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ë Section 3(1)(i) of the Companies Act,
1956 defines a company as: ³a
company formed and registered under
this Act or an existing Company´.
ë µExisting Company¶ means a company
formed and registered under any of
the earlier Company Laws.
 |


ë Separate Legal Entity
Case: Salomon v. Salomon & Co. Ltd.
ë Limited Liability
However, liability of a company is never
limited. It¶s liability of members only that
is limited.
ë Free Transferability of Shares
ë Other Features:
Perpetual Succession: Separate property
and Common Seal.
 D 


 

ërrivate Company
ërublic Company
 r 


‰ 
  
ë A private company means a company
which has a minimum paid up capital of
one lakh rupees or such higher paid-up
capital as may be prescribed and by its
articles :
(V)restricts the right to transfer its
shares, if any;
( )limits the number of its members to
50, not including:
 r 



 
(i) persons who are in the employment
of the company, and
(ii) persons who, having been formerly in
the employment of the company, were
members of the company while in that
employment and have continued to be
members after the employment ceased;
(c) prohibits invitation to the public to
subscribe for any shares in or
debentures of, the company; and
r 



 
(d) prohibits any invitation or acceptance of
deposits from persons other than its
members, directors or their relatives.
ë Ahere two or more persons hold one or
more shares in a company jointly, they
shall, for the purposes of membership,
be treated as a single member.
r


‰ 
  
ë A public company means a company which:
(a) is not a private company [án other words, it
should not have the restrictions of Section
3(1)(iii) in its articles ];
(b) has a minimum paid-up capital of five lakh
rupees or such higher paid-up capital, as
may be prescribed; and
(c) is a private company, which a subsidiary of
a company, which is not a private company.
 -   



ë Dhe whole process of formation of a
company may be divided into four
stages, namely:
(i) rromotion
(ii) Registration
(iii) Floatation/Raising of Capital
(iv) Commencement of Business.
 r



ë Aho is a Promoter?
ë Bowen, L.J.
Dhe term promoter is ³a term not of law but of
business´, usefully summing up, in a single
word² promotion, ³a number of business
operations familiar to the commercial world by
which a company is brought into existence´.
However, the ?
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ë rromoter stands in a fiduciary position
towards the company.
ë án other words, he is not allowed to make
secret profits.
Case:  v. V
 
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ë MV .

ë However, pre-incorporation contracts

shall be valid if:
ë Dhe contract is made for the purpose of
the company and the contract is
warranted by the terms of incorporation.
ë Dhe company adopts the transactions
after incorporation.
†  
  
ë Private Company
ë inimum Number of embers
required ± 2.

ë Public Company
ë inimum Number of embers
required ± 7.
  
u. Application for availability of name:
ë Dhree names in order of priority
conforming to the provisions of the Act
and the Guidelines issued by Department
of Company Affairs in this regard:
ë Name to end with the word(s) µLimited¶ or
µrrivate Limited¶, as the case may be,
except:
(i) Section 25 Companies
(ii) Govt. Companies (need not use rvt. Ltd.)
(iii)rroducer Companies.
 
 
ë Name should not be identical or too
similar to the name of an already existing
company.
ë Should not include the name of a
registered trade mark.
2. Preparation of Memorandum and
Articles of Association
ë emorandum defines and limits the
scope of activities of a company.
 
 
ë Contents of Memorandum
1. Name clause
2. Registered office clause
3. Object clause
ë Doctrine of 
V

˜. Liability clause
5. Capital clause
 
 
3. Preparation of other documents
ë rower of Attorney in favour of a
professional to effect registration.
ë Consent of Directors (in case of a
rublic Company)
ë rarticulars of Directors, anager,
Secretary, etc. in the prescribed form.
ë Notice of registered address
ë Do be supplied within 30 days of
incorporation.
  
 
ë V

 V
V
ë Do the effect that all requirements of law
with respect to incorporation have been
duly complied with.
ë Dhe declaration to be signed by:

Advocate of Supreme Court or High Court; OR

C.A../C.S. practising in ándia and associated
with the formation of the company; OR
Director, anager, Secretary of the company
(as named in the Articles)
˜. Filing of documents with ROC
  






ë Effect of Certificate of Incorporation
(Section 3˜
On incorporation, the association of persons
becomes a body corporate by the name
contained in the memorandum, capable
forthwith of exercising all the functions of an
incorporated company and having perpetual
succession and a common seal but with such
liability on the part of the members to
contribute to the assets of the company in the
event of its being wound-up as is mentioned in
the Act.


