Companies act 1956 i

© INTEGRAL UNIVERSITY
BM202 CORPORATE LAW
B.Com 3RD SEMESTER
Mr. Shahab Ud Din
Assistant Professor
DCBM

Companies Act 1956 -I
UNIT 2

Syllabus
• Meaning and Essential Features of Company,
• Types of Companies,
• Formation of Company
• Memorandum and Articles of Association,
• Prospectus

MEANING
The word ‘company’ is derived from the Latin word
COM PANY
with or together Bread

The word ‘COMPANY’ originally referred to an association of
persons who took their meals together. In the leisurely past,
merchants took advantage of festive gatherings, to discuss
business matters

Definition
• As per the Act
According to Section 2(20) ―company‖ means a company incorporated
under this Act or under any previous company law in India .
• As per Judicial pronouncement
Company means voluntary organization of persons who are contributing
their money in the common stock of the company and who agree to invest
for the same goal/ purpose and share the profits and losses arising
therefrom.
Such persons are called as share holders or members and the common stock
is called as the share capital of the company.

HISTORY AND DEVELOPMENT OF THE
CONCEPT OF COMPANY LAW IN INDIA
• At the end of 1950, the Government of India appointed
a Committee under the Chairmanship of Dr. Homi
Jhangir Bhabha to go into the entire question of the
revision of the Indian Companies Act, with particular
reference to its bearing on the development of Indian
trade and industry.
• This Committee examined a large number of witnesses
in different part of the country and submitted its report
in March 1952. Based largely on the recommendations
of the Company Law Committee, a Bill to enact the
present legislation, namely, the Companies Act, 1956
was introduced in Parliament. This Act, once again
largely followed the English Companies Act, 1948.
• The Companies Act, 1956 consisted of 658 Sections
and 15 Schedules.

Features of a company as per the Companies
Act, 1956
1. Artificial Legal Person:
A company is an artificial person created by law. Though it has no body,
no conscience, still it exists as a person.
Like a person, it can enter into contracts in its own name and likewise
may sue and be sued in its own name.

2. Separate Legal Entity:
A company has a distinct entity separate from its members or
shareholders.
A shareholder of the company can enter into contract with the
company. He/she can sue the company and be sued by company.

3. Common Seal:
Being an artificial person, company cannot sign the documents. Hence,
it uses a common seal on which its name is engraved.
Putting the common seal on papers relating to company’s transactions
makes them binding on the company.

*Common seal is used to authenticate the originality of the document. Using seal to
authenticate a document has been a common practice among kings, merchants and
various leaders even today.
• A tughra (Ottoman Turkish:
‫,طغرا‬ romanized: tuğrâ) is a
calligraphic monogram, seal
or signature of a sultan that
was affixed to all official
documents and
correspondence
Official Tughra of Mughaal Empire
A farman issued by
Emporer Shah Alam II
containing a Tughra for
authenticity of the

4. Perpetual Existence:
Unlike partnership, the existence of a company is not affected by the
death, lunacy, insolvency or retirement of its members or directors.
This is because the company enjoys a separate legal existence from that
of its members.
It is said, “Members may come, members may go but the company
goes for ever”. It is created by law and is dissolved by law itself

5. Limited Liability:
The liability of the members of a company is normally limited to the
amount of shares held or guarantee given by them.

6. Transferability of Shares:
The member of a public limited company can sell his shares to others
without the consent of other shareholders. Yes, he has to follow the
procedure laid down in the Companies Act for transferring his shares.
However, there are restrictions for transferring shares to others in case
of a private limited company.

7. Separation of Ownership from Management:
The shareholders, i.e., owners being scattered all over country give
right the directors to manage the affairs of the company. The directors
are the representatives of the shareholders. Thus, ownership is
separated from management.

8. Number of Members:
In case of a public limited company, the minimum number is seven and
there is no maximum limit. But, for a private limited company, the
minimum number of members is two and the maximum number is
fifty.

Classification of Companies on the Basis of
Incorporation
1. Chartered Companies
Chartered companies are established by the King or Queen of a
country.
Powers and privileges of chartered company are specified in the
charter. Power to cancel the charter is vested with King/Queen.
Examples: East Indian Company, Bank of England, Hudson’s Bay
Company. The Companies Act does not apply to them. Such
companies cannot be started in India.

