company act , types of companies, difference between private and public company

1. Company Law
• By a Company is meant an association of
persons who contributes money to a common
stock and employ it for a common purpose
• According to James L.J. the term “Company”
means “an association of persons united for
common object”.
• Sec 3 (1) of Company Act 1956, Co. means a
Co. formed & regd. Under this act or an
existing Co.

2. • Justice Marshal – “A person”, artificial,
invisible, intangible and existing in eyes of law.
• Co. is a juristic person with perpetual
succession and in which shares are
transferable and liability is limited.

3. Characteristics of a Company:
• Independent corporate existence.(Salomon v.
Salomon and Co. Ltd.)
• Perpetual succession.
• Common Seal
• Limited liability.
• Transferability of shares.
• Separate property
• Power to sue and to be sued.

4. Characteristics of Company
• Independent Existence- A co. is regarded by law
as a person just as a human being
In Salomon V Salomon Co. Ltd., it was held that
co. is a separate juristic entity distinct from share
holders.
• Perpetual Succession- Law is the creator of Co.
and only law can destroy it and it never dies.
• Limited Liability- Liability of members of ltd. Co.
is Ltd. Their liability is ltd. to the nominal values
of shares held by them

5. Characteristics of Company
• Separate Property- A Co. is separate and
distinct person from the members composing
it. The company’s money and property
belongs to co. and not to share Holders.
• Transferability of shares- Sec. 82 of Company
Act 1956 “ shares in the company are movable
property, transferable in the manner provided
by Article of Association
• Capacity to sue & be sued- A Co. can file a
suit (Case) against any person & Vice versa

6. Company Vs Partnership
Criteria
/Basis
Company Partnership
Mode of
Generation
Created by registration under Co. Act
1956.
Formed by agreement, which may
be written or oral, express or
implied.
Registration of partnership is not
compulsory
Legal Status Co. is an artificial person existing in
the eyes of law.
Association of persons/
individuals
Minimum
Numbers of
persons
Private Co. =2
Public Co. =7
Minimum numbers of persons=2
Maximum
Numbers of
persons
Private Co. =50
Public Co. =any number of members
Maximum numbers = 20
If carrying banking business =10
Transfers of
Shares
A shareholder can transfer his share
without the consent of other
shareholders
A partner can’t transfer his share
without consent of other partners

7. Criteria
/Basis
Company Partnership
Liability of
Members
Limited to nominal values of share
held by them
Liability of partners for debts of
firm is unlimited
Length of
Existence
A Co. having legal existence has no
effect by death, insolvency or
outgoing members.
It has perpetual existence
Firm can be dissolved at any time
by agreement between partners.
Statutory
Obligation
Co. is required to comply with various
statutory obligation like filling Balance
Sheet, conducting annual meetings,
maintaining various records and
registers etc.
No statutory obligation are to be
complied
Authority of
Members
Management of Co. rests in hand of
directors elected by shareholders.
Shareholders has no interference on
day to day management.
All partners has a right to actively
participate in management of a
firm.
Audit Auditing of financing account is
compulsory.
Not Compulsory.

8. Advantages of Company
• Large financial resources: by issuing shares,
debentures co. can collect large amount of
capital from public
• Limited liability: liabilities of members is
limited to the extent of value of shares held by
them
• Professional Management: management of
co. vests in board of directors. These are
persons having sound financial, legal &
business knowledge so that co. can be
managed efficiently.

9. • Large Scale Production: Due to large financial
resources an technical expertise it is possible
to have large scale production.
• Contribution to Society: Co. offers
employment to large no. of people
• Research & Development: Co. invests
substantial amount on R&D activities which
help co. to adopt new techniques & process of
production, new design, better quality
products etc.

10. • Enjoys Public Confidence: Co. is regulated by
various Acts like Co.’s Act. SEBI 1992,
Securities Contract Regulation Act. Co. has to
comply with provisions, rules and regulations
of these Acts.
• Effective Management: There is separation of
ownership & management in Co. Co. can
afford expert managers for each deptt. The
shareholders invests money while few eligible,
experienced professional manage the affairs
of the Co.

