Nature and Types of Companies – Major Principles –

Formation – Memorandum and Articles of

Association – Prospectus – Power – Duties and
Responsibilities – Liabilities of Directors – Winding
up of Companies – Corporate Governance
 According to Justice Cave, “A corporation is
a legal person just as much as an individual,
but with no physical existence”
 Legal Personality
 Limited Liability
 Perpetual Succession – members may come
and go but the company is forever
 Right to property
 Common Seal
 Transferability of Shares
 Capacity to sue and be sued
 Not a citizen
 Limited Liability
 Easy Mobilization of Resources
 Possibilities for expansion
 Long Life
 Easy transferability of shares
 Democratic Management
 Capital Formation
 Long Drawn Process
 Expensive
 Separation of ownership from control
 Rigid Government Control
 Erosion of Limited liability
 Administrative Delays
I. Classification on the Basis of Incorporation
1. Chartered Companies – King or Queens.
Ex. Queen of England incorporated several
companies like East India Company, bank of
England etc. In India, we have no such
company
2. Statutory Companies - Companies which
are established by special act of the central
legislature or any state legislature are
called statutory companies
3. Registered Companies
Companies which are established by
registration under the companies act, 1956
or under earlier companies acts are called
registered companies.
II. Classification on the Basis of Liability
1. Companies limited by shares
2. Companies limited by guarantee
Companies in which the liability of
members is limited by the memorandum to
such an amount as the members undertake
to pay are called companies limited by
guarantee
III. Classifications on the basis of members
1. Private Companies
– minimum paid up capital of Rs.1,00,000 and
more
- Word Private limited has been included with
the company name
- minimum 2 members, maximum – 50
members
2. Public Companies
– minimum paid up capital of Rs.5,00,000 and
more
- minimum 7 members, maximum – no limit
IV. Classification on the Basis of Control of
Ownership
1. Holding company
A company is deemed to be a holding
company of another
2. Subsidiary company
The company which is controlled by
another company
3. Government Company
51% of the company owned by government
4. Foreign Company
 Public Company Private Company
1. Minimum number of 7 2
members
2. Commencement of After getting As soon as getting
Business certificate of certificate of
incorporation and incorporation
certificate of
commencement of
business
3. Allotment of Shares Allot shares only after Allot shares
minimum subscription irrespective of the
has been subscribed by number of shares
the public subscribed by the
applicant
4. Kinds of shares Equity shares and Any kind of shares and
preference shares with such voting rights
as it may think
5. Minimum number of Not less than 3 Minimum two directors
directors directors
 Public Company Private Company
6. Qualification of Directors of a public Need not acquire
shares company should
acquire the
qualification shares
specified in the
articles of association
7. Consent to act as a In writing and filed No need
Director with registrar
8. Statutory meeting Must hold Need not
9. Multiple Cannot be a director Can have any number
Directorship of more than 15 of companies
companies at a time
10. Managerial 10% of net profit No limit
Remuneration
 Public Company Private Company
11. Compulsory 1/3 of the directors Directors need not
retirement of a public company retire
are compelled to
retire by rotation
every year
12. Maximum No limit 50
members
13. Issue of Can issue Cannot issue
Prospectus
14. Use of the word Public company may Private company may
“Ltd” add simply the word add the words
“Ltd” “Private Limited”
15. Meeting (Quorum) Five members Two members
personally present
1. Promotion
2. Registration
3. Commencement of Business
Definition
“The discovery of business opportunities and
the subsequent organization of funds,
property and management ability into a
business concern for the purpose of making
profit therefrom”
Promoter: The person who undertakes all these
activities is known as the promoter
Define Promoter
“a promoter is a person who undertakes to
form a company with reference to a given
object and to set it going and who takes
necessary steps to accomplish that purpose”
 Promotion of an idea
 Detailed investigation
 Verification
 Assembling
 Financing the proposition
 Presentation of the proposition
 Duty to Disclose
 Not to make any secret profit
 Duty to give benefits of negotiations to the
company
 Not to make unfair use of his position
1. Approval of the proposed name
2. Documents to be filed with the Registrar
a. Memorandum of Association
b. Articles of Association
c. List of directors
d. Consent of the directors
e. Statutory declaration – Advocate, Chartered
accountant, Director or Managing Director
f. Notices of the Address of the Registered
Office (within 30 days)
g. A letter of authority for making necessary
corrections in Memorandum and articles
h. Letter of Registrar of companies about the
availability of name