Levant Company
The Levant Company was an English chartered company formed in
1592. Elizabeth I of England approved its initial charter on 11
September 1581 when the Venice Company (1583) and the Turkey
Company (1581) merged, because their charters had expired, as she
was anxious to maintain trade and political alliances with the Ottoman
Empire.

Portrait in Turkish
costume of Turkey
merchant Francis Levett
(1700–1764), chief
representative of the
Levant Company at
Constantinople 1737–
1750.

The Hudson's Bay Company (HBC) is a Canadian retail business group. A fur trading
business for much of its existence, HBC now owns and operates retail stores in
Canada and the United States.

The British East India Company's
headquarters in London.

Barbary Company
• The Barbary Company or Marocco Company was a trading company
established by Queen Elizabeth I of England in 1585 through a patent
granted to the Earls of Warwick and Leicester, as well as forty others.
• The privilege of the company was to benefit from exclusive trade for
Morocco for a period of 12 years, until its charter expired in 1597.
Queen Elizabeth sent her Minister Roberts to the Moroccan sultan
Ahmad al-Mansur to reside in Morocco and obtain advantages for
English traders. A treaty signed in 1728 extended these privileges,
especially those pertaining to the safe-conduct of English nationals.

2. Statutory Companies
• Companies are established by a Special Act made in
Parliament/State Assembly.
• Constitution of company is specified in the Memorandum of
Association (MOA). Rules relating to day-to-day management of
statutory companies are specified in the Articles of Association
(AOA).
• Audit of statutory company is conducted by Comptroller and Auditor
General of India (CAGI). The report of CAGI is placed in
Parliament/State Assemblies concerned.

* They don’t need not use the word ‘Limited’
next to its name.

3 Association Not for Profit
According to Section 25, the Central Government may, by license, grant
that an association may be registered as a company with limited
liability, without using the words ‘limited’ or ‘private limited’ as part of
its name.
.

The license will be granted only in the case of ‘association not for profit’. In other
words, the Central Government will grant the license only if it is satisfied that:
(i) The association about to be formed as a limited company aims at the promotion
of Sports, Commerce, Art, Science, Religion, Charity or any other useful object.
(ii) It intends to apply its profits, if any, for promoting its objects.
(iii) It prohibits the payment of dividend to its members.
Such companies may be public or private companies and may or may not have
share capital

Comparison between a trust, a society and a non-profit company
Public Trust
Society Section 8 Company
Statute/Legislation Indian Trust Act 1882]] Societies Registration Act of 1860 Companies Act of 2013
Jurisdiction of the Act Concerned state where registered Concerned state where registered Concerned state where registered
Authority
Charity Commissioner/Deputy
Registrar
Registrar of Societies Registrar of Companies
Registration As Trust
As Society (and by default also as
Trust in Maharashtra and Gujarat)
As Section 8 Company
Main Document Trust deed
Memorandum of Association and
Rules & Regulations
Memorandum and Articles of
Association.
Stamp Duty
Trust deed to be executed a non-
judicial stamp paper of prescribed
value
No stamp paper required for
Memorandum of Association and
Rules & Regulations
No stamp paper required for
Memorandum and Articles of
Association
Number of persons needed to
register
Minimum two trustees; no upper
limit
Minimum seven, no upper limit Minimum three, no upper limit
Board of Management Trustees
Governing body or
council/managing or executive
committee
board of directors/Managing
Committee
Mode of succession on board of
management
Usually by appointment
Usually election by members of the
general body
Usually election by members of the
general body

On the basis of membership

a. Private Company
Private limited company is a type of company which is formed with
minimum two shareholders and two directors, The minimum
requirement with respect to authorised or paid up capital of Rs.
1,00,000 has been omitted by The Companies (Amendment) Act, 2015
w.e.f. 29th of May, 2015. Another crucial condition of a private limited
company is that it by its articles of association restricts the right to
transfer its shares & also prohibits any invitation to the public to
subscribe for any securities of the company.
Maximum of 200 persons can become shareholders in a private
company. The name of private company should be suffixed with pvt ltd
or (p) ltd. Ex. Scientific publishing services private Limited, Chennai.

