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COMPANIES ACT, 1956
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NATURE, FORM AND TYPES OF BUSINESS
ENTERPRISES
Business Enterprises
Non-Corporate Corporate
(Sole Proprietorship, Partnerships & HUF) (Cos. & Co-operatives)
The basic difference between and Corporate and Non-Corporate form
of business organization is that while a non-corporate form of business
can be started without Registration, Corporate bodies cannot be set
up without registration under the laws which govern their
functioning.
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BRIEF STRUCTURE OF THE COMPANIES ACT,
1956
Section 1 – Short Title, Extent and Commencement
Section 2 – Definitions
Section 3 to 658 – Other Provisions
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BRIEF STRUCTURE OF THE COMPANIES ACT,
1956
Section 1 – Short Title, Extent and Commencement
Section 2 – Definitions
Section 3 to 658 – Other Provisions
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COMPANIES ACT, 1956 - FEATURES
The Companies Act, 1956 is the longest piece of
legislation ever passed by our Parliament.
The Act consists of 658 Sections and 15 Schedules.
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SHORT TITLE, EXTENT AND
COMMENCEMENT (SECTION 1)
This Act may be called the Companies Act, 1956.
It extends the whole of India.
It came into force on April 01, 1956.
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COMPANY – ITS MEANING
A Company in broad sense may mean an
association of individuals formed for carrying on
some business or undertaking for acquisition of
gain.
However, an association formed not for profit
acquires a corporate life and falls within the
meaning of a company by reason of a license u/s 25
of the Companies Act, 1956.
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COMPANY – ITS MEANING
An incorporated co. is a single and legal
(artificial) person distinct from the individuals
constituting it, whereas an unincorporated co. such
as a partnership, is a mere collection of
individuals.
Therefore, unlike a partnership, a co. is a
corporate body and a legal person having status
and personality distinct and separate from that of
the members constituting it.8
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COMPANY – ITS MEANING
The incorporated co. owes its existence either to a
special act of Parliament (LIC, DVC, Air India)
or to a company legislation (TISCO, RIL,
WIPRO).
The trading partnership which is governed by
Partnership Act is the most apt example of an
unincorporated association.
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COMPANY – ITS MEANING
In legal sense, a co. is an association of both
natural and artificial persons incorporated
under the existing laws of the country.
As per the Co. Act, 1956, a co. means a co. formed
and registered under the Co. Act, 1956 or
under the previous laws relating to companies.
(Sec. 3(1)(iii).
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COMPANY – ITS MEANING
Co means as association of many persons who
contribute money or money’s worth to a common
stock & employ it in some trade or business & who
share the profit or loss arising there from.
The common stock so contributed is the capital.
The persons who form it are the members.
The proportion of the capital to which each
member is entitled is his share.
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COMPANY – ITS CHARACTERISTICS
The most striking characteristics of a company are:
1. Corporate Personality
By incorporation under the Act, the co. is vested
with a corporate personality quite distinct from
individuals who are its members.
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CORPORATE PERSONALITY
Being a separate legal entity :
It bears its own name;
It has a seal of its own;
It is capable of owning property,
Incurring debts, borrowing money,
Having a bank account,
Employing people, entering into contracts,
Suing and being sued
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CORPORATE PERSONALITY
Saloman V. Saloman and Co. Ltd.
Saloman V. Saloman.xlsx
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CORPORATE PERSONALITY
Lee V. Lee’s Air Farming Ltd.
Lee V. Lee Air Farming.xlsx
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CORPORATE PERSONALITY
Small deviation from the Corporate Personality
Rule
Experience of a Shareholder is the experience of a
Company
New Horizons Limited V. Union of India
New Horizons Limited.xlsx16
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COMPANY – ITS CHARACTERISTICS
2. Limited Liability
One of the most important advantages of doing
business under the corporate form or organization.
This means that the liability of a members is
limited.
