MODULE 2

COMPANIES ACT
 COMPANY MEANING AND DEFINITION
The rapid growth of trade, commerce and industry in modern times has brought about a number
of changes in the size of a firm. With the expansion in the scale of operation or business
undertakings. Thus, a new form of business organization came into existence and this is called
a joint stock Company or simply a 'company' or 'corporation.

The word company' is derived from the Latin words, 'com’ which means together and the word
‘panies’ which means 'bread'. A company is thus an association of persons who took their meals
together. In simple language the term company means an association of persons formed for
some common purpose. When a few persons form a Company for the purpose of some business
of profit with capital divisible into transferable shares it is called a joint-stock company. The
persons forming the Company are called shareholders. The liability of the members of the
company is usually limited.

A company is a corporate body, comprising a large number of persons, with greater capital,
and engaged in more extensive enterprises, and trading under a title not disclosing the names
of individuals.

According to section 2(20) of the companies Act, 2013 "a company mean s a company
incorporated under this Act or under any previous Company Law.

According to W.H.Haney 'A company is an incorporated association, which is an artificial

person created by law, having separate entity with a perpetual succession and a common
seal

From the above definition it is clear that, a company is an incorporated association, which is
an artificial person created by law, having an independent legal entity, with capital divisible
into transferable shares carrying limited liability, having a common seal and perpetual
succession.

CHARACTERISTICS OF A COMPANY

 Voluntary association:

A company is a voluntary association of persons i.e., it can neither compel a person to become
its member nor to give up his membership. It is the personal choice of people and their desire
to get profit or some other object of their own which inspires them to become members of the
company.

 Separate legal entity:

A company has perpetual succession and is independent of the life of its members. It can hold
and deal with any type of property in its ownership in any way it likes. It can enter into
contracts, open bank account in its own name, sue and be sued by its members as well as
outsiders. On account of the independent existence, the creditors of the company can recover
their money only from the company and the property of the company.

They cannot sue individual members. Similarly, the company is not in any way liable for the
individual debts of its members. No member can claim any ownership right in the assets of the
company either individually or jointly. So, it was stated that a company is a separate legal
entity.

 Perpetual succession:

A company has perpetual succession and is independent of the life of its members. Its existence
is not affected in any way by the death, insolvency of any share holder. There is a commentary
for the justification of perpetual succession of a company. It is remarked that members may
come and members may go, but the company goes on until it is wound up according to law.

 Limited liability:

The liability of the members of a company is generally limited in the case of a company limited
by shares the liability of members is 132 limited to the extent of the nominal value of shares
held by them. A shareholder can never be asked to pay anything more than the unpaid value or
the share money. However, the Articles may prescribe certain restrictions as regards the mode
of transfer, registration of transfer etc.

 Artificial legal person :

A com pany is an artificial legal person. It is created by a process other than natural birth. It
does not possess the physical attributes of a natural person. At the same time, it is clothed with
many of the rights of a natural person . It is invisible, intangible, immortal and exists only in
the eyes of law. It has no body and no soul. Because of these physical disabilities a company
is called an artificial person . But it cannot be treated as a fictitious entity because it really
exists.
  Common seal :

As a company is an artificial person, it cannot act on its own. It acts through natural persons
who are known as directors. All contracts entered into by directors must be under the common
seal of the company. The common seal with the name of the company engraved on it, is used
as a substitute for its signature. The com mon seal is affixed on important documents su ch as
share certificate and share warrant and also on important contracts. No document issued by the
company shall be binding on it unless it bears the common seal which is duly witnessed by at
least two directors of the company. But the Companies Amendment Act, 2015 made the use of
common seal optional. All such documents which required affixing the com mon seal may now
instead be signed by two directors or one director and a Company Secretary of the Company.

 Capacity to sue and be sued:

A company is a legal per son and has independent existence. Because of this particular feature
a company can file suits against others in its own name and others can file a suit against a
company. That is a company can sue and be sued in its corporate name.

 Large amount of Capital

Capital refers to the amount invested in the company so that it can carry on its activities. In a
company large number of shareholders are there, it can raise huge amount by way of shares
from among the shareholders, and can carry its business activities in a better manner with out
any shortage of funds.

 Winding up:

Winding up represents the last stage in company life. It is a proceeding by which a company
dissolved. The company's assets are disposed off the debts paid off out of the realised assets,
and the surplus any is then distributed among the members in proportion to their holdings in
the company.

