Unit II

A company is an artificial person, invisible and intangible and exiting in the eyes
of law. Being a creation of law, it possesses only those properties which the charter of its
creation confers upon it, either expressly or as incidental to its very existence, among
the most important of which are immortality and individuality”
- Chief justice john Marshal of USA

CHARACTERISTICS:

1) VOLUNTRAY ASSOCIATION:
“ A Company is a voluntary association of many people. The association is
registered. There fore a company is formed by the choice and consent of members. A
private limited company must have at least two persons and a public limited company
must have at least seven members to get it registered. In case of private Ltd. Company
the maximum number is fifty and in case of public Ltd. Company maximum number is
unlimited.

2) SEPARATE LEGAL ENTITY:

A company is an artificial person created by law. It has a separate legal existence
apart from its shareholders. It can sue and be sued in its own name. It can sell and
purchase goods, make contracts and file suits against any party in its name, like natural
person.

3) LIMITED LIABLITY:
The liability of the shareholder in a joint stock company is limited face value of the
shares held by him. He is not personally like for the debts of the company, beyond the
value of the shares held by them. The creditors have no right to proceed against the
personal properties of the shareholders.

4. PERPETUAL EXISTENCE:
The company has a permanent existence. The shareholders may come or may go
but the company will go on forever, the continuity of the company is not affected by
death, lunacy, or insolvency of its shareholders. The company can be wound up only by
the operation of law.

5. COMMON SEAL:
A company being an artificial person can not sign any document. All the acts of
the company are authorized by its common seal. The common seal serves as a official
signature of the company a common seal with the name of the company engraved on it
is used as a substitute for its signature. A document not bearing the seal of the company
will not bind the company. The common seal is kept in safe custody by the secretary of
the company and is used according to the directions of the Directors.

6. TRANSFERABILITY OF SHARES:
The shares in a joint stock company are freely transferable except in the case of a
private limited company. Hence a share holder can transfer his shares to any body
without the consent of the other share holders.

7. MANAGEMENT:
Ownership and management of a company are separate in a joint stock company.
Shareholder are the real owners of the company management of the company is vested I
the hands of directors elected by share holders. Shareholder has no right to take part in
the management.

8. CORPORATE FINANCE:
Usually a joint stock company raises huge amount of capital for its business,
capital is divided into large number of shares of small value a large number of persons
purchase shares and contribute to the capital of the company large amounts of sources
can be raised from persons in different walks of life.
9. ARTIFICAIL PERSON:
A joint stock company is an artificial person in the sense that it is created by law
and does not possess physical attributes of a natural person.

10. STATUTORY REGULATIONS:

A company is governed by the companies Act, 1956 it has to follow various
provisions of the act. It has to submit a number of returns to the Govt. A joint stock
company is required to file annual statements. Its accounts must be audited by a
Chartered Accountant.

KINDS OF COMPANIES

BASIS OF CLASSIFICATION

Incorporation Liability Transferability Ownership

Nationality
of Shares

1. Chartered 1. Unlimited 1. Private 1. Holding 1. Indian

Companies Companies Companies Companies Companies

2. Statutory 2. Limited 2. Public 2. Subsidiary 2. Foreign

Companies Companies Companies Companies Companies

3. Registered 3. Limited by 1. Govt.

Companies Guarantee Companies

I. ON THE BASIS OF INCORPORATION

The companies may be divided into three categories according to incorporation.

1. CHARTERED COMPANIES

Companies which are incorporated under Royal Charter issued by the kind or
Queen or Head of the state is known as chartered companies. These companies are
governed by the charters by which they are created. Chartered companies were popular
in England in the nineteenth century. The East India Company, the chartered Bank of
India and Australia were incorporated under Royal charters.

2. STATUORY COMPANIES

The Companies which come into existence through special acts of parliament or
State Legislatures are known as statutory companies. These companies are governed by
the provisions of their respective acts. Usually, such companies are established to run
the enterprises of social or natural importance. These companies are given wide powers
under the acts.

Eg :- Reserve Bank of India, Life Insurance, Corporation of India, State Trading

Corporation of India, State Bank of India, Industrial Development Bank of India, etc.

3. REGISTERED COMPANIES

The Companies which are registered under the Indian companies Act are known
as registered companies. The working of such companies is regulated by the provisions
of the companies Act, memorandum of association and Articles of association most of the
companies in India come under this category.
II. ON THE BASIS OF LIABILITY

According to liability, the companies may be classified into three categories.

1. COMPANIES LIMITED BY SHARES :

These companies are very common in India. In these class of companies, the
liability of the share holders is limited to the extent of the face value of the shares held
by them. The share holders are not liable to pay any thing more than the value the
shares held by them, whatever be the liabilities of the company.

