Legislative Backdrop of Companies Act

Company Law and Secretrial Practice

LEGISLATIVE BACKDROP OF COPA!IES ACT eanin" o# Company Law$ Comp Company any law is that that branch branch of law law which which deals deals exclu exclusiv sively ely with with all all aspe aspects cts relati relating ng to compani companies, es, such as incorpora incorporation tions s of companie companies s allotmen allotmentt of shares shares and share capital capital membersh membership ip in compani companies es manageme management nt and administ administratio ration n of companie companies, s, winding winding up of companies. etc. Company law in India is that branch of Indian law which regulates companies in India.

%ISTOR& OF I!DIA! COPA!& LA'

(oint )toc* companie) act o# +,-.$ Companies legislation in India owes its origin to the English Company law. The companies acts passed from time to time in India have been following following the English companies acts with certain modifications modifications to suit Indian conditions. conditions. The first legislative enactment for "Registration of oint stoc! companies" was passed in the year #$%. This &ct was based on the English companies &ct, #'' (!nown as the oint stoc! companies &ct #'') which recogni*ed company as a distinct legal entity, but did not grant to it the privilege of limited liability. (oint Stoc* Companie) act o# +,-/$ The oint stoc! companies act of #$% was replaced by the oint stoc! companies act of #$+. This act of #$+ conferred, for the first time in India the benefit of limited liability on the members of companies. ut this act did not extend the benefit of limited liability to the members of ban!ing companies and insurance companies. (oint Stoc* Companie) Act or +,0.$ The oint stoc! companies act of #$+ was replaced by the oint stoc! companies act of #--. The oint stoc! companies &ct of #-% extended the the bene benefit fit of limite limited d liabi liabilit lity y to the membe members rs of an!i an!ing ng compa companie nies s and and insura insuranc nce e companies. T1e companie) Act or +,00$ The oint stoc! companies &ct of #-% was replaced by the companies &ct of #--. The companies &ct of #-- was the first comprehensive companies &ct passed in India. The companies companies &ct of #-- was based on the English companies &ct &ct of #-. The companies companies &ct of #-- was intended to consolidate and amend the law relating to the incorporation, regulation and winding up of trading companies and other associations. Companie) Act o# +2+3$ The Indian Companies &ct, /0 did not ta!e into account the peculiar features of the Indian trade and commerce and some peculiar institution such as "managing agency.1 The &ct was, therefore, found to be highly unsatisfactory in the course of its operation. &s such, this &ct was sub2ected to a large number of amendments from time to time. Companie) Companie) Act o# +2-0$ &fter +2-0$ &fter the end of 3orld 3ar II, the need for a further revision of the company law was felt. 4any changes had ta!en place in the organi*ation and management of oint stoc! companies. The government of India, therefore, appointed on $th 5ctober, /$%. & committee of  members representing various fields under the chairmanship of 6hri. 7. C. habha for a comprehensive comprehensive review of the Indian companies &ct /0. The committee subm submit itte ted d its its repo report rt on all all aspe aspect cts s of comp compan any y law law in &pril pril /$ /$.. ase ased d on the the 8var8www8apps8conversion8tmp8scratch9$80'#0/-#.doc

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recommendation of the habha Committee companies &ct of /$- was passed. The companies &ct of /$- was based on the English companies &ct of /'#, with some modifications to suit the Indian conditions. The companies &ct of /$- came into force from st &pril, /$-. This act contains -$# sections and ' schedules.

OB(ECTIVE OF T%E COPA!IES ACT OF +2-0$ The main ob2ectives of the companies &ct of I/$- are: I. II. III. I;.

;.

;I. ;II. ;III.

I>.

>.

>I.

To protect the interests of the investors by furnishing fair and accurate information in the prospectus. To recogni*e the rights of the shareholders to receive reasonable information for ma!ing an intelligent 2udgment with reference to the management. To ensure full and fair disclosure of the affairs of the companies in their published annual accounts. To protect the interests of the 6hare holders by ensuring the holding of general body meeting and ensuring effective participation and control by the share holders and providing for prevention of oppression of minority and mismanagement. To protect the interest of the creditors by preventing reduction of capital, by convening the meeting of creditors and appointment of li
(OI!T STOCK COPA!& De#inition$ & oint stoc! company is an incorporated association formed for the purpose of carrying on some business. It is an artificial person having a distinctive name and a Common seal. It may be defined as ?an artificial person created by law with a distinctive name and a separate legal entity, a common seal, a common capital contributed by the members and 8var8www8apps8conversion8tmp8scratch9$80'#0/-#.doc

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comprising transferable shares of a fixed denomination, with limited liability and with a perpetual succession.1 &ccording to @ord ustice @indley defined a company as, "an association of many persons who contribute money or money=s worth to a common stoc! and employ it is some trade or business and who share the profit and loss arising there from."

