Companies Act, 1956

Companies Act, 1956
Meaning and types of companies, Formation of a company, Memorandum and Articles of Association, Prospectus and Issue of Shares, Share Capital and Shareholders, Company Meetings and Proceedings, Powers and Liabilities of Directors ,meeting ,Managerial Remuneration and Winding up of Company

The Company Act 1956

This principal Act aims at:
• Protection of companies and investors.

• Facilitating the growth and development of the company.

• Safeguarding the interest of creditors.

• Attainment of the socio-economic goals fixed by the government policies.

• Regulating company affairs to preserve public interest.

Introduction
A company is a form of business organization. The definition of the term varies by country. In general, a company is same as a corporation.
Which is a union of natural persons that has its own legal status that is independent from the persons involved. It is a "creature" of statute; i.e., it is like a person created by law. Because it is recognized by governments as such (as a separate creature) it must file tax returns and pay taxes and conform to state and federal law. This separation of persons and corporation gives it special powers. Its status and capacity is determined by the law of the place of incorporation.

A CORPORATION IS DEFINED AS
A LEGAL ENTITY OR STRUCTURE CREATED UNDER THE AUTHORITY OF A STATE'S LAWS,
CONSISTING OF A PERSON OR GROUP OF PERSONS WHO BECOME SHAREHOLDERS.
THE ENTITY'S EXISTENCE IS CONSIDERED SEPARATE AND DISTINCT FROM THAT OF ITS MEMBERS.
LIKE A REAL PERSON, A CORPORATION CAN ENTER INTO CONTRACTS, SUE AND BE SUED, PAY TAXES SEPARATELY FROM ITS OWNERS, AND DO THE OTHER THINGS NECESSARY TO CONDUCT BUSINESS.

CHARACTERISTICS

1. Independent corporate existence
   
2. Perpetual succession
   
3. Limited liability
   
4. Transferable shares
   
5. Separate property
   
6. Power to sue / sued
   
7. Common seal
   
8. Separate management
   

Types of company

A. Private company B. Public company
Limited by shares
Limited by guarantee
Unlimited companies
Association not for profits
Government companies
Holding companies
Subsidiary companies

Types of company

PRIVATE COMPANY / PUBLIC COMPANY

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,
(a) restricts the rights to transfer its shares, if any;
(b) limits the number of its members to fifty not including-
(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; and
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company ;
(d) prohibits any invitation or acceptance of deposits from persons other than its member, directors or their relatives;
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definitions, be treated as a single member;

Public company means a company which -
(a) is not a private company;
(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;
(c) is a private company which is a subsidiary of a company which is not a private company.

A company limited by guarantee.

Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise they have no economic rights in relation to the company. This type of company is common in England.

A company limited by shares.

The most common form of company used for business ventures. Specifically, a limited company is a "company in which the liability of each shareholder is limited to the amount individually invested" with corporations being "the most common example of a limited company .This type of company is common in England.

A limited-liability company.

"A company—statutorily authorized in certain states—that is characterized by limited liability, management by members or managers, and limitations on ownership transfer",
An unlimited liability company. A company where the liability of members for the debts of the company are unlimited. Today these are only seen in rare and unusual circumstances.

Incorporation of a Company
The incorporation of a Company is governed by the Companies Act 1956. The Companies Act is an Act to consolidate and amend the law relating to companies and certain other associations. It extends to the whole of India. Chapters I and II deal with the incorporation of a company and matters incidental thereto.

ADVANTAGES

1. Limited liability. One of the key reasons for forming a corporation is the limited liability protection provided to its owners. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation's debts. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities.
   
2. Corporate persona. Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners (at least in the typical C corporation). Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays taxes, at the corporate rate, on any profits.
   
3. Attractive investment. The built-in stock structure of a corporation makes it attractive to investors.
   
4. Capital incentive.
   
5. Flexibility & autonomy
   
6. Capacity to sue
   
   
7. Operational structure. Corporations have a set management structure. The owners of a corporation are shareholders, who elect a Board of Directors, which then elects the officers. Other than the election of directors, shareholders do not participate in the operations of the corporation. The Board of Directors is responsible for managing and exercising the rights and responsibilities of the corporation. The Board sets corporate policy and the strategy for the corporation.
   