3. Payment of necessary fees

4. Registration of the company
 Afterthe above documents are filed with the
Registrar and the prescribed fees are paid
and the registrar is satisfied then he will
issue a certificate known as Certificate of
Incorporation. (in other words, upon the
issue, the company is born)
A private company can commence business
right from the date of the certificate of
incorporation
 A public company cannot commence business
immediately upon incorporation. A further
certificate known as Certificate of
Commencement of Business is necessary
before it commences its business
 Memorandum of association is the
constitution of the company.
 “The MOA of a company as originally framed
or as altered from time to time in pursuance
of any previous companies law or of this act”
1. Name Clause
The name clause contains the name of the
company. A company being a legal person,
must have a name to establish its corporate
existence.

The last word of the name must be “Limited”

in case of Public companies and in case of
private companies it should be a “Private
Limited”
2. Situation Clause
It contains the name of the state in which the
company’s registered office is to be situated
3. Objects Clause - Objectives of the company
4. Liability Clause
5. Capital Clause
6. Association Clause
1. Alteration of the Name Clause
 General change of the name
 Change of name under the direction of the
central government
 Addition or Deletion
 Minor Mistakes
2. Alteration of the Situation Clause
 Change of registered office
3. Alteration of the objects Clause
4. Alteration of the Liability Clause
5. Alteration of the Capital Clause
 Theterm “Ultra” means beyond and “Vires”
means powers. The term, therefore, means
the doing of an act which is beyond the legal
power and authority of the company
 MOA and AOA are available for public
inspection in the registrar’s office on
payment of nominal fee for each inspection
 Its purpose is to safeguard the ignorant
stranger who deals with the company in good
faith
 This document contains the rules and
regulations regarding the internal
management of the company.