11. • Democratic Management: Directors are
elected representative of shareholders. They
are elected in General Meeting of Co.. There
are provisions for retirement & election of
new directors.

12. Types of Company
The Company can be classified on
following Basis
• Nationality
• Mode of Incorporation
• Ownership
• Liability
• Transferability of Shares

13. 1.Nationality
• Indian Company: Registered under Company’s
Act 1956 and regd. Office in India.
• Foreign Company: Incorporated outside India but
established a place of business in India.
2.Mode of Incorporation
• Statutory Company/Public Corporation:
Established under special Act of Parliament or
state legislature eg. RBI,LIC,UTI etc.
• Registered Company: Company registered under
Company’s Act 1956

14. 3. Ownership
• Govt. Company: Company in which at least
51% paid up share capital is held by Govt. eg.
BSNL
• Holding Company: A Company is deemed to
be holding Company of another if, but only if,
that other is its subsidiary
• Subsidiary Company: A Company is subsidiary
of another Company if other Company holds
more than 50% shares or other Company
controls composition of Board of Directors

15. 4. Liability
• Limited By Shares: Liability of members is ltd.
Up to amount of share held by them.
• Limited By Guarantee: Liability is ltd. To the
extent amount the members agree to
contribute in case of winding up of a
Company .
• Unlimited Company: Do not exist today. There
is no limit on liability of members.
5. Transferability of Shares
• Private Limited Company
• Public Company

16. Private Company ,Sec2(68)
• Restricts the right of members to transfer its shares
• Limits the number of members minimum 2 to maximum 200
• Prohibits any invitation to public to subscribe it's securities
• These companies must add "Private" word with its name.
• These companies enjoy certain exemptions and privileges

17. Public Company ,Sec.2(71)
• Shares are freely transferable
• Minimum membership required is 7 but
maximum no limit
• Can invite public for subscription of its securities
• Subsidiary of a public company will be deemed to
be public company (even when the subsidiary is a
private company and has those three restricting
clauses in its AOA)
• These companies are required to comply with lot
of formalities and procedures

18. Private Company vs Public Company
PRIVATE COMPANY PUBLIC COMPANY
Minimum no. of members – 2 Maximum no.
of members-200
Minimum no. of members -7
Maximum no. of members- No limit
There must be restrictions on transfer of
shares of the company.
No restrictions on transfer of shares.
Any invitation to public to subscribe for any
securities of the company is prohibited.
A public company can invite public for
subscription of its securities.
It can issue securities only through private
placement, or by way of rights or bonus issue
It can issue securities to public through
prospectus, private placement or by way of
rights or bonus issue
It can allot shares without receiving the
minimum subscription
It cannot allot shares without receiving
minimum subscription
A private company must have atleast 2
directors
A public company must have atleast 3
directors
Directors are not required to retire by
rotation. All its directors can be permanent.
Atleast 2/3 directors of a public company shall
be rotational directors .
It is not required to appoint independent
directors.
A public company which is listed or otherwise
prescribed must appoint independent
directors

19. Private Company vs Public Company
PRIVATE COMPANY PUBLIC COMPANY
It may by its AOA, provide special
disqualifications for appointment of directors
.
It cannot prescribe additional disqualifications
in its AOA for appointment of directors.
No restriction on payment of remuneration to
directors, managing directors etc.
Overall maximum managerial remuneration is
fixed at 11% of annual net profits of a public
company.
Exempted from constituting committees like
Audit Committee, Nomination and
Remuneration Committee.
Public companies ( listed/prescribed) are
required to constitute Audit Committee,
Nomination and Remuneration Committee
Exempted from Secretarial Audit Public companies( listed/prescribed) are
required to get Secretarial audit by a
practicing Company Secretary
Not required to rotate auditor/ audit firm Public companies ( listed/prescribed) required
to rotate auditor/ audit firm
Unless AOA provide for a larger no., quorum
for general meeting -2 members personally
present
Quorum shall be 5 to 30 members personally
present depending upon the number of
members in the co.
Must have word ‘Pvt./Private’ in its name. Name must end with word ‘Lmt./Limited’