TYPES OR KINDS OF COMPANIES

Companies can be classified on the basis of incorporation, on the basis of

liability, on the basis of number of members, on the basis of ownership, on

the basis of control and on the basis of nationality

 1. ON THE BASIS OF INCORPORATION

On the basis of incorporation or formation, companies may be divided into

 Chartered Companies:

This form of the company could be formed by the crown. Crown has always had the power to
grant charter of incorporation and it was by this means that chartered companies were formed.
A chartered company is regulated by the charter incorporating it and the companies act doesnot
apply to it. Examples of such companies are the East India Company, Chartered Bank, Bank
of England etc. such type of companies were in existence in India before independence and at
present such companies do not exist in India.

 Statutory Companies:

A company formed under a special statute or Act passed by the Parliament or State Legislature
is known as statutory company. The form of incorporation is used extensively to promote
public utility enterprises such as Railway, Gas and Electricity Companies and the Reserve Bank
of India, Life Insurance Corporation and the Unit Trust of India etc. These Companies are
formed in the case of national importance. This companies do not have any memorandum or
articles of association, and they derive their powers from the acts constituting them.

 Registered Companies:

These are the companies formed under the Companies Act 2013 or some earlier Companies
Act. Such Companies come into existence only when they are registered under the Act and a
certificate of incorporation has been issued by the Registrar. So public registration is an
essential feature of these type of companies. These companies derive their powers from the
Companies Act and from memorandum of association, and its intern al rules and regulations
are described in its articles of association.

2. ON THE BASIS OF LIABILITY

 Companies Limited by Shares

"Company limited by shares means a company having the liability of its members limited by
the memorandum to the amount if any, unpaid on the shares respectively held by them. (Section
2(22) That is if a shareholder has already paid the total amount of his share, he shall have no
further liability at all. If any amount is remained un paid on shares, it can be called up at any
time during the life time of the company or at the time of winding up. Hence in the case of
these companies, a shareholder cannot be called up on to pay more than the amount remaining
unpaid on his shares, and his personal assets cannot be called upon for the payment of the
liabilities of the company, if he has paid the amount on the shares purchased by him.

 Companies Limited by Guarantee

A company limited by guarantee is a company having the liability of its members limited by
the memorandum to such amount as the mem bers may respectively undertake by the
memorandum to contribute to the assets of the company in the event of its being wound up
Section 2 (21)). Such amount is only required when the company is wound up. Such companies
may or may not have share capital. But they are formed generally without share capital for non
trading purpose, such as for the promotion of art, science, Commerce, culture. charity. sport
etc.

 Unlimited Companies

Section 2(92) defines in unlimited company not having any limit on the liability of its members.
Liability in such case extend to personal property of the shareholders and each and every
member is liable for the debt of the company.

3. ON THE BASIS OF NUMBER OF MEMBERS

On the basis of number of members a company may be a private Company, a Public Company
and a one person company
One Person Company (OPC): The companies Act 2013 classifies the companies into one
person company, private company and public companies on the basis of the number of
members. A one person company is a kind or private company having only one member.

4. ON THE BASIS OF OWNERSHIP

On the basis of ownersh ip, companies are of two types. They are (a) Govern ment

companies and (b) Non- Government companies.

 Government Companies

A public enterprise incorporated under the Indian Companies Act, 2013 is called a government
company. These companies are owned and managed by the Central or the State Government.
According to Indian Companies Act 2013, (Section 2(45) a government company means "any
company in which not less than 51% of the paid up share capital is held by the Central Govt.
or by any State Government or Governments or partly by the Central Government and partly
by the one or more State governments,

 Non - Government Companies

Trading Corporation of India, Minerals and Metals Trading Corporation of India are the list of
non government companies includes all those companies which are registered under the
Companies Act but not as Government Company.

5.ON THE BASIS OF CONTROL

On the basis of control companies may be classified into two types.

 Holding company

A company is known as holding company of another company, if it has control over that other
company. According to Section 2(46) of Companies Act 2013 holding company in relation to
one or more other companies means a company of which such companies are subsidiary
companies.

 Subsidiary Company

According to section 2 (87) of the Companies Act 2013, a company is known to be subsidiary
company or subsidiary in relation to any other company that controls the composition of the
Board of Directors, exercises or controls more than one half of the total share capital either of
its own or together with one or more of its subsidiary companies

6. ON THE BASIS OF NATIONALITY

 National Companies

A company formed under a specific company act of nation is known as national

company. Eg: A Company formed and registered under the lndian companies Act,2013 1s
Knowns as an Indian company.