Definition
“Articles means the Articles of Association of a
company originally framed or as altered from
time to time in pursuance of any previous
companies law or of this act”
 Adoption of preliminary contracts
 Number and values of shares
 Allotment of Shares
 Calls of Shares
 Share certificates and rights of different
types of shareholders
 Transfer and transmission of shares
 Forfeiture of shares
 Alteration of capital
 Borrowing Powers
 Alteration of the Memorandum
 General meetings, voting rights of the
members
 Number of directors, their qualifications and
remunerations
 Dividend
 Accounts and audit
 Issue of bonus shares
 Appropriations to various reserves
 Winding up
A special resolution must be passed. The
articles can never be altered by a general
resolution
 A certificate copy of the resolution must be
filled with the registrar within 30 days of the
passing of it
 If the alteration is for converting a public
company into a private company, or if it is
related to the managing director or the
manager, the approval of the central
government is also necessary
 Alteration should be made in all the articles
issued thereafter
 The alteration should not affect the rights of
the outsider
 The alteration should not cause a breach of
contract
 The alteration must be benefit of the
company as a whole
 The alteration should not force the members
to take more shares or to pay more money
for the shares already purchased by them
Memorandum Articles
Charter of the company and Bye law or internal regulation of
defines and also confines the the company
fundamental conditions and
objects for which company is
granted incorporation
Subordinate to the companies Subordinate to the memorandum
act
Principal Document Secondary Document
Specifies the scope of authority Specifies the procedures to be
and the objectives followed to carry out the
objectives stated in the
memorandum
Defines the relationship between Defines the relationship between
company and outsiders the company and its members
Alteration is difficult Alteration is easy
Memorandum is compulsory for The company need not have its
all companies own articles. Instead, it can
adopt Table A as its articles
Act Ultra vires to Memorandum Acts Ultra vires to Articles can be
cannot be ratified and outsiders ratified by suitable legal
have no remedy against the formalities.
company
 After obtaining the Certificate of
Incorporation, the promoters of a public
company have to issue a prospectus to
arouse public interest in the proposed
company
 “any document described or issued as a
prospectus and includes any notice, circular,
advertisement or other document inviting
deposit from the public, inviting offers from
the public for the subscription or purchase of
any shares in or debentures of a body
corporate”
 To attract the investors
 To make enough disclosure to the investors
to enable them to decide whether or not to
purchase shares or debentures of the
company
 To secure that the directors of the company
accepted responsibility for the statement in
the prospectus. A prospectus is thus only a
window through which a prospective investor
can look into the soundness of a company’s
venture
I. As per provisions contained in the companies
act, 1956
 A prospectus cannot be issued by a prospective
company before its incorporation
 Every prospectus must be dated usually, that
date is taken as the date of publication of the
prospectus.
 A copy of every prospectus must be signed by
every director or proposed director or by their
authorized agents.
 On or before the date of publication, a copy of
the prospectus must be filed with the register.
 This copy must be accomplished by the following documents:
 A) Written consent of all persons named therein as auditors,
legal advisors, bankers, solicitors, attorneys and brokers.
 B) A copy of every contract entered into with the managing
directors, managers etc. regarding their conent.
 C) A copy of every material contract (unless entered into before
2 years)
 D) If a running business is taken over by the company,
statement of the profit and loss for the previous 5 years,
certified by a chartered accountand.
 E) The prospects must contain a statement that a copy of the
prospectus has been filed with the registrar.
 F) The consent of the director U/S 266 in respect of new
directors, if any, named therein.
 G) A copy of underwriting agreement, if any, should also be
filed as required by sec.76(1)(b)(v).
The prospectus must be issued to the public within 90 days of its
registration . If not, it will not be a prospectus under this act
 If any default is made in issuing the prospectus
within 90 days, the company and every officer
responsible thereof shall be fined upto Rs
5,000/-
 The prospectus must contain a statement that a
copy has been delivered for registration, also
indicating the requisite documents (giving
names) delivered with it.
 The consent of the expert should be obtained. If
the prospectus includes a statement purporting
to be made by an expert, a consent in writing of
that expert should be obtained and this fact
should be stated in the prospectus. It should also
that the consent given has not been withdrawn.
 Sec.56 requires every prospectus to disclose the
matter as specified in schedule II to the companies
act.
 The central government has vide note no 666(e)
dated 3.10.1991 amended schedule II. The matters to
be stated in the prospectus under the revised
scheduled II are divided into 3 parts which are as
under:

PART 1
1.General information
1. Name and address of registered office of the
company.
2. a) consent of the central government for the present
issue and declaration of the central government about
non-responsibility for financial soundness or correctness
of statements.
 b) letter of intent/industrial license and
declaration of the central government about non-
responsibility for financial soundness or correctness
of statements.
 3. Names of regional stock exchanges and other stock
exchanges where application made for listing of
present issue.
 4. provisions of sub section (1) of sec.68A of the
companies act relating to punishment for fictitious
applications.
 5. statement/declaration about refund of the issue if
minimum subscription of 90 per cent is not received
within 90 days from closure of the issue.
 6. Declaration about the issue of allotment
letters/refunds within a period of 10 weeks
and interest in case of any delay in refund at
the prescribed rate under sec. 73(2) & (2A).
 7. Date of opening of the issue.
 Date of closing of the issue
 Date of earlist closing of the issue.
8. Name and address of auditors, and lead
managers.
9. Name and address of trustee under debenture
trust deed.
 10. Whether rating from CRISIL or any rating
agency has been obtained for the proposed
debenture/preferences shares issue.
 If no rating has been obtained, this
should be answered as “No”
 If yes rating should be indicated.
 11. Underwriting of the issue.
 (Names and address of the underwriters and
the amount underwritten by them)
 (Declaration by board of directors that the
underwriters have sufficient resources to discharge
their respective obligations).
1. Authorized, issued, subscribed and paid-up
capital.
 2. size of present issue giving separately
reservation for preferential allotment to
promoters and others.
 3.paid-up capital:
 (a) after the present issue.
 (b) after conversion of debentures (if applicable)
 III. Terms of the present issue
1. Terms of payments.
2. Rights of the instrument holders.
3. How to apply – availability of forms,
prospectus and mode of payment.
4. Any special tax benefits for company and its
shareholders.
 IV. Particulars of the issue
 1. objects.
 2. project cost.
 3. means of financing (including contribution
of promoters).
 V. company, management and project
 1.History and main objects and present
business of the company.
 2. subsidiary(ies) of the company, if any (For
financial data refer to auditors report in part
II).
 3. promoters and their background.
 4. Names, addresses and occupation of
manager, managing directors, whole-time
directors.
 5. Location of Project
 6. Plant and machinery. Technology, process
etc
 7. Infrastructure facilities