Feat4re o# a (oint )toc* company5

. . 0. '. $. -. +. #.

Registration 6eparate legal entity Common seal Aerpetual succession @imited liability 6eparation of ownership from management Transferability of share 6eparate property

) Re"i)tration or incorporated a))ociation$ oint stoc! company is an Incorporated association. The company is created only when it is registered under the Companies &ct of /$-. It comes into existence from the date mentioned in the certificate of incorporation for the formation of a public company atleast + person B and for private Company atleast  persons are necessary. ) Separate Le"al entity$ & oint stoc! companies has entity
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a) Limited 6y S1are)$ The liability of the members is limited only to the amount unpaid on their shares, whatever may be the liability of the company. or e.g., if a shareholder holds %% shares of Rs. % each, and has already paid Rs. - per share, he is liable to pay only the amount unpaid on his shares, i.e., Rs. ' per share on his %% shares, and if he has already paid the fun value of Rs. % per share on his %% shares, his liability will be nil. b) Limited 6y G4arantee$ The liability of the members is limited to the extend of the amount guaranteed by them i.e., the amount which the members have agreed to contribute to the assets of the company in the event of its winding up. -) Separation o# Owner)1ip #rom ana"ement$ In a company, shareholders are the owners but the management is entrusted to aboard of directors who are separate from the body of the shareholder. The shareholders do not directly participate in the dayBtoBday management of their company. 7owever the ultimate control of the Company rests with the members for the members are empowered to remove any director and replace him by a new director and to amend the memorandum and the articles of association. +) Tran)#era6ility o# S1are)$ The shares of a public limited Company are freely transferable i.e., the members of a public limited company can dispose of and transfer their shares to any persons they li!e without the consent of the company or the other members, as per conditions laid in the articles of the Company. ut there are certain restrictions on the transfer of shares in respect of private limited companies as the very nature of the Company indicates, namely, private. The free transferability of the share provides: i.

@i
ii.

It helps the 6hareholders to sell their share in the open mar!et and satisfy their financial needs.

iii.

It provides financial stability to the Company

#) Separate Property$ & Company has a right to own and transfer property since it is a legal entity. & shareholder has no proprietary right in the property of the Company but merely to their shares"lnBother words, the property of a Company belongs to the Company and not to the individual shareholders of the Company. Di##erence) 6etween Company and Patner)1ip$ & Company is an artificial entity created by law with limited liability, perpetual succession, a common seal and a capital divided into transferable shares. & Aartnership is the relation between persons who agree to share the profit of a business carried on by all or any one of them acting for all. The individuals agreed to enter into partnership with one another and called individually as =partners= and collectively as a =firm=

Company . & Company is formed when registered under the Indian Companies &ct, /$-. . & Arivate Company is formed with a minimum of  persons and a public company with + persons at least 8var8www8apps8conversion8tmp8scratch9$80'#0/-#.doc

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0. & private Company is limited to $% members excluding its present and past employees. There is no limit to the maximum numbers of members in case of a public company. '. & Company has a separate legal entity distinct from the members who constitute it. $. Aroperly belongs to the Company and not to the individual members. -. The liability of the shareholders is limited. +. 6hares are freely transferable. In a private company the articles restrict the right of members to transfer their shares. #. & Company has a perpetuaI succession. It comes to an end in the event of winding up. /. ut the capital of a oint stoc! companies is very large, as it is contributed by a large number of 6hareholders. %. &udit of account by
Partner)1ip$ I.

Aartnership is created when agreed between the individuals. Registration of partnership firm is optional under the partnership &ct.

II.

& partnership can be created by two persons.

III.

The maximum number of members in a partnership firm is limited to % in case of ban!ing business and % in case of any other business.

I;.

& partnership firm has no legal exisience apart from its members i.e., the partners and the firms are one and the same.

;.

Aroperty of the partnership firm belongs to individual partners comprising the firm.

