the indian companies act, 1956

7/29/2019 The Indian Companies Act, 1956

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The Indian Companies Act,

1956The companies of India are governed by IndianCompanies Act, 1956.


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Definitions

Company: A voluntary association ofpersons.

An association of persons whocontribute money or moneys worthto a common stock and employ it insome common trade or business and

who share the profit or loss arisingtherefrom.

A group of persons registered under

companies act, 1956 of India is


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Characteristics of acompany

Separate legal entity (Salmon vsSalmon)

Limited Liability Perpetual Succession

Common Seal

Transferability of Shares

Separate property

Capacity to sue


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Lifting of Corporate Veil

Protection of revenue

Prevention of fraud or improper

conduct Determination of Character of a

company whether it is enemy

(Daimler Co. Ltd vs Continental Tyreand Rubber Co. Ltd)

Prevention of fraud or improper

conduct


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Types of Companies

Limited Liabilities Companies

Unlimited Liability Companies

Government Companies Foreign Companies

Public Companies

Private Companies

Statutory Companies

Holding Companies


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Incorporation and Procedureof a Company

Before forming a company it has tobe decided whether it should be apublic company or a private

company

Formation of a Public Company:

Any 7 or more persons (2 or more incase of private company) may filethe required documents with theregistrar of the companies

Re uired documents to be filed with


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Incorporation of a Company

If the proposed name of the companyis approved then the followingdocuments duly stamped together

with the necessary fees are to befiled with the registrar:

1. The MOA duly signed by the

subscribers 2. The AOA if any signed by the

subscribers to the MOA. A public

company limited by shares need not


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A list of directors who have agreed tobecome the first directors of thecompany and their written consent

to act as a director and to take up aqualification of shares.

A declaration stating that all the

requirements of the Companies Actand other formalities relating toregistration have been complied

with. This declaration has to be


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A person named in the AOA as adirector, manager or secretary of thecompany.

Within 30 days of the date ofincorporation of the company anotice of the situation of the

registered office of the companyshall be given to the registrar whoshall record the same.

Certificate of Incorporation: When


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Satisfy means not conductinginvestigation

He keeps himself the MOA and AOAand issues A Certificate ofIncorporation.

In case the company is limited then itbecomes a limited company.

COI(Certificate of Incorporation) is aconclusive proof of the existence of acom an .


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Procedure of ConductingAnnual General Meeting

A promoter is a person who does thenecessary preliminary workincidental to the formation of a

company. No remuneration for him. The meetings of a company can be

classified into following:

Statutory meeting

AGM

EGM


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Meetings

Class meetings of share holders

Meetings of creditors and debenture

holders This will be held during the lifetime of

the company

At the time of winding up of acompany

Meetings of a directors.


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Procedure of a AGM

Every company Shall in each yearhold in addition to any othermeetings a general meeting as its

AGM There shall not be an interval of more

than 15 months between one AGM

and another AGM A first time company may hold its

first AGM within its 18 months from

the date of incorporation


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Procedure of conducting ameeting

The registrar may for any specialreason extend the time for holdingany annual general meeting by a

period not exceeding 3 months. Butno extension for First AGM

There should be at least one AGM per

year and as many meetings as thereare years.

Time and place of meeting: During

business hours (not a public holiday.


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21 days notice to be given. Shorternotice can be given provided all themembers entitled to vote in the

meeting agree. If not conducted:

Any member can apply for CLB

The company and every officer whois default shall be punishable

Share holders can exercise their


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21 days notice

Agenda, Date, time and venue

Conducting the meeting according tothe agenda

Chairmans powers

If a member is not able to come andattend proxy.

Proper authority


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Board should pass a generalresolution for conducting a generalmeeting.

If some defect has been noticed afterthe meeting has been started then ifnot be fatal for voting purposes.

Proper notice should be given to allthe members that is 21 days

If less than 21 days then all themembers entitled to vote there at to


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Procedure of a meeting

In the case of any other meeting(SGM or EGM) a company having ashare capital by members holding

95% of the paid up share capital asgives a right to vote

No share capital then 95% of voting

power Notice should be given to every

member who is eligible to vote, after

deceased members or insolvent


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Procedure of a conducting ameeting

Deliberate omission of sending anotice may amount to cancellation ofmeeting.