2. COMPANIES LIMITED BY GUARANTEE:

These companies are generally formed to promote Art, Commerce, Science,

Culture, charity, Religion, Sports etc. These companies are also formed under the
companies Act with a stipulation in the memorandum clause that members are
guaranteed to pay a certain amount of money in case of its winding up. The amount
which members undertake to pay is called the guarantee money.

3. UNLIMITED COMPANIES

The companies registered without limiting the liability of members to the value of
shares are called unlimited companies. The companies are just like partnership concerns
where liability is unlimited. All the members will be liable to meet the liabilities of the
company to an unlimited extent.

III. ACCORDING TO TRANSFERABILITY OF SHARES

1. PRIVATE COMPANY:

A private company is one which by its Articles of Association (1) Limits the
number of members to 50, (2) Restricts the right of members to transfer shares, & (3)
Prohibits any invitation to the Public to subscribe for its shares or debentures.

A Private company must have its own articles of association. A Private limited
company is required to add the word “ Private Limited” at the end of its name. There
must be at least two members in the Co.

2. PUBLIC COMPANY :

Public company means a company which is not a private company. These must
be at least seven members to form the public limited company. The maximum number
of members is unlimited. Its shares are freely transferable. It can invite public to
subscribe to its shares or debentures by issue of prospectus.

IV. ON THE BASIS OF OWNERSHIP

1. HOLDING COMPANY
If a company can control the policies of an other company through the ownership
of its shares or through control over the composition of its Board of Directors, the
company is called a Holding Company. The holding company has a say in the formulation
of policies of the other company.

2. SUBSIDIARY COMPANY
A company is called a subsidiary company when one of the following conditions is
fulfilled.
a) If the formation of Board of Directors is controlled by another company
b) The other company controls more than half of the voting rights of this company
c) If it is subsidiary of a company which itself is the subsidiary of another company.
d) The other company owns more than half of the maximum value of the shares in the
company.

3. GOVERNMENT COMPANY

Government company means any company in which not less than 51% of the
paid-up share capital is held by central Government or by the any State government or
Governments or partly by the Central Government and partly by one or more State
Governments and includes a company which is subsidiary of Government company.
Government companies are registered both as public limited and private limited
companies but the management remains with the Government in the both cases.

V. ON THE BASIS OF NATIONALITY :

1. INDIAN COMPANIES :

A company incorporated in India under the companies Act, 1956, whether

operating in India or out side, is called as Indian company. There may be companies
incorporated under Indian companies Act but separate rules are framed for their
regulations.

2. FOREIGN COMPANIES :

A company which is incorporated in other countries but doing business in our

country is deemed to be a foreign company. It must exhibit at the outside of every
office, the name of the company and the country in which it is incorporated in English
and in one of the local languages.

MERITS OF COMPANY FORM OF ORGANISATION:

The company form of Organisation dominates the world of industry and trade.
This form is suitable where large resources are required and the production has to be
carried out on large scale. The following are the various advantages enjoying by a joint
stock company.

1. ACCUMULATION OF LARGE RESOURCES:

A company can collect large sum of money from large number of share holders.
There is no limit on the number of share holders in a public company. It need for more
funds arise, the number of share holders can be increased. Joint stock companies are
suitable for those businesses where large resources are required.

2. LIMITED LIABILITY:
The liability of the share holders is limited to the face value of the shares held by
them. Share holders are not personally liable for the debts of the company. The limited
liability encourages many persons to invest in shares of joint stock companies.

3. TRANSFERABILITY OF SHARES
The shares of a public company are freely transferable. A share holder can sell or
transfer his shares freely without the consent of other share holders in the company. He
can sell his shares easily in the stock market. This facility attracts a large number of
investors to invest their savings in the shares.

4. CONTINUOUOS EXISTENCE
 A joint stock company enjoys permanent legal existence. Its existence is not
affected by the retirement, death, insolvency or lunacy of share holders.

5. LARGE SCALE OPERATION

Joint Stock Companies are essentially large scale business units, with the
availability of large resources; the company can organize production on a big scale. The
increase in scale and size of the business will result in economies in production, purchase
marketing and management etc. As a result the average cost of the products falls
considerably.

6. EFFICIENT MANAGEMENT
In company form of Organisation, ownership is separate from management. It
enables the company to appoint expert and qualified persons for managing various
business functions. The efficient management will help the company to expand and
diversity its activities.

7. DIFFUSED RISK:
In company form of Organisation the number of contributors, is large, so risk is
shared by a large number of persons. Therefore, the risk of an individual investor is
reduced.

8. DEMOCRATIC MANAGEMENT:
A Company is managed on democratic principles. Share holders come from all
walls of life. Every individual has an opportunity to become a share holder. The share
holders elect the board of directors to manage the affairs of the company. The company
form of Organisation is democratic both from ownership and management side.