 Foreign Companies

Foreign Company 1s one incorporated outside India. As per section 2(42) of the companies
Act 2013, Foreign Company means any company or body corporate incorporated outside India
which

(a) has a place of business in India whether by itself or through an agent physically or through
electronic mode, and

(6) conducts any business activity in India in any other manner.

FORMATION OF A COMPANY(STEPS)
The process of formation of a company consists of three distinct stages ie,

 Promotion
 Registration and incorporation
 Commencement of business

PROMOTION
It is the first stage in the formation of a company . it is the initial work involved in bringing a
business concern into existence and making arrangements for its proper running. According to
Haney, promotion is the process of organizing and planning the finances of a business
enterprise under the corporate form.

Company Promoter
The term promoter has also defined as any individual, syndicate, association, partnership or a
company which puts into motion the machinery by which a company is bought into existence.
A promoter means

1. A person who has control over the affairs of the company directle or indirectly whether
as a shareholder, director or any other.
2. The promoters are the people who carry out the promotion of a company.
3. They are primarily responsible for the success or failure of a business project.
4. They identify the business idea and initiate the process of forming a company to
conduct the business.
5. They investigate the business idea and chart the course of setting up the business.
6. They plans out the sources of finance and other factors of production.

REGISTRATION AND INCORPORATION

 A company should either be a public, private or a one man company (write about
public, private and one man company…explanation in types of company )
 Based on liability whether it is a company limited by shares, guarantee or an
unlimited company…(explanation in types of company)
 Important documents should be filled:
1. Memorandum of Association

The first step in the formation of a company is to prepare a document called the memorandum
of association. It contains the fundamental conditions on which the company is to be
incorporated. No company can be registered without a memorandum of association and it is a
document of great importance in relation to a company.

The memorandum of association of a company is its charter and defines the limitations of the
powers of the company. The memorandum contains the fundamental conditions upon which
alone the company is allowed to be incorporated.

The memorandum of every company shall state:

 The name of the company with limited as the last word of the name in the case of a
public limited company and with private limited as the last words of the name in the
case of a private limited company.
 The state in which the registered office of the company is to be situated
 The objective of the company
  The liability of members of the company whether limited or unlimited explaining
clearly with regard to company limited by shares and company limited by guarantee.
 The amount of share capital with which the company is to be registered.
 Each subscriber of the memorandum shall write opposite to his name the number of
shares he takes.

CONTENTS OF MEMORANDUM

 Name clause

A company being a legal entity must have a name for its existence. The name of the company
with limited as the last word of the name in the case of a public limited company and with
private limited as the last words of the name in the case of a private limited company. The
name stated in the memorandum shall not be identical with or resemble too nearly to the name
of an existing company registered under this act. A person may make an application in such
form and manner accompanied by such fee as may be prescribed, to the Registrar for the
reservation of a name set. Upon receipt of an application the Registrar may on the basis of
information and documents furnished along with the application, reserve the name for a period
od sixty days from the date of the application. After reserving the name it is found that the
name was applied by furnishing wrong or incorrect information then if the company has not
been incorporated the reserved name shall be cancelled and the person making application shall
be liable to a penalty which may extend to one lakh rupee.

 Registered Office Clause

This clause mention the name of the state in which the registered office of the company is to
be situated. The registered office clause is very significant as it ascertain the nationality of the
company.

 Object Clause

This states the objects of the company. That is, the type of the activities which the company
can carry on. A company can take up only those activities which are mentioned in the
memorandum and beyond which it cannot go.

 Liability clause

The liabily of the members of the company whether limited or unlimited and also how to cope
up with liabilities of the firm when debts occur.
  Capital clause

This clause mention the division of the share capital.

 Association or subscription clause

In the case of company having share capital the number of shares the subscribers to the
memorandum agree to subscribe shall not be less than one share and the number of shares each
subscriber to the memorandum intends to take indicated opposite his name

2. ARTICLES OF ASSOCIATION

The articles of association is the second important document required to be filed with the
registrar for the registration of the company. The articles of association of a company are its
bye laws or rules and regulations that govern the management of its internal affairs and conduct
of its business. The articles regulates the internal management of the company. They defines
the power of its officers. They set out the provision for the manner in which the company is to
be administered. It is a document regulating the rights of members of the company among
themselves and the manner in which the business of the company shall be conducted.