Quorum: Minimum number ofmembers who are eligible to attendthe meeting

If within hour if the quorum is notpresent the meeting standscancelled, in any other case same

day, same place and time in the next


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Resolutions

Questions which are generally put inthe meeting are presented in theform of proposals called as motions.

It should be seconded by some one.

Ordinary Resolution: Simple majority

Egg: Rectification of name oradoption of new name by thecompany, alteration of share capital,re-issue of redeemed debentures,ado tion of statutor re ort assin


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Resolutions

Special Resolution: Intention to beduly specified

3/4ths of the members who areentitled to vote . They can vote byperson or by proxy

Egg: Alteration of memorandum ofassociation, Change of the name ofthe company with the permission ofCentral Govt

Reduction of share ca ital


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Statutory meeting

Every company limited by shares andevery company limited by guaranteeand having a share capital shall,

within a period of not less than onemonth nor more than six monthsfrom the date at which the company

is entitled to commence businesshold a general meeting of themembers of a company.

This is the first meeting of the share


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Statutory meeting

Statutory report: The board ofdirectors shall at least 21 days beforethe day on which the meeting is to

be held forward a report called thestatutory report to every member ofthe company. If all the members

eligible to attend the meeting agreeto call that meeting as statutorymeeting then it will be called asstatutory meeting.


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Procedure of Statutorymeeting

Agenda,

List of members

Discussion of matters relating toformational aspect

Adjournment

If any default every director or anyother officer of the company who isin default shall be punishable with

fine which may extend to 5,000/-.


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Extra Ordinary GeneralMeeting

Any meeting other than AGM andSGM is called as EGM.

It is for transacting some urgentbusiness or special business.

It may be convened by:

The board of directors on its own oron the requisition of the members

By the requisitionists themselves on

the failure of the Board of directors to


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EGM

The board of directors may call anEGM:

On its own

Egg: Issue of right shares, Increase inthe remuneration of MD or WTD

On requisition of members (Shareholders of not less than 1/10 th ofpaid up share capital, or by membersrepresenting not less than 1/10 th ofvotin ower


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EGM

Every holder of a company has aright to requisition an EGM. No needto disclose the reasons.

If the board of directors fail to call ameeting as required by therequisition the meeting may be

called: By the requisitionists themselves

If the company is having a paid upshare ca ital 1 10th of it


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EGM

It should not held more than 3months from the date of requisition.

A meeting held in that period can bepostponed after the period of 3months.

Shares:

A share is the interest of a shareholder in a company.

A share is evidenced by a share


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Shares

Stocks can validly be issued onlywhen the shares are fully paid up.

The issue of partly paid up stock is a

nullity. A company limited by shares may, if

authorised by its articles, by ordinary

resolution passed in general meeting,convert its fully paid up shares intostock.


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Types of Shares

Under the Companies Act, 1956 acompany can issue two types ofshares

Preference Shares and

Equity shares

Preference Shares: With reference tocompany limited by shares are thosewhich have 2 characteristics:

They have preferential right to be


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Types of Shares

Equity Shares: Equity shares withreference to any company limited byshares are those which are not

preference shares. Sweat Equity shares: Equity shares

issued at a discount or for

consideration other than cash forproviding know-how or makingavailable rights in the nature of

intellectual property rights or value


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Preference Shares

Cumulative Preference Shares: Theseare the shares on which dividendgoes on accumulating till it is fully

paid off. The arrears of any yearsdividend are carried forward as acharge upon the subsequent years

profits. Non Cumulative preference shares:These are the shares on which the

dividend does not go on


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Preference Shares

Participating Preference Shares:These shares are not only entitled toa fixed rate of dividend but also to a

share in the surplus profits whichremain after the claims of the equityshares holders (up to a limit say

15%) have been met. Non Participating preference shares:These shares are entitled to only a

fixed rate of dividend. The holders of


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Preference Shares

Non Convertible Preference Shares:These are the shares which do notconfer on their holder a right of

conversion into equity shares. Redeemable Preference Shares: A

company limited by shares may if so

authorised by its articles issuepreference shares which are to beredeemed.