9. PUBLIC CONFIDENCE
As per companies act, every company must gets its accounts audited by a
qualified Charted Accountant. The companies will also publish their accounts and annual
reports and are open to public inspection. This creates confidence in the public about
the functioning of the company.
10. SOCIAL BENEFITS:
The Company form of Organisation has encouraged the habit of savings and
investment among the people. It offers employment to a large number of people. If
facilitates promotion of various ancillary industries, trade and ancillaries to trade. Some
times it also donates money for education, health, community service and renders help
to charitable and social institutions.
DIS ADVANTAGES OF COMPANY FORM OF ORGANISATION:
1. DIFFICULTY OF FORMATION:
The company formation is difficult and expensive. Its formation requires
preparation of many documents and compliance of many provisions of the companies
act. It involves heavy expenditure. In some cases, Government sanction is also required
for the formation.

2. SEPERATION OF OWNERSHIP AND MANAGEMENT

The ownership and management of a public company is in different hands. The
owners (share holders) play an insignificant role in the working of the company. On the
other hand, control is in the hands of those who have no stakes in the company. There is
no direct relationship between efforts and rewards. The management does not take
personal interest in the working of the company as is the case in partnership and sole
trade business.

3. EVILS OF FACTORY SYSTEM:

The company form of Organisation leads to large scale production. The evils of
factory system like insanitation, air pollution, congestion of cities are attributed to joint
stock companies. Joint stock companies facilitate formulation of business combinations
which ultimately leads to the monopolistic control and exploitation of consumers.

4. SPECULATION IN SHARES:
The joint stock companies facilitate speculation in the shares at stock exchanges.
The price of a share is determined in terms of the dividend expected and the reputation
of the company. The speculators try to fluctuate the prices of shares according to their
suitability. The management of joint stock companies also some times encourages
speculation in shares for their personal gains.

5. FRAUDULENT MANAGEMENT
The promoters and directors may indulge in fraudulent practices. The
management is in the hands of those persons who have not invested much in the
company. So there is possibility for directors to be fraudulent as there is no proper
control over them.

6. LACK OF SECRECY:
The management of companies remains in the hands of many persons. Every
thing is discussed in the meetings of Board of Directors. A number of persons are
involved in management.

7. DELAY IN DECISION MAKING:

In company form of Organisation, all important decisions are taken either by the
Board of Directors or are referred to General House. Decision taking process is time
consuming. If some business opportunity arises and a quick decision is needed it will not
be possible to arrange meetings all of a sudden. So many opportunities may be lost.

8. CONCENTRATION OF ECONOMIC POWER:

The company form of Organisation has helped concentration of economic power
in a few hands. Some persons become directors in a number of companies and try to
formulate policies which promote their own interests. The shares of a number of
companies are purchased to create subsidiary companies. Inter locking of directorship
and establishment of subsidiary companies have facilitated concentration of economic
power in the hands of a few business houses.

9. EXCESSIVE STATE REGULATIONS:

A large number of rules and regulations are framed for the working of the
companies. A company is very much controlled by the Govt, and it was to observe many
provisions of the different laws. Again there is a penalty for the non-observation of the
provision of different laws.

PROMOTION OF A COMPANY

The promoters have to take a number of steps to float a company. A number of

formalities have to be completed before a unit can come into existence. The length of
process and the number of formalities vary with the type of Organisation and scale of
operations.

“Promotion may be defined as the process of organizing and planning the finance
of a business enterprise under the corporate form” - L.H. HANEY
“The Discovery of business opportunities, and the subsequent Organisation of
funds, property and managerial ability into a business concern for the purpose of making
profits there form” - C.W. GERNSTEN
BERG.
 “Promotion starts with the conception of the idea from which the business is to
evolve and continue down to the point at which the business is fully ready to begin
operations as a going concern”. - GUTHMANN
& DOUGAL

STAGES OF PROMOTION:

There are four stages in the promotion of a joint stock company.

1. DISCOVERY OF AN IDEA:
The first stage in company promotion is the conception of anew idea. The idea
may be to exploit a new are of natural resources or more profitable ventures in an
existing line of business. He develops this Idea with the help of Technical experts in that
field.

2. DETAILED INVESTIGATION:
At the second stage various factors relating to that business are studied from a
practical point of view. The promoters will estimate total demand for the product. The
possible sources of finances are discussed in detail. The availability of power, labour,
raw materials and machinery is also considered. A expert opinion is sought of the
viability of the project.

3. ASSEMBLING THE REQUIREMENT:

After making sure that the proposition is practical and profitable, the promoter proceeds
to assemble the requirements. The promoter selects the factory site, decides about
plant and machinery and contacts suppliers or raw materials etc.

