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COMPANIES ACT, 1956 IMT Nagpur; 2010-12 1

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Page 1: PPT - Companies Act - 1st

COMPANIES ACT, 1956

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Page 2: PPT - Companies Act - 1st

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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Page 3: PPT - Companies Act - 1st

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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Page 4: PPT - Companies Act - 1st

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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Page 5: PPT - Companies Act - 1st

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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Page 6: PPT - Companies Act - 1st

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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Page 7: PPT - Companies Act - 1st

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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Page 8: PPT - Companies Act - 1st

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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Page 9: PPT - Companies Act - 1st

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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Page 10: PPT - Companies Act - 1st

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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Page 11: PPT - Companies Act - 1st

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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Page 12: PPT - Companies Act - 1st

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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Page 13: PPT - Companies Act - 1st

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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Page 16: PPT - Companies Act - 1st

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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Page 17: PPT - Companies Act - 1st

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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Page 18: PPT - Companies Act - 1st

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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Page 19: PPT - Companies Act - 1st

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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Page 20: PPT - Companies Act - 1st

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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Page 21: PPT - Companies Act - 1st

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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Page 22: PPT - Companies Act - 1st

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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Page 23: PPT - Companies Act - 1st

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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Page 24: PPT - Companies Act - 1st

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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Page 25: PPT - Companies Act - 1st

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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Page 26: PPT - Companies Act - 1st

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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Page 27: PPT - Companies Act - 1st

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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Page 28: PPT - Companies Act - 1st

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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Page 29: PPT - Companies Act - 1st

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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Page 30: PPT - Companies Act - 1st

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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Page 31: PPT - Companies Act - 1st

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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Page 32: PPT - Companies Act - 1st

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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Page 33: PPT - Companies Act - 1st

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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Page 34: PPT - Companies Act - 1st

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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Page 35: PPT - Companies Act - 1st

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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Page 36: PPT - Companies Act - 1st

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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Page 37: PPT - Companies Act - 1st

TYPES OF COMPANIES

COMPANIES

Basic Type

Private Co. Public Co.

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Page 38: PPT - Companies Act - 1st

TYPES OF COMPANIES

COMPANIES

On the basis of Incorporation

Statutory Cos. Registered Cos.

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Page 39: PPT - Companies Act - 1st

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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Page 40: PPT - Companies Act - 1st

TYPES OF COMPANIES

COMPANIES

Other Classification

Government Co. Foreign Co.

Holding & Subsidiary Co.

Association not for Profit

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Page 41: PPT - Companies Act - 1st

TYPES OF COMPANIES

COMPANIES

On the basis of Listing

Listed Cos. Unlisted Cos.

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Page 42: PPT - Companies Act - 1st

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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Page 43: PPT - Companies Act - 1st

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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Page 44: PPT - Companies Act - 1st

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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Page 45: PPT - Companies Act - 1st

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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Page 46: PPT - Companies Act - 1st

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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Page 47: PPT - Companies Act - 1st

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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Page 48: PPT - Companies Act - 1st

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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Page 49: PPT - Companies Act - 1st

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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Page 50: PPT - Companies Act - 1st

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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Page 51: PPT - Companies Act - 1st

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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Page 52: PPT - Companies Act - 1st

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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Page 53: PPT - Companies Act - 1st

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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Page 54: PPT - Companies Act - 1st

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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Page 55: PPT - Companies Act - 1st

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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Page 56: PPT - Companies Act - 1st

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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Page 57: PPT - Companies Act - 1st

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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Page 58: PPT - Companies Act - 1st

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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Page 59: PPT - Companies Act - 1st

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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Page 60: PPT - Companies Act - 1st

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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Page 61: PPT - Companies Act - 1st

THANK YOU

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