CONTENTS

 The execution or adoption of preliminary contracts

 Lien on shares
 Transfer of shares
 Transmission of shares
 Alteration of capital
 Voting rights of members
 Board of Directors
 Seal of the company
 Books of accounts and audit
 Winding up of the company
 Conversion of shares into stock
DIFEERENCE BETWEEN MEMORANDUM AND ARTICLES

After getting the name approved, an application with the following documents shall be filed
with the Registrar

 The memorandum and articles of the company duly signed by all the subscribers of the
memorandum
 A declaration in the prescribed form by an advocate, a chartered accountant, cost
accountant or company secretary who is engaged in the formation of the company
 The address for correspondence till its registered office is established
 The particulars name including surname or family name, residential address, nationality
and such other particulars of every subscribers to the memorandum along with the proof
of identity
Etc.
3. PROSPECTUS
CERTIFICATE OF INCORPORATION

 The Registrar on the basis of documents and information filed shall register all the
documents and information in the register and issue a certificate of incorporation
prescribed form to the effect that the proposed company is incorporated.
 On and from the date mentioned in the certificate of incorporation issued, the Registrar
shall allot to the company a corporate identity number, which shall be a distinct identity
for the company and which shall also be included in the certificate.
 The company shall maintain and preserve at its registered office copies of all documents
and information as originally filed till its dissolution under this act.
 If any person furnishes any false or incorrect particulars of any information or surpasses
any material information of which he is aware in any of the documents filed with the
Registrar in relation to the registration of a company, he shall be liable for action.

NOTE:
Important documents of company are Memorandum of association, articles of association
and prospectus
(in formation of company notes memorandum, articles and prospectus notes given)

SHARES AND SHARE CAPITAL

MEANING OF SHARE

In simple words, a share indicates a unit of ownership of the particular company. If you are a
shareholder of a company, it implies that you as an investor, hold a percentage of ownership
of the issuing company. As a shareholder you stand to benefit in the event of the company’s
profits, and also bear the disadvantages of the company’s losses.

TYPES OF SHARES

share can be of two types:

 Equity shares
  Preference shares

EQUITY SHARES MEANING

These are also known as ordinary shares, and it comprises the bulk of the shares being issued
by a particular company. Equity shares are transferable and traded actively by investors in stock
markets. As an equity shareholder, you are not only entitled to voting rights on company issues,
but also have the right to receive dividends. However, the dividends - issued from the profits
of the company - are not fixed. You must also note that equity shareholders are subject to the
maximum risk - owing to market volatility and other factors affecting stock markets - as per
their amount of investment. The types of shares in this category can be classified on the basis
of:

 Share capital
 Definition
 Returns

Classification Of Equity Shares On The Basis Of Share Capital

Equity financing or share capital is the amount raised by a particular company by issuing
shares. A company can increase its share capital by additional Initial Public Offerings (IPOs).
Here is a look at the classification of equity shares on the basis of share capital:

 Authorised Share Capital: Every company, in its Memorandum of Associations,

requires to prescribe the maximum amount of capital that can be raised by issuing
equity shares. The limit, however, can be increased by paying additional fees and after
completion of certain legal procedures.

 Issued Share Capital: This implies the specified portion of the company’s capital,
which has been offered to investors through issuance of equity shares. For example, if
the nominal value of one stock is Rs 200 and the company issues 20,000 equity shares,
the issued share capital will be Rs 40 lakh.

 Subscribed Share Capital: The portion of the issued capital, which has been
subscribed by investors is known as subscribed share capital.

 Paid-Up Capital: The amount of money paid by investors for holding the company’s
stocks is known as paid-up capital. As investors pay the entire amount at once,
subscribed and paid-up capital refer to the same amount.
Classification Of Equity Shares On The Basis Of Definition

Here is a look at the equity share classification on the basis of definition:

 Bonus Shares: Bonus share definition implies those additional stocks which are issued
to existing shareholders free-of-cost, or as a bonus.

 Rights Shares: Right shares meaning is that a company can provide new shares to its
existing shareholders - at a particular price and within a specific time-period - before
being offered for trading in stock markets.

 Sweat Equity Shares: If as an employee of the company, you have made a significant
contribution, the company can reward you by issuing sweat equity shares.

 Voting And Non-Voting Shares: Although the majority of shares carry voting rights,
the company can make an exception and issue differential or zero voting rights to
shareholders.

