companies Act, 1956

defines a company as: “an association of
individuals formed for some purposes and
registered under the present Companies Act
or an earlier Indian Companies Act.”.
CHARACTERISTICS
• Separate Legal Entity
•Limited Liability
•Free Transferability of Shares
•Perpetual Succession
TYPES OF COMPANIES
•Private Company
•Public Company
PRIVATE COMPANY
[SECTION 3(1)(III)]
A 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 right to transfer its shares, if

any;
(b)Limits the number of its members to 50, not

including:
PRIVATE COMPANY …
CONTD.
(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;
PRIVATE COMPANY
…CONTD
(c) Prohibits invitation to the public to subscribe for
any shares in or debentures of, the company; and
(d) Prohibits any invitation or acceptance of

deposits from persons other than its members,
directors or their relatives Where two or more
persons hold one or more shares in a company
jointly, they shall, for the purposes of
membership, be treated as a single member
PUBLIC COMPANY
[SECTION 3(1)(IV)]
A public company means a company which:
(a)is
not a private company [In other words, it should not
have the restrictions of Section 3(1)(iii) in its articles ];
(b)hasa minimum paid-up capital of five lakh rupees or

such higher paid-up capital, as may be prescribed; and
(c) is a private company, which a subsidiary of a

company, which is not a private company
How to form a company?
 The whole process of formation of a company
may be divided into four stages, namely:
(i) Promotion & Pre-incorporation Contracts
(ii) Registration/Incorporation
(iii) Floatation/Raising of Capital
(iv) Commencement of Business
PROMOTION
Who is a Promoter?
Bowen, L.J.
The term promoter is “a term not of law but of
business”, usefully summing up, in a single word
— promotion, “a number of business operations
familiar to the commercial world by which a
company is brought into existence”.
However, the persons assisting the promoters by
acting in a professional capacity do not thereby become
promoters themselves
LEGAL POSITION OF A
PROMOTER
• Promoter stands in a fiduciary position
towards the company.
• In other words, he is not allowed to

make secret profits.
Pre-incorporation contracts
 Pre-incorporation contracts shall be valid if:
 The contract is made for the purpose of

the company and the contract is
warranted by the terms of incorporation.
 The company adopts the transactions
after incorporation
REGISTRATION
Private Company
• Minimum Number of Members required –
Public Company
• Minimum Number of Members required –
7
STEPS
1. Application for availability of name:
2. Preparation of Memorandum and Articles of

Association
3. Preparation of other documents
4. Filing of documents with ROC

CERTIFICATE OF
INCORPORATION
Effect of Certificate of Incorporation
(Section 34)
On incorporation, the association of persons
becomes a body corporate by the name contained
in the memorandum, capable forthwith of
exercising all the functions of an incorporated
company and having perpetual succession and a
common seal but with such liability on the part of
the members to contribute to the assets of the
company in the event of its being wound-up as is
mentioned in the Act.
CONCLUSIVENESS OF CERTIFICATE OF INCORPORATION (SECTION 35)
Conclusive to the effect that all requirements

of law relating to registration and matters
precedent and incidental thereto have been
duly complied with.
PROVISIONAL
CONTRACTS
• Contracts entered into by company after
incorporation but before getting the certificate to
commence business are called ‘provisional contracts’.
• Provisional contracts are, therefore, relevant to

public companies only.
• Such contracts become void, if company fails to

obtain certificate to commence business and
automatically become valid, and binding if company
obtains the certificate.
Raising of Capital
 A company may raise capital

through
 Private placement
 Issue of Prospectus
Commencement of Business
(Section 149)
 Where Company has issued a Prospectus:
 A company cannot commence business

or exercise borrowing powers unless:
(a) Shares up to the amount of the minimum

subscription have been allotted by the
company;
…contd.
(b)Every director of the company has paid to the

company, on each of the shares taken or
contracted to be taken by him and for which he is
liable to pay in cash, the same proportion as is
payable on application and allotment on the
shares, offered for public subscription;
(c)No money is, or may become, liable to be repaid