4. FINANCING THE PROPOSITION:

The promoter decides about the capital structure of the company. The requirements of
finances are estimated first. Then the sources from which this money will be issued, the
type of the shares to be issued, and the nature of loans, whether debentures or
borrowing from financial institutions for a longer period all are finalized.

LEGAL ASPECTS OF PROMOTION:

1. APPLICATION FOR APPROVAL OF NAME:

The first step in getting a company incorporated is a obtaining the approval of name
from Registrar of Companies. A company may adopt any name which is not prohibited
under the Emblems and Names (prevention of improper use) Act, 1950 and which is not
identical with or does not closely resemble the name of a company already registered.

2. PREPARATION OF MEMORANDUM OF ASSOCIATION:

Memorandum of association is the constitution of the company which describes its
objects and scope and the relation with outside world. It is to be signed by at least seven
persons if it is a public limited company and at least two persons in case of a private
limited company.

3. PREPARATION OF ARTICLES OF ASSOCIATION:

It is a document which contains rules and regulations relating to the internal
management of the company. A Public limited company may adopt model clauses
prescribed in Table “A”, Schedule – I of the act.

4. LIST OF DIRECTORS:
A List of directors with their full names, addresses, ages and occupations should be filed.

5. WRITTEN CONSENT:
A written consent of the directors to act as such should be given. Each director has to
give his full name, address, occupation, age and nationality and should sign to act as
director of the company.

6. PAYMENT OF FEE:
At the time of registration, prescribed registration fees and filing fee for each document
filed for registration are to be paid at the registrar’s office.

7. INCORPORATION CERTIFICATE:
When all the required documents are filed with the registrar along with the requisite fees,
a scrutiny is made. When all documents are found order, the registrar will enter the
name of the company in register of companies and issues a certificate of incorporation.

DIFFERENCES BETWEEN PRIVATE COMPANY & PUBLIC COMPANY

PRIVATE COMPANY PUBLIC COMPANY

1. It can be started with a minimum of 1. It can be started with a minimum of
two members. The maximum is fifty seven members and no maximum
members. limit.
2. It cannot issue prospectus for inviting 2. It can issue prospectus for inviting
the public for purchase of its shares. the public for purchase of its shares.
3. Transfer of shares is generally 3. Shares are freely transferable.
restricted by the articles.
4. It need not secure minimum 4. It must secure minimum subscription
subscription before the allotment of
shares.
5. It can commerce business 5. It cannot commence business unless
immediately after securing the it gets certificate of commencement
“Certificate of incorporation” of business.
6. The minimum number of directors is 6. The minimum number of directors is
two. three.
7. Written consent of directors is not 7. Written consent of directors is
necessary. necessary for incorporation.
8. Directors need not possess 8. Directors should possess
qualification shares. qualification shares.
9. It need not hold statutory meeting nor 9. It must hold statutory meeting and
file a statutory report. file a statutory report
10. Two members form a quorum for 10. Five members form a quorum for
meetings meetings
11. The word “Private Limited” must be 11. The word “Limited” must be added
added at the end of its name. at the end of its name.
12. It can grant loan to its directors 12. It can grant loans to its directors only
without the consent of the with the consent of the Government.
Government. 13. One – Third of the directors should
13. Directors need not retire by rotation. retire by rotation every year.
14. A single resolution is sufficient for 14. A separate resolution is necessary
electing all directors. for electing each director.
15. There is no age limit to the directors 15. Persons who are of 65 years of age
of this Company. or more cannot be appointed as
16. It need not keep the index of its directors.
members 16. It must keep index of its members.
17. It can issue shares of any kind 17. It can issue only equity and
including deferred shares. preference shares.
18. Final accounts are not kept open for 18. Final accounts are kept open for
the public inspection. public inspection.
 DIFFERENCES BETWEEN PARTNERSHIP FIRM & JOINT STOCK COMPANY

PARTNERSHIP FIRM JOINT STOCK COMPANY

1. A partnership concern is governed by 1. Joint Stock Company is governed by
the partnership Act 1932. the companies Act, 1956
2. Registration of a partnership concern 2. The Registration of company
is not compulsory compulsory
3. A partnership can be started by at 3. There must be at least two persons for
least two persons. The maximum starting a private company and
number is ten in case of banking and maximum number of members can be
insurance business and it is twenty fifty. At least seven persons are
for any other business. required to start a public company and
there is no maximum limit
4. A partnership has no separate legal 4. A company has a separate legal entity
entity apart from its members. apart from its members.