Classification Of Equity Shares On The Basis Of Returns

On the basis of returns, here is a look at the types of shares:

 Dividend Shares: A company can choose to pay dividends in the form of issuing new
shares, on a pro-rata basis.

 Growth Shares: These types of shares are associated with companies that have
extraordinary growth rates. While such companies might not provide dividends, the
value of their stocks increase rapidly, thereby providing capital gains to investors.

 Value Shares: These types of shares are traded in stock markets at prices lower than
their intrinsic value. Investors can expect the prices to appreciate over a period of time,
thus providing them with a better share price.

PREFERENCE SHARES MEANING

These are among the next types of shares issued by a company. Preferential shareholders
receive preference in receiving profits of a company as compared to ordinary shareholders.
Also, in the event of liquidation of a particular company, the preferential shareholders are paid
off before ordinary shareholders. Here is a look at the different types of shares in this category:

 Cumulative And Non-Cumulative Preference Shares Meaning: In the case of

cumulative preference shares, if a particular company doesn’t declare an annual
 dividend, the benefit is carried forward to the next financial year. Non-cumulative
preference shares don't provide for receiving outstanding dividends benefits.

 Participating/Non-Participating Preference Share Definition: Participating

preference shares allow shareholders to receive surplus profits, after payment of
dividends by the company. This is over and above the receipt of dividends. Non-
participating preference shares carry no such benefits, apart from the regular receipt of
dividends.

 Convertible/Non-Convertible Preference Shares Meaning: Convertible preference

shares can be converted into equity shares, after meeting the requisite stipulations by
the company’s Article of Association (AoA), while non-convertible preference shares
carry no such benefits.

 Redeemable/Irredeemable Preference Share Definition: A company can repurchase

or claim redeemable preference share at a fixed price and time. These types of shares
are sans any maturity date. Irredeemable preference shares, on the other hand, have no
such conditions.
 DEBENTURES
The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which means to borrow
or loan. Debentures are written instruments of debt that companies issue under their common
seal. They are similar to a loan certificate.

Debentures are issued to the public as a contract of repayment of money borrowed from them.
These debentures are for a fixed period and a fixed interest rate that can be payable yearly or
half-yearly. Debentures are also offered to the public at large, like equity shares. Debentures
are actually the most common way for large companies to borrow money.

FEATURES OF DEBENTURES

 Debentures are instruments of debt, which means that debenture holders become
creditors of the company

 They are a certificate of debt, with the date of redemption and amount of repayment
mentioned on it. This certificate is issued under the company seal and is known as a
Debenture Deed

 Debentures have a fixed rate of interest, and such interest amount is payable yearly or
half-yearly

 Debenture holders do not get any voting rights. This is because they are not instruments
of equity, so debenture holders are not owners of the company, only creditors

 The interest payable to these debenture holders is a charge against the profits of the
company. So these payments have to be made even in case of a loss.

ADVANTAGES OF DEBENTURES

 Investors who want fixed income at lesser risk prefer them.

 As a debenture does not carry voting rights, financing through them does not dilute
control of equity shareholders on management.

 Financing through them is less costly as compared to the cost of preference or equity
capital as the interest payment on debentures is tax deductible.

 The company does not involve its profits in a debenture.

  The issue of debentures is appropriate in the situation when the sales and earnings are
relatively stable.

DISADVANTAGES OF DEBENTURES

 Each company has certain borrowing capacity. With the issue of debentures, the
capacity of a company to further borrow funds reduces.

 With redeemable debenture, the company has to make provisions for repayment on the
specified date, even during periods of financial strain on the company.

 Debenture put a permanent burden on the earnings of a company. Therefore, there is a

greater risk when the earnings of the company fluctuate.

TYPES OF DEBENTURE

1. Secured and Unsecured:

Secured debenture creates a charge on the assets of the company, thereby mortgaging
the assets of the company. Unsecured debenture does not carry any charge or security on the
assets of the company.

2. Registered and Bearer:

A registered debenture is recorded in the register of debenture holders of the company. A

regular instrument of transfer is required for their transfer. In contrast, the debenture which is
transferable by mere delivery is called bearer debenture.

3. Convertible and Non-Convertible:

Convertible debenture can be converted into equity shares after the expiry of a specified period.
On the other hand, a non-convertible debenture is those which cannot be converted into equity
shares.

4. First and Second:

A debenture which is repaid before the other debenture is known as the first debenture. The
second debenture is that which is paid after the first debenture has been paid back.