THE COMPANY ACT 1956 GROUP 1

INDEX OF PRESENTATION COMPANY NATURE OF COMPANY TYPES OF COMPANIES PRIVATE Vs PUBLIC COMPANY PRIVILEGES OF PRIVATE COMPANY DOCTRINE OF CONSTRUCTIVE NOTICE PROSPECTUS MEMORANDAM OF ASSOCIATON. ACTICLE OF ASSOCIATION. CASES

COMPANY In a simple words a company may be defined as a “ association of persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who shares the profit or loss there from. Section 3(1)(i) of the Companies Act, 1956 defines a company as: “a company formed and registered under this Act or an existing Company”.‘Existing Company’ means a company formed and registered under any of the earlier Company Laws. Legal definition “ Incorporated association, which is an artificial legal person, having a separate legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability.

1 SEPERATE LEGAL ENTITY 2.ARTIFICIAL PERSON 3.PERPETUAL EXISTENCE 4.COMMON SEAL 5.LIMITED LIABILITY 6.CAPACITY TO SUE OR TO BE SUED 7.TRANSFERABILITY OF SHARE NATURE OF COMPANY

Separate legal entity A company is an separate legal entity means it is different from its members. It works as a individual body. It can make contracts, open a bank account, can sue and be sued by others. The law has recognised that even if a person holds virtually all the shares, the right and obligations of the company shall be different from its members. Artificial person A company is a purely a creation of law. It is invisible, intangible and exists only in the eyes of law. It has no soul, no body, but has a position to enter or exit into a contract, to appoint a people as its employees In short it can do every thing just like a natural person.

Perpetual existence [sec 34(2)] Section 34(2) of the act states that an incorporated company has perpetual life. The life of the company is not related to the life of the members. Law create the company and law alone can dissolve it. The existence of the company is not affected b y death, insolvency, retirement or transfer of share of members. Limited liability It means that the liability of a member shall be limited to the value of the share held by him, he cannot be called upon to bear the loss from his personal property.

Common seal A company being an artificial person can not work as a natural being. Therefore, it has to work through its directors, officers and other employees. Common seal used as a official signature of a company. Transferability of share sec(82) The share of a company are freely transferable. The shareholder can transfer his share to any person without the consent of other members. A company cannot impose absolute restrictions on the rights of member to transfer their shares

Capacity to sue and be sued When a company incorporated it acquire a separate and independent legal personality. As a legal person it can be sue and be sued in its own name.

Types of companies (Registered under company act 1956)

Definition : Private & Public Company A private company is one which, by its Article of association restricts the right to transfer its share, limits the maximum number of its member to fifty, prohibits any invitation to the public to subscribe for any share or debenture of the company. A public company means a company which is not a private company. In other words, a public company, means a company which by its article does not limit the number of its member & does not prohibit any invitation to the public to subscribe for any share or debentures, of the company.

Private Vs Public Company Private CompanyPublic Company Minimum paid up capital 1 Lac5 Lacs Minimum no of members 27 Maximum no of members 50No limit Minimum no of Directors 23 Transfer of Shares Restricted AOA & requires the prior permission of Board of Directors Shareholders can transfer shares freely

Private Vs Public Company..Contd.. Private CompanyPublic Company Public Subscription AOA prohibits any invitation to public to subscribe to its sharess & debentures Can invite public to subscribe to its shares & debentures Acceptance of public Deposits AOA prohibits acceptance of deposits from public Can acceptance of deposits from public Commencement of Business Immediately after Certificate of Incorporation Only after getting the Certificate of commencement of Business Issue of prospectus Need not prepare or file 'Prospectus' or 'statement in lieu of prospectus' with registrar Must prepare or file Prospectus with registrar

Private Vs Public Company…Contd.. Private CompanyPublic Company Statutory meetingNot required to hold Must hold after one month and before 6 months from date of obtaining the Certificate of commencement of business Provisions regarding directors No Central Govt approval for appointing and reappointing of MD or Whole time director Central Govt approval is must for appointing and reappointing of MD or Whole time director Managerial remuneration No restriction on payemnt of remuneration to directors & MD's Remuneration is fixed at 11 % of net profits Index of members Need not maintain index of members Must maintain index of members if no of members exceed 50