A private Limited company can be formed in three variations.
(a) as a private limited company;
(b) As a small private limited company;
(c) As a One Person Company (OPC).

• Section 2(62) of Companies Act defines a one-person company as
a company that has only one person as to its member. Furthermore,
members of a company are nothing but subscribers to its
memorandum of association, or its shareholders. So, an OPC is
effectively a company that has only one shareholder as its member.

b. Public Company
Public Company means a company which is not a private company. A public company may be said to
be an association which
i. consists of at least 7 members.
ii. has a minimum paid-up capital of Rs. 5,00,000 or such higher paid up capital as may be
prescribed.
iii. is a subsidiary of a company which is not a private company.
iv. does not restrict the right to transfer its shares.
v. does not prohibit any invitation to subscribe for any shares or debentures of the company.
vi. does not prohibit any invitation or acceptance of deposits. (The name of public company should
be suffixed with ltd. Ex.National Aluminium company Limited, Chennai

3. Classification of Companies
on the Basis of Liability

a. Company Limited by Shares
A company limited by shares is a company in which the liability of its
members is limited by its Memorandum to the amount (if any) unpaid
on the shares respectively held by them. The companies limited by
shares may be either public companies or private companies. If a
member has paid the full amount of shares, then his liability shall be
nil.

Thus two main features of a company limited by shares are as follows:
i. The liability of its members is limited to the amount (if any) remaining
unpaid on the shares held by them.
ii. Such liability can be enforced either during the lifetime of the
company or during the winding up of the company.

b. Company Limited by Guarantee
A company limited by guarantee is a company in which the liability of
its members is limited by its Memorandum to such an amount as the
members may respectively undertake to contribute to the assets of the
company in the event of its being wound up.
Such companies are generally formed for the promotion of Commerce,
Art, Science, Religion, Charity or any other useful object. The
companies limited by guarantee may be either private companies or
public companies.

c. Unlimited Company
An unlimited company is a company in which the liability of its
members is not limited by its Memorandum. In other words, the
liability of members is unlimited i.e., there is no limit on the liability of
members.
The members of such companies may be required to pay company’s
losses from their personal property. Because such companies have
separate legal entity, its creditors cannot file a suit against the
members directly.
The creditors will have to apply to the court for the winding up of the
company and then the liquidator will direct the members to contribute
to the assets of the company to pay off its liabilities

4. Classification of Companies on
the Basis of Membership

A public enterprise incorporated under the Indian Companies Act,
1956 is called a government company. These companies are owned
and managed by the central or the state government. Section 617 of
the Companies Act, 1956 defines “Government Companies” as any
company in which not less than 51% of the [paid-up share capital] is
held by.
1. The Central Government; or
2. Any State Government or Governments; or
3. Partly by the Central Government and partly by one or more
State Governments.

A subsidiary of a Government company shall also be treated as a
Government company. These companies are registered as private
limited companies though their management and their control vest
with the government. This is a type of organization where both the
government and private individuals are shareholders. Sometimes these
companies are called as a mixed ownership company.
Examples: Steel Authority of India, Indian Oil Corporation, Oil and
Natural Gas Corporation, Bharath Heavy Electricals.

b. Holding Companies
As per Section 2(87) “subsidiary company” or “subsidiary”, in relation
to any other company (that is to say the holding company), means a
company in which the holding company—
i. Controls the composition of the Board of Directors; or
ii. Exercises or controls more than one- half of the total share capital
either at its own or together with one or more of its subsidiary
companies:

• Provided that such class or classes of holding companies as may be
prescribed shall not have layers of subsidiaries beyond such numbers
as may be prescribed.

c. Subsidiary Companies
“Subsidiary company” or “Subsidiary”, in relation to any other company
(that is to say the holding company), means a company in which the
holding company.
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one- half of the total share capital
either at its own or together with one or more of its subsidiary
companies:

• Examples: H Ltd., holds more than 50% of the equity share capital of S
Ltd. Now H Ltd., is the holding company of S Ltd., and S Ltd., is the
subsidiary of H Ltd.

