Quick Reference Study Notes for Company Law (Foundation)

Company Law

What is Company

The word company is basically derived from a Latin word `companies`. A company is an artificial person or entity created by Law. A Company is defined as a group of persons associated together for the attainment of common Economic goals. In India laws relating to the affairs of the companies are contained in The Companies Act 1956. The Sec 3(1)(i) of the Companies Act 1956 of India  defines that company as “a company formed and registered under the Companies Act 1956 act or an existing company”

Meaning and definition
A company is a voluntary association of persons formed for some common purpose with capital divided into parts also known as shares.
Justice Lindlay defines company “as an association of many persons who contribute money or money’s worth to common stock and employ it in some trade or business and who share the profits arising therefrom”
According to Companies Act 1956, a company means a company formed and registered under Companies Act and incorporated by this Act

Company: A Separate Legal Entity
- A company is in law regarded as an entity separate from members. It has an independent
  corporate existence.
- Any members of it  can enter into a contract with it in the same way as any other individual
  can enter into a contract and he cannot be held liable for the acts of the company even if he holds
virtually entire share capital.
- The company’s Assets, property and Money belongs to it and not to the shareholders although
   the shareholders own the company)

Main Features of a Registered company under The Companies Act 1956.

1.  Voluntary Association

A company is a voluntary association of persons who have come together for a common object which generally is to earn a profit from the activity. All the activities of this association are governed by the law and are only limited by its incorporated memorandum of association.

2.Incorporated association
A company comes into existence when it is incorporated or registered under The Companies Act. A minimum number of persons required for incorporation of  Public company is seven and in case of a Private company it's two.

3.Separate legal entity
On incorporation, the company gets personality which is separate and distinct from those of its members. The company is basically an artificial person in the eyes of law.

4.Separate property
The company created under Companies Act 1956 can own, enjoy and dispose of its property in its own name.

5. Legal restrictions
The Companies Act 1956 of India enacts the formation, working and winding up of a company registered under this act and strictly governed by laws, rules and regulations as per the Companies Act provisions.

6. Perpetual succession
A company never dies as a person dies. Company’s existence is not affected in any way by the death or insolvency of any shareholder of the company. In the company, members may come and members may go, but the company continues its operations under the regulations of Companies Act until it is wound up.

7. Common seal
A company registered under Companies Act is considered as an artificial person in the eyes of Law,  it cannot sign its name on a contract. So all the functions of the registered company are done with the help of the seal. All contract entered by a company into by the members will be under the common seal of the company under the Companies Act regulations.

8. Share capital
A company organises its capital by selling its shares. Those who buy these shares become its shareholders and thereby become members of the company.

9.Limited Liability
In the case of the Limited Companies registered under Companies Act, a liability of members will be limited only to the amount unpaid on the shares.

10. Transferability of shares.
The members or shareholder as they are called in the company can freely transfer and sell their shares. The right to transfer the shares is a statutory right of members given under the Companies Act.


Ownership and Management
The owners or stakeholders of a company are mainly called the shareholders. The affairs of the company are managed by their representatives are known as Directors.

Classification of  companies
The companies are classified on the basis of the following segments:

A. Incorporation
 
  1. Chartered company
    2. Statutory company
    3. Registered company
B. Liability of members
 
  1. Limited company
    2. Company limited by guarantee
    3. Unlimited company
C.    Number of members
 
  1. Private company
    2.  Public company

D.   Ownership
   
1.Government Company
    2.Foreign company
    3.Holding and subsidiary company


A. Incorporation
1. Chartered company

The company which has formed and incorporated under a special charter granted by the
           king or queen or the ruler of the Land.Eg East India company. Bank of England.

2. Statutory company
These are companies which are created by means of any special Act created in the
           Parliament or any state legislature.Eg RBI, Railway

3. Registered company
The Company which is formed and registered under companies Act 1956 is called
Registered companies.


B. Liability of members
    1. Limited company or company limited by share
       
   Majority of registered companies will be the companies limited by shares. The    
          companies registered as Limited Companies under the Companies Act, here in
          registered company liability of Members or shareholders  will be limited to the amount
          unpaid on the shares.

2. Company limited by guarantee
         
 The  Companies registered under Companies Act, the liability of each member in those companies
          are limited by the memorandum to such amount as he may guarantee by the memorandum
          to contribute to the assets of the company in the event of its winding up.   
         
