Indian Companies Act

Indian Companies Act, 1866 a company can be defined as a group of persons associated together for the purpose of carrying on a business, with a view to earn profits, _a company means a Company formed and registered under this Act or an existing company._ _ an existing company means a company formed and registered under any of the previous companies laws specified below._ a. any Act or Acts relating to companies in force before the Indian Companies Act, 1866 (10 of 1886), and repealed by That Act; b. the Indian Companies Act, 1866 (10 of 1866); c. the Indian Companies Act, 1882 (6 of 1882); d. the Indian Companies Act, 1913 (7 of 1913); e. the Registration of Transferred Companies Ordinance, 1942 (54 of 1942); and Characteristics of a Company

Separate Legal Entity On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. Limited Liability The liability of the members of the company is limited to contribution to the assets of the company up to the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him when called upon topay and nothing more, even if liabilities of the company far exceeds its assets. Perpetual Succession A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence ofthe company. Separate Property

A company is a distinct legal entity. The company’s property is its own. A member cannot claim to be owner of the company_sproperty during the existence of the company. Transferability of Shares Shares in a company are freely transferable, subject to certain conditions, such that no shareholder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares. Common Seal A company is a artificial person and does not have a physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force. Capacity to Sue and Being Sued A company can sue or be sued in its own name as distinct from its members. Separate Management

A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company. One Share-One Vote: The principle of voting in a company is one share-one vote. I.e. if a person has 10 shares, he has 10 votes in the company. Let us try to differentiate between company and partnership. Consequences of Non-registration Law does not recognize an illegal association. An illegal association cannot enter into any contract, cannot sue any members or any outsider, and cannot be sued by any members or outsiders for any of its debts. The members of the illegal association are personally for the obligations of the illegal association. A member may be liable to a fine of Rs. 1000. Any member of an illegal association cannot sue another member in respect of any matter connected with the association. Minimum Number of Members A public company must have at least 7 members whereas private company may have only 2 members. If the number of members falls below the statutory minimum and the company carries on its business beyond a period of six months after the number has so fallen, the reduction of number of members below the

legal minimum is a ground for the winding up ofthe company. On the basis of the number of the members, companies can be divided in two: " A Private Company " A Public Company Public Company means a company which not a private company. Private Company means a company which by its articles of association: a. Restricts the right of members to transfer its shares b. Limits the number of its members to fifty. In determining this number of 50, employee-members and ex-employee members are not to be considered. c. Prohibits an invitation to the public to subscribe to any shares in or the debentures of the company. If a private company contravenes any of the aforesaid three provisions, it ceases to be private company and loses all the exemptions and privileges, which a private company is entitled. Following are some of the privileges and exemptions of a private limited company:-

1. Minimum number is members is 2 (7 in case of public companies) 2. Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply. 3. Restriction contained in Section 81 related to the rights issues of share capital does not apply. A special resolution to issue shares to non-members is not required in case of a private company. 4. Restriction contained in Section 149 on commencement of business by a company does not apply. A private company does not need a separate certificate of commencement of business. 5. Provisions of Section 165 relating to statutory meeting and submission of statutory report do not apply. 6. One (if 7 or less members are present) or two members (if more than 7 members are present) present in person at a meeting of the company can demand a poll. 7. In case of a private company which not a subsidiary of a public limited company or in the case of a private company of which the entire paid up share capital is held by the one or more body corporate incorporated outside India, no person other than the member of the company concerned shall be entitled to inspect or

obtain the copies of profit and loss account of that company. 8. Minimum number of directors is only two. (3 in case of a public company) The Company Law Board on being satisfied that the infringe-ment of the aforesaid 3 conditions was accidental or due to inadvertence or that on other grounds, it just an equitable to grant relief, may grant relief to the company from the consequences of such infringement. The infringement of the aforesaid 3 conditions does not automatically convert a private company into a public company. It continues to remain private company; it merely ceases to be entitled to the privileges and exemptions available to a private company. Companies Deemed to be Public Limited Company A private company will be treated as a deemed public limitedcompany in any of the following circumstances:1. Where at least 25% of the paid up share capital of a private company is held by one or more bodies corporate, the private company shall automatically become the public company on and from the date on which the aforesaid percentage is so held. 2. Where the annual average turnover of the private company during the period of three consecutive financial years is not less than Rs 25 crores, the private