  
 






 
 
ë Conclusive to the effect that all
requirements of law relating to
registration and matters precedent and
incidental thereto have been duly
complied with.
ë Case Laws:
RV v. á
V 

  R v.  
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ë Contracts entered into by company after
incorporation but before getting the
certificate to commence business are
called µprovisional contracts¶.
ë rrovisional contracts are, therefore,
relevant to public companies only.
ë Such contracts become void, if company
fails to obtain certificate to commence
business and automatically become valid,
and binding if company obtains the
certificate.
 †




ë A company may raise capital
through
ë rrivate placement
ë ássue of rrospectus
ë r
V ?V
 means raising of
capital from friends, relatives and
through brokers.
 |



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ë Ahere Company has issued a Prospectus:
ë a company cannot commence business or
exercise borrowing powers unless:
(a) shares up to the amount of the minimum
subscription have been allotted by the
company;
(b) every director of the company has paid to
the company, on each of the shares taken or
contracted to be taken by him and for which
he is liable to pay in cash,
 |



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the same proportion as is payable on
application and allotment on the shares,
offered for public subscription;
() no money is, or may become, liable to be
repaid to the applicants for shares or
debentures offered for public subscription, for
failure to obtain permission for the shares to
be dealt in on any recognised stock
exchange;
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() there has been filed with the Registrar a duly
verified declaration by one of the directors or
the secretary or, where the company has not
appointed a secretary, a secretary in whole
time practice in the prescribed form that
clauses (V), ( ) and () (mentioned above)
have been complied with.
Penalty:
ë Every person at fault may be fined upto
Rs.5,000/- for every day of default.
R 








ë Every company has to have a emorandum

of Association.
ë át contains, besides other significant
information, the objects for which the
company is formed.
ë µObject clause¶ defines as well as confines
the powers of the company.
ë Anything done beyond these objects is 
V

 the company and void.
 
  
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1. wame Clause: át contains the name with
which company is proposed to be
registered. Companies Act requires that:
(a) Dhe name chosen should end with the
word µLimited¶ or the words µrrivate
Limited¶, as the case may be.
(b) Dhe name should not be undesirable i.e., it
should not be identical or too similar to the
name of an already existing company OR
include the name of a registered trade
mark unless consent of the owner of the
trade mark is obtained.
 
  
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2. Registered Office Clause:
Dhis clause states the name of the State in
which registered office of the company is to be
situated.
3. Objects Clause
Dhis clause is to be divided into:
(a) ain objects and objects incidental or ancillary to
main objects
(b) Other objects
A company cannot commence any business
stated under other objects unless µspecial
resolution¶ by the shareholders is passed.
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Case Law: a 


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V 
 v.  .
Effects of ºltra-vires transactions
(i) V 
(ii) ánjunction
(iii) rersonal liability of directors
ë towards the company
ë towards the outsiders
 
  
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˜. Liability Clause
5. Capital Clause
Dhis clause states the authorised capital
and the number of shares into which
the same shall be divided.



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ë Marious clauses of memorandum of
association can be altered by following
the procedure laid down in the Act.
Different requirements are prescribed
for different clauses:
1. wame Clause: can be altered by:
(a) rassing a special resolution; and
(b) Obtaining the approval of the Central
Govt.
 


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2. Registered Office Clause: may be
shifted:
(a) within the same city by passing Directors¶
Resolution;
(b) From  
V
city   
V
V 
ë by passing special resolution only, if no
change in jurisdiction of Regional Director
ë by passing special resolution, and
ë Obtaining the approval of Regional
Director.
 


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3. Objects Clause
ë Special Resolution
ë Only on Grounds stated in Sec.17(1).
˜. Liability Clause
ë Cannot be increased without written
consent of each and every member.
ë Can be reduced:
ë by passing special resolution
ë Confirmation of court
 


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2. Capital Clause
ë Authorised capital may be increased
by passing an ordinary resolution at
a meeting of the shareholders.
   




ë Dhe articles of association of a company are its bye-
laws or rules and regulations that govern the
management of its internal affairs and the conduct of
its business.
ë Dhe articles regulate the internal management of the
company. Dhey define the powers of its officers.
Dhey also establish a contract between the company
and the members and between the members 

 . Dhis contract governs the ordinary rights and
obligations incidental to membership in the company
[V
  V
V V
V v. VV 
 V aV  (1971)].