5. The liability of partners is unlimited. 5. The liability of the share holders is

The partners are jointly and severally limited to the value of shares held by
responsible for the liabilities of the them. The members are not
business. personally liable for the obligations of
the business.
6. A partner can transfer his share only
with the consent of all other partners 6. A share holder can sell his shares
when ever he feels so. There is no
7. A partnership concern is managed binding on the transfer of shares of a
and controlled by the partners. The company.
partners have a right to participate in
the administration of business. 7. A company is managed by the elected
representative of the share holders ie.
8. There is no compulsion to maintain Board of Directors. But the members
certain books, get the accounts cannot participate in the day to day
audited and to publish them. working of the company

9. A partnership concern is dissolved on 8. A Company is required to maintain

the death or insolvency of a partner. prescribed books and have a periodical
audit.
10. A partner can bind the firm by his
acts. There is an implied authority. A 9. The continuity of a company is not
partner is an agent of the firm. affected by the death or insolvency of
a member.

11. A partnership concern can be 10. A share holder has no implied

dissolved easily. No legal formalities authority to bind the company. A
are required for winding up a share holder cannot act on behalf of
partnership firm the company.
11. A company is wound up only
through court. If the court is satisfied
12. It can change the objects of the that there is reasonable ground for
business or name by mutual consent. winding up the company only then it is
 to be wound up. A proper procedure is
to be followed.
12. If cannot easily change its objects
or name. A complex procedure has to
be followed.

Memorandum of association
The memorandum of association is the most important document of the company.
It is known as the Charter of the company. It is the foundation of which the super
structure of the company is raised. It describes the objectives for which the company is
promoted. It defines the relations of the company with the outside world.

The memorandum of association is to be carefully prepared. It has to be prepared

in accordance with the provisions of companies act. It must be printed, divided into
paragraphs, numbers consequently and be signed by at least seven persons in the case
of public limited company and two persons in the case of private limited company. The
memorandum of association contains the following clauses.
1. NAME CLAUSE :
The first Para of the memorandum of association contains the name of the
company. The name of the company should end with the word “Ltd” if is a public limited
company and with the words “Pvt Ltd” if it is a private limited company. A company may
choose any name as it likes unless it is considered undesirable. The name of the
company should not be identical to the name of another company which was already
registered.
2. SITUATION CLAUSE:
The second Para of memorandum contains the name of the place and the state in
which the registered office of the company is situated. Registered office means only the
office at which the company keeps its statutory books, common seal and other books of
Account. The clause determines the jurisdiction of the companies.

3. OBJECT CLAUSE:
This is the most important clause in the memorandum. It defines the scope of
activities of a company. A company cannot do any business that does not fall within the
scope of its objects. Therefore, this clause must be carefully drafted. It is made
compulsorily to specify in clear terms the main and subsidiary objects of the company.

4. LIABILITY CLAUSE :
This clause states that the liability of the members is limited to the extent of the
face value of the shares purchased by them. In case of a company limited by guarantee,
the liability of the members is limited to the guarantee given by them.

5. CAPITAL CLAUSE :
This clause states the amount of share capital with which the company is
proposed to be registered and the division of capital into shares of a fixed amount. The
clause must contain the number of shares and the value of each share.

6. ASSOCIATION CLAUSE :
In this clause, it is to be stated by the subscribers to the memorandum that they
are willing to form a joint stock company to carryout objects setout in the memorandum.
Every subscriber must take at least one share each and should write the number of
shares to be taken by him against his name. They must be sign the memorandum in the
presence of a witness. Seven persons in case of public ltd company and two persons in
the case of pvt. Ltd. Company must be sign the memorandum. Memorandum must be
stamped.
ARTICLES OF ASSOCIATION :

The articles of association are the second important document which the
promoters have to file with the registrar of Joint Stock Companies. It contains the rules
and regulations for internal management of the company. It determines the relationship
among the share holders themselves and the relation between the share holders and the
company.
It is a public document. It should be printed and divided into paragraphs and
consequently numbered. It must be signed by seven persons in the case of a public
limited company and two persons in the case of a private limited company.
Articles of association define the rights duties and powers of the directors as
between the and the company and specify the mode and form in which the business of
the company is to be carried.
Articles of association is always subordinate to the memorandum. Memorandum
states the objects for which the company is formed, while articles of association state the
ways and means by which the objects are to be achieved. If the articles are not filed by
a company limited by shares, model articles given in table A of the companies Act 1956
will apply.