5. Classification of Companies on
the Basis of Nationality

a. Domestic Companies
A company which cannot be termed as foreign company under the
provision of the Companies Act should be regarded as a domestic
company

b. Foreign Companies
A foreign company means a company which is incorporated in a country
outside India under the law of that country. After the establishment of
business in India, the following documents must be filed with the Registrar of
Companies within 30 days from the date of establishment.
(i) A certified copy of the charter or statutes under which the company is
incorporated, or the Memorandum and articles of the company translated
into English.
(ii) The full address of the registered office of the company.

iii) A list of directors and secretary of the company.
(iv) The name and address of any person resident of India who is
authorised to accept, on behalf of the company, service of legal process
and any notice served on the company.
(v) The full address of the company’s principal place of business in
India.

c. Multi National Companies
A Multi National Company (MNC) is a huge industrial organisation
which,
i. Operates in more than one country
ii. Carries out production, marketing and research activities on
international Scale in those countries.
iii. Seeks to maximise profits world over.

A domestic company or a foreign company can be a MNC.
Examples: Microsoft Corporation, Nokia Corporation, Nestle, Coca-
Cola, International Business Machine, Pepsico, Sony Corporation.

Different Acts
• The Indian Companies Act 1882
• The Indian Companies Act 1913
• The Companies Act 1956
• The Companies Act 2013

• Corporate affairs in India are regulated through the Companies Act,
1956, Companies Act 2013 and related laws and regulations, which
are administered by the Ministry of Corporate Affairs (MCA)

• A company is a corporate body and a legal person having status and personality
distinct and separate from the members constituting it.
• It is called a body corporate because the persons composing it are made into one
body by incorporating it according to the law and clothing it with legal
personality. The word ‘corporation’ is derived from the Latin term ‘corpus’ which
means ‘body’. Accordingly, ‘corporation’ is a legal person created by a process
other than natural birth. It is, for this reason, sometimes called an artificial legal
person. As a legal person, a corporation is capable of enjoying many of the rights
and incurring many of the liabilities of a natural person.
• An incorporated company owes its existence either to a special Act of Parliament
or to company law. Public corporations like Life Insurance Corporation of India,
SBI etc., have been brought into existence by special Acts of Parliament, whereas
companies like Tata Steel Ltd., Reliance Industries Limited have been formed
under the Company law i.e. Companies Act, 1956 which is being replaced by the
Companies Act, 2013.

Definition
• Lord Justice Lindley has defined a company as “ an association of
many persons who contribute money or money’s worth to common
stock and employ it in some trade or business and who share the
profit and loss arising therefrom. The common stock so contributed is
denoted in money and is the capital of the company.
• The persons who contributed in it or form it, or to whom it belongs,
are members. The proportion of capital to which each member is
entitled is his “share”. The shares are always transferable although the
right to transfer them may be restricted.”

NATURE AND CHARACTERISTICS OF A COMPANY
• Since a corporate body (i.e. a company) is the creation of law, it is not
a human being, it is an artificial juridical person (i.e. created by law); it
is clothed with many rights, obligations, powers, and duties
prescribed by law; it is called a ‘person’. Being the creation of law, it
possesses only the powers conferred upon it by its Memorandum of
Association which is the charter of the company. Within the limits of
powers conferred by the charter, it can do all acts as a natural person
may do. The most striking characteristics of a company are:

1. Corporate Personality
• A company incorporated under the Act is vested with a corporate
personality so it redundant bears its own name, acts under a name,
has a seal of its own and its assets are separate and distinct from
those of its members. It is a different ‘person’ from the members who
compose it. Therefore it is capable of owning property, incurring
debts, borrowing money, having a bank account, employing people,
entering into contracts and suing or being sued in the same manner
as an individual. Its members are its owners however they can be its
creditors simultaneously. A shareholder cannot be held liable for the
acts of the company even if he holds virtually the entire share capital.

Case 1
• Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass
AIR 2000 SCW 139].

Question
• Whether the Guru Granth Sahib could be treated as a juristic person or
not?
• If it is, then it can hold and use the gifted properties given to it by its
followers out of their love, in charity. This is by creation of an endowment
like others for public good, for enhancing the religious fervour, including
feeding the poor etc.. Sikhism grew because of the vibrating divinity of
Guru Nanakji and the 10 succeeding gurus, and the wealth of all their
teachings is contained in Guru Granth Sahib.
• The last of the living guru was Guru Gobind Singhji who recorded the
sanctity of Guru Granth Sahib and gave it the recognition of a living Guru.