20. Formation of a Company:
• The process of formation of a company may
be divided into three parts:
1. Promotion
2. Incorporation/ Registration
3. Floatation

21. 1. Promotion: It is the process of conceiving an
idea and developing it into a project to be
accomplished by the incorporation and
floatation of a company. The persons who take
the necessary steps to accomplish these
objectives are called promoters.
2. Steps involved in incorporation
• Acquire DIN and DSC
• Ascertaining availability of name by filing e-
form 1A
• Preparation of Memorandum of Association
(MOA) and Articles of Association (AOA).

22. Other documents to be filed with the ROC:
• e-form 18 – Notice of the situation of the
registered office of the company.
• e-form 32 – Particulars of the directors,
manager or secretary.
• e-form 1 - Statutory declaration
• Payment of Registration fees
• Certificate of Incorporation

23. 3. Floatation:
• After a company has received its certificate of
incorporation, it is ready for floatation i.e. it can
go ahead with raising capital sufficient to
commence business.
• In case of private companies capital is obtained
from friends and relatives by private
arrangement.
• In case of public companies capital can be raised
in either of the following two ways-
• 1. By issuing Prospectus- If public is to be invited
to subscribe to its capital.
• 2. By issuing Statement in lieu of prospectus- If
capital is to be arranged privately.

24. Certificate of Commencement of Business:
• A private company can commence business
immediately after the certificate of
incorporation has been obtained.
• In case of Public companies it is necessary to
obtain a certificate of commencement of
business. This certificate can be obtained only
after ‘floatation’ of the company.

25. MOA
• MOA is the company’s charter & is a document of great
importance in relation to proposed company.
• MOA must be printed & must be divided into paragraphs
numbered consecutively. It is the company's charter &
must contain the following six clauses-
• The Name Clause
• The Registered Office Clause
• The Object Clause
• The Liability Clause
• The Capital Clause
• The Subscription Clause
• THE NAME CLAUSE

26. • THE NAME A company shall have a registered
office to which all communication must be made
within 30 days after the date of its incorporation
or from the day on which it begins to carry on
business.
• The Object Clause-It must mention-The main
objects of the company to be pursued by the
company on its incorporation & objects incidental
or ancillary to the attainment of main objects
• -Other objects of the company not included in
the “main objects’” sub clause.

27. • The company in law is equal to a natural person
& has a legal entity of its own. It must bear its
own name. The promoters give any name to the
company, subject to the following restrictions-
• The last word must be the word "Limited” in case
of public limited company & “Private Limited” in
case of private limited company.
• The name must not in the opinion of Central
Government be undesirable.
• The Registered Office Clause –This clause must
mention the state in which registered office of
the company is to situate. This fixes the domicile
of the company & this domicile clings to it
throughout its existence.

28. • Restrictions on object-1-not against the provisions of
company’s Act
• -not against the policy of our constitution
• -not include anything in contravention of general law
• The Liability clause-From the liability point of view
companies are of 3 sorts-
• 1-A company limited by shares object-1-not against the
main object
• 2-A company limited by guarantee
• T3-An unlimited company
• If the company is to be incorporated a" company limited
by shares” the liability of the members shall be limited
by shares. This means that no member can be called
upon to pay more than nominal amount of his shares, or
so much thereof as remains unpaid; & if his shares be
fully paid up, his liability is nil.

29. • In case of company limited by guarantee “ the
liability clause must state that each member
undertakes to contribute to assets of the
company in the event of its being wound up
for payment of debts & liabilities of the
company such amount as may be required.
• A company not having any limit on the
liability of its members is termed as an
unlimited company. Such companies are rarely
formed now. The liability of members of an
unlimited is unlimited.