Part II
I. General Information
1. Consent of Directors, Auditors, Advocates
etc
2. Expert Opinion
3. Resolution passed
II. Financial Information
III. Statutory and other information

Part III
Declartion
Definition
“a director means any person occupying the
position of a director by whatever name
called”

Deemed Director
Directions or instruction, the board of
directors is accustomed to act
 Directorsof a company collectively are
referred to as the Board of Directors.

 Who is eligible to become a director?

 Only an individual can be appointed as a
director.
 Achieving prescribed qualification of shares
 First
Director
 Appointment by the company
 Appointment by the board
 Appointment by outsiders
 Appointment by the Central Government
 Directors as Agents
 Directors as Trustees
 Directors as Employees
 Directors as Officers
I. General Powers
All powers and to do all such acts and
things as the company is authorized to do .
So long as the directors exercise their
powers within the limits specified under
this section.
II. Specific Powers
To make calls, to issue debentures, to
borrow money by other means, to invest
the funds of the company and to make
loans
III. Powers Subject to the Consent of the
Company
IV> Powers Subject to the consent of the
Central Government
 Statutory Duties
1. Supervise, control and director the
Managing Director and Manager
2. Fresh issue of shares
3. Misleading statements
4. Statutory Report
5. Extra Ordinary General Meeting
6. Annual Accounts
7. Dividends
 Non Statutory Duties
1. Duty to keep the relationship
2. Duty to take care and skill
 Civil Liabilities
1. Contracts in their own name
2. Ultra Vires Acts
3. Misleading Prospectus
4. Failure to repay application money
5. Fraudulent act
 Liability to the company
1. Ultra Vires Act
2. Breach of Trust

 Criminal Liabilities
 Only an individual can be a managing
director. He should be a director of the
company. He should not be the one who is
disqualified for directorship
 Winding up of a company is the process whereby
its life is ended and its property administered for
the benefit of its creditors and members.

 Modes of Winding up - A company may be

would up in any one of the three ways,

 (I) compulsory winding up ie., by Court (s.433)

 (Ii) voluntary winding up; (s 484)
 (ii) voluntary winding up subject to the supervision of
the Court.(s 522)
Section 433 provides that a company may be wound up by the Court :
(a) if the company has, by special resolution, so resolved ;

(b) if default is made in delivering the statutory report to the Registrar

or in holding the statutory meeting, where applicable ; but petition
should be filed within 14 days.

(c) if the company within a year from its incorporation, or does not
commence its business suspend its business for a whole year,

(d) if the number of members is reduced-

in the case of a public company, below 7, and
in the case or a private company, below 2;
(e) if the company is unable to pay its debts ;(s 434)
A company shall be unable to pay its debts :

A. If a creditor to whom the company owes more than Rs 500 then

due, has served on the co. a demand in writing and the co. has
within 3 weeks thereafter neglected to pay or secure or compound
the sum to the reasonable satisfaction of the Creditor.