8. Perpetual existence. A corporation continues to exist until the shareholders decide to dissolve it or merge with another business.
   
9. Freely transferable shares. Shares of corporations are freely transferable, because as a separate entity, the existence of a corporation is not dependent upon who the owners or investors are at any one time. A corporation continues to exist as a separate entity, and is not terminated or dissolved even when shareholders die or sell their shares.
   

Disadvantage of incorporation

1. Formalities ,expenses
   
2. Corporate disclosure
   
3. Divorce of control
   
4. Increased social responsibility
   
5. Greater tax burden
   

Salomon v. Salomon & Co. Ltd is a foundational decision of the House of Lords in the area of company law
Background
Aron Salomon was a successful leather merchant who specialized in manufacturing leather boots. For many years he ran his business as a sole proprietor. By 1892, his sons had become interested in taking part in the business. Salomon decided to incorporate his business as a Limited company, Salomon & Co. Ltd.
At the time the legal requirement for incorporation was that at least seven persons subscribe as members of a company i.e. as shareholders. The shareholders were Mr. Salomon, his wife, daughter and four sons. Two of his sons became directors; Mr. Salomon himself was managing director. Mr. Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost £39,000, of which £10,000 was a debt to him. He was thus simultaneously the company's principal shareholder and its principal creditor.
When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud.
HELD: J.V. Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors.

Piercing corporate veil
Ultra vires is a Latin phrase that literally means "beyond the powers". Its inverse is called intra vires, meaning "within the powers". It is used as a legal term in a number of common law contexts. In corporate law, ultra vires describes acts attempted by a corporation that are beyond the scope of powers granted by the corporation's Charter or in a clause in its ; in the laws authorizing its formation, or similar founding documents. Acts attempted by a corporation that are beyond the scope of its charter are void or voidable.
The corporate law concept of piercing (lifting) the corporate veil describes a legal decision where a shareholder or director of a corporation is held liable for the debts or liabilities .
Piercing the corporate veil is not the only means by which a director or officer of a corporation can be held liable for the actions of the corporation. Liability can be established through conventional theories of contract, agency, or tort law. For example, in situations where a director or officer acting on behalf of a corporation personally commits a tort, he and the corporation are jointly liable and it is unnecessary to discuss the issue of piercing the corporate veil. The doctrine is often used in cases where liability is found, but the corporation is insolvent.

Factors for piercing the veil

1. Absence or inaccuracy of corporate records;
   
2. Concealment or misrepresentation of members;
   
3. Failure to maintain arm's length relationships with related entities;
   
4. Failure to observe corporate formalities in terms of behavior and documentation;
   
5. Failure to pay dividends;
   
6. Intermingling of assets of the corporation and of the shareholder;
   
7. Manipulation of assets or liabilities to concentrate the assets or liabilities;
   
8. Non-functioning corporate officers and/or directors;
   
9. Other factors the court finds relevant
   

Formation of company

• Promotion
  
• Preparation of memorandum of association
  
• Preparation of articles of association
  
• Preliminary Contract
  
• Registration of company
  
• Issue of prospectus
  

Promotion
Promotion of company is the process of conceiving an idea and developing it into concrete proposition or project.
Memorandum of association
The memorandum of association of a company, often simply called the memorandum (and then often capitalised as an abbreviation for the official name, which is a proper noun and usually includes other words), is the document that governs the relationship between the company and the outside world
A memorandum of association is required to state the name of the company, the type of company (such as public limited company or private company limited by shares), the objectives of the company, its authorised share capital, and the subscribers (the original shareholders of the company). A company may alter particular parts of its memorandum at any time by a special resolution of its shareholders, provided that the amendment complies with company law .
THERE ARE DIFFERENT CLAUSES TO BE MENTIONED IN THE MOA :
NAME CLAUSE
REGISTERED OFFICE CLAUSE
OBJECT CLAUSE
LIABILITY CLAUSE CAPITAL CLAUSE

Purpose
The MOA is designed to communicate to the public the state of affairs of the company and its purpose of being and operating. This aids various stakeholders of the company (creditors, suppliers, shareholders, etc.) to evaluate the extent of their risk and also possibilities of the company to overcome them at a future date.

