Company Act

1956

The Companies Act, 1956

In India, the Companies Act, 1956, is the most important piece of legislation that
empowers the Central Government to
regulate the formation,
financing,
functioning and winding up
of companies.

The Act contains the mechanism regarding

organizational,
financial,
Managerial
powers and responsibilities of the directors and managers,
raising of capital,
holding of company meetings,
maintenance and audit of company accounts,
powers of inspection, etc.

The Act applies to whole of India and to all types of companies, whether registered under this
Act or an earlier Act.
It does not apply to universities, co-operative societies, unincorporated trading,
scientific and other societies.

CONT..
The Act empowers the Central Government
to inspect the books of accounts of a company,
to direct special audit,
to order investigation into the affairs of a company
and
to launch prosecution for violation of the Act.
Prima facie case of fraud or cheating, action is
initiated under provisions of the Companies Act.

Administration of the Act

The Companies Act is administered by the Central
Government through

the Ministry of Corporate Affairs (9 th May 2007)

Offices of Registrar of Companies,
Official Liquidators,
Public Trustee,
Company Law Board(1964 sec 10 E)
Director of Inspection,
SEBI sec 55A Company Amendment Act 2000
Issues and transfer of securities
Non payment of dividends.

The Registrar of Companies (ROC) controls the task

of incorporation of new companies and the
administration of running companies.

Company Law Board

The set-up at the Headquarters includes the Company Law
Board(CLB) a quasi-judicial body, having the principal
Bench at New Delhi, an additional principal bench for
Southern Region at Chennai and four Regional Benches
located at New Delhi, Mumbai, Kolkata and Chennai.
National Company Law Tribunal(NCLT)
National Company Law Appellate Tribunal(NCLAT)
Supreme court
Matters

Prospectus
Statement in lieu of prospectus
Return of allotment
Issues of shares
Redemption of preferences shares etc.

CONT..
The Ministry of Corporate Affairs, (Department of
Corporate Affairs under Ministry of Finance).
The Ministry has a three-tier organisational setup: The Headquarters at New Delhi,
The Regional Directorates at Mumbai, Kolkata,
Chennai and Noida, and
The Registrars of Companies (ROCs) in States and
Union Territories.

CONT
The Official Liquidators(OL) who are attached to the
various High Courts functioning in the country are also
under the overall administrative control of the Ministry.
Official Liquidators are the officers appointed by the
Central Government under Section 448 of the
Companies Act and are attached to the various High
Courts.
They are under the administrative charge of the
respective Regional Directors who supervise their
functioning on behalf of the Central Government.

CONT
The organisation at the Headquarters also includes two
Directors of Inspection and Investigation with a complement
of staff.( Economic Adviser for Research and Statistics ,legal,
accounting, economic and statistical matters.)
The four Regional Directors(RD), who are in charge of the
respective regions, comprising a number of States and
Union Territories,
RD also supervise the working of the Offices of Registrars
of Companies and the Official Liquidators working in their
regions.
Liaison with the respective State Governments and the
Central Government in matters relating to the administration
of the Companies Act, 1956.

Registrar of Companies
(ROCs) Sec 69
The powers vested with the ROCs are:
Registration of memorandum and articles.

Registration of prospectus.

Registration of reduction of capital.

Call information or explanation.

Seizure of documents.

Investigation into affairs of a company.

Inspection of books of accounts, etc of companies.

To strike off defunct companies from register.

Enforcement of duty of company to make returns, etc

to Registrar.

Non-disclosure of information in certain cases.

Winding up petition by the Registrar.

What is a company
The word company is derived from the Latin word
(Com=With or together; panis=bread), and it
originally referred to an association of persons who
took their meals together.

Cont..
Lord Justice James has defined a company as
an association of many persons who contribute
money or moneys worth to a common stock and
employ it in some trade or business and who
share the profit and loss arising therefrom. The
common stock so contributed is denoted in money
and is the capital of the company. The persons
who form it, or to whom it belongs, are members.
The proportion of capital to which each member is
entitled is his share.

Salomon v. Salomon and Co. Ltd.,

(1897)
Saloman leather merchant
Sold business for pound 30000 20000 fully paid shares- 10000 debentures floating
charge over the company asset.

One year later company wound up asset pound 6000 liabilities secured dentures pound
10000 unsecured creditors pound 11000,

A Company is defined as a
According to the Act, a company means
In the terms of the Companies Act, 1956 a company means a
company formed and registered under the Companies Act, 1956 or
under the previous laws relating to companies [Section3(1)(ii)].
The salient features of a company are:Artificial legal person: It is invisible, intangible,
immortal and exists only in the contemplation of law.
It has to operate through a board of directors consisting of individuals.

Salomon v. Salomon and Co. Ltd., (1897) A.C.22,

Lee v. Lees Air Farming Ltd. (1961)
Foss v. Harbottle (1843)
Re. Kondoli Tea Co. Ltd., (1886)
Kania, J. observed in T.R Pratt (Bombay) Ltd. V. E.D. Sasson & Co,
Ltd., A.I.R. 1936 Bom 62 as follows:

Features of a company
Separate legal entity: the property of the company belongs to it and not to the members or
shareholders;
no member can either individually or jointly claim any ownership rights in
the assets of the company;
an individual member cannot be held liable for the wrongful acts of the
company even if he/she holds virtually the entire share capital;
the members of the company can enter into contracts with the company.
(lifting of the corporate veil)

Perpetual succession: continuance is not affected by the death, insolvency, mental or physical
incapacity of its members. It is created by law and law alone can dissolve it.