 
 
   

ë ºnlimited Companies:
ë Dhe Articles of such a company must
state:
ë Dotal number of members; and
ë Share capital.

ë Companies limited by Guarantee:

ë Articles
of such company must state
total number of members.


 
 
   

 
ë rrivate Companies limited by shares:
ë mustinclude requirements of
Section 3(1)(iii).
wo Article Company
ë A public limited company having share
capital may be registered without
Articles.



  
ë Articles may be altered by a company
by passing special resolution at a
general body meeting of shareholders.
ë However, where alteration has the
effect of converting a public company
into a private company (i.e., introduction
of restrictive clauses of Section 3(1)(iii),
approval of Central Government must
be obtained.
 
  


  

ë According to Section 610, every person
dealing with the company is deemed to
have read /A and A/A and understood the
contents thereof in the correct perspective.
ë !octrine of Indoor Management
ë Dhe rule was first laid down in 
V
 
Vv. 
V
ë Rule of ándoor anagement is an exception
to the Doctrine of Constructive notice.
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u. Knowledge of irregularity : Case: -V

rV á


Ú. wegligence : Case: aV V
V v.
 V V

. Forgery : Case:   v. 
VV
V  [Secy. Forged signatures of two
directors]
˜. wo knowledge of articles : Case: V
V

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V v. r
  
V
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ë A prospectus, as per Section 2(36),
means any document described or issued
as prospectus and includes any notice,
circular, advertisement or other document
inviting deposits from the public or inviting
offers from the public for the subscription
or purchase of any shares or debentures
of a body corporate.
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ë  V?
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ë As per Section 67, ánvitation to public
includes:
ë invitation to any section of the public
howsoever selected provided the invitation
is made to all the members of that section
of public indiscriminately.
ë ánvitation calculated to be made available
even to those who do not receive the
same.
ë ánvitation to 50 or more persons.
 R
  
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Ahat is Mis-statement?
ë According to Section 65(1) of the Act:
(V) a statement included in a prospectus shall be
deemed to be untrue, if the statement is
misleading in the form and context in which it is
included; and
( ) where the omission from a prospectus of any
matter is calculated to mislead, the prospectus
shall be deemed in respect of such omission, to
be a prospectus in which an untrue statement is
included. Case:  v. Ñ
V
 †   
Liability for Mis-statements in a Prospectus

Civil Liability (Sec.62 & 26 Criminal Liability (Sec. 63

Against the Promoters, Against the Promoters,

Company Directors, other
Officers and Experts
Against the Company Directors and Other officers
(not available against experts

Compensation under Sections Fine upto

Rescission of Contract Imprisonment u
62 and 26 Rs. 2 ,

Damages Fine upto Rs

Claim for Damages Both

 





ë According to Section 2(˜6), A µShare¶ represents
a unit into which capital of a company is divided.
However, courts have held that a share is not
merely a unit of capital, it represents a bundle of
rights and obligations. Holder of a share is
entitled to certain rights (say, right to receive
dividends, to receive notice of meetings, to
participate in the proceedings of a meeting, to
elect directors) and is also subjected to a number
of obligations (say, to abide by Articles of
Association, to maintain decorum of the
meetings).
 Ñ


ë Dhe following kinds of shares may be
issued by a company:
1. Equity shares carrying voting rights.
2. Equity shares carrying differential rights
as to voting or dividend (commonly called
Non-Moting Equity Shares)
3. rreference Shares
˜. Cumulative convertible rreferable
Shares
 Ñ


 
ë rreference Shares carry preference
with respect to two things:
1. rreference with respect to dividend at a
fixed rate or of a fixed amount.
2. rreference with respect to return of
capital in case of winding up.
ë 0 uity Shares means a share which is
not a preference share.
 
  


ë µAllotment¶ is an acceptance to an offer for
purchase of shares.
ë Ahere allotment does not conform to the
statutory requirements, it is called irregular
allotment. For allotment to be valid,
following requirements must be satisfied:
1. A copy of prospectus or statement in lieu of
prospectus must have been delivered to
Registrar of Companies.
 