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COMPANY – ITS CHARACTERISTICS
2. Limited Liability
Eg., If A holds shares of nominal value of Rs.
1000 and has already paid Rs. 500, he cannot be
called upon to pay more than Rs. 500, the amount
remaining unpaid on his shares.
If he holds fully paid up shares, he has no further
liability to pay even if the co. is declared insolvent.
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COMPANY – ITS CHARACTERISTICS
2. Limited Liability
In Partnership firms, the liability of the partners
for the debts of the business is unlimited.
Not only their share in the firm but their
personal assets may be attached to satisfy the
debts and liabilities of the firm.
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COMPANY – ITS CHARACTERISTICS
3. Perpetual Succession
“Members may come and members may go, but
the co. can go on forever.”
During the war, all the members of one Private
Co., while in the General Meeting, were killed by a
bomb, but the co. survived – not even a hydrogen
bomb could have destroyed it.”
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COMPANY – ITS CHARACTERISTICS
4. Separate Property
A Co. being a legal person and entirely distinct
from its members, is capable of owning, enjoying
and disposing of property in its own name.
The property of the Co. is not the property of the
shareholders, it is the property of the Co.
Norther Insurance Co. Ltd..xlsx 21
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COMPANY – ITS CHARACTERISTICS
5. Transferability of Shares
The capital of a co. is divided into parts, called
Shares.
A member may sell his shares in the open market
and realise the money.
This provides liquidity to the members and
ensures stability to the Co. (as the member is not
withdrawing his money from the Co.).
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COMPANY – ITS CHARACTERISTICS
6. Common Seal
Since, the Co. has no physical existence, it must
act through its agents and all contract entered into
by his agents must be under the seal of the Co.
The Common Seal of a Co. is of great importance
and acts as official signature of a Co.
The name of the Co. must be engraved on its seal. 23
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COMPANY – ITS CHARACTERISTICS
7. Capacity to sue and be sued
A Co. being a body corporate, can sue and be sued
in its name.
To sue means, to institute a legal proceedings
against (a person) or to bring a suit in a court of
law.
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COMPANY – ITS CHARACTERISTICS
8. Contractual Rights
A Co., being a separate legal entity different from
its members, can enter into contracts for the
conduct of the business in its own name.
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COMPANY – ITS CHARACTERISTICS
9. Limitation of action
A Co. cannot go beyond the power stated in the
MOA.
MOA of the Co. regulates the powers and fixes
the objects of the Co. and provides the entire super
structure of the Co. rests.
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COMPANY – ITS CHARACTERISTICS
10. Separate Management
Members do not have effective and intimate
control over its working and elect its
representatives to conduct corporate functioning.
The Co. is administered and managed by its
managerial personnel.
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COMPANY – ITS CHARACTERISTICS
11. Termination of Existence
A Co., being an abstract and artificial person,
does not die a natural death.
It has its existence only in contemplation of law.
It is created by law, carries on its affairs as per
law and ultimately is effaced by law.28
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COMPANY – ITS CHARACTERISTICS
11. Termination of Existence
The existence of a Co. is terminated by means of
winding up.
However, to avoid winding up sometimes
companies change their form by means of
reorganization, reconstruction and
amalgamation.
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LIFTING OF CORPORATE VEIL
Fraudulent Conduct :
Where the business has been carried on with an
intent to defraud creditors or any other person or
for any fraudulent purpose, those who are
knowingly parties to such conduct of business be
made personally liable without any limitation for
all or any debts or other liabilities of the Co.
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LIFTING OF CORPORATE VEIL
Non Payment of Tax:
When any Pvt. Co. is wound up, any tax assessed
on the Co., whether before or in the course of
liquidation in respect of any income of any PY
cannot be recovered, every person who was
Director of that co. at any time during the relevant
PY shall be jointly and severally liable for payment
of tax.
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LIFTING OF CORPORATE VEIL
Ultra Vires Act:
Directors of a Co. will be personally liable for all
those acts which they have done on behalf of a co. if
they are Ultra Vires the Co.
