COMPANIES ACT

MEANING
According to Prof. Lindley, company is defined as, “An association of many persons who
contribute money or money’s worth to a common stock, and employ it in some common
trade or business (i.e., for a common purpose), and who share the profit or loss (as the case
may be) arising therefore. The common stock so contributed is denoted in money and it
the capital of the company. The persons who contribute it, or to whom it belongs, are
members. The proportion of capital to which each member is entitled is his share. Shares
are always transferable although the right to transfer them is often more or less restricted”.

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Characteristics of a Company

• Separate Legal Entity A company formed and registered under the companies act is a distinct
legal entity. It is a creation of law and is sometimes called artificial person having invisible and
intangible. It is a fiction of law with legal, but no natural or physical existence.
• Perpetual Succession A company is an artificial person, as such it never dies. Its life does not
depend on the life of its members. It may not affected by insolvency, mental disorder or
retirement of its members. It is created by law and can be put an end to only by the process of
law. Even the earthquake, flood or hydrogen bomb cannot destroy it. It continues to exist even if
all its human members are dead. Unlike a natural person a company never dies. It is an entity
with a perpetual succession. Its existence is not affected by the death, lunacy and insolvency of
its members.

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 Characteristics of a Company

• Limited Liability In a company limited by shares, the liability of members is limited to the
unpaid value of the shares. If the face value of a share in a company is Rs.10 and a member has
already paid Rs.7 per share, he can be called upto to pay not more than Rs.3 per share during the
lifetime of the company. 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.
• Common seal A company is a juristic person with a perpetual succession and a common seal.
Since the company has no physical existence, it must act through its agents and all such
contracts entered into by its agents must be under the seal of the company. The common seal
acts as the official signature of the company. Every company mush has a seal with its name
engraved on it.

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 Characteristics of a Company

• Transferability of shares The capital of a company is divided into parts, called shares. These shares
are, subject to certain conditions, freely transferable so that no shareholder is permanently or
necessarily wedded to the company. When the joint stock companies were established, the great object
was that the shares should be capable of being easily transferred.
• Capacity to sue and be sued A company can sue 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 being. On incorporation, a company acquires separate and independent legal personality. As a
legal person, it can sue and be sued in its name.
• Separate Property A company, as already observed, is a legal person distinct from its members. It is
therefore capable of owing, enjoying and disposing of property in its own name. Although, the capital
and assets of the company are contributed by its shareholders, they are not the private and joint
owners of the property of the company. The property of the company is not the property of the
shareholders; it is the property of the company.

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 LIFTING THE CORPORATE VEIL

• A company is a legal person distinct from its members. This principle

may be referred to as ‘the veil of incorporation’. The effect of this
principle is that there is a veil between the company and its members i.e.,
the company has a corporate personality which is distinct from its
members. But over a period, the abuses of this corporate personality
became apparent. Thus it became necessary for the court to break
through or lift the corporate veil or crack the shell of corporate.

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KINDS OF COMPANIES

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KINDS OF COMPANIES

I. On the Basis of Incorporation Any company is to be incorporated under an Act. The provision of
the particular Act under which it is established governs it working. Companies of this kind are of
three types. Theyare;
a. Statutory Companies
These are the companies which are created special act of the Parliament or State
Legislature, e.g., the Reserve Bank of India, the State bank of India, the Life
Insurance Corporation, etc. these are mostly concerned with public utilities, e.g.,
railways, tramways, electricity companies and enterprise of national importance.
b. Registered Companies
• Companies which are registered under the Companies Act, 1956, or were registered under
any of the earlier companies Acts are called registered companies. A vast majority of
companies we come across belong to this category. Tata Motors Limited, Reliance
Telecommunication Limited, EID Parry Limited, etc belong to this category.

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KINDS OF COMPANIES

Chartered Companies
Companies established as a result of a charter granted by the King or Queen of a
country is known as chartered companies. The charter issued, governs their
functioning. In other words, The Crown, in the exercise of the royal prorogated has
power to create a corporation by the grant of a charter to persons assenting to be
incorporated. Example – Bank of England, East India Company, etc.
II. On the Basis of Liability
On the basis of the extent of liabilities of the shareholders such companies
are divided into three categories.
Companies Limited by Share
•Where the liability of the members of a company is limited to the
amount unpaid on the shares such a company is known as a company limited
by shares. If the shares are fully paid, the liability of the members holding 9
such shares is nil.
KINDS OF COMPANIES

Companies Limited by Guarantee

•In a company limited by guarantee the liability of a shareholder is limited to the amount he
has voluntarily undertake to contribute to meet any deficiency at the time of its winding up. Such
a company may or may not have a share capital. If it has a share capital a member’s liability is
limited to the amount remaining unpaid on his share plus the amount guaranteed by him. This
type of company is started with the object of promoting science, arts, sports, charity, etc. it is
clear that its objective is not profit earning. It gets subscription from its members and donations
and endowments from philanthropists.
Unlimited Liability
•A company without limited liability is known as an unlimited liability. In case of such a
company, every member is liable for the debts of the company, as in an ordinary partnership, is
proportion to his interest in the company. In other words, their liability extends to their private
properties also in the event of winding up. Unlimited companies are almost non- existent.