to the applicants for shares or debentures
offered for public subscription, for failure to
obtain permission for the shares to be dealt in on
any recognized stock exchange;
…
contd.
(d) There has been filed with the Registrar a
duly verified declaration by one of the
directors or the secretary or, where the
company has not appointed a secretary, a
secretary in whole time practice in the
prescribed form that clauses (a), (b) and (c)
(mentioned above) have been complied with.
Memorandum of Association
Definition
“Memorandum means memorandum of

association of a company originally formed or
as altered from time to time in pursuance of
any previous companies law or of this Act”
CONTENTS OF MEMORANDUM
1. Name Clause
2. Registered Office Clause
3. Objects Clause
4.Liability Clause
5.Capital Clause
6.Association Clause or Subscription Clause.

ALTERATION OF
MEMORANDUM
1. Name Clause
2. Registered Office Clause
3. Objects Clause
4.Liability Clause
5.Capital Clause
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
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.
Share and Share Capital
 Preference Share
 Equity Share
Allotment of Shares
 ‘Allotment’ is an acceptance to an offer for

purchase of shares.
 Where allotment does not conform to the

statutory requirements, it is called irregular
allotment. For allotment to be valid,
following requirements must be satisfied:
ALLOTMENT OF
SHARES…….(CONTD)
1. A copy of prospectus or statement in lieu of
prospectus must have been delivered to Registrar of
Companies.
2. Application money must not be less than 5% of the
nominal value.
3. Minimum subscription (i.e., at least 90% of the issue)
must have been received.
4. Application money must be kept deposited in a
Scheduled Bank till the minimum subscription has
been received.
5. Shares must have been listed on the stock
exchange(s) mentioned in the Prospectus.
Directors
Sec2(13) defines-
“ Director includes any person occupying the
position of director by whatever name it is
called ”
QUALIFICATIONS OF A
DIRECTOR
•He must be competent to contract
•Share qualifications
DISQUALIFICATIONS OF
DIRECTOR
Section 274 of the Companies Act, 1956 provides that the following
persons shall not be capable of being appointed as directors of any
company:
• He is found to be of unsound mind

• He is an undischarged insolvent.
• He has applied to be adjudicated as insolvent.
• He has been convicted of any offence involving moral
turpitude and sentenced to imprisonment for not less than six

months and a period of five years has not lapsed from the date of
expiry of the sentence.
• He has not paid calls for six months.
• He has been disqualified by the court on the ground of fraud or
misfeasance in relation to the company.

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Companies Act, 1956

MEANING AND DEFINITION

Section 3(1) of the Companies Act, 1956

• Separate Legal Entity

•Free Transferability of Shares

(a)Restricts the right to transfer its shares, if

(b)Limits the number of its members to 50, not

(ii) persons who, having been formerly in the

(d) Prohibits any invitation or acceptance of

(b)hasa minimum paid-up capital of five lakh rupees or

(c) is a private company, which a subsidiary of a

• In other words, he is not allowed to

 The contract is made for the purpose of

• Minimum Number of Members required –

• Minimum Number of Members required –

2. Preparation of Memorandum and Articles of

3. Preparation of other documents

4. Filing of documents with ROC

Conclusive to the effect that all requirements

• Provisional contracts are, therefore, relevant to

• Such contracts become void, if company fails to

 A company may raise capital

 A company cannot commence business

(a) Shares up to the amount of the minimum

(b)Every director of the company has paid to the

(c)No money is, or may become, liable to be repaid

“Memorandum means memorandum of

2. Registered Office Clause

6.Association Clause or Subscription Clause.

2. Registered Office Clause

 ‘Allotment’ is an acceptance to an offer for

 Where allotment does not conform to the

•He must be competent to contract

• He is found to be of unsound mind

• He has applied to be adjudicated as insolvent.

• He has been convicted of any offence involving moral

turpitude and sentenced to imprisonment for not less than six

• He has been disqualified by the court on the ground of fraud or

misfeasance in relation to the company.

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