Articles of association
The articles of association of a company, often simply referred to as the articles, are the regulations governing the relationships between the shareholders and directors of the company
EFFECT OF MEMORANDUM AND ARTICLES.
(1) Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each members, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.
(2) All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company
Incorporation by registration
(1) Any seven or more persons, or where the company to be formed will be a private company, any two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability.
(2) Such a company may be either -
(a) a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them (in this Act termed "a company limited by shares");
(b) a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up (in this Act termed "a company limited by guarantee"); or
(c) a company not having any limit on the liability of its members (in this Act termed "an unlimited company

Prospectus
A prospectus is a legal document that institutions and businesses use to describe the share & securities they are offering for participants and buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors.

Share Capital
The issued share capital of a company is the total nominal value of the shares of a company which have been issued to shareholders and which remain outstanding .These shares, along with the share premium account, represent the capital invested by the shareholders in the company. The issued share capital may be less than the authorised share capital, the latter being the total value of the shares that are available for issue by the company.
Shareholder
One who owns shares of stock in a corporation or mutual fund. For corporations, along with the ownership comes a right to declared dividends and the right to vote on certain company matters, including the board of directors. also called stockholder
TYPES OF SHARES
A company may have as many different types of shares as it wishes, all with different conditions attached to them. Generally share types are divided into the following categories:

Ordinary Shares
As the name suggests these are the ordinary shares of the company with no special rights or restrictions. They may be divided into classes of different value.

Preference Shares
These shares normally carry a right that any annual dividends available for distribution will be paid preferentially on these shares before other classes.

Cumulative preference
These shares carry a right that, if the dividend cannot be paid in one year, it will be carried forward to successive years.

Redeemable Shares
These shares are issued with an agreement that the company will buy them back at the option of the company or the shareholder after a certain period, or on a fixed date. A company cannot issue redeemable shares only.

Types of Meetings
Two types of meeting

1. Shareholders meeting

Statutory meeting
Annual General Meeting
Extra Ordinary General Meeting
2. Directors Meeting

Statutory meeting
This meeting is held by Public limited company compulsorily. The meeting should be held after one month but before six months of obtaining the certificate of commencement of business.

Annual General Meeting
The company gathering, usually held at the end of each fiscal year, at which the previous year and the outlook for the future are discussed and directors are elected by common shareholders. Shortly before each annual meeting, the corporation sends out a document called a proxy statement to each shareholder. The proxy statement contains a list of the business concerns to be addressed at the meeting and a ballot for voting on company initiatives and electing the new Board. This proxy ballot authorizes someone else at the meeting (usually the management team) to vote on investors' behalf.

Extra Ordinary General Meeting
All general meetings other than statutory meeting and annual general meeting is called Extra Ordinary General Meeting. This meeting is called by the directors or tribunal

2. Directors Meetings
Also known as Board Meetings. The directors have no individual rights (subject Articles of Association) to act on behalf of the company. They must act through the Board and their powers emanate from their collective decisions.
Regulations affecting the conduct of Board meeting and their powers (and limitations) are usually set out in their Articles of Association.

Powers of Directors
Powers of directors Subject to the provisions of the Act, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company.... The powers given by this regulation shall not be limited by any special power given to the directors by the articles and a meeting of directors at which a quorum is present may exercise all powers exercisable by the directors.
In other words, the directors have the power to deal with any particular matter unless the Act, the articles or a (previously passed) special resolution says to the contrary.
Most companies do not have special articles and most have not passed special resolutions to restrict the directors' powers, so the reality is that in most companies the directors can make any decision unless the Act says it needs a resolution in general meeting is required.

