Module 3

COMPANIES ACT
COMPANY
DEFINITION:
A company is an artificial legal person, created by law, having a
separate legal identity, perpetual succession, and a common seal, with
the capacity to own property, enter into contracts, sue and be sued in
its own name.

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A company is an artificial legal person created by law, having separate
legal existence, perpetual succession, and limited liability.
CHARACTERISTICS
• ARTIFICIAL LEGAL PERSON
• SEPARATE LEGAL ENTITY
• PERPETUAL SUCCESSION
• LIMITED LIABILITY
• COMMON SEAL
• TRANSFERABIITY OF SHARES
• SEPARATE PROPERTY
• CAPACITY TO SUE AND BE SUED
• MANAGEMENT BY BOARD OF DIRECTORS
• ARTIFICIAL LEGAL PERSON:
It is created by law – not born naturally.
It has legal rights and duties.
It acts through human agents – like directors & managers.

• SEPARATE LEGAL ENTITY:

A company has an identity separate from its members (shareholders).
Which means,
Company's properties and not shareholder’s properties.
Company’s debts are not the debts of shareholders.
• PERPETUAL SUCCESSION:
The company has a continuous existence irrespective of :
• The Death of Members
• Insolvency
• Transfer of Shares

The company will exist until it is legally dissolved.

• LIMITED LIABILITY
Members are not personally responsible for company debts
Liability is limited to:
The unpaid amount on shares held
Example:
You hold 100 shares of ₹10 each (₹1,000 total).
You have paid ₹8 per share (₹800).
If the company is wound up:
The liability for you would be 200 only
Company Limited by Guarantee:
Members agree to pay a fixed amount
Payable only at the time of winding up

Example:
A member guarantees ₹5,000.
The max liability for the person will be only that amount.
Not even a rupee more.
EXCEMPTION:

UNLIMITED COMPANY:
If debts exceed company assets, members may have to pay from
personal property.
• COMMON SEAL
The common seal is the official signature of the company.
It represents the company’s consent

• TRANSFERABILITY OF SHARES
Shares of a company, especially a public company, are freely
transferable.

Private companies may restrict transfer of shares

• SEPARATE PROPERTY
All property owned by the company belongs to the company itself, not
its members.

• Members have no direct claim over company assets

• Even majority shareholders cannot use company property personally
• CAPACITY TO SUE AND BE SUED
File a lawsuit in its own name
Be sued by others in its own name
Legal actions are independent of its members.

• MANAGEMENT BY BOARD OF DIRECTORS

Though shareholders are owners, management is handled by the Board
of Directors.
Directors make policy and business decisions
Shareholders exercise control indirectly through voting
CLASSIFICATION OF COMPANY
1. On the basis of incorporation
2. On the basis of liability
3. On the basis of number of members
4. On the basis of control/ownership
ON THE BASIS OF INCORPORATION
• CHARTERED COMPANY
• STATUTORY COMPANY
• REGISTERED COMPANY
ON THE BASIS OF LIABILITY
• LIMITED BY SHARES
• LIMITED BY GUARANTEE
• UNLIMITED COMPANY
ON THE BASIS OF NUMBERS
• PUBLIC COMPANY
• PRIVATE COMPANY
• ONE PERSON COMPANY
ON THE BASIS OF CONTROL
• HOLDING COMPANY
• SUBSIDIARY COMPANY
OTHER CLASSIFICATION
• On the basis of ownership – Government Company
• On the basis of place of incorporation – Domestic Company & Foreign
Company
• On the basis of Purpose – Profit Making , Non- Profit , Government
Company
• On the basis of Listing – Listed Companies & Unlisted Companies
FORMATION OF COMPANY
• Promotion – idea, feasibility , capital, promoters and directors
• Digital Signature from MCA
• Director Identification Number
• Approval of Company Name
• Drafting of Documents
• Filing of Documents with Registrar of Company
• Certificate of Incorporation
• Creation of PAN and TAN
• Creating a separate company Bank Account
MEMORANDUM OF ASSOCIATION
The Memorandum of Association is the fundamental legal document of a
company.
It defines the constitution of the company and lays down the scope of its
powers and activities.
A company cannot act beyond what is stated in its Memorandum of
Association.

In short, it tells:
• WHAT THE COMPANY IS
• WHY IT EXISTS
• WHAT IT CAN DO
CLAUSES :
• Name of the Company and it must end with either limited or private limited
• Registered Office Clause:
Specifies the State in which the company’s registered office is located.
• Object Clause:
States the purpose and activities for which the company is formed.
The company cannot undertake activities outside this clause.
Example: To manufacture, assemble and sell electronic goods and related
accessories.
• LIABILITY CLAUSE: Specifies the extent of liability of members.
Limited by shares
Limited by guarantee
Unlimited liability

• CAPITAL CLAUSE: States the authorized share capital of the company.

It mentions:
Total Capital
Division into shares of fixed value
Example:
Authorized capital is 10,00,000 divided into 1,00,000 equity shares of 10
each.
• SUBSCRIPTION CLAUSE:
Contains details of initial subscribers to the Memorandum of
Association
Subscribers agree to take a certain number of shares and sign the
document.
ARTICLE OF ASSOCIATION
The Articles of Association is the document that contains the rules and
regulations for the internal management of a company.