30. The Subscription Clause

31. The Subscription Clause
• This is also known as’ association clause .’In this clause
the subscribers to the memorandum declare that they
desire to be formed into a company & agree to take the
shares opposite their names.
• There must be at least 7 persons (or 2 persons in case
of private company) & they all must subscribe for at
least 1 share each. The full name ,address &
occupation of each must be given. Then each of the
subscribers must sign the memorandum in the
presence of at least one witness who shall attest the
signature. One witness to all the signatures is
sufficient. But a subscriber cannot attest the signature
of another subscriber.

32. Articles of Association
The articles of association cover the internal
running of the company and will provide among
other things for-
1)The holding of meetings
2)appointment, removal& proceedings of directors
3)The allotment & transfer of shares
4)Alteration of capital
5)Borrowing
6)Dividends & reserve funds&
7)The rights of holders of different classes of
shares(preference or ordinary)

33. Memorandum and Articles distinguished
The important points of distinctions are-
MOA is the dominant document whereas the AOA
are subordinate importance & controlled by the
MOA. If there arises any conflict b/w the
provisions of two documents, the AOA must give
way.
The MOA deals with all the major external affairs of
the company while the AOA deals only with its
internal management.

34. • An act of the company in violation of its MOA
is ultra vires {beyond Power} & void &
altogether incapable of ratification while
anything done in violation of articles is only
irregular & can be ratified by the shareholders.
• The MOA cannot be easily altered but the
AOA can be altered by a special resolution.
• No company can be registered without a
memorandum whereas a public company
limited by shares may not have articles.

35. Prospectus
• Definition-’’Any document described or issued as
a prospectus & includes
• Any notice
• Circular
• Advertisement, or
• Other document
• Inviting deposits from the public or
• For the subscription or purchase of any shares in,
or debenture of a body corporate’’[Sec.2(36)]

36. What constitutes a prospectus?
• An invitation to public
• Invitation be by or on behalf of the company
• Invitation must be to subscribe or purchase
• Must relate to shares/debentures or other
instrument
• Authentication of Prospectus
• The Act provides that any prospectus issued by or
on behalf of the company must be
• Dated

37. • Signed by every person named in it as director
• Delivered to the Registrar of Companies for
registration on or before the date of publication.
• Statement in lieu of prospectus
• A public company which has a share capital
but does not issue a prospectus on its
formation, cannot allot any shares without
first filling with the Registrar of companies a
document called “ the statement in lieu of
prospectus”.

38. • The document must be filed at least three
days before the first allotment of shares or
issue of debentures.
• It must be signed by every person who is
named therein as director or a proposed
director or by his agent duly authorized in
writing.

39. Directors
• A Director is a member of a Board appointed to
direct the affairs of a company. Only an individual
can be appointed as a director. Every public limited
company shall have at-least 3 directors and other
companies shall have at-least 2 directors.
Appointment of Directors: Directors may be
appointed-
• By provision in the Articles
• By shareholders in general meeting
• By the Board of Directors
• By Central Government

40. `General Powers vested in the Board of Directors:
• The Board of Directors is entitled to exercise all
such powers and to do all such acts and things as
the company is authorized to exercise and to do.
• In the exercise of its powers the Board is
subjected to the provisions of the Companies Act,
the memorandum and the articles and any
regulations, not inconsistent with them, made by
the company in general meeting.
Minimum No. of Directors:
• Private Companies- 2 directors
• Public Companies- 3 directors

41. • Except where express provision is made & the
powers of a company in respect of any particular
matter are to be exercised by the company in
general meeting, in all other cases board of
directors are entitled to exercise all its powers.
• Duties of directors
• 1)Fiduciary duties –The first & the foremost duty
is to act honestly.
• It includes the duty not to utilise the position &
knowledge possessed by him for his personal
advantage or against companies interest.