  


 
2. Application money must not be less than
5% of the nominal value.
3. inimum subscription (i.e., at least 90% of
the issue) must have been received.
˜. Application money must be kept deposited
in a Scheduled Bank till the minimum
subscription has been received.
5. Shares must have been listed on the stock
exchange(s) mentioned in the rrospectus.
 

R

   





ë A company functions through the medium of
Board of Directors. However, certain powers
have been reserved to be exercised by
shareholders in general body meetings.
Section 291 of the Companies Act, 1956
confers general power on the Board of
Directors. át provides: ³Subject to the provisions
of the Act, the Board of Directors of a company
shall be entitled to exercise all such powers,
and to do all such acts and things, as the
company is authorised to exercise and do.
 r
 
 
 

  

 
1. Sell, lease or otherwise dispose of the whole,
substantially the whole, of the undertaking of
the company, or where the company owns
more than one undertaking, of the whole or
substantially the whole, of any such
undertaking.
2. Remit or give time for the repayment of any
debt due by a director except in the case of
renewal or of continuance of an advance made
by a banking company to its directors in the
ordinary course of business.
 r
 
 
3. ánvest, otherwise than in trust securities, the
amount of compensation received by the
company in respect of compulsory acquisition
of any property or fixed assets of the company.
˜. Borrow monies exceeding the aggregate of the
paid-up capital of the company and its free
reserves. µBorrowing¶ does not include
temporary loans ( , loans payable on
demand or within six months but excluding
loans for capital expenditure) obtained from
the company¶s bankers in the ordinary course
of business.
 r
 
 
Dhe resolution passed at the general meeting
must specify the total amount upto which
moneys may be borrowed by the Board of
directors in any financial year.
5. Contribute in any year, to charitable and other
funds not directly relating to the business of the
company or the welfare of its employees any
amount exceeding Rs. 50,000 or five per cent
of its average net profits of the last three
financial years, whichever is higher.
r
 
 
ë However, the resolution must specify the total
amount that may be contributed by the Board
of directors in any financial year.
ë However, contributions to National Defence
Fund, the rrime inister¶s National Relief
Fund or any other fund approved by the
Central Government* for the purpose are
exempted from the above provisions.
 










 

ë ualifications
ë A public company cannot prescribe any
qualifications for directorship except share
qualification. Again, share qualification
requirement cannot exceed holding of
shares exceeding Rs. 5000/- in nominal
value or value of one share where nominal
value of one share exceeds Rs.5000/-. A
director may obtain his share qualification
within 2 months after his appointment.
Disq&
 
ë Section 27˜ of the Companies Act, 1956
provides that the following persons shall
not be capable of being appointed as
directors of any company :
(a) a person found by a competent court to be
of unsound mind and such finding
remaining in force;
(b) an undischarged insolvent;
(c) a person who has applied to be adjudged
an insolvent;
 Disq&
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() a person who has been convicted by a Court of
an offence involving moral turpitude and sentenced
in respect thereof to imprisonment for not less than
six months, and a period of five years has not
elapsed from the date of the expiry of the
sentence;
( ) a person who has not paid any call in respect of
shares of the company held by him, whether alone
or jointly with others and six months have elapsed
from the last date fixed for the payment of the call;
and
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() a person who is already a director of a

public company which,²
() has not filed the annual accounts and
annual returns for any continuous three
financial years commencing on and after the
first day of April, 1999; or
()has failed to repay its deposit or interest
thereon on due date or redeem its
debentures on due date or pay dividend and
such failure continues for one year or more.
 
 
 
 
Ahole-time Directorship
ë A person cannot be appointed as a
whole-time director in more than one
company.
Part-time Directorship
ë Not more than 15 companies
excluding the directorships of,


 
 
 
i. private companies [other than subsidiaries
or holding companies of public
company(ies)].
ii. unlimited companies,
iii. associations not carrying on business for
profit or which prohibit payment of a
dividend, and
iv. alternate directorships (  he is appointed
to act as a director only during the absence
or incapacity of some other director).
 †emedies
Liability for Mis-statements in a Prospectus

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Civil Liability (Sec.62 & 26 Criminal Liability (Sec. 63
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Against the Promoters, Against the Promoters,

Against the Against the
Directors, other Directors and Other
Company Company
Officers and Experts officers (not available
against experts
Claim for
Rescission Fine upto Rs. 2 ,
Damages
of Contract

Compensation
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Damages under Imprisonment   Fine upto Both
 
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Sections  
 
upto 2 years Rs.2 ,
62 and 26