company shall be, irrespective of its paid up share capital, become a deemed public company. 3. Where not less than 25% of the paid up capital of a public company limited is held by the private company, then the private company shall become a public company on and from the date on which the aforesaid percentage is so held. 4. Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives), such companies shall become public company on and from date such acceptance or renewal is first made. On the basis of the liability of the members, a company canbe classified in " Limited Companies " Unlimited Companies Limited Companies Companies may be limited or unlimited companies. Companymay be limited by shares or limited by guarantee. a. Company limited by shares In this case, the liability of members is limited to the amount of uncalled share capital. No member of company limited by the shares can be called upon to pay more than the face value of

shares or so much of it as is remaining unpaid. Members have no liability in case of fully paid up shares. b. Company limited by the guarantee A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. A guarantee company may be a company with share capital or without share capital. Unlimited Company The liability of members of an unlimited company is unlim-ited. Therefore their liability is similar to that of the liability ofthe partners of a partnership firm. It may or may not have ashare capital. Under the Companies Act, 1956, the name of a public limitedcompany must end with the word _Limited_ and the name of aprivate limited company must end with the word _PrivateLimited_. However, under Section 25, the Central Governmentmay allow companies to remove the word _Limited / PrivateLimited_ from the name if the following conditions aresatisfied :-

1. The company is formed for promoting commerce, science, art, religion, charity or other socially useful objects 2. The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objects. On the basis of the control, we can classify company as Holding and Subsidiary companies Holding and Subsidiary Companies (Sec 4) A company shall be deemed to be subsidiary of anothercompany if: 1. That other company controls the composition of its board of directors; or 2. That other company holds more than half in face value of its equity share capital 3. Where the first mentioned company is subsidiary company of any company, which that other_s subsidiary. eg Company B is subsidiary of the Company A and Company C is subsidiary of Company B, therefore Company C is subsidiary of Company A.The control of the composition of the Board of Directors of the company means that the holding company has the power atits discretion to appoint or remove all or

majority of directorsof the subsidiary company without consent or concurrence ofany other person. On the basis of the ownership, a company can be classified as: " Government Companies " Non Government Companies " Foreign Companies Government Companies It means any company in which not less than 51% of the paidup share capital is held by the Central Government or any StateGovernment or partly by the Central Government and partly bythe one or more State Governments and includes a companywhich is a subsidiary of a government company. Government Companies are also governed by the provisions of the CompaPrivate Company / Public Company Private company means a company which has a minimum paid-up capital of one lakhrupees 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, weremembers of the company while in that employment and have continued to be membersafter 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, asmay be prescribed; (c) is a private company which is a subsidiary of a company which is not a privatecompany. • Every private company, existing on the commencement of the Companies(Amendment) Act, 2000, with a paid-up capital of less than one lakh

rupees, shall,within a period of two years from such commencement, enhance its paid-capitalto one lakh rupees. • Every private company, existing on the commencement of the Companies(Amendment) Act, 2000, with a paid-up capital of less than five lakh rupees,shall, within a period of two years from such commencement, enhance its paidcapitalto five lakh rupees. • Where a private company or a public company fails to enhance its paid-up capitalin the manner specified in sub-section (3) or sub-section (4), such company shallbe deemed to be a defunct company within the meaning of section 560 and itsname shall be struck off from the register by the Registrar. 2 • A company registered under section 25 before or after the commencement ofCompanies (Amendment) Act, 2000 shall not be required to have minimum paidupcapital specified in this section. Formation of a Private Limited Company A private Company can be formed either by i. incorporation of a new company for doing a new business , or

ii. Conversion of existing business of a sole proprietary concern or partnership firm into a company. A sole proprietory or partnership business can be converted into a company in any of thefollowing ways: 1. By outright sale of the business as a going concern. It may be a block sale where thefollowing takes over all the assets and liabilities of the firm or it may be partial take overof certain assets and liabilities. The consideration may be based on itemized sale or itmay be on slump sale basis. 2. A company becoming a partner of the firm which will be dissolved thereafter bymaking partners of the firms the only shareholders of the newly incorporated companyfor which the following steps should be taken: (i) Form a private company as per the procedure. (ii) The proprietor of the existing business alongwith some other persons (generally,family members and friends) or the partners of the existing firms, are the subscribers to the Company Memorandum of Association (iii) Make the newly formed company a partner with the sole-proprietor or the partners ofthe existing business. For this purpose a fresh partnership deed is to be executed.