Powers of Directors
1.General powers of the Board :

The board is entitled to exercise all such powers and to do all such acts and things as the company is authorised to do, provided the board shall exercise shall its powers subject to Companies Act, MOA, AOA.

2.Powers to be exercised in the board meetings

The board shall exercise the following powers on behalf of the company by means of resolution passed at the Board meeting:
Issue debentures.
Invest funds of the company.
Make loans.
Borrow money otherwise than on debentures.

3. Powers to be exercised with the approval of company in general meeting
To sell, lease or dispose of the whole of the undertaking of the company.
To remit or give time for repayment of any debt due to the company by a director.
To contribute to charitable or other finds not directly related to the business of the company.( Rs. 50,000 or beyond).
Borrowing of money beyond the paid-up capital of the company.
4. Power to make political contributions:

To any political parties or for any political purpose but should not exceed 5 % of the company’s net profit of three consecutive financial years.

Liabilities of Directors
Directors' legal duties fall into the following categories:

(1) general fiduciary duties imposed by the branch of the common law known as equity;

(2) the duty to observe care under the common law of negligence;

(3) duties under the Companies Acts, the Insolvency Act 1986 and related legislation, including for fraudulent and wrongful trading;

(4) duties imposed by the company itself;

(5) duties imposed by other legislation and common law provisions

Managerial Remuneration
Remuneration of directors The directors shall be entitled to such remuneration as the company may by ordinary resolution determine and, unless the resolution provides otherwise, the remuneration shall be deemed to accrue from day to day.
The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its manager in respect of any financial year shall not exceed eleven per cent of the net profits of that company for that financial year computed in the manner laid down in sections 349 except that the remuneration of the directors shall not be deducted from the gross profits

Winding up of Company
Wind-up or windup can refer to a verb for terminating the existence of a company or other entity with a view to its liquidation and dissolution. In law, liquidation refers to the process by which a company (or part of a company) is brought to an end, and the assets and property of the company redistributed.
MODES OF WINDING UP :
There are three ways, in which a company may be wound up. They are :

• Winding up by the court.
  
• Voluntary winding up,
  
• Members Voluntary winding up.
  
• Creditors Voluntary winding up.
  
• Winding up subject to supervision of the court
  

WINDING UP BY THE COURT:
A company may be wound up by the court in following situations. Here, the court means "High Court".
If the company itself, has passed a special resolution in the general meeting
If there is a default, in holding the statutory meeting
If the company fails to commence it's business within one year from the date of it's incorporation, or suspends it's business for a whole year.
A company limited by shares, has to obtain a "certificate of commencement" of business from the registrar. Unless it obtains such certificate, it cannot carry on it's business operation.
If the number of members, in a public company is reduced to less than seven, and in case of private company less than two.
If the company is unable to pay its debits; where the financial position of the company is, such, that it has more liabilities than assets, and after disposing off the assets
If the court, itself is of the opinion that the company should be wound up.

VOLUNTARY WINDING UP
A company may , voluntary wind up it's affairs, if it is unable to carry on it's business, or if it was formed only for a limited purpose, or if it is unable to meet it's financial obligation, and etc. A company may voluntary wind up itself, under any of the two modes:

Members voluntarily winding up

Creditors voluntarily winding up
A company may voluntarily wind up itself, either by passing :
An ordinary resolution, where the purpose for which the company was formed has completed, or the time limit for which the company was formed, has expired.
Or
By way of special resolution
Both types of resolution shall be passed in the general meeting of the company.

WINDING UP SUBJECT TO SUPERVISION OF COURT
Winding up subject to supervision of court, is different from "Winding up by court." Here the court only supervise the winding up procedure. Resolution for winding up, is passed by members in the general meeting. It is only for some specific reasons, that court may supervise the winding up proceedings. The court may put up some special terms and conditions also.

Disqualifications of directors
A person shall not be capable of being appointed director of a company, if-

(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a Court of any offence involving moral turpitude

(e) he has not paid any call in respect of shares of the company