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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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Incorporation of a Company
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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Incorporation of a Company
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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Incorporation of a Company
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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Procedure of conducting ameeting
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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Procedure of conducting ameeting
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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Procedure of conducting ameeting
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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Removal of Directors
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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Removal of Directors
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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Removal of Directors
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 of Directors
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.
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