• About 56 persons of villages Bilaspur, Ghodani, Dhamot, Lapran and Buani
situated in the Village Bilaspur, District Patiala moved petition
under Section 7(1) of the said Act for declartion that the disputed property
is a Sikh Gurdwara. The State Government through Notification No. 1702
G.P. dated 14th September, 1962 published the aforesaid petition in the
Gazette including the boundaries of the said gurdwaras which were to be
declared as Sikh Gurdwaras. Thereafter, a composite petition
under Sections 8 and 10 of the said Act was filed by Som Dass son of
Bhagat Ram, Sant Ram son of Narain Dass and Anant Ram son of Sham
Dass of Village Bilaspur, District Patiala, challenging the same. They claimed
it to be a dharamshala and Dera of Udasian being owned and managed by
the petitioners and their predecessors since the time of their forefathers
and that they being the holders of the same, received the said Dera in
succession, in accordance with their ancestral share. They also claimed to
be in possession of the land attached to the said Dera.

Salomon v. Salomon and Co. Ltd., (1897)
• A.C. 22 case has clearly established the principle that once a company has been validly constituted under the Companies Act, it
becomes a legal person distinct from its members and for this purpose it is immaterial whether any member holds a large or small
proportion of the shares, and whether he holds those shares as beneficially or as a mere trustee.
•
• In the case, Salomon had, for some years, carried on a prosperous business as a leather merchant and boot manufacturer. He
formed a limited company consisting of himself, his wife, his daughter and his four sons as the shareholders, all of whom
subscribed to 1 share each so that the actual cash paid as capital was £7.
•
• Salomon sold his business (which was perfectly solvent at that time), to the Company formed by him for the sum of £38,782. The
company’s nominal capital was £40,000 in £1 shares. In part payment of the purchase money for the business sold to the
company, debentures of the amount of £10,000 secured by a floating charge on the company’s assets were issued to Salomon,
who also applied for and received an allotment of 20,000 £ 1 fully paid shares. The remaining amount of £8,782 was paid to
Salomon in cash. Salomon was the managing director and two of his sons were other directors.
•
• The company soon ran into difficulties and the debenture holders appointed a receiver and the company went into liquidation.
The total assets of the company amounted to £6050, its liabilities were £10,000 secured by debentures, £8,000 owing to
unsecured trade creditors, who claimed the whole of the company’s assets, viz., £6,050, on the ground that, as the company was a
mere ‘alias’ or agent for Salomon, they were entitled to payment of their debts in priority to debentures. They further pleaded
that Salomon, as a principal beneficiary, was ultimately responsible for the debts incurred by his agent or trustee on his behalf.

• framed two issues:
• (1) What right, title or interest have the petitioners in the property in
dispute?
• (2) What right, title or interest has the notified Sikh Gurdwara in the
property in dispute.

2. Limited Liability
• “The privilege of limited liability for business debts is one of the principal advantages of
doing business under the corporate form of organization.” The company, being a
separate person, is the owner of its assets and bound by its liabilities. The liability of a
member as a shareholder extends to the contribution to the capital of the company up
to the nominal value of the shares held and not paid by him. Members, even as a whole,
are neither the owners of the company’s undertakings nor liable for its debts. In other
words, a shareholder is liable to pay the balance, if any, due on the shares held by him,
when called upon to pay and nothing more, even if the liabilities of the company far
exceed its assets. This means that the liability of a member is limited.
•
• For example, if A holds shares of the total nominal value of `1,000 and has already paid
`500/- (or 50% of the value) as part payment at the time of allotment, he cannot be
called upon to pay more than ` 500/-, the amount remaining unpaid on his shares. If he
holds fully-paid shares, he has no further liability to pay even if the company is declared
insolvent. In the case of a company limited by guarantee, the liability of members is
limited to a specified amount of the guarantee mentioned in the memorandum.

• Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1
Ch.D. 728 at 731, has observed: ‘The statutes relating to limited
liability have probably done more than any legislation of the last fifty
years to further the commercial prosperity of the country. They have,
to the advantage of the investor as well as of the public, allowed and
encouraged aggregation of small sums into large capitals which have
been employed in undertakings of “great public utility largely
increasing the wealth of the country”.

• Exceptions to the principle of limited liability
• Where a company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or
information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an
application made to it, on being satisfied that the situation so warrants, direct that liability of the members of such company shall be unlimited.
[Section 7(7)(b)(Section 7(7) is yet to be notified]
• Further under section 339(1), wherein the course of winding up it appears that any business of the company has been carried on with an intent to
defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal may declare the persons who were knowingly
parties to the carrying on of the business in the manner aforesaid as personally liable, without limitation of liability, for all or any of the
debts/liabilities of the company.[Section 339 is yet to be notified]
• When the company is incorporated as an Unlimited Company under Section 3(2)(c) of the Act
• Under Section 35(3), where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any
other person or for any fraudulent purpose, every person who was a director at the time of issue of the prospectus or has been named as a director in
the prospectus or every person who has authorised the issue of prospectus or every promoter or a person referred to as an expert in the prospectus
shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person
who subscribed to the securities on the basis of such prospectus.
• As per section 75(1), where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time
specified or such further time as may be allowed by the Tribunal and it is proved that the deposits had been accepted with intent to defraud the
depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without
prejudice to other liabilities, also be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have
been incurred by the depositors.
• Section 224(5) states that where the report made by an inspector states that fraud has taken place in a company and due to such fraud any director,
key managerial personnel, another officer of the company or any other person or entity, has taken undue advantage or benefit, whether in the form
of an asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for appropriate orders with
regard to disgorgement of such asset, property, or cash, and also for holding such director, key managerial personnel, officer or other person liable
personally without any limitation of liability.

3. Perpetual Succession
• An incorporated company never dies, except when it is wound up as per law. A company, being a separate
legal person is unaffected by death or departure of any member and it remains the same entity, despite the
total change in the membership. A company’s life is determined by the terms of its Memorandum of
Association. It may be perpetual, or it may continue for a specified time to carry on a task or object as laid
down in the Memorandum of Association. Perpetual succession, therefore, means that the membership of a
company may keep changing from time to time, but that shall not affect its continuity.
•
• The membership of an incorporated company may change either because one shareholder has
sold/transferred his shares to another or his shares devolve on his legal representatives on his death or he
ceases to be a member under some other provisions of the Companies Act. Thus, perpetual succession
denotes the ability of a company to maintain its existence by the succession of new individuals who step into
the shoes of those who cease to be members of the company. Professor L.C.B. Gower rightly mentions,
•
• “Members may come and go, but the company can go on forever. During the war, all the members of one
private company, while in general meeting, were killed by a bomb, but the company survived — not even a
hydrogen bomb could have destroyed it”.

4. Separate Property
• A company is a legal person and entirely distinct from its members, is
capable of owning, enjoying and disposing of property in its own
name. The company is the real person in which all its property is
vested, and by which it is controlled, managed and disposed of. Their
Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin,
A.I.R. 1960 Mad. 43 held that “no member can claim himself to be
the owner of the company’s property during its existence or in its
winding-up”. A member does not even have an insurable interest in
the property of the company.

5. Transferability of Shares
The capital of a company is divided into parts, called shares. The shares are said to be movable property and, subject to certain
conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a company. When the joint stock
companies were established, the object was that their shares should be capable of being easily transferred, [In Re. Balia and San
Francisco Rly., (1968) L.R. 3 Q.B. 588].
Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares held by the members are movable
property and can be transferred from one person to another in the manner provided by the articles. If the articles do not provide
anything for the transfer of shares and the Regulations contained in Table “F” in Schedule I to the Companies Act, 2013, are also
expressly excluded, the transfer of shares will be governed by the general law relating to the transfer of movable property.
A member may sell his shares in the open market and realize the money invested by him. This provides liquidity to a member (as he
can freely sell his shares) and ensures stability to the company (as the member is not withdrawing his money from the company). The
Stock Exchanges provide adequate facilities for the sale and purchase of shares.
Further, as of now, in most of the listed companies, the shares are also transferable through Electronic mode i.e. through Depository
Participants in dematerialized form instead of physical transfers.
However, there are restrictions with respect to transferability of shares of a Private Limited Company which are dealt in chapter 2.