CONTENTS OF ARTICLES OF ASSOCIATION :

1) The amount of share capital and its division into various shares.
2) Rights of each class of share holders.
3) Issue and allotment of shares.
4) Transfer of shares.
5) Forfeiture of shares.
6) Lien of shares.
7) Calls on shares.
8) Rules regarding the issue of shares.
9) Conversion of shares into stock and stock into shares.
10) Issue of share certificates and share warrants.
11) Rights for altering share capital.
12) Conduct of meetings, voting, quorum, poll and proxy.
13) Voting rights of members
14) Borrowing powers of the company.
15) Powers, duties, remuneration & qualifications of Directors
16) Matters relating to accounts and audit.
17) Procedure for declaring dividends.
18) Creation of reserves, Depreciation etc.
19) Adoption of preliminary contracts.
20) Custody of common seal
21) Appointment and payment of remuneration to manager, secretary etc.
22) Payment of underwriting commission.
23) Procedures regarding the winding up the company
24) Capitalization of reserves.
PROSPECTUS

Prospectus is a valuable document supporting the structure of the company. Every

public company issues a prospectus inviting the public to subscribe shares or debentures
of the company. The main purpose of a prospectus is to inform the public about the
existence of the company and to induce the investors to invest in the shares and
debentures of it only public companies can issue a prospectus. Private companies
cannot issue the prospectus, because they are strictly prohibited from inviting the public
to subscribe their shares.

Section 2(36) of the companies Act defines a prospectus as “Any document

described or issued as a prospectus and includes any notice, circular, advertisement or
other document inviting offers from the public for the subscription or purchase of any
shares in or debentures of a company”.

CONTENTS OF PROSPECTUS:

1. Company’s Name and address of registered office.

2. The main objects of the company.
3. Signatories to the memorandum and shares taken up by them.
4. Particulars of shares to be issued, their number and rights attached there to
5. Names, addresses, occupations etc. of directors, bankers, managers, managing
director, auditors, solicitors, brokers etc.
6. Minimum subscription to be raised.
7. Amount payable on application and allotment of each share.
8. Qualification shares of directors.
9. Preliminary expenses incurred.
10. Names of underwriters, their commission and brokerage
11. Time of opening the subscription lists.
12. Interest of every promoter as director
13. Remuneration to the directors
14. Names and addresses of vendors of property and amount payable to each.
15. Reference if any about the listing of shares on a recognized stock exchange.
16. History and business of the company.
17. Shares issued for consideration other than cash as fully or partly paid up in the
last two years.
18. Remuneration of promoters
19. Amount of premium or discount on issue of shares.
20. Details of contracts, if entered.
21. The manner and extent of maintaining the reserve fund and its utilization.
22. Capitalization of reserves of profits.
23. Rights and privileges of the members of the company
24. Borrowing powers of the company.

STATEMENT IN LIEU OF PROSPECTUS

A public company having share capital need not file and publish a prospectus if it
wants to raise its capital privately without public notice. In such a case, it must file a
statement in lieu of prospectus with the registrar at least three days before the allotment
of shares. It must be duly signed by all the directors. It should be dated and should
indicate when it was delivered to the registrar. The contents of this statement are more
or less similar to the contents of a prospectus. It will constitute the basis of the contract
between company and share holders. It must disclose all material facts relating to
company. A private company public company limited by guarantee is not required to fil
a statement in lieu of prospectus.

DIFFERENCES
MEMORANDUM of Association ARTICLES OF ASSOCIATION
1. Memorandum is the company’s 1. Articles contain the rules and
fundamental charter, which regulations for the internal
deals with the constitution of management of the company.
the company.
2. It contains the objects and 2. It lays down the rules by which
powers of the company those objects are achieved.
3. It defines the relationship 3. It defines the relationship
between the company and the between company and
outside world. members and also the
relationship among the
4. Number company can be members themselves.
registered without a 4. A public company need not file
 memorandum being filed with it. It can adopt rules stated in
the registrar. Table “A” of schedule I of the
act.
5. Outsiders must have 5. Outsiders presume the articles
knowledge about the clause of are complied with.
the memorandum. There is no
remedy for ultra virus acts.
6. It is subordinate only to the 6. Articles are subordinate to the
companies act. memorandum as well as to the
companies act.
7. It can be altered only under 7. Alternation of articles is not
special circumstances and difficult. It can be altered by
involves many formalities. passing special resolution.
 ALTERATION OF A MEMORANDUM OF ASSOCIATION

Memorandum of association is a basic document of the company. Company Law

has prescribed a particular procedure for making a change in the memorandum. The
procedure provided for different clauses varies. The following procedure is followed for
carrying out a change in the memorandum.

1. NAME CLAUSE (SEC.25) :

A company may change its name by passing a special resolution and with the
prior approval of the central Govt. If the company is registered with an undesirable
name then it can change it with an ordinary resolution with the approval of the central
government. The central government can also direct the company within 2 months of its
registration to change its name and this will have to be done within 3 months. The
change in name will be effective when it is registered with the registrar.