Limited liability of members: members cannot be asked to contribute any further, if the company goes
into liquidation.

Common seal:-

Features of a company
Transferability of shares: the shares of a public company are freely transferable without
the permission of the company but in a manner provided in the
Articles.
The shareholders may transfer their shares to another person
and this does not affect the funds of the company.
A private company imposes restrictions on transfer of its shares.
Separate property:
all the property of the company vests in it.
The company can control, manage and hold the same in its own
name.
The members have no ownership rights in the company's
property, either individually or collectively.
A shareholder does not even have an insurable right in the
property of the company.
The creditors of the company can have a claim only against the
property of the company and not against the property of the
individual members.
Capacity to sue and being sued:

Advantages of a Limited Company

Members' (the directors and shareholders) financial liability is
limited to the amount of money they have paid for shares.
The management structure is clearly defined, which makes it easy
to appoint, retire or remove directors.
If extra capital is needed, it can be raised by selling more shares
privately.
It is simple to admit more members.
The death, bankruptcy or withdrawal of capital by one member
does not affect the company's ability to trade.
The disposal of the whole or part of the business is easily arranged.

Disadvantages of
incorporation
Formality and expensive
Wastage and inefficiency of managementseparation of control from ownership-agency
cost
Greater social responsibility
Greater tax burden in certain cases
Corporate disclosures
Limitation of action
Detailed winding up procedures.

Disadvantages of a Limited
Company
Requirement to register the company with the registrar of
companies and provide annual returns and audited
statement of accounts.
All details of the company are available for public inspection
-no secrecy.
There are penalties for failing to make returns.
Expensive to set up.
Need professional help to form.
As a director, you are treated as an employee and must pay
tax.
The advantages of limited liability status are increasingly
being undermined by banks, finance house, landlords and
suppliers who require personal guarantees from the
directors before they will do business

Lifting of the corporate

veil
Statutory provisions:
Reduction of numbers of members below statutory
minimum sec 45
Relation ship between holding and subsidiary
company sec 212-214 (transport license company
case)
Misdescription in name 147
Fraudulent conduct Section 542 winding up
Failure to return application money section 69(5)first allotment of shares- 130 days- interest
Misrepresentation in prospectus sec 62
Non payment of tax
Ultra vires act

Judicial provisions
Decide foreign character-enemy company-UK German
case
Decide weather company is a JV
Decide weather company is a Partnership
To decide complaint of oppression
Production of subsidiary can be own production
People behind the company are seen by a businessman
Experience of the directors is the experience of the
company
All associates are part of one concern
Avoidance of welfare legislation-holding and subsidiary
company transferred all the profits to avoid payment of
bonus to empolyees.
Tax avoidance device excise tax case SSI exemption
Wealthy man formed four company

A comparison of company and others

forms of business organization

Company and partnership

Company and LLP
Company and corporation
A corporation includes a company incorporated
outside India exception:
A sole corporation-bishop in English law
Co-operative society-Co-operative Society act 1912
(vote, not for profits)

Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) Act of 2008.
LLP is an alternative corporate business entity that
provides the benefits of limited liability of a company
but allows its members the flexibility of organizing their
internal management on the basis of a mutually-arrived
agreement, as is the case in a partnership firm.

Useful for small and medium enterprises

services sector
professionals and
knowledge based enterprises.

Limited Liability Partnership (LLP)

LLP shall be a body corporate and a legal entity
separate from its partners.
It will have perpetual succession.
LLP will be a separate legal entity, liable to the full
extent of its assets, the liability of the partners would
be limited to their agreed contribution in the LLP.

No partner would be liable on account of the

independent or unauthorized actions of other partnersno joint liability created by another partners wrongful
business decisions or misconduct.

Cont..
Indian Partnership Act, 1932 shall not be applicable to
LLPs and there shall not be any upper limit on number
of partners in an LLP.
An LLP shall be under obligation to maintain annual
accounts reflecting true and fair view of its state of
affairs.
Provisions have been made for corporate actions like
mergers, amalgamations etc.
Provisions in respect of winding up and dissolutions of
LLPs

Distinction between Company and

Corporation
A society should not be deemed to be a body corporate within the
meaning of Section 2(7) of the Companies Act, 1956, although such a
society can be treated as a person having separate legal entity
apart from the members constituting it and thereby capable of
becoming a member of a company under Section 41(2) of the Act.
The expression body corporate occurring in various provisions of the
Companies Act Sections 295, 303, 372 etc. should therefore be
interpreted so as to exclude a society registered under the Societies
Registration Act from the scope of the expression body corporate
(Circular No. 8/48/2(7)/63-PR dated November 24, 1962).
Oil and Natural Gas Commission established under Section 3 of the
Oil and Natural Gas Act, 1959 (43 of 1959) is to be treated as a body
corporate by virtue of the provision of Section 2(7)(c) of the
Companies Act, 1956 under which the Central Government issued a
notification to that effect

Thanks

 holders, etc. For example, the Companies

(Amendment) Act, 2006 introduced an important
provision of Director Identification Number (DIN),
which is an unique Identification Number allotted
to an individual who is an existing director of a
company or intends to be appointed as director of
a company pursuant to section 266A & 266B of
the Companies Act, 1956 (as amended vide Act
No 23 of 2006). The various amendments are:-