6. Common Seal
Upon incorporation, a company becomes a legal entity with perpetual succession and a
common seal. Since the company has no physical existence, it must act through its agents
and all contracts entered into by its agents must be under the seal of the company. The
Common Seal acts as the official signature of a company. The name of the company must
be engraved on its common seal. A rubber stamp does not serve the purpose. A document
not bearing a common seal of the company, when the resolution passed by the Board, for
its execution requires the common seal to be affixed is not authentic and shall have no
legal force behind it. However, a person duly authorized to execute documents pursuant to
a power of attorney granted in his favour under the common seal of the company may
execute such documents and it is not necessary for the common seal to be affixed to such
documents.
The person, authorized to use the seal, should ensure that it is kept under his personal
custody and is used very carefully because any deed, instrument or a document to which
seal is improperly or fraudulently affixed will involve the company in legal action and
litigation.

7. Capacity to sue or be sued
A company is a body corporate, can sue and be sued in its own name. To sue means to institute
legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against
the company are to be instituted in its name. Similarly, the company may bring an action against
anyone in its own name.
A company’s right to sue arises when some loss is caused to the company, i.e. to the property or the
personality of the company. Hence, the company is entitled to sue for damages in libel or slander as
the case may be [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj)]. A
company, as a person distinct from its members, may even sue one of its own members. A company
has a right to seek damages where a defamatory material published about it, affects its business.
Where video cassettes were prepared by the workmen of a company showing, their struggle against
the company’s management, it was held to be not actionable unless shown that the contents of the
cassette would be defamatory. The court did not restrain the exhibition of the cassette. [TVS
Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37]. The company is not liable for
contempt committed by its officer. [Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P)
Ltd., (2006) 129 Com Cases 192 Mad].

8. Contractual Rights
A company, being a legal entity different from its members, can enter into contracts for the
conduct of the business in its own name. A shareholder cannot enforce a contract made by
his company; he is neither a party to the contract nor be entitled to the benefit derived
from of it, as a company is not a trustee for its shareholders. Likewise, a shareholder
cannot be sued on contracts made by his company. The distinction between a company
and its members is not confined to the rules of privity but permeates the whole law of
contract. Thus, if a director fails to disclose a breach of his duties towards his company, and
in consequence, a shareholder is induced to enter into a contract with the director on
behalf of the company which he would not have entered into had there been disclosure,
the shareholder cannot rescind the contract.
Similarly, a member of a company cannot sue in respect of torts committed against the
company, nor can he be sued for torts committed by the company. [British Thomson-
Houston Company v. Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore, the company as
a legal person can take action to enforce its legal rights or be sued for breach of its legal
duties. Its rights and duties are distinct from those of its constituent members.

9. Limitation of Action
A company cannot go beyond the power stated in its Memorandum of
Association. The Memorandum of Association of the company
regulates the powers and fixes the objects of the company and
provides the edifice upon which the entire structure of the company
rests. The actions and objects of the company are limited within the
scope of its Memorandum of Association. In order to enable it to carry
out its actions without such restrictions and limitations in most cases,
sufficient powers are granted in the Memorandum of Association. But
once the powers have been laid down, it cannot go beyond such
powers unless the Memorandum of Association, itself altered prior to
doing so.

10 Separate Management
As already noted, the members may derive profits without being
burdened with the management of the company. They do not have
effective and intimate control over its working and they elect their
representatives as Directors on the Board of Directors of the company
to conduct corporate functions through managerial personnel
employed by them. In other words, the company is administered and
managed by its managerial personnel.

11. Voluntary Association for Profit
A company is a voluntary association for profit. It is formed for the
accomplishment of some stated goals and whatsoever profit is gained
is divided among its shareholders or saved for the future expansion of
the company. Only a Section 8 company can be formed with no profit
motive.

11. Termination of Existence
A company, being an artificial juridical person, does not die a natural
death. It is created by law, carries on its affairs according to law
throughout its life and ultimately is effaced by law. Generally, the
existence of a company is terminated by means of winding up.
However, to avoid winding up, sometimes companies adopt strategies
like reorganization, reconstruction, and amalgamation.

