Companies Act, 1956

MEANING OF COMPANY
"A company is meant an association of many
persons who contribute money or money's
worth to a common stock and employ it in some
trade or business, and who share the profit and
loss (as the case may be) arising there from. The
common stock contributed is denoted in money
and is 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".

CHARACTERISTICS OF A COMPANY
• Incorporated association: A company is created when
it is registered under the Companies Act. It comes into
being from the date mentioned in the certificate of
incorporation. It may be noted in this connection that
Section 11 provides that an association of more than
ten persons carrying on business in banking or an
association or more than twenty persons carrying on
any other type of business must be registered under
the Companies Act and is deemed to be an illegal
association, if it is not so registered. For forming a
public company at least seven persons and for a private
company at least two persons are required.

• Artificial legal person: A company is an artificial
person. Negatively speaking, it is not a natural
person. It exists in the eyes of the law and cannot
act on its own. It has to act through a board of
directors elected by shareholders. It was rightly
pointed out in Bates V Standard Land Co. that :
"The board of directors are the brains and the
only brains of the company, which is the body
and the company can and does act only through
them".

• Separate Legal Entity: A company has a legal
distinct entity and is independent of its members.
The creditors of the company can recover their
money only from the company and the property
of the company. They cannot sue individual
members.
• Perpetual Existence: A company is a stable form
of business organization. Its life does not depend
upon the death, insolvency or retirement of any
or all shareholder (s) or director (s). Law creates it
and law alone can dissolve it. Members may
come and go but the company can go on for ever.

• Common Seal: A company being an artificial
person has no body similar to natural person and
as such it cannot sign documents for itself. But
having a legal personality, it can be bound by only
those documents which bear its signature.
Therefore, the law has provided for the use of
common seal, with the name of the company
engraved on it, as a substitute for its signature.
Any document bearing the common seal of the
company will be legally binding on the company.

• Transferable Shares: In a public company, the
shares are freely transferable. The right to
transfer shares is a statutory right and it
cannot be taken away by a provision in the
articles. However, the articles shall prescribe
the manner in which such transfer of shares
will be made and it may also contain bona fide
and reasonable restrictions on the right of
members to transfer their shares.

• Separate Property: As a company is a legal
person distinct from its members, it is capable of
owning, enjoying and disposing of property in its
own name. Although its capital and assets are
contributed by its shareholders, they are not the
private and joint owners of its property.
• Delegated Management: A joint stock company
is an autonomous, self- governing and self-
controlling organization. Since it has a large
number of members, all of them cannot take part
in the management of the affairs of the company.
Actual control and management is, therefore,
delegated by the shareholders to their elected
representatives, know as directors. They look
after the day-to-day working of the company.

TYPES OFCOMPANY
• Joint Stock Company can be of various types.
The following are the important types of
company:
1. Classification of Companies by Mode of
Incorporation:
Depending on the mode of incorporation,
there are three classes of joint stock
companies:

a) Statutory Companies
• These companies are incorporated by a Special
Act passed by the Central or State legislature.
Reserve Bank of India, State Bank of India,
Industrial Finance Corporation, Unit Trust of
India, State Trading Corporation and Life
Insurance Corporations are some of the examples
of statutory companies.
• Such companies do not have any memorandum
or articles of association. They derive their
powers from the Acts constituting them and
enjoy certain powers that companies
incorporated under the Companies Act have.

B. Registered or incorporated
companies
• These are formed under the Companies Act,
1956 or 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.
This is the most popular mode of
incorporating a company. Registered
companies may further be divided into three
categories of the following:

i) Companies limited by Shares
• These types of companies have a share capital and the
liability of each member or the company is limited by
the Memorandum to the extent of face value of share
subscribed by him.
• In other words, during the existence of the company or
in the event of winding up, a member can be called
upon to pay the amount remaining unpaid on the
shares subscribed by him. Such a company is called
company limited by shares.
• A company limited by shares may be a public company
or a private company. These are the most popular
types of companies.