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Directors

Director includes any personoccupying the position of director bywhatever name called.

The important factor to determinewhether a person is or is not adirector is to refer to the nature of

the office and its duties. Every public company (other than a

deemed public company) shall have

at least 3 directors and every other


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Directors

However a public company having:

A paid up capital of Rs. 5 Crore ormore

One thousand or more small shareholders shall have at least onedirector elected by such small shareholders in the manner as may beprescribed.

Small share holder means a shareholder holdin shares of nominal


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Types of Directors

Any increase in number of directorsbeyond the maximum permitted bythe articles shall be approved by the

central government but if it is below12 then there is no need for approvalof central government.

First Directors: The articles of acompany usually name the firstdirectors by their respective names

or prescribe the method of


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Types of directors

Directors appointed by directors:Additional directors ( not to exceedthe number prescribed by the articles

[excess work]). Casual Director: Vacancy arising

before the term expires because of

death, resignation disqualification orfailure of an elected director toaccept the office for any reason other

than retirement by rotation.


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Types of directors

Alternate directors: If a director isabsent for more than 3 months fromthe state in which board meetings

are ordinarily held. Directors appointed by third parties:The articles under certain

circumstances give power to thedebenture holders or other creditorswho have advanced loans to the

company to appoint their nominees


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Types of directors

Appointment by proportionalrepresentation: The articles of acompany may provide for the

appointment of not less than 2/3rdsof the total number of directors of apublic company or of a private

company which is subsidiary of apublic company according toproportional representation.

Directors appointed by central


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Types of directors

Number of members who have to giverepresentation to confirm that there isoppression and mismanagement:

100 members of the company or more

Members of the company holding notless than 1/10th of the total votingpower therein.


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Removal of Directors

The office of a director shall bevacant in the following ways:

1. He fails to obtain within 2 monthsof his appointment or at any timethere after ceases to hold the sharequalification according to AOA

2. He is adjudged to be of unsoundmind

3. He applies to be adjudicated aninsolvent


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He absents himself from 3consecutive meetings of the board ofdirectors or from all meetings of the

board for a consecutive period of 3months whichever is longer withoutobtaining leave of absence from the

board. He is a director of a company which

has taken loan or a partner of a

company or accepts a loan from the


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He fails to make disclosures to theboard of directors with regard to anycontract with the company directly or

indirectly He becomes disqualified by an order

of the Tribunal from being a director

on the ground of having beenconvicted of an offence in connectionwith the promotion, formation or

management of the company or


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He is removed before the expiry ofhis period of office by an ordinaryresolution

Having been appointed a director byvirtue of his holding any office orother employment in the company

he ceases to hold such office or otheremployment in the company.

Directors may be removed by share

holders: By passing an ordinary


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Removal by Central Government: TheCentral Government may, in certaincircumstances, remove the

managerial personnel from office onthe recommendation of the tribunal.

Resolutions:

Ordinary resolutions: An ordinaryresolution is a resolution is passed ata general meeting of a company by a

simple majority of votes. The votes


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Resolutions

Egg: Rectification of name oradoption of new name by a companywhere it resembles the name of an

existing company with the previousapproval by the central government.

Issue of shares at a discount

RE-Issue of redeemed debentures

Adoption of statutory report

Passing of annual accounts and


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Resolutions

Special Resolutions: A specialresolution is one which satisfies thefollowing conditions:

The intention to propose theresolution as a special resolution hasbeen dully specified in the notice

calling the general meeting. The notice has been duly given of the

general meeting

The votes cast in favour of the


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Resolutions

Egg: Alteration of MOA

Change of name of a company withthe consent of the CentralGovernment

Omission or addition of the wordPrivate from or to the name of acompany

Alteration of AOA

Payment of interest out of capital


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Resolutions

Resolutions requiring special notice:A resolution requiring a special noticeis not an independent class of

resolutions it is a type of OrdinaryResolution. A notice of the resolutionto be given by the proposer to the

company. The notice should be givento the company not less than 14days before the meeting.