Distinction between Company and Partnership
• (1) A company is a distinct legal person. A partnership firm is not distinct from the several persons who form the partnership.
•
• (2) In a partnership, the property of the firm is the property of the individuals comprising it. In a company, it belongs to the company and not to the individuals who are its members.
•
• (3) Creditors of a partnership firm are creditors of individual partners and a decree against the firm can be executed against the partners jointly and severally. The creditors of a company can proceed only against the company and not against its members.
•
• (4) Partners are the agents of the firm, but members of a company are not its agents. A partner can dispose of the property and incur liabilities as long as he acts in the course of the firm’s business. A member of a company has no such power.
•
• (5) A partner cannot contract with his firm, whereas a member of a company can.
•
• (6) A partner cannot transfer his share and make the transferee a member of the firm without the consent of the other partners, whereas a company’s share can ordinarily be transferred.
•
• (7) Restrictions on a partner’s authority contained in the partnership contract do not bind outsiders whereas such restrictions incorporated in the Articles are effective because the public is bound to acquaint themselves with them.
•
• (8) A partner’s liability is always unlimited whereas that of a shareholder may be limited either by shares or a guarantee.
•
• (9) A company has perpetual succession, i.e. the death or insolvency of a shareholder or all of them does not affect the life of the company, whereas the death or insolvency of a partner dissolves the firm, unless otherwise provided.
•
• (10) A company may have any number of members except in the case of a private company which cannot have more than 200 members (excluding past and present employee members). In a public company, there must not be less than seven persons in a private company not
less than two. Further, a new concept of one person company has been introduced which may be incorporated with only one person.
•
• (11) A company is required to have its accounts audited annually by a chartered accountant, whereas the accounts of a firm are audited at the discretion of the partners.
•
• (12) A company, being a creation of law, can only be dissolved as laid down by law. A partnership firm, on the other hand, is the result of an agreement and can be dissolved at any time by agreement among the partners.

Distinction between Company and Hindu
Undivided Family Business
• A company consists of heterogeneous (varied or diverse) members,
whereas a Hindu Undivided Family Business consists of homogenous
(unvarying) members since it consists of members of the joint family itself.
• In a Hindu Undivided Family business, the Karta (manager) has the sole
authority to contract debts for the purpose of the business, other
coparceners cannot do so. There is no such system in a company.
• A person becomes a member of a Hindu Undivided Family business by
virtue of birth. There is no provision to that effect in the company.
• No registration is compulsory for carrying on business for gain by a Hindu
Undivided Family even if the number of members exceeds twenty
[Shyamlal Roy v. Madhusudan Roy, AIR 1959 Cal. 380 (385)]. Registration of
a company is compulsory.

DOCTRINE OF LIFTING OF OR PIERCING THE
CORPORATE VEIL
• The separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only. Where a
fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the
corporate personality. The Court will break through the corporate shell and apply the principle/doctrine of what is called “lifting of
or piercing the corporate veil”.
•
• The Court will look behind the corporate entity and take action as though no entity separate from the members existed and make
the members of the controlling persons liable for debts and obligations of the company
•
• The corporate veil is lifted when in defense proceedings, such as for the evasion of tax, an entity relies on its corporate personality
as a shield to cover its wrongdoings. [BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai [1996] 86 Com Cases 371 (Bom).]
•
• However, the shareholders cannot ask for the lifting of the veil for their purposes. This was held in Premlata Bhatia v. Union of
India (2004) 58 CL 217 (Delhi) wherein the premises of a shop were allotted on a license to the individual licensee. She set up a
wholly owned private company and transferred the premises to that
•
• company without Government consent. She could not remove the illegality by saying that she and her company were virtually the
same people.

Companies Act 1956 –II

Syllabus
• Share Capital, Types of shares, Allotment and Transfer and Purchase
by a company of its own shares. Company Management:
Appointment and Removal of Directors. Rights and Duties of directors

Meetings

Syllabus
• Statutory Meetings, Basic knowledge of various types of resolutions.
Winding up by court and voluntary winding up.

Companies act 1956 i

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