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LIFTING OF CORPORATE VEIL
Mis Description of name:
Where an officer of a Co. signs on behalf of a Co.
any contract, agreement, cheque, bill of exchange,
order for money or goods or such other documents,
such person shall be personally liable to the holder
if the name of the Co. in not mentioned.
Hendon V. Adelman & Others.xlsx
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LIFTING OF CORPORATE VEIL
Misrepresentation in Prospectus:
In case of misrepresentation in Prospectus, every
Director, Promoter and every other persons who
authorises the issue of such prospectus incurs
liability towards those who subscribe for share on
the faith of untrue statement.
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ILLEGAL ASSOCIATION
An unincorporated Co., association or
partnership consisting of large number of persons
has been declared illegal.
No Co., Association or Partnership consisting of
more than 20 persons (10 in case of banking
business) can be formed for the purpose of carrying
on any business for gain, unless it is registered as
a Co. under the Companies Act, 1956 or is formed
in pursuance of some other Indian Law.35
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ILLEGAL ASSOCIATION
This provision is not applicable to:
A single Joint HUF carrying on any business
whatever may be the no. of its members. But if 2 or
more Joint HUF carry on business together and
their no. of members exceeds 20, then their
association will be illegal.
Charitable, Religious or scientific associations,
which are not formed for the purpose of making
profit or gain.36
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TYPES OF COMPANIES
COMPANIES
Basic Type
Private Co. Public Co.
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TYPES OF COMPANIES
COMPANIES
On the basis of Incorporation
Statutory Cos. Registered Cos.
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TYPES OF COMPANIES
COMPANIES
On the basis of Liability
Unlimited Cos. Limited Cos.
Cos. Limited by Guarantee Cos. Limited by Shares
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TYPES OF COMPANIES
COMPANIES
Other Classification
Government Co. Foreign Co.
Holding & Subsidiary Co.
Association not for Profit
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TYPES OF COMPANIES
COMPANIES
On the basis of Listing
Listed Cos. Unlisted Cos.
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PRIVATE COMPANIES
A Pvt. Co. means a Co. which has a minimum
share capital of Rs. 1.00 lacs and by its AOA:
a) Restricts the right to transfer its shares;
b) Limits the no. of its members as 50;
c) Prohibits any invitation to public to subscribe
for any shares or debentures of the Co.,
c) Prohibits any invitation or acceptance of
deposits from persons other than its members or
Directors or their relatives 42
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PRIVATE COMPANIES
The word “Private Limited” must be added at the
end of its name by a Pvt. Co.
Minimum no. of Members = 2
Minimum no. of Directors = 2
The only 2 members may also be the only 2
Directors of a Pvt. Co.43
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PRIVILEGES AND EXEMPTIONS TO
PRIVATE COMPANIES
Co. Act confers certain privileges on Pvt. Cos. and
such Cos. are exempt from complying with few
provisions of the Act.
The basic rationale behind this is that since Pvt.
Cos. are restrained from inviting capital and
deposits from the public, not much public interest
in involved in their affairs as compared to Public
Cos.
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PUBLIC COMPANIES
A Public Co. means a Co. which:
a) is not a Private Co.;
b) has a minimum paid up capital of 5.00 lacs;
c) is a Pvt. Co. which is a subsidiary of Public Co.,
Minimum no. of Members = 7
Minimum no. of Directors = 345
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STATUTORY COMPANIES
Constituted by a Special Act of Parliament or
State Legislature.
Companies Act, 1956 do not apply to them.
Eg., Reserve Bank of India, Life Insurance
Corporation of India, ONGC,
Such Cos. Do not use the word “Limited” as part
of their name. 46
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REGISTERED COMPANIES
Companies registered or incorporation under the
Companies Act, 1956.
Eg., Reliance Industries Limited, Hero Honda
Motors Limited, Tata Consultancy Services
Limited.