ii) Companies Limited by Guarantee
• These types of companies may or may not have a
share capital. Each member promises to pay a
fixed sum of money specified in the
Memorandum in the event of liquidation of the
company for payment of the debts and liabilities
of the company [Sec 13(3)]. This amount
promised by him is called 'Guarantee'.
• The Articles of Association of the company state
the number of member with which the company
is to be registered [Sec 27 (2)].
• Such a company is called a company limited by
guarantee. Such companies depend for their
existence on entrance and subscription fees.

iii) 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' [Sec
12(c)].
• An unlimited company may or may not have a
share capital. If it has a share capital it may be a
public company or a private company.
• If the company has a share capital, the article
shall state the amount of share capital with which
the company is to be registered [Sec 27 (1)]

II. On the Basis of Number of
Members
• On the basis of number of members, a
company may be :
(1) Private Company, and
(2) Public Company.

A. Private Company
• According to Sec. 3(1) (iii) of the Indian Companies Act,
1956, a private company is that company which by its
articles of association:
a) Limits the number of its members to fifty, excluding
employees who are members or ex-employees who
were and continue to be members;
b) restricts the right of transfer of shares, if any;
c) Prohibits any invitation to the public to subscribe for
any shares or debentures of the company.
According to Sec 12 of the Companies Act, the
minimum number of members to form a private
company is two. A private company must use the word
"Pvt" after its name.

B. Public company
• According to Section 3 (1) (iv) of Indian
Companies Act. 1956 "A public company which is
not a Private Company”.
• If we explain the definition of Indian Companies
Act, 1956 in regard to the public company, we
note the following:
a) The articles do not restrict the transfer of shares
of the company.
b) It imposes no restriction on the maximum
number of the members on the company.
c) It invites the general public to purchase the
shares and debentures of the companies.

Differences between a Public
Company and a Private company
1. Minimum number : The minimum number of
persons required to form a public company is 7. It
is 2 in case of a private company.
2. Maximum number: There is no restriction on
maximum number of members in a public
company, whereas the maximum number cannot
exceed 50 in a private company.
3. Number of directors. A public company must
have at least 3 directors whereas a private
company must have at least 2 directors (Sec. 252)

4. Restriction on appointment of directors: In the case of
a public company, the directors must file with the
Registrar a consent to act as directors or sign an
undertaking for their qualification shares. The directors
or a private company need not do so (Sec 266)
5. Restriction on invitation to subscribe for shares. A
public company invites the general public to subscribe
for shares. A public company invites the general public
to subscribe for the shares or the debentures of the
company. A private company by its Articles prohibits
invitation to public to subscribe for its shares.

6. Name of the Company: In a private company, the
words "Private Limited" shall be added at the end of its
name.
7. Public subscriptions: A private company cannot invite
the public to purchase its shares or debentures. A
public company may do so.
8. Issue of prospectus: Unlike a public company a private
company is not expected to issue a prospectus or file a
statement in lieu of prospectus with the Registrar
before allotting shares.

9. Transferability of Shares. In a public company, the
shares are freely transferable (Sec. 82). In a private
company the right to transfer shares is restricted by
Articles.
10. Special Privileges. A private company enjoys some
special privileges. A public company enjoys no such
privileges.
11. Managerial remuneration. Total managerial
remuneration in a public company cannot exceed 11
per cent of the net profits (Sec. 198). No such
restriction applies to a private company.

III On the basis of Control
• On the basis of control, a company may be
classified into :
1. Holding companies, and
2. Subsidiary Company

IV On the basis of Ownership of
companies
a) Government Companies. A Company of which
not less than 51% of the paid up capital is held by
the Central Government of by State Government
or Government singly or jointly is known as a
Government Company. It includes a company
subsidiary to a government company.
b) Non-Government Companies. All other
companies, except the Government Companies,
are called non-government companies. They do
not satisfy the characteristics of a government
company as given above.

V On the basis of Nationality of the
Company
• Indian Companies : These companies are
registered in India under the Companies Act.
1956 and have their registered office in India.
Nationality of the members in their case is
immaterial.
• Foreign Companies : It means any company
incorporated outside India which has an
established place of business in India [Sec. 591
(I)].

Companies Act, 1956

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Companies Act, 1956