;I. The liability of partnership is unlimited. ;II. The partner cannot transfer his share without the consent of his coBpartners. ;III. Aartnership comes to an end when a partner dies or becomes insolvent, unless otherwise provided in the partnership deed. I>. The capital of a partnership firm is limited, as it is contributed only by a few persons >.

&udit of account is not compulsory.

KI!DS OF COPA!IES Companies may be classified into different !inds or types from different points of view: . Cla))i#ication o# companie) #rom t1e point o# 7iew o# incorporation or re"i)tration$ rom the point of view of their incorporation, companies can be classified into three types. they are. a) C1artered companie)$ If a Company is incorporated under a special charter granted by the monarch it is called a chartered companies and is regulated by that charter. Chartered companies were common in the +th and #th centuries. or eg. ritish East India companies, an! of England, Chartered an! of &ustralia etc. are examples of chartered companies. This form of organi*ation does not exist in India, as there is no monarchy. b) Stat4tory Companie)$ & statutory Company is a company which is incorporated under a special or separate act of the legisiature (i.e.., parliament). & statutory company re
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and activities of a statutory companies are regulated by the special act under which it is established. This method of incorporation is adopted for companies of national importance and public utility companies, such as railway companies, electricity supply companies, etc. The RI, 6I, @IC, DTI, etc are examples of statutory companies. c) Re"i)tered Companie)$ & company is brought into existence by registration with the registrar of companies under the companies &ct of /$-, is called a registered company. The activities of these companies are governed by the comapanies &ct. These constitute the most important oint stoc! companies. . Cla))i#ication o# Re"i)tered Companie) on t1e 6a)i) o# t1e lia6ility o# mem6er)$ rom the point of view of the liability of the members, registered companies may be classified into three categories. They are: a) Companie) Limited 6y S1are)$ Companies limited by share are companies in which the liability of a member is limited to the nominal or face value of the shares held by him. In short, these are the companies in which the liability of a member is limited only to the amount unpaid on the shares held by him. These companies are mostly trading companies. 4ost of the companies registered under the companies &ct are of this type. b) Companie) Limited 6y G4arantee$ Companies limited by guarantee are companies in which the liability of each member is limited to a fixed amount which he has guaranteed ie., agreed to contribute to the assets of the company to meet the liabilities of the company in the event of its winding up. The amount guaranteed by each member is mentioned in the 4emorandum of &ssociation or &rticles of &ssociation of the Company. The members are re
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can by notification in the official ga*ette, restrict or modify the application of certain provision of the companies &ct in regard to government conlpanies. b) !on9 Go7ernment companie)$ & nonBgovernment company is a company which is owned and managed by private investors. '. Cla))i#ication) o# companie) on t1e 6a)i) o# nationality$ 5n the basis of nationality, companies may be classified into two !inds, Theyare. a) Homestic companies b) oreign companies a) Dome)tic companie)$ & Homestic company is a company which is inccrporated in India .Today most of the oint stoc! companies in India are domestic companies. b) Forei"n Company$ & foreign Company is a Company which is incorporated in a foreign country, but which has established a place of business in India. <hough foreign Companies are not registered or incorporated in India, some of the provisions of the companies &ct, are applicable to them. The companies (&mendment) &ct, /+', has made several sections of the &ct applicable to foreign companies in order to bring into the ambit of the provisions applicable to Indian companies. . Dnder section $/ of the companies &ct, every foreign company must file with the registrar of companies within 0%days of the establishment of its business in India, the following documents. a. & certified copy of its charter, statute memorandum and articles or other documents defining its constitution. b. The full address of the registered or principal office of the company. c. @ist of the directors and secretary of the company with the re
7olding companies

ii) 6ubsidiary companies. i)

7olding Companies and 6ubsidiary Companies: &s per section ' of the companies &ct of /$-," a holding Company is a company which is controlling a subsidiary company". In other words, a holding conBtpany is a company a) 3hich holds more than +%G of the nominal value ofihe e
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b) 3hich controls the composition of the board of directors of another Company c) 3hich controls more than $%G of the total voting power of another Company d) 3here a Company is a subsidiary of another Company which is a subsidiary of a holding Company, that is, Company C is a subsidiary of Company  , whereas Company  is a subsidiary of holding Company &. &s per section ' of the companies &ct of /$-, " a subsidiary Company is a Company which is controlled by a holding Company". In other words, a Company becomes the subsidiary of another Company if: a) The other Company holds more than $%G of the nominal value of its e
Arivate Companies

ii) Aublic Companies i)