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KINDS OF COMPANIES

• On the Basis of Nationality

Domestic Company
Companies registered under the Companies Act, 1956, or under earlier Acts are
considered domestic companies.
Foreign Company
• Foreign company means a company incorporated outside India but
having a place of business of India. It has to furnish to the authorities the
full address of the registered or principal office of the company or a list
of its directors or names and addresses of the residents in India
authorized to receive notices, documents, etc.

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KINDS OF COMPANIES

• On the Basis of Number of Members

Private Company
• A private company means a company which by its articles
i. restricts the rights to transfer its shares
ii. Limits the number of its members minimum 2 and maximum number of members
fifty (excluding the employees)
iii. Prohibits any invitation to the public to subscribe for any shares or debentures of the
company. The name of the company must end with the words ‘private limited’.
Public Company
•The public is invited to subscribe to the shares of the company usually by
issuing a prospectus. Shares are easily transferable. A public company must have
at least 7 persons to form and no maximum limit as to its number of
shareholders or members. The name must end with the word ‘limited’.
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KINDS OF COMPANIES

• On the Basis of Control / Ownership

Holding Company and Subsidiary Company
•A company is known as the holding company of another company if it has
control over that other company. A company becomes a holding company of
another
i) if it can appoint or remove all or majority of the directors of the latter company or
ii) if it holds more than 50% of the equity share capital of the latter or
iii)if it can exercise more than 50% of the total voting power of the latter.
•A company is known as a Subsidiary of another company when control is
exercised by the latter (called holding company). Over the former called a subsidiary
company.

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KINDS OF COMPANIES

Government Companies
•A Government company is one in which not less than 51% of the paid up capital
is held by the Central Government or by any one or more State Governments or partly
by the Central Governments and partly by one or more State Governments. Examples:
Bharath Heavy Electricals Limited, Steel Authority of India Limited, etc.
•A subsidiary of a Government company is also treated as a Government
company. A Government company also enjoys a separate corporate existence. It
should not be identified with the Government and its employees are not Government
employees.
One man company
•These are companies in which one man holds virtually the whole of the share
capital with a few extra members holding the remainder who may be his relations or
nominees.
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MEMORANDUM OF ASSOCIATION
(MOA)
• MOA is one of the core documents, which has to be
filed with the Registrar of companies at the time of
incorporation of a company. It is a document, which
sets out the constitution of the company and is
really the fundamental conditions upon which alone
the company is allowed to be incorporated.

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Contents of Memorandum
• Name Clause
• Registered Office Clause
• Object Clause
• Liability Clause
• Capital Clause
• Association Clause or Subscription Clause

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ARTICLES OF ASSOCIATION
• ‘Articles’ means the Articles of Association of a company as
originally framed or as altered from time to time in pursuance of
any previous companies law or of this Act. The articles of
association are the rules and regulations of a company frame d for
the purpose of internal management of its affairs. The articles are
framed for carrying out the aims and objects of the Memorandum
of Association.

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ARTICLES OF ASSOCIATION
• ‘Contents of Articles of Association 1. Adoption of preliminary contracts 2.
number and value of shares 3. allotment of shares 4. calls on shares 5. lien on
shares 6. transfer and transmission of shares 7. forfeiture of shares 8.
alternation of shares 9. shares certificate 10. conversion of shares into stock
11. voting rights and proxies 12. meetings 13. directors, their appointment etc
14. borrowing powers 15. accounts and audit 16. dividends and reserves 17.
winding up 18. issue of redeemable preference shares

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Shares
• Definition of Shares According to section 2 (46) of the
companies act, a share means a share in the share
capital of the company and includes stock, except
where a distinction between stock and shares is
express or implied. A share indicates certain rights and
liabilities.