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UNLIMITED COMPANIES
A Co. not having any limit on the liability of its
members.
Members are liable for the Company’s debt and
their liability in unlimited.
Members of an UC are not liable directly to the
creditors of the co., the liability is only towards the
co. and in the event of its being wound up only
liquidator can ask the members to contribute. 48
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COMPANIES LIMITED BY GUARANTEE
A co. having liability of its members limited by its
MOA to such an amount as the member undertake
to contribute to the assets of the Co. in the event of
its winding up.
The liability of the members arises only when the
Co. has gone into liquidation.
Eg., Club, Trade Association, Socities
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COMPANIES LIMITED BY SHARES
Liability of the members is limited by the MOA
to an amount, if any, unpaid on the shares held by
them.
If his shares are fully paid up, he has nothing
more to pay.
Eg., a shareholder who has paid Rs. 75 on a share
of face value Rs. 100, can be called upon to pay the
balance of Rs. 25 only.
Most common types of Companies.
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ASSOCIATION NOT FOR PROFIT OR SEC
25 COMPANIES
Companies incorporated to promote the
charitable, religious, educational or other similar
objects.
Co. prohibits the payment of dividend to its
members but use it for aforesaid objects.
Need not end the name of the Co. with “Pvt. Ltd.”
or “Ltd.”
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GOVERNMENT COMPANIES
Any Co. in which not less than 51% of the paid up
share capital is held by the CG or by any SG or
Governments or partly by the CG and partly by one
or more SGs.
A subsidiary of the Govt. Co. is also treated as
Govt. Co.
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FOREIGN COMPANIES
A Co. which is incorporated in a country
outside India under the laws of that other
country and has a place of business in India.
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HOLDING AND SUBSIDIARY COMPANIES
A Co. shall be treated as a Subsidiary of another
Co., if and only if –
a) That other controls the composition of BODs;
b) That other controls more than half of the total
voting power of such Co.;
c) That other holds more than half in the nominal
value of its equity share capital;
The first mentioned Co. is a subsidiary of any Co.
which is the other’s subsidiary.
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HOLDING AND SUBSIDIARY COMPANIES
To illustrate, Co. A is a subsidiary of Co. B if, and
only if:
1. Co. B (holding) controls the composition of the
BODs of Co. A (subsidiary) ;
2. Co. B (holding) controls more than 50% voting
power of Co. A (subsidiary) ;
3. Co. B (holding) holds more than half in the
nominal value of equity shares of Co. A (subsidiary)
;
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HOLDING AND SUBSIDIARY COMPANIES
To illustrate, Co. A is a subsidiary of Co. B if, and
only if:
4. If Co. A (subsidiary) is a subsidiary of Co. C
which is subsidiary of Co. B, then the Co. A is also
a subsidiary of Co. B;
B
C
A 56
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HOLDING AND SUBSIDIARY COMPANIES
To illustrate, Co. A is a subsidiary of Co. B if, and
only if:
5. If Co. D is the subsidiary of Co. A, then D will
be the subsidiary of Co. C and also of Co. B;
B
C
A
D
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LISTED COMPANIES
A company is said to be “listed”, if its shares can
be traded on a stock exchange.
It is the securities that are listed, not the
company.
The phrase “listed company” is widely used to
mean a company that has listed its Equity
Shares.
It is possible for a company to have listed Debt
Securities but not listed shares. 58
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UNLISTED COMPANIES
Unlisted Cos. means those Cos. whose shares (or
debt instruments) are not listed at any of the
Recognized Stock Exchange (BSE, NSE) in India.
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IMPORTANT NOTE
In respect of Insurance, Banking and Electricity
Supply Companies incorporated and registered
under the Companies Act, 1956, the provisions of
Insurance Act, Banking Regulations Act and
Electricity Supply Act will prevail when they are
inconsistent with the provisions of the Companies
Act, applicable generally.
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THANK YOU
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