(iv) Make a provision in the new partnership deed for the transfer of all assets andliabilities of the firm to any one of the partners who will pay off to the other partners. (v) Dissolve the partnership with the whole business going to the company as the solecontinuing partner. (vi) Every other partner of the firm (or the proprietor) gets shares in the company in lieuof his interest in the firm on dissolution. Name The name of a corporation is the symbol of its personal existence. Any suitable namemay be selected subject, however, to the following instructions: i. No company can be registered with a name which in the opinion of the CentralGovernment is undesirable.ii. The name of the company should not be identical with or should not too nearly resemble, the name of another registered company, for such name may bedeclared undesirable by the Central Government. 3iii. Whatever be the name of the company if the liability of the members is limitedthe last word of the name must be ‘Limited’ and in the case of a private company ‘Private Limited’

iv. Name of the Company must be printed on the outside of every place where thebusiness of the company is carried on. Such name including the address of theregistered office, must also be mentioned on all business letters and other officialpublications, on all negotiable instruments issued or endorsed by the company andon all other orders, receipts, etc. Application for Availability of Name • The promoters should select three to five alternative names, quite distinct fromeach other. • The names should suggest, as far as possible, the main objects of the proposedcompany. • The names should not too closely resemble with the name of any other registeredcompany. • The official guidelines issued by the Central Government should be followedwhile selecting the names. Besides, the names so selected should not violate theprovisions of the Emblems and Names (Prevention of Improper Use) Act, 1950. • The Deptt. Of Company Affairs has advised the ROCs to make arrangements forallowing the promoters and their representatives to ascertain the availability ofproposed names. This will ensure that the names applied for would be madeavailable promptly when an application for this purpose is made subsequently bythe promoters

• Apply in form 1-A to the Registrar of Companies have jurisdiction alongwith afiling fee of Rs. 500, to ascertain which of the selected names is available .The feecan be deposited in cash at the counter of the office of the Registrar or by postalorder. Company to be Registered within 6 Months of Approval of the Name • After scrutiny of the application for availability of name and finding no objectionto the proposed name, the Register of Companies informs the promoters to theincorporation of company by that name within 7 days of receipt of application.• The promoters should complete all other formalities for registration within 6months from the date of approval of name by Registrar. • Various documents required for the registration of company must be filedsufficiently well before the period of six months so that the company obtains thecertificate of incorporation on a date which is within 6 months of approval ofname, after these documents are vetted by ROC. 4• If, for any reason the formalities cannot be completed, the promoters should applyfor revalidation of name by filling Form 1A afresh alongwith a request letter onplain paper stating the reason together with a fee of Rs. 500 giving completereference to the letter of the Registrar.

• If none of the names suggested is available, the promoters should apply againselecting fresh names, or removing the objections raised, within a period of onemonth from the date of the letter. • If no action is taken within this period, on the rejection of the name, nameavailability application is to be made afresh alongwith a fee of Rs. 500 . The promoters may, however, make representation the Registrar’s refusal to thefollowing authoritiesnies Act. However, the Central Government may direct thatcertain provisions of the Companies Act shall not apply or shallapply only with such exceptions, modifications and adaptionsas may be specified to such government companies. Non Government Companies It is controlled and operated by a private capital Foreign Companies By this, we mean a company incorporated in a country outsideIndia under the law of that other country and has establishedthe place of business in India. There is another important type of company which is called as One Man Company One man company is a company in which one man holdspractically the whole of the share capital of the

company, and inorder to meet the statutory requirement of minimum numberof members, some dummy members who are mostly hisfriends or relations, hold just 1or 2 shares each. It is like anyother company is a legal entity distinct from its members. Thedummy members are usually nominees of the principalshareholder who is the virtual owner of the business and who carries it on with limited liability. Procedure of Conversion of a Private Company into a Public Company A private company must by law include the following condi-tions in its Articles of Association :a. The right to transfer its shares is restricted b. The number of members cannot be more than fifty. In calculating such number, employees / ex-employees who are also shareholders of the company are not to be considered. c. The company cannot invite subscriptions from the public for subscribing to the share capital or debentures of the company d. The company cannot invite or accept deposits from any member of the public other than members, directors and their relatives A company which is not a private company is a public companyand need not be bound by the above restrictions.