Pri7ate Companie)$ 6ection 0() (iii) of the companies &ct of /$- defines a private company as a company which by its articles of association, a) Restricts the right of its members to transfer shares, if any, b) @imits the number of its member to fifty, excluding those members who are its present or past employees c) Arohibits any invitation to the public to subscribe to its shares or debentures

ii) P46lic Companie)$ 6ection 0 (I) (iv) of the companies &ct of /$- states that a "Aublic company is a company which is not a private company". In other words, a public company is a company a) 3hich has at least + members b) 3hich has no maximum limit to the number of members, c) 3hich can invite the public to subscribe to its shares or debenture, and which generally does not restrict the right of its members to transfer shares. +. 5ther Jinds of Companies: a) One an Companie) : Family Companie)$ 5ne man company refers to a company in which one man holds practically the hole of or the substancial no. of shares of the companies, and has controlling powers over the company and some dummy members who are mostly his relations or friends, hold one or two shares 8var8www8apps8conversion8tmp8scratch9$80'#0/-#.doc

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each. The dummy members are included only to comply with the statutory re
cultural

association,

sports,

clubs,

charitable

Hifference between Aublic Company and a Arivate Company: There are many differences between a public company and a private company. They are: Sl5 !o5

O6;ecti7e

P46lic Companie)

Pri7ate Companie)



ormation

The formation of a public company is difficult

3hereas the formation of a private company is easy



Certificates Re
The formation of a public company re
or the formation of a private company re
0

Commencement of usiness

& public company cannot & private company can commence business commence business immediately after immediately after incorporation. It can incorporation. commence business only after obtaining the business commencement certificate

'

iling of statement prospectus

prospectus in lieu

or & public companies must file of a prospectus or statement in lieu of prospectus with the registrar of companies before alloting shares.

$

Fame of the Companies

The name of the public company must end with the word ?@imited1.

ut the name of the private company must end with the words ?Arivate @imited1

-

Fumber of 4embers

In a public comapny the minimum number of member is seven and the maximum is unlimited

In a private company the minimum number of member is two and the maximum is fifty exclusive of members who are its present or past employees.

+

Raising of Capital

& public companies can raise

& private company cannot


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ut private companies need not file a prospectus or a statement in lieu of prospectus with the registrar of companies


huge capital therefore unlimited membership

of raise huge capital therefore of the limitation on membership

#

Invitation to the public to subscribe

Aublic companies can invite & private company cannot the public to subscribe to its invite the public to subscribe shares or debentures to its shares or debentures.

/

Transfer of 6hare

The shares of a public company are, generally, freely transferable

The share of a private co., are not freely transferable

%

6igning of 45& and &5&

The memorandum and articles of association of a public co. have to be signed by seven subscribers

The 45& and &5& of a private co. have to be signed by two subscribers.

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Kuotation in stoc! exchanges

The shares of a public co. are dealt in the stoc! exchange.

The shares of a private co. are not


Issue of share warrants

&. public co. is allowed to & private company is issue share warrants. prohibited from issuing share warrants.

0

5ffer of shares.

'

4inimum directors.

$

&ppointment of directors.

further

issue

number

of 3hile ma!ing any further & private co. is not re
of The minimum directors is two.

number

Each director has to be &ll the directors may be appointed by a separate appointed by a single resolution. resolution

PRIVILEGES OF PRIVATE COPA!IES A5 Pri7ile"e) en;oyed 6y all pri7ate company<) = ie5> 6ot1 independent pri7ate< company<) and )46)idiary pri7ate companie)?5 . 5nly two members are sufficient for a private Company at the time of registration. . The company can immediately Commence business on obtaining certificate of incorporation. It need not wait for certificate of commencement of business 0. & private Company need not file a prospectus or a statement in lieu of prospectus with the registrar of companies. '. & private company is not re
of

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+. Restriction imposed on public companies regarding further issue of share do not apply to a private company.

Pri7ile"e) En;oyed 6y Independent pri7ate companie)$ & private company which is not subsidiary of a public company en2oy certain privileges. The following can be enumerated the privileges en2oyed by such a company. . I. It can issue any class of share e

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Legislative Backdrop of Companies Act

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