PRIVILEGES OF PRIVATE COMPANY Sec.Privileges 58A For Pvt.Co., amount received from its shareholders by a private company is not included in the meaning of deposit. If the depositor ceases to be a shareholder, the deposits made by him cease to qualify for exemption from the date of such cessation 77(2 & 3) There is no prohibition on a Pvt. Co., which is not a subsidiary of a public company, to provide financial assistance to anyone for purchasing or subscribing for its own shares or of its holding company. 81 A Pvt. Co. can issue further shares in any manner; i.e. rights shares to the existing shareholders need not be offered. 85 to 90The provisions of these sections requiring that there should be only two kinds of share capital and that voting rights should be proportional to the capital paid up and prohibiting and terminating disproportionately excessive voting rights are not made applicable to a private company which is not subsidiary of a public company

PRIVILEGES …..Contd Sec.Privileges 111 (13) The right of appeal to the Company Law Board against rejection of a transfer of shares is not available as long as the private company is only enforcing the provisions of its articles in rejecting a particular transfer 170 to 186 The provisions of these sections relating to general meetings do not apply to such a private company to the extent to which the company makes its own provisions by its articles 192APassing of resolution by Postal Ballot not relevant for Pvt. Co. 220P & L A/c. of a Pvt. Co. is not open for inspection by Public. 224(1B) The ceiling, on number of companies an auditor can audit, does not include audit of Pvt. Cos. 252 & 252A Minimum Directors for Pvt. Co. is 2 (two) against 3 (three) in case of Public Co. Requirement of Independent Directors or Small Shareholders’ Directors not applicable to Pvt. Co. 255Retirement of Directors by rotation not mandatory.

PRIVILEGES …..Contd Sec.Privileges 256 A Pvt. Co. need not adopt the procedure relating to appointment, retirement, re-appointment of directors etc. applicable to a public company. 257 The provision requiring the giving of 14 days notice by new candidates seeking election as directors and deposit of certain amount (Rs. 500) are not mandatory for Pvt. Cos. 259 Central Government approval for increasing number of directors beyond the permissible maximum (presently 12) not required. 262 The provision relating to manner of filling casual vacancy among directors and the duration of the period of office of those so appointed do not apply to Pvt. Co. 263(1) Appointment of two or more persons as directors by a single resolution can be done by Pvt. Co. 264 No requirement of filing consent by the directors to be filed with the Registrar to act as a director. 266(5)Restrictions on appointment of director and subscription to qualification shares not applicable to Pvt. Co.

PRIVILEGES …..Contd Sec.Privileges 268, 269 Central Government approval for amendment relating to appointment/reappointment of a whole-time director/ director not liable to retire by rotation Requirements of qualification shares holding by directors the time within which the qualification shares to be acquired and filing of a declaration by each director of the qualification shares held, is not applicable to Pvt. Co. 274(1)(g) The disqualification u/s. 274(1) clause (g) does not include directorships of Pvt. Co to 279 The Directorships of Pvt. Cos. not to be considered for the limit on no. of companies a person can be director. 292AProvisions relating to formation of Audit Committee not applicable. 293Restrictions on certain powers of Board of directors regarding selling, leasing, remitting or giving time for payments of debts, investing or borrowing moneys, or contributing to charities other than for political purpose are not applicable to Pvt. Co.

PRIVILEGES …..Contd Sec.Privileges 295 Restriction on loans to directors/relatives etc. does not apply to Pvt. Co. 300 No restriction on interested directors from participating in the proceedings of the Board and exercising their votes. 316, 317 No restriction on period of appointment of managing director/manager for more than 5 years at a time. 349, 350 Provision relating to the determination of net profits and ascertainment of depreciation shall not apply. 372A No restrictions on giving loans or guarantees to other companies or on making investment in the shares of the other companies. 386, 388 No. of companies on which a person may be appointed manager, the remuneration of a manager and the application of sections 269, 310 to 312 and 317 in relation to managers do not apply. 409(3) Powers given to the Central Government to prevent change in the Board of directors not applicable to Pvt. Co. 416(1)Restrictions on Contract by agents of the company in which the company is the undisclosed principal shall not apply.

DOCTRINE OF CONSTRUCTIVE NOTICE Every person dealing with the company was treated as having the knowledge of the contents of the memorandum. (Public documents of the company). It seeks to protect the company against the outsider. Imputation of knowledge –whether the party concerned has actual knowledge or not. A member of the company can sue for an injunction to restrain the company or its directors from doing an ultra vires act. All contracts made by the company for an ultra vires purpose are void and can not be ratified and validated by any kind of resolution passed by the general meeting of the company or even with the unanimous consent of its members.