42. • 2)Duties of care & skill- A director need not exhibit in
his performance of his duties a greater degree of skill
than may reasonably be expected from a person of his
knowledge & experience.
• 3)Duty to attend Board meeting- Since a person may
simultaneously become the director of 20 companies
,is not bound to give continuous attention to the affairs
of the company.
• Sec.283[1][g] provides that the office of director
becomes vacant if he absents himself from 3
consecutive meetings of the Board of directors , or
from all meetings of Board for a continuous period of 3
months ,whichever is longer, without obtaining leave of
absence from the Board.

43. • 4)Duty to attend his duties personally-Since the
directors are agents of the company , they must
perform their duties personally.
• 5)Duty to disclose interest-If a director has an
interest in a contract with his company ,the
company can avoid the contract.
• 6)Miscellaneous duties-There are other duties
which the Act requires to be performed by the
directors. E.g-a)To take share qualification
• b)Declaration & payment of debts
• c) To see the truthfulness of the contents of the
prospectus & sign it.

44. Meetings
• The meetings may be divided into 4
categories:
• Directors meeting
• Share holder’s meeting
1. Statutory meeting
2. Annual general meeting
3. Extra-ordinary general meeting
• Creditor, s meeting
• Debenture holder’s meeting

45. • Director’s meeting-shall be held at least in every
3 months & at least 4 such meeting shall be held
in every .
• The mgmt. of the company is vested in the Board
of Directors collectively & the directors must, act
at the board meeting.
• Quorum means minimum numbers of persons
necessary for transaction of business
• Quorum for Board meeting is 1/3 of its total
strength or 2 directors, whichever is higher[any
fraction should be rounded as 1 ]

46. • Shareholder’s meeting-are of 3 kinds
1)Statutory meeting(Sec 165):-Every public company hold
this meeting
– held between 1&6 months of the date at which the
company is entitled to commence business
– held once in whole life of company
2)Annual General Meeting(Sec 166):-
• held every year
• -held at registered office of the company or within local
limits in which registered office is situated
3)Extraordinary General Meeting(Sec 169):-Every meeting
which is not statutory or annual general meeting is
extraordinary general meeting

47. • Requisite & Procedure of the general meeting
• Notice-To whom notice is to be given-
1)to every member of the company.
2)auditors of the company
• Length of notice-A general meeting may be called by giving
not less than 21 days notice in writing
• Contents of notice-Notice must specify-place, day,
hour/time, statement of business to be transacted
• Business to be transacted is of 2 sorts-ordinary business &
special business
• Quorum-In case of public company-5 members
• in case of private company-2 members
• -they should be personally present & shall be quorum for
meeting of the company

48. Winding -Up
• ‘’Process whereby life of a company is ended
& its property is administered for the benefit
of its creditors & members.’’
• Modes of Winding Up-(1)Winding up by the
Court or Compulsory Winding Up
• (2)Voluntary winding up
– Compulsory winding up occurs when the directors
or those in control do not want the company to be
wound up whereas voluntary occurs when they do

49. • Compulsory Winding Up-(Sec.433)-Court may
order winding up if one or more of the following
grounds are present-
a)By special resolution-The company has by
special resolution ,resolved that the company be
wound up by the court.
b)Default in holding statutory meeting-First
meeting of the shareholders of a public company
is known as statutory meeting.
• If default is made in delivering the ‘’Statutory
report’’ to the Registrar or in holding the
‘’statutory meeting’’ it may be ordered to be
wound up.

50. • c)Failure to commence business-If a company does not
commence its business within a year from its
incorporation, or suspends its business for a whole
year, it may be ordered to be wound up.
• d)Reduction in membership-Where the membership is
reduced ,in case of public company below 7,& in case
of private company below 2.
• e)Inability to pay debts-If a company is unable to pay
its debts ,it may be wound up.
• f)Just & equitable-The court is of the opinion that it is
just & equitable that the company should be wound
up. Ex. Incurring huge losses, fraudulent or illegal
purposes, etc.