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Kinds of Shares
• According to the Companies Act, 1956 a company can issue only types of shares viz.,
• 1. Preference Shares and 2. Equity Shares
I. PREFERENCE SHARES
A preferential right to get a fixed rate of dividend during the life of the company. It means that only after
payment of dividend to preference shareholders, the surplus, if any, can be used for paying dividend to
equity shareholders.
Kinds of Preference Shares
Cumulative Preference Shares
Non Cumulative Preference Shares
Participating Preference Shares
Non Participating Preference Shares
Convertible Preference Shares
Non-Convertible Preference Shares
Redeemable Preference Shares
Irredeemable Preference Shares
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Kinds of Shares
• EQUITY SHARES
• Equity shares are those, which are not preference shares. They were also known as
ordinary shares. They are entitled to get dividend only after the fixed rate of dividend
is paid to preference shareholders. Similarly at the time of winding up of the
company, only after returning preference shares capital in full, and if there is any
surplus, it will be paid to equity shareholders.
• Equity shareholders’ rights An equity shareholder of a company limited by shares has
a right to vote on every resolution placed before the company. His voting right on a
poll is in proportion to his share of the paid-up equity capital of the company.

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DEBENTURE
• Meaning of Debentures: According to Sec. 2 (12) of the companies Act,
1956, debentures include “debenture stock, bonds and any other securities
of a company”. Debentures are debt instruments issued by a joint stock
company. Amounts collected by way of debentures form part of the loan
capital of a company. They are repayable after a fixed period. Debenture
holders get interest on their debentures. They are creditors of the
company. They do not get dividend. Only shareholders get dividend.

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Types of Debentures
• On the Basis of Repayment
a. Redeemable Debentures: These debentures are paid off or redeemed after the
prescribed period
b. Irredeemable or Perpetual Debentures: These debentures are permanent debentures of
a company. They are paid back only in the event of winding up of a company.
On the Basis of Transferability
a. Registered Debentures: These are debentures for which the company maintains record
of debenture holders. Therefore when such debentures are sold or transferred it should
be intimated to the company for making change in the register of debenture holders.
b. b. Bearer Debentures: These debentures are transferable by mere delivery. There is no
need or registration of transfer with the company.

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• On the Basis of Security
a. Simple or Naked Debentures: These are debentures not secured by any asset of the company.
If the company goes into liquidation these debentures are treated as unsecured creditors.
b. Mortgage Debentures: Mortgage debentures are issued on the security of certain assets of the
company. They can be secured by fixed assets or floating assets of the company.
4. On the basis of Conversion
a. Convertible Debentures: These debentures are issued with an option to debenture holders to
convert them into shares after a fixed period. Convertible debentures are either partially
convertible debentures or fully convertible debentures.
b. Non Convertible Debentures: These are debentures issued without conversion option. The
total amount of the debenture will be redeemed by the issuing company at the end of the
specific period.
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Winding up of a company
Winding up of a company is a process of putting to an end to the life of a company. It is a
proceeding by means of which a company is dissolved and in the course of such dissolution
its assets are collected, its members, if necessary pay off its debts out of assets of the
company or from contribution. If any surplus is left, it is distributed among the members in
accordance with their rights.
DEFINITION According to Prof. Gower, 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.
An administrator, called liquidator, is appointed and he takes control of the company,
collects its assets, pay its debts and finally distributes any surplus among the members in
accordance with their rights.

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MODES OF WINDING UP
• COMPULSORY WINDING UP BY THE COURT
• If the company makes a default in delivering the statutory report to the registrar or in
holding the statutory meeting, the court may order winding up of the company either on the
petition of the registrar or on the petition of the contributory
• Where a company does not commence its business within a year from its incorporation, or
suspends its business for a whole year, the court may order for its winding up.
• Where the number of members is reduced below 7 in the case of a public company and
below 2 in case of a private company, the court may order the winding up of the company.
• The court may order for the winding up of a company if it is unable to pay its debts.

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VOLUNTARY WINDING UP
• Members voluntary winding up Section 488 provides that where it is proposed to wind up a
company voluntarily, the directors or a majority of them, may, at a meeting of the Board, make a
declaration verified by an affidavit that the company has no debts or that it will be able to pay its
debts in full within a period not exceeding 3 years from the commencement of winding up as may
be specified in the declaration. Where such a declaration is duly made and delivered, the winding
up following shall be called members voluntary winding up.
• Creditors Voluntary winding up Where the declaration of solvency is not made the winding up is
referred to as creditors’ voluntary winding up. The provisions for creditors’ voluntary winding up
are similar to those applicable to the members’ voluntary winding up except that in the former, it is
the creditors who appoint the liquidator, fix the remuneration and generally conduct the winding
up.

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