Companies Act, 1956

Companies Act, 1956
Meaning and Definition of a Company
Section 3(1)(i) of the Companies Act, 1956

defines a company as: “a company formed
and registered under this Act or an existing
Company”.
‘Existing Company’ means a company formed
and registered under any of the earlier
Company Laws.
Characteristic Features
 Separate Legal Entity Case: Salomon v. Salomon & Co.

Ltd.
 Limited Liability However, liability of a company is never
limited. It’s liability of members only that is limited.
 Free Transferability of Shares
 Other Features: Perpetual Succession: Separate property
and Common Seal.
Types of Companies
 Private Company
 Public Company
Private Company [Section 3(1)(iii)]
 A private company means a company which has a minimum

paid up capital of one lakh rupees or such higher paid-up
capital as may be prescribed and by its articles :
(a)restricts the right to transfer its shares, if any;
(b)limits the number of its members to 50, 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, were members of the company while in that
employment and have continued to be members after the
employment ceased;
Private Company [Section 3(1)(iii)]
(c) prohibits invitation to the public to subscribe for any

shares in or debentures of, the company; and
(d) prohibits any invitation or acceptance of deposits from
persons other than its members, directors or their relatives.
Where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of
membership, be treated as a single member.
Public Company [Section 3(1)(iv)]
 A public company means a company which:

(a)is not a private company [In other words, it should not
have the restrictions of Section 3(1)(iii) in its articles ];
(b)has a minimum paid-up capital of five lakh rupees or
such higher paid-up capital, as may be prescribed; and
(c)is a private company, which a subsidiary of a company,
which is not a private company.
How to form a company?
 The whole process of formation of a company may be

divided into four stages, namely:
(i) Promotion
(ii) Registration
(iii)Floatation/Raising of Capital
(iv)Commencement of Business.
Promotion
 Who is a Promoter?
 Bowen, L.J.
The term promoter is “a term not of law but of business”,
usefully summing up, in a single word— promotion, “a
number of business operations familiar to the commercial
world by which a company is brought into existence”.
However, the persons assisting the promoters by acting in a
professional capacity do not thereby become promoters
themselves.
Legal Position of a Promoter
 Promoter stands in a fiduciary position towards the

company.
 In other words, he is not allowed to make secret profits.
 Case: Gluckstein v. Barnes
Pre-incorporation contracts
 Void-ab-initio.
 However, pre-incorporation contracts shall be valid if:
The contract is made for the purpose of the company and the contract is
warranted by the terms of incorporation.
The company adopts the transactions after incorporation.
Registration/Incorporation
 Private Company
Minimum Number of Members required – 2.
 Public Company
Minimum Number of Members required – 7.
1. Application for availability of name:
 Three names in order of priority conforming to the provisions of the Act and
the Guidelines issued by Department of Company Affairs in this regard:
 Name to end with the word(s) ‘Limited’ or ‘Private Limited’, as the case
may be, except:
(i) Section 25 Companies
(ii) Govt. Companies (need not use Pvt. Ltd.)
(iii) Producer Companies.
 Name should not be identical or too similar to the name of an already
existing company.
 Should not include the name of a registered trade mark.
2. Preparation of Memorandum and
Articles of Association
 Memorandum defines and limits the scope of activities of a company.

 Contents of Memorandum
1. Name clause
2. Registered office clause
3. Object clause ----Doctrine of ultra-vires
4. Liability clause
5. Capital clause
3. Preparation of other documents
 Power of Attorney in favour of a professional to effect registration.

 Consent of Directors (in case of a Public Company)
 Particulars of Directors, Manager, Secretary, etc. in the prescribed form.
 Notice of registered address
To be supplied within 30 days of incorporation.
 Statutory Declaration
 To the effect that all requirements of law with respect to incorporation have
been duly complied with.
 The declaration to be signed by:
Advocate of Supreme Court or High Court; OR
C.A../C.S. practising in India and associated with the formation of the
company; OR
Director, Manager, Secretary of the company (as named in the Articles)
4. Filing of documents with ROC
 Effect of Certificate of Incorporation (Section 34)

 On incorporation, the association of persons becomes a body corporate
by the name contained in the memorandum, capable forthwith of
exercising all the functions of an incorporated company and having
perpetual succession and a common seal but with such liability on the part
of the members to contribute to the assets of the company in the event of
its being wound-up as is mentioned in the Act.
Conclusiveness of Certificate of
Incorporation (Section 35)
 Conclusive to the effect that all requirements of law relating to registration
and matters precedent and incidental thereto have been duly complied
with.
 Case Laws:
Moosa v. Ibrahim
Jubilee Cotton Mills Ltd. v. Lewis
Provisional Contracts
 Contracts entered into by company after incorporation but before getting

the certificate to commence business are called ‘provisional contracts’.
 Provisional contracts are, therefore, relevant to public companies only.
 Such contracts become void, if company fails to obtain certificate to
commence business and automatically become valid, and binding if
company obtains the certificate.
Raising of Capital

Companies Act, 1956

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Companies Act, 1956

Meaning and Definition of a Company

Section 3(1)(i) of the Companies Act, 1956

 Separate Legal Entity Case: Salomon v. Salomon & Co.

 A private company means a company which has a minimum

(c) prohibits invitation to the public to subscribe for any

 A public company means a company which:

 The whole process of formation of a company may be

 Promoter stands in a fiduciary position towards the

 Memorandum defines and limits the scope of activities of a company.

 Power of Attorney in favour of a professional to effect registration.

 Effect of Certificate of Incorporation (Section 34)

 Contracts entered into by company after incorporation but before getting

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