3. Unlimited company
       
   The company which is not having any limit on the liability of its members is known as an
           unlimited company. In these companies, the  members are liable for the debts of the
           company at the time of winding up.
 

C. Number of members
1. Private company
       
    A private company is a company
           -in which it restricts the right of its members to transfer its shares.
           -limits the number of its members to 50.
          -prohibits the members for an invitation to the public to subscribe to its shares.

2. Public company
       
   A Public company is a company which is not a private company and Registered under
          the Companies Act 1956.

D. Ownership
1. Government company
     
    A company is said to be a government company when 51% of the paid up capital is held
          by the central government or state government or partly by central govt or partly by one
          or more state govt.

2. Foreign company
         
  A company which is incorporated outside India and having the business operation on
           Indian soil is called a Foreign Company

3. Holding and subsidiary company
         
  A holding company is a company which controls another company and the controlled
           the company is known as a subsidiary company.

One Man Company
The company in which the whole of the share capital is in the hold of one man is called the one-man company, and in order to meet the statutory requirement of The Company Act regulations  of minimum number of members some dummy members from family like wife, son or any close relation holds one or two shares each.

Formation of a company

The process of formation of a company may be divided into four stages;
1. Promotion
2. Incorporation
3. Raising of capital
4. Commencement of business

I. Promotion

Promotion is one of the first stages in the formation of a company. In this stage, the idea of starting and launching a new business is conceived by a person or a group of persons called promoters. The detailed investigation about the workability of the idea, amount of investment of the required capital, operating expense etc takes place.
Before forming a company, there must be some persons called promoters who have an intention to form a company and those persons take the necessary steps to carry forward that intention into operation. These are the promoter who brings a company into existence.

II. Incorporation
A company is said to be registered and incorporated when it got registered with the registrar of companies under The Companies Act. After registration, a  certificate of incorporation is given that is the birth certificate of the company. From the date of incorporation, the company comes into existence.

Procedure for registration
The promoter has to first decide the proposed form of the company as for whether it is to be a public company or a private company.
The promoters may form the company with these limitation factors like limited liability, unlimited liability or limited by guarantee. The promoters have every right to decide the name of the new company which is agreeable and desirable to all the members. For eg, if the name proposed is identical with or closely is similar to the name of an existing company, so that will be certainly undesirable. Forgetting the company to be registered an application has to be made to the registrar of the companies. This application shall contain these following important documents:
1.      Memorandum of association
2.      Articles of association
3.      A statement of nominal capital
4.      A notice of having the address of the registered office of the new company.
5.      A list of directors and their consent to an act signed by them
6.      A declaration that which states that all the requirements of the act have been compiled as
        per Company Act regulations. Such a declaration should be duly signed by an advocate of  
        the high court or supreme court or a chartered accountant who is engaged in the
        formation of company

Certificate of incorporation

After applying for registration of the company If the registrar is fully satisfied that all the required formalities are compiled as per the Companies Act, he shall register the company and issue a certificate of incorporation.

Conclusive proof
Once a company is registered under the Companies Act the incorporation cannot be challenged subsequently. The certificate of incorporation issued by the registrar of Companies is conclusive evidence which proves that
1. all the requirements of the Companies Act have been complied with.
2. company is duly registered with the registrar of Companies.
3. company came into existence on the date of the certificate of incorporation.
 

 


Advantages of incorporation
1.      Transferability of shares
2.      Separate legal entity
3.      Perpetual succession
4.      Common seal
5.      Separate property
6.      Capacity to sue

III. Raising of capital
Once the companies got incorporated or registered, a company can raise capital by issuing shares to the Public. In case of a private company, it cannot issue shares to the public.
In the case of a public company, a copy of the prospectus is filed with the registrar and it will be issued to the public. Those who are intended in purchasing share are required to send their application money to the company's banker.
On the last date fixed for the receipt of application if the company has received application equal to minimum subscription, the directors will start with an allotment of shares.

IV. Commencement of business
After incorporation, a private company may commence its business operations at any time. But in case of a public company to commence business immediately after incorporation it should obtain a certificate of commencement from the registrar.