In view ofthe restrictive conditions applicable to private companies, often,it becomes necessary to convert a private company to a publiccompany. This article aims to give the procedure for suchconversion. Following is the procedure to convert a private company into a public company :" Pass

resolution in board meeting approving conversion

" Convene

general meeting of members for alteration of

name clause of Memorandum of Association and Articles of Association and pass special resolution thereat. " Make

application to the Registrar of Companies (RoC) for approving conversion to public company. The application must be accompanied with the following documents :i. Form No.23 (with requisite filing fees) for special resolution passed for conversion of Private Company into Public Company u/s 44 of the Companies Act, 1956 and for altering the Articles of Association u/s 31 of the Companies Procedure of Conversion of Public Company into

Private Company A public company is subject to several legal provisions which aprivate company is not required to comply with. Since privatecompanies are generally owned by fewer people and are closelyheld, several relaxations in law have been made available toprivate companies. As a result, the management may be of the opinion that it would be preferable to convert a public companyinto a private company. This article aims to give a broadoverview of the procedure involved. Following is the procedure to convert a public company into a private company :" Pass

resolution in board meeting approving conversion

" Convene

general meeting of members for alteration of name clause of Memorandum of Association and Articles of Association and pass special resolution thereat." Make application u/s 31 of the Companies Act, 1956 to the Registrar of Companies (RoC) for approving conversion to public company. The application must be accompanied with the following documents :i. Form No. 23 (with requisite filing fees) in respect of special resolution passed u/s 31 of the Companies Act, 1956 for

alteration of Articles for converting Public Company into Private Company along with a copy each of (a) Notice calling The process of forming a company can be divided into four distinct stages: a. Promotion b. Registration or incorporation c. Capital Subscription d. Commencement of Business. As regards a private company, it needs to go through the firsttwo stages only. As soon as it receives the certificate of incorpo-ration, it can commence business. This is so because it cannotinvite the public to subscribe to its shares and must arrange toraise the capital privately. But Public Company has to go through all of the four stages. We shall now discuss each of these four stages. Promotion This is the first stage in the formation of a company. It refers tothe entire process by which a company is brought into existence.It starts with the conceptualization of the birth of a companyand determination of the purpose for

which it is to be formed.Do you know what we mean by promoters? Promoters The persons who conceive the company and invest the initialfunds are known as the promoters of the company. Thepromoters enter into preliminary contracts with vendors andmake arrangements for the preparation, advertisement and thecirculation of prospectus and placement of capital. However, aperson who merely acts in his professional capacity on behalf ofthe promoter (e.g. lawyer, CA, etc) for drawing up the agree-ment or other documents or prepares the figures on behalf of the promoter but the person to whom the promoter pays isnot a promoter.

Pre-Incorporation or Preliminary Contracts The promoters of a company usually enter into contract toacquire some property or right for the company, which is yet to be incorporated. Such contracts are called PreIncorporation orPreliminary Contracts Registration of the Company

Once the documents have been prepared, vetted, stamped andsigned, they must be filed with the Registrar of Companies forincorporating the Company. The following documents must be filed in this connection: 1. The Memorandum of Association duly signed by subscribers and the Articles of Association, if any signed by subscribers to the Memorandum of Association 2. An agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager. 3. In addition to the above, in case of a public company, the following documents must also be filed: 1. Written consent of directors in Form 29 to agree to act as directors and their written consent to act as directors and take up qualification shares. 2. The complete address of the registered office of the company in Form 18. 3. Details of the directors, managing director and manager of the company in Form 32. 4. A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear before the High Court or a company secretary or Chartered Accountant in whole - time practice in India who is engaged in the formation of the company or by a person who is named

as a director or manager or secretary of the company that the requirements of the Companies Act have been complied with in respect of the registration of the company and matters precedent and incidental thereto. Certificate of Incorporation Once all the above documents have been filed and they arefound to be in order, the Registrar of Companies will issueCertificate of Incorporation of the Company. This document isthe birth certificate of the company and is proof of theexistence of the company. Once, this certificate is issued, thecompany cannot cease its existence unless it is dissolved byorder of the Court.