B. if an execution or other process issued on a decree or order of any

court in favour of Creditor has not been satisfied by the Company.

C . If is proved to the satisfaction of the court that the company is

unable to pay its debts including contingent and prospective
liabilities.
 Procedure for winding up
 Date of commencement of winding up - date on which the petition is
presented to court. As such, Until winding up order is made , the
company will have to comply with the requirements of the companies act
as are required if company not wound up. However in case if voluntary
winding up,the winding of the company is deemed to have commenced
at the time of the passing of the resolution.

 Hearing of Petition. - notices issued to all concerned parties. Before

hearing the petition the provisional liquidators are appointed to safe
guard the assets of the company.

 Intimation to Official Liquidator.

 On hearing the petition the court may dismiss it, with or without costs,
adjoin the hearing conditionally or unconditionally, make any interim
order that it thinks fit, make an order for winding up the company with or
without costs or any other order that it thinks fit.
Consequences of Winding up order :

 the court must, as soon as the winding up order is made, cause

intimation thereof to be sent to the official liquidator and the
registrar(S444).

 The petitioner and the company must also file with the registrar
within 30 days a certified copy of the order.(S445(1)). In case the
certified copy is not filed the petitioner is fined (S445).

 the registrar should take the the minutes in his book and notify in the
official Gazette that such order has been made(S445(2)).

 The order for winding up is deemed to be a notice of discharge to the

officers and the employees except when the business is continued.
 and suits against the company are stayed, unless the court gives
leave to continue or commence proceedings.

 All power of the board of directors cease and the same are then
exercised by the liquidator.(s491,s505)

.
 On the commencement of the winding up the limitation ceases to run
in favour of the company.

 Any disposition of the property of the company and any transfer of

shares in the company are then void. the official liquidator, by virtue
of his office becomes the liquidator of the company and takes
possession and control of the assets of the company.(S536(2))
 Any distress or execution put in force without the court orders are
void.(S537(a))

 Any type of sale or floating charge created within the period of

proceedings are void.[S534]

 Statement of affairs to be made to the liquidator

 Order of Dissolution by the Court -thereafter the company has no

existence
 Voluntary Winding up - Winding up by the members or
creditors without any intervention of the Court is called
voluntary winding up.

 As per section 484, a company may be wound up

voluntarily
 by Ordinary resolution or by Special resolution.
 By passing an ordinary resolution in general
meeting
a. where either the time fixed by the articles for the duration of the
company has expired OR
b. the event specified in the Articles has occurred on which the
company is to be dissolved.
  In any other case, the company may
resolve to be wound up voluntarily by
passing a special resolution in general
body meeting of shareholders.

 A voluntary winding up is deemed to commence

from the time the resolution for voluntary winding
up is passed.
 when the company has passed the resolution for
voluntarily winding up, it must within 14 days, give
notice in official gazette and also in some
newspapers
 A voluntary winding up is deemed to be commence at
the time when the resolution for voluntary winding up is
passed.
 The company ,from the commencement of the winding
up, must cease to carry on its business except so far as
may be required to secure a beneficial winding up.
 The transfer of shares and alterations in the status of
members, made after commencement becomes void.
 A resolution to wind up voluntarily operates as notice of
discharge to the employees of the company.
 On the appointment of the liquidator all the powers of
the board of directors shall cease except after the
permission of the registrar.
 Types of Voluntary Winding up - Voluntary winding up may be of
two types, namely,
a) Members’ voluntary winding up ;
b) Creditors’ voluntary winding up.

 Members’ Voluntary Winding up - Members’ voluntary winding up is

possible only in case of solvent companies.