Company to give notice to members


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Resolutions

Provision that a retiring auditor shallnot be re appointed

Removal of a director before theexpiry of his period.

Appointment of a director in place ofone who is removed

Auditors: A person is qualified as anauditor only if he/she is an CharteredAccountant according to CharteredAccountants Act 1949.


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Auditors

Appointment of Auditors:Appointment in AGM from that AGMto next AGM. The company shall,

within 7 days of the AGM giveinformation thereof to every auditorso appointed.

To get auditors consent that it iswithin his number of companies.


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Auditors

Removal of Auditors: A companyshall not appoint or reappoint anyperson who is in full time

employment else where or firm asits auditor is such person or firm is atthe date of such appointment or

reappointment holding appointmentas auditor of more than specifiednumber of companies. The specifiednumber shall mean:


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Auditors

Compulsory reappointment: Anauditor can be reappointed except inthe following ways:

If he is not qualified forreappointment

If he has given to the companynotice in writing of his unwillingnessto be re-appointed

If a resolution has been passed to theeffect a ointin somebod instead


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Auditors

Where notice has been given of anintended resolution to appoint someperson or persons in the place of a

retiring auditor and by reason ofdeath, incapacity or disqualificationof that person or of all those persons

the resolution cannot be proceededwith.

The first auditors of a company

before the first AGM may be removed


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Rights of an Auditor

Auditor is required to make a reportto the members of the company on:

The accounts examined by him

Balance sheet and profit and lossaccount

Every document annexed to thebalance sheet and profit and lossaccount laid before the company ingeneral meeting during his tenure inoffice.


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Rights of an auditor

The book entries of the company arenot prejudicial to the company

Whether the loans and advancesmade by the company have beenshown as deposits

Whether personal expenses havebeen charged to revenue account

Where any shares has beentransferred for cash if it is so thenwhether cash has been transferred to


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Rights of an auditor

Rights of access to books accountsand vouchers

Right to obtain information andexplanations

Right to visit branch offices and rightto access to books

Right to receive notice of generalmeetings and to attend them

Right to receive remuneration


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Duties of an Auditor

Acquaintance with the articles andthe companies act

Report to members

Duty of care and caution

Preparation of statutory report

Prospectus Assistance in investigation

Borrowing Powers Loans


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Borrowing Powers, Loansand Debentures

A company needs money to financeits activities from time to time.

Every trading company unlessprohibited by its MOA has impliedpower to borrow money for thepurposes of its business.

A non trading company has noimplied power to borrow.

Ultravires Borrowing:


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Borrowings

Borrowings which is ultravires thecompany: If a company borrowsmoney beyond its express or implied

powers the borrowing is ultraviresthe company and is void.

Lenders rights when the borrowing is

ultravires: Injunction, Subrogation(Ifthe money is borrowed has beenused by the company in paying off its

lawful debts, the lender will rank as a


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Borrowings

Identification and Tracing, Recoveryof Damages

Borrowings which is intra vires the

company but ultravires the directors:Then it can be ratified by thecompany, if the agent is exceeding

the limits then the lender has to relyupon Royal British Bank vs Turquandand recover the loan amount from

the company.


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Debentures

Debenture: Includes debenture stock,bonds and any other securities of acompany, whether constituting a

charge on the assets of the companyor not.

In other words it means a document

which either creates a debt oracknowledges it.

Characters: It is issued by the

company under seal, It is issued by a


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Types of Debentures

Bearer Debentures( Thesedebentures also known asunregistered debentures are payable

to its bearer) Registered debentures: (These are

payable to registered holders)

Secured debentures (Charge on theproperty of the company)

Unsecured or naked debentures,

Redeemable debentures Irredemable


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Winding up of a company

Winding up by a tribunal

Voluntary winding up:

Members voluntary winding up Creditors voluntary winding up.

the indian companies act, 1956

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