MEMORANDUM OF ASSOCIATION

Memorandum of association or MOA is commonly known as the constitutional law for a newly formed company. MOA is a Company Document which contains the rules regarding constitution and activities of the company to be incorporated for its functioning. Basically, MOA is the fundamental charter of the registered company under The Companies Act 1956.
It clearly defines the extent of the powers of the company, beyond which it cannot go. It is a primary document which is filed at the time of incorporation.
The MOA is a public document it means that anyone interested in can get a copy on payment of prescribed fees.

Contents of memorandum
1. Name clause
2. Registered office clause
3. Object clause
4. Liability clause
5. Capital clause
6. Association clause or subscription clause.

1. Name clause
The first clause of memorandum requires a company to state its name Rules:-it means that it should not have the identical name or similar name that of an existing company.   Ltd for a public company and Pvt Ltd for a private company. The company should not use any name which is prohibited by the Name and Emblems Act.
2. Registered office clause
The MOA must clearly specify the state in which the company has mentioned its registered office to be situated.
3. Object Clause
It is the one of the most important clauses of the memorandum of association. It defines the objective of the company and the extent of its powers dispersed. In MOA the object of the company for which it's been incorporated must be stated very clearly and a company cannot do any activity or function beyond object clause. The objects of the company shall not be to carry any illegal activity or activity against public policy.
4. Liability clause
This  clause clearly mentions the state the nature of liability of members in the company
5. Capital clause
This clause basically defines and mentions the total amount of capital with which the promoters have registered the company. This capital to start with is known as authorized capital or nominal capital or registered capital of the company.
6. Association clause or subscription clause
The memorandum concludes with subscription clause. In the case of a public company, the memorandum must be subscribed by at least  7 persons and 2 in case of a private company. Each registered subscriber to this must sign the document and write the number of shares he possesses

ALTERATION OF MEMORANDUM
To perform any alteration of the memorandum, it should be followed according to the procedure and regulations laid down in The Companies Act.

1. Alteration of a name clause
To change the name of a company a special resolution can be passed and with only with the approval of central govt. If a company is registered with a name which according to central govt opinion is identical with or resemble very much to the name of any existing company, then it can be changed with the passing of an ordinary resolution but with strictly with the approval of central govt.

2. Alteration of registered office clause
To shift the office within local limits means that from one place to another place in the same town or city, the village then it can be done by giving a notice of the change to a registrar of the companies.
To shift the registered office outside local limits, a special resolution for that has to be passed.
If the shift of registered office is from the jurisdiction area limit of one registrar to another's the special resolution should be duly confirmed by the regional director of the state. (new sec 17 A Amendment Act 2000)

3. Alteration of object clause
     To alter the object clause there are many restrictions. Alteration of its objects may be for the following purposes;
    1. To carry out business functions more economically or more efficiently than before.
     2. To achieve its main goals/purposes by improvising new means.
     3. To expand, diversify or change the local area of operation
     4. To stop or restrict any of its prior objects specified in the memorandum.
     5. To implement the process of amalgamation of the company with any other company.
     6. To carry out the dispose of or selling of the whole or any part of the undertaking of the company.

So to carry all these alterations a special resolution and approval of company law board is a must

4. Alteration of liability clause

Alteration in liability clause cannot take place to make the liability of members unlimited.

5. Alteration of capital clause
The alteration can be made to
1. To increase share capital
2. To convert fully paid share to stock
3.Cancellation of shares  etc

Doctrine of ultra vires
Memorandum of Association  contains the rules regarding company constitution and activities that the company has to carry. MOA is a fundamental charter of the company. It clearly  defines the scope and the extent of powers of the company, beyond that the company cannot go.
MOA defines the limits and act of function within the company has to operate.. Any act which is beyond the MOA is ultra vires the company. Such acts are void in the eyes of Law.
Ultra is  “beyond” and vires is “powers”. So ultra vires mean that company is going  ‘beyond powers’.
The main purpose of this doctrine is to helps the stakeholders mean the shareholders, creditors and every third person associated and dealing with the company affairs to ensure that their investment is safe are not diverted to any illegal or unauthorized objects of the company.

ARTICLES OF ASSOCIATION
Articles of association are the internal regulations of any  company and are these are for the benefit of stakeholder or shareholders. AOA are basically the rules and regulation relating to the internal affairs of the management of a company. The Article of Association define the mode and form on which the business of the company is to be performed within these the defined rules.

*NOTE : "This study material is collected from multiple sources to make a quick refresh course available to students."

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