PROSPECTUS  ‘Prospectus’ is the basic document for raising funds from the public.  ‘Prospectus’ means any document described or issued as prospectus and includes any Notice, Circular, Advertisement inviting deposits or offers from the public for the subscription or purchasing any shares in, or debentures of the company.  Thus prospectus is a general invitation to the public to subscribe to the capital of the company on the conditions specified in the application from

MEMORENDUM OF ASSOCIATION (MOA) The first step in the formation of the company is to prepare memorandum of association. it is one of the documents which has to be filed with registrar of the companies at the time of incorporation of a company. MOA of a company is its character and defines the limitation of the power of the company. MOA contains the fundamental condition upon which the company is allowed to incorporated. The purpose of MOA is to enable the Shareholders, creditors and those who deal with the company to know what is permitted range of enterprise.

IMPORTANCE OF MOA It defines the rights and liabilities of the members. It shows the capital structure of the company It shows the object of the company It specifies the state in which the registered office of the company is situated. It shows the constitution of the company It specify the conditions under which the company has been incorporated.

ARTICLES OF ASSOCIATION (AOA)

CONTENTS OF AOA Rights of different classes of shareholder. Use of common seal of the company. Different classes of shares and their right. Appointment, powers, duties, salary of MD, manager, and secretary. Borrowing power of directors. Voting rights of member. Board meetings and proceedings. Winding up company.

Case – 1 ABDUL AZIZ BIN ATAN & 87 ORS V LADANG RENGO MALAY ESTATE SDN BHD (1985) 2 MLJ 165. Facts All the shareholders of the company sold and transferred their entire share holdings to a certain buyer Issue The court had to determine whether a change of employer took place Held An incorporated company is a legal person separate and distinct from its shareholders. The company, from the date of incorporation, has perpetual succession and did not change its identity or personality even though the entire share holding of the company changed hands.

Case – 2 LEE V LEE’S AIR FARMING LTD (1961) AC 12 Fact Lee who was a pilot who conducted an aerial top-dressing business, formed a company to conduct the business. Lee hold 2999 shares of the 3000 shares in the company. The remaining one share was taken by his solicitor as nominee for Lee. Under the articles of association, Lee was governing director with very wide powers. Workers’ compensation insurance was taken out, naming Lee as an employee. Lee was killed when his aeroplane crashed while engaged in aerial top-dressing. Issue His widow made a claim for payment under the Workers’ Compensation Act Her claim was initially rejected on the ground that as Lee had full control of his company he could not be a "worker" within the meaning of the Act. "Worker’ was defined under the Act as a person "who has entered onto or works under a contract of service... with an employer." Held By Privy Council The company was a separate legal entity distinct from its founder, Lee Lee could enter into a contract of employment with him

Case – 3 MACAURA v NORTHERN ASSURANCE CO LTD (1925) AC 619 Fact Macaura own land on which stood timber. He sold the land and timber to a company he formed and received as consideration all the fully paid shares. The company carried the business of felling and milling timber. A fire destroyed all timber which had been felled. Macaura had earlier insured the timber against loss of by fire in his own name. He had not transferred the insurance policy to the company. Issue When Macaura made a claim his insurers refused to pay arguing that he had no insurable interest in the timber. Only persons with a legal or equitable interest in property are regarded as having interest in it. Held By House Of Lords The insurers were not liable. Only Macaura’s company, as owner of the timber, which had the requisite insurable interest in it. Only the company, and not Macaura, could insure its property against loss or damage. Shareholders have no legal or equitable interest in their company’s property.

Case 4 Ackruti v/s MoF (GOI) Fact The government is likely to initiate prosecution against Mumbai-based realty firm Ackruti City Ltd in a case involving loans given to other companies Issue Section 295 deals with loans given to directors and other companies. It is alleged that Ackruti City gave loans to other companies in which its directors were interested, without seeking the required approvals from the central government. The allegations follow an inspection report of the Registrar of Companies (RoC), an arm of the corporate affairs ministry that oversees registered companies in India. The ministry had ordered an inspection into Ackruti’s books of accounts in February. The inspection was based on the RoC’s preliminary findings that there were prima facie violations in Ackruti’s balance sheets till the period to March Ackruti to face action for company law violations

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