2. REGISTERED OFFICE (SEC.17) :

The change in registered office place affects the interests of share holders, investors,
creditors, employees etc. This change can be affected only with the approval of
company law board.
3. OBJECT CLAUSE (SEC.17)
The object clause is the most important clause in the memorandum, its change may
affect the activities of the company. The object clause can be changed by passing a
special resolution and by getting the permission of the company law board. A copy of
the resolution should be filed with the registrar with n 30 days of passing the resolution.
A petition is also made to the company law board for issuing a confirmation. When this
change is allowed by the board, then a printed copy of the memorandum of altered must
be filed with the registrar within 3 months of the order.

4. LIABILITY CLAUSE :
If the articles permits, the liability clause of memorandum of association can be altered
to make the liability of the directors or any one director, manager unlimited. For this
purpose, the company has to pass a special resolution. A company limited by shares or
guarantee cannot change its liability clause unless the members agree in writing to bear
additional liability (Sec.38)

5. CAPITLA CLAUSE:
a company can alter its share capital by an ordinary resolution, but it must be according
to the articles of association. Details of the alteration must be intimated to the registrar
within 30 days from the date alteration. To increase the share capital of a company an
ordinary resolution in the general meeting should be passed. If the company want to
reduce its share capital, a special resolution is necessary which must be approved by the
court.

CETIFIACTE OF COMMENCEMNET OF BUSINESS :

A private company can start its business soon after the receipt of certificate of
incorporation. A public company can commence its business only after getting one more
certificate by name certificate of commencement of business. After incorporation, a
public company issues a prospectus inviting public to subscribe its share capital. If the
shares are subscribed to the extent to minimum subscription, they have to file the
declaration with the registrar to secure the certificate of commencement of business if
the registrar is satisfied with the declarations he will issue a certificate known certificate
of commencement of business”

Winding up of a company

The company is created by law when the legal existence of a company

abolishes it is called the winding up of a company. Winding up of a company is a process of
putting an end to the life of a company. It is a proceeding by means of which a company is
dissolved and in the course of such a dissolution its assets are collected, its debts are paid off
out of the assets of the company or from contributions by its members, if necessary. If any
surplus is left, it is distributed among the members in accordance with their rights.

Modes of Winding Up

There are three modes of winding up of a company. These are:

(a) Compulsory winding up by the court.

(b) Voluntary winding up, which is itself of two kinds:

• Members’ voluntary winding up.

• Creditors’ voluntary winding up.

(c) Winding up under the supervision of the court.

(a) Winding up by court:

A company may be wound up by an order of the court. This is called compulsory winding up.
Section 433 lays down the following grounds for the winding up of a company by the court.

1. Special resolution of the company: [Sec: 433(a)]

If the company has by a special resolution resolved that it may be wound up by the
court. The power of the court in such a case is discretionary. The court may refuse to order
winding up where it is opposed to public or company’s interest.

2. Default in holding statutory meeting: [Sec: 433(b)]

If a company makes a default in delivering the statutory report to the registrar or

in holding the statutory meeting, the court may order winding up of the company either on
the petition of the register or on the petition of the contributory. The petition for winding up
must not be filed before the expiration of 14 days after the last day on which the statutory
meeting ought to have been held. However, the court may instead of making a winding up
order, direct the statutory report shall be delivered or that meeting shall be held.

3. Failure to commence or suspension of business: [Sec: 433(c)]

Where a company does not commence its business within a year from its
incorporation, or suspends its business for a whole year, the court may order for its winding
up. The power of the court is discretionary and will be exercised only where there is a fair
indication that the company has no intension to carry on the business. Where the suspension
of the business is temporary or can be satisfactorily accounted for, the court will refuse to
make an order. A company will not be wound up if it abandons one of its several businesses,
unless that business is the main object of the company.
4. Reduction of members below minimum: [Sec: 433(d)]

Where the number of members is reduced below 7 in the case of public company
and below 2 in case of a private company, the court may order the winding up of the
company. This provision is for the protection of existing members against unlimited liability.

5. Inability to pay debts: [Sec: 433(e)]

The court may order for the winding up of a company if it is unable to pay its
debts. The basis of an order for winding up under this clause is that the company has ceased
to be commercially solvent i.e. it is unable to met its current demands, although the assets
when realized may exceed its liabilities. According to section 434 of the act a company shall
be deemed to be unable to pay its debts in the following cases:

a. If a creditor to whom the company owes a sum of Rs.500 or more has served on the
company a notice for payment and the company has for three weeks neglected to pay or
otherwise satisfy him. But where the company bonafide disputes the debt and the court is
satisfied with the defense of the company, the court will not order for its winding up.

b. If execution or other process issued on a decree or order of any court in favor of a

creditor is returned unsatisfied in whole or in part.

c. If it is proved to the satisfaction of the court that the company is unable to pay its debts
and in determining whether a company is unable to pay its debts, the court will take into
account the contingent and the prospective liabilities of the company. What has to be proved
under this clause is not whether the company’s assets exceed it s liabilities, but whether it is
unable to meet its current demands. If a company is unable to meet its current liabilities, it is
commercially insolvent and liable to be bound up.