1) DECLARATION OF SOLVENCY (S448)–

 The directors must enquire whether the company will be able to able to pay
all its debts within the period of 3 years.
 In order to be effective, this declaration must be made within 5 weeks
immediately preceding the date of passing of the winding up resolution by
the members;
 delivered to the Registrar for filing ; and
 must be accompanied by a copy of the report of the auditors of the
company on the accounts and balance sheet.
 Appointment and remuneration of liquidators:
(S492)the company in general meeting must:
a) appoint one or more liquidators
b)fix the remuneration
any remuneration so fixed cannot be increased in any
circumstances whatever, whether with or without the
sanction of the court. No liquidator shall charge of his
office unless his remuneration is fixed.
 Board’s power to cease: (S491)on the appointment of
the liquidators all the powers of the directors cease but
their powers may continue if the general body or the
liquidator sanctions it.
 Notice of the appointment of the liquidator to be
given to the registrar(S493):within 10 days of his
appointment otherwise Rs.1000 fine per day.
 Power of liquidator to accept shares, etc., as
consideration of sales of property of the
company(S497):
 Duty of liquidator to call creditors meeting in case of
insolvency: S495 if the liquidator finds that the
company will not be able to pay its debts he should tell
it to the creditors with all records.
 Duty of liquidator to call general meeting at the end
of each year(S496):In case the winding takes more then
one year the liquidator must call a general meeting and
tell the acts and winding operations done by him.
 Final meeting and dissolution(S497): the liquidator
must(a)make up an account of the winding up showing
how the company has been disposed of (b)call the
general meeting of the company for laying the
account before it as well as explanations.
 Creditors’ voluntary winding up

 Where the Board of directors does not file a declaration

as to solvency of the company, the voluntary winding up is
called ‘ the Creditors ‘ voluntary winding up.

 - if the members and creditors nominate two different persons as

liquidators, creditors’ nominee shall become the liquidator of the company.

 - Besides, in the case of creditors’ winding up, if the creditors so wish , a ‘

committee of inspection ‘ may be appointed to work along with the
liquidator's.
 Notice to registrar: A company of any resolution passed at the creditors
meeting must be filed with the registrar within 10 days of the passing thereof.
otherwise fine of 500 Rs per day(S501).

 Appointment of liquidator: (S502) the creditors nd the members at their

respective first meeting may nominate a person to be liquidator but should
take the board of directors into considerations.

 Committee of inspection(S503): The creditors at their first or any subsequent

meeting, appoint a committee of inspection of not more than 5 members.

 Fixing of liquidator’s remuneration(S505): the remuneration of the liquidator

is fixed by the committee of inspection.

 Board’s power to cease on appointment of liquidator(S505): all the powers of

the directors should go to the liquidator.

 Duty of liquidator to call meeting of company and creditors at the end of

each year[S508]: within 3 months from the end of the year.
 Final meeting and dissolution [S509]
 A voluntary winding up may be effected under supervision of the Court
where an application to that effect is made by a creditor or a
contributory or the company or the liquidator and the Court makes an
order that the voluntary winding up should continue subject to the
supervision of the Court.

 Such an order is passed by the Court where

 (i) the resolution for winding up was obtained by fraud, or
 (ii) the rules relating to the winding up order have not been observed, or
 (iii) the liquidator is prejudicial or is negligent in collecting the assets.

 The Court is also empowered under the section 527 to make an order
for compulsory winding up superseding the order of winding up under its
supervision.
 “CORPORATE GOVERNANCE is the system by which
companies are directed and controlled by the management
in the best interest of the shareholders and others ensuring
greater transparency and better and timely financial
reporting.

 The Board of Directors are responsible for governance of

their companies.”

 “CORPORATE GOVERNANCE is needed to create a corporate

culture of consciousness, transparency and openness. It
refers to combination of laws, rules, regulations,
procedures and voluntary practices to enable the
companies to maximize the shareholders long-term value.
It should lead to increasing customer satisfaction,
shareholder value and wealth.”
 Rights and equitable treatment of shareholders

 Interest of other stakeholders

 Role and responsibilities of the board

 Integrity and ethical behaviour

 Disclosure and transparency

 Transparency

 Disclosure

 Fairness

 Independent supervision