It governs how the company is run on a day-to-day basis.

IN SHORT ,
It says HOW the company will run
Note:
• It is subordinate to the Memorandum of Association.
• It binds the company and its members
• Any provision in the Articles of Association contrary to the
Memorandum or Companies Act is void.
CLAUSES:
• SHARE CAPITAL CLAUSE: Deals with type of shares , rights each share
will be having and issue of new shares
• SHARE HOLDER RIGHTS : What all rights does these share holders
have - can they change and if they change - how it will change .
• LIEN ON SHARES: Gives the company the right to retain shares for
unpaid dues.
• CALL ON SHARES: Director or authorities ask the payment of shares
which are unpaid on a specific time period.
• TRANSFER OF SHARES
• TRANSMISSION OF SHARES- Transfer of shares due to death,
insolvency or succession.
• FORFEITURE OF SHARES – Under what circumstances the shares be
taken back
• Surrender of Shares – Voluntary giving up of shares
• ALTERATION OF SHARE CAPITAL- Scenarios where the entire share
capital changes for the company
• GENERAL MEETINGS – Meetings such as Annual General Meeting ,
Extraordinary general meeting, ….
• VOTING RIGHTS – Determines which all members can vote, how do
they vote and how votes will be counted.
• DIRECTORS – Appointment , removal, power & duties, remuneration.
• PROCEEDS OF BOARD MEETING
• DIVIDEND AND RESERVES – Rules regarding dividend decisions and
transfer to reserves.
• ACCOUNTS AND AUDIT – How to maintain the records and
appointment of auditors.
• BORROWING POWER – How much and the conditions for borrowing.
• COMMON SEAL – Who can use and when can they use
• WINDING UP – How the assets and liabilities will be managed on the
situation of winding up
PROSPECTUS
A prospectus is a legal disclosure document issued by a public company
inviting the public to subscribe to its shares or debentures. It contains
material information about the company and the proposed issue, enabling
investors to make an informed decision.

PURPOSE:
• To invite the public to invest in the company
• To provide full, true, and fair disclosure of material facts
• To ensure transparency and investor protection
• To fix legal responsibility for statements made
• To help investors evaluate risk and return
Contents:
• Name and registered office of the company
• Objects of the issue
• Details of directors, promoters, and key management
• Capital structure of the company
• Financial statements
• Terms and conditions of the issue
Types of Prospectus
• Red Herring Prospectus :
Issued before the price and quantity are fixed
Used in book-building issues
Contains all details except price and number of securities
• Shelf Prospectus:
Valid for multiple issues within a period (up to 1 year)
• Abridged Prospectus:
A summary version of the prospectus
• Deemed Prospectus:
Issued when securities are offered to the public through an intermediary
Even if the company itself doesn’t issue it, the law treats it as a prospectus
SHAREHOLDERS MEETINGS
Shareholders’ meetings are meetings of the members (owners) of the
company where major policy decisions are taken.

Types :
Annual General Meeting
Extraordinary General Meeting
Annual General Meeting
• Held once every year
• First AGM: within 9 months of end of first financial year
• Notices: Minimum 21 clear days in advance
• Compulsory for every company
• The reasons could be –Discussion of P&L / Balance Sheet, Dividend,
Appointment of Directors, Auditors
Extraordinary General Meeting
• Held when urgent matters arise
• Called when decision cannot wait till AGM
• It could be for – issue of new shares , Change in MOA or AOA
• Removal of Directors
BOARD MEETINGS
Meetings of the Board of Directors to manage the day-to-day affairs of
the company.

• Minimum 4 meetings every year

• Gap between two meetings ≤ 120 days
• Notices: Minimum 21 clear days in advance
• First meeting within 30 days of incorporation
• Quorum: 2 directors or 1/3rd, whichever is higher
QUALIFICATIONS, APPOINTMENT, POWERS,
LEGAL POSITIONS OF: DIRECTORS, MD ,
CHAIRMAN
QUALIFICATIONS

Managing Director
Factor Director Chairman
(MD)

Must be a director
Age ≥18 years ≥18 years
(age ≥18)

Must not be
disqualified under Must not be
Legal Eligibility Same as director
Section 164 (e.g., disqualified
insolvent, fraud)

No special
Special Must be appointed as
DIN required requirement beyond
Requirements MD
being director
APPOINTMENTS
Factor Director Managing Director (MD) Chairman

Shareholders in AGM
Board of Directors, Board of directors or
(ordinary resolution);
Who appoints subject to shareholders’ shareholders as per
board can fill casual
approval Articles of Association
vacancy

Usually 5 years, As per Articles; usually for

Tenure As per Articles / rotation
renewable board meeting term
POWERS
Factor Director Managing Director (MD) Chairman
Policy-making, Daily management +
General Role Presides over meetings
management decisions director powers

Approve financial Sign contracts, manage Decide meeting agenda,

Operational Powers statements, borrow operations, execute board conduct meetings, may
funds, enter contracts decisions cast deciding vote

Acts as principal
Acts as agent of the Limited to governance of
Legal Authority executive, represents
company meetings unless also MD
company legally

Can delegate to Can delegate duties to Usually cannot delegate

Delegation
committees KMPs management powers