6. Just and equitable: [Sec: 433(f)]

The last ground on which the court can order the winding up of a company is when
the court is of the opinion that it is just and equitable that the company should be wound up.
This clause gives the court a very wide power to order winding up wherever the court
considers it just and equitable to do. The court will consider such grounds to wind up a
company for just and equitable reasons as are not covered by the preceding fie clauses.

The following are the instances where the courts have exercised their discretion under
this clause:

i) Where there is a deadlock in the management.

ii) Where it is impossible to carry on the business of the company except at a loss.

iii) Where the company has ceased to carry on its authorized business and is engaged in an
illegal business.

iv) Where the object for which the company is formed is impossible of further pursuit.
v) Where the minority is being disregarded or oppressed.

vi) Where there is lack of confidence in directors.

vii) Where a company has been conceived and brought forth in fraud.

(b) VOLUNTARY WINDING UP:-

Under the following circumstances a company can be wind up voluntarily.

1. A company may be wound up on the expiry of period.

2. It may be wind up on the happening of any event on which company is to be dissolved.

3. If the company passes special resolution for this purpose.

4. If company passes extra ordinary resolution that it cannot continue its business due to
heavy liabilities.

The voluntary winding up has two kinds:

The members of the company can wind up the company voluntarily. The
voluntary winding up can take place under the following circumstances

1. Expiry of period:-

A company may be wind up voluntarily after the expiry of a period by passing a

resolution in the general meeting.

2. Statutory declaration:-

The majority of the directors make statutory declaration to registrar that the company
will be able to pay its debts in full within three years.

3. Special resolution:-

After submitting the statutory declaration to the registrar, the company in the
general meeting passes the ordinary or special resolution to wind up the company.

4. Appointment of liquidators:-

In the general meeting shareholders of the company appoint the liquidator to wind
up the affairs of the company. Assets of the company are also distributed by the liquidator.
After the appointment all the powers of the directors and officers cease. The shareholders
also fix the remuneration of the liquidator.

5. Final meeting:-
 After winding up the affairs of the company, liquidator calls the general meeting of
the shareholders. The full account of the company is placed in the meeting by the liquidators.

6. Dissolution:-

Within one week of the meeting, liquidator sends the copy of full accounts to the
registrar. He also sends other important documents to registrar. The company shall be
dissolved on the expiration of three months on the receipt of the copy of accounts and other
documents.

(c) CREDITORS VOLUNTARY WINDING UP:-

In case of creditors voluntary winding up there is no need to submit statutory

declaration to registrar. A company can be dissolved by adopting the following methods

1. Special resolution:-

In the general meeting of the company special resolution is passed by the

shareholders, to windup the company.

2. Creditors meeting :- ( Sec 500)

A meeting of the creditors must be called by the company on the same day or on the
next day. A notice of the meeting should be sent to each creditor.

3. Statement of company affairs:-

In the meeting of the creditors directors of the company should intimate the names,
addresses and claims of the creditors. One of the directors presides the meeting of the
creditors.

4. Notice of resolution to be given to registrar :- ( Sec 501)

Within ten days after the date of creditors meeting, a copy of resolution passed
should be sent to registrar.

5. Appointment of liquidator :- ( Sec 502)

The creditors and shareholders will nominate any person as a liquidator in their
respective meeting. The opinion of the creditors is preferred.

6. Appointment of Inspection committee :- ( Sec 503)

The creditors and shareholders can appoint the inspection committee consisting of five
members in each case.

7. Remuneration of liquidators :- ( Sec 504)

It is fixed by the inspection committee or by the creditors. The duties and powers of the
liquidators are also sanctioned by the inspection committee or creditors.
8. Boards power to cease on appointment of Liquidator :- ( Sec 505)

On the Appointment of a liquidator all the powers of the board of directors shall cease.

9. Final meeting :- ( Sec.509)

The liquidator calls the meeting of the creditors and paces before them the full
account of the company assets.

10. Dissolution:-

Within one week after the date of meeting liquidator sends the copy of account and
other documents to registrar. Registrar will register the documents. After three months from
the date of registration a company will be dissolved.

WINDING UP UNDER THE SUPERVISION OF A COURT:-

Sometimes if Court feels necessary it may issue the order to dissolve the
company under its own supervision. But this order is issued only in that case when the
voluntary winding up for voluntary winding up. Dissolution of a company can take place
under the supervision of a court under the following conditions.

1. If a liquidator is partial.

2. If the rules for winding up are not observed strictly.

3. If the winding up resolution is obtained by fraud.

4. If the liquidator is not taking keen interest.