The Companies Act, 2013
The Companies Act, 2013
The Companies Act, 2013
ACT,2013
• Introduction
The Companies Act,2013 has been enacted to consolidate and
amendment the law relating to the companies. The changes in the
existing company law(the companies act 1956) where
indispensable due to change in the national and international
economic environment and for expansion and growth of economy
of our country, the central government decided to replace the
companies act 1956 with a new legislation to meet the changed
national and international economic environment and further
accelerate the expansion and growth of our country.
The word Company is derived from Latin word ’companies’ it
means a group of persons who took their need together.
• Definition
Section 2(20) of the Companies Act 2013 defines the term
company ‘company means a company incorporated under this act
or under any previous company law’. Company is also defined as ‘a
voluntary incorporated association which is an artificial person
created by law with limited liability having a common seal and
perpetual succession ’.
Lord Justice Lindley defines a company as ‘by a company is
meant an association of many persons who contribute money or
money’s worth to a common stock and employ it for a common
purpose. The common stock so contributed is denoted in money
and is the capital of the company. The persons who contribute to it
or to whom it belongs are members. The proportion of capital to
which each member is entitled is his share.’
• Characteristics of a Company
1. Voluntary association :- A company is a voluntary association of
persons who have come together for a common object with
generally is to earn profit.
2. Incorporated association :- A company comes into existence on
incorporation under the companies Act.
3. Independent legal Entity :- A company is an artificial person
created by law though it has no body nor a soul the law
recognizes it as a person and hence enjoys almost all the rights
of a person.
4. Separate property :- A Company is capable of owning, enjoying
and disposing of property in its own name.
5. Legal restrictions :- The formation, working and winding up of a
company are strictly governed by laws , rules and regulations.
6. Perpetual Succession :- A company has a perpetual succession
7. Common Seal :- The seal of a company is of great importance. It
acts as the official mark of the company. Anything done under an
agreement between the company and the third party requires
recognition of the company in the form of an official seal.
8. Share Capital :- A Company mobilises its capital by selling its
shares. Those persons who buy these shares becomes share
holders and becomes members in it.
9. Limited Liability :- In the case of a company limited by shares
the liability of the individual member is limited in the sense that is
confined to the amount of money which a member has contributed
or has agreed to contribute to the common capital fund.
10. Transferability of Shares :- Shares in a company are
transferable and can be sold or purchased in the share market. In
a public company shares are freely transferred.
11. Ownership and Management :- The owners of a company are
its shareholders. The affairs of the company are managed by their
COMPANY DISTINGUISHED FROM
PARTNERSHIP
• A company is the creation of law. It is registered under
Companies Act, while partnership is created by an agreement
between competent parties.
• Registration of a company is compulsory while it is not
compulsory for a firm.
• Minimum two persons and maximum fifty constitute a Private
Limited Company while minimum seven and maximum unlimited
constitute a Public Limited Company. But minimum two persons
constitute a partnership.
• A company has a separate legal existence of its own and is
considered as a separate person from its members. A firm has no
individual legal status.
• Property of the company belongs to the company. But property of
• Management of a company vests in the Board of Directors
elected by the shareholders. In Partnership firm, partners
manage the affairs of the firm.
• The liability of shareholders is usually limited. Partners of the
firm are liable to unlimited extent.
• In the case of companies, creditors are only the creditors of the
company and not of individual shareholders. But creditors of the
firm are also the creditors of the partners individually.
• Death of the shareholder does not affect the existence of a
company but death of a partner may mean dissolution of
partnership.
• Accounts of a company must be audited by an Auditor. But it is
not necessary in the case of a firm.
• Shares are freely transferable in a company but a partner cannot
transfer his share without the consent of other partners.
KINDS OF COMPANIES
• Companies can be classified on the basis of :-
(1)Incorporation
(2)Liability of members
(3)Number of members
A company comes into existence when a number of persons come together with a
view to commence some business. They form an incorporated company after
complying with all requirements. An incorporated company may be (a) limited by
shares (b) limited by guarantee (c) unlimited company.
The formation of a company involves four distinct stages (a) Promotion (b)
Registration or incorporation (c) Raising of Capital (d) Commencement of
Business
PROMOTION
Promotion is the first stage in the formation of a company. In this stage, first, the
idea of carrying on a business is conceived by a person or by a group of persons
called promoters. They make detailed investigations about the workability of the
idea, the amount of capital required the operating expenses and probable
income.
• Promoter
The promoters of a company are those persons who set in motion the
machinery of law for setting up and starting company. They are the
persons who form or float of a company.
• Remuneration of Promoter
(a) A promoter is entitled to get the reimbursement of preliminary
expenses incurred by him in promoting the company.
(b) The promoter has no right to receive remuneration for high services
unless there is a contract to this effect but a promoter is entitled to be
remunerated by way of commission on the sale of his property to the
company.
(c) In some cases, the articles empower the directors to pay a specified
sum to the promoters, either as commission, profit or one time
payment.
(d) Promoters may be given fully or partly paid shares as consideration of
services
(e) Promoters may be given a commission on the shares sold.
• Liabilities of a promoter
(a) He is liable for mis-statements in the prospectus
(b) He is liable to make good the loss sustained by the company on sale
of its property
(c) He is liable to compensate any person who subscribes to the capital
of the company on account of irregular or misleading prospectus
(d) He is criminally liable under the Companies Act for breach of trust and
untrue statements made in the prospectus
(e) He may be sued for damages for breach of his fiduciary duty
(f) He is also criminally liable with imprisonment for any false statement
made in the prospectus
(g) He is liable for his auctions done with regard to the formation of the
company and to third parties for all contracts entered into on behalf
of the company prior to its incorporation.
• Functions and duties of a Promoter
(1) He settles the company’s name and ascertains that it will be accepted
by the Registrar of Companies. He also settles the details of the
company’s Memorandum and articles, nomination of directors
(2) He cannot make any profit unless the company consents. He may be
compelled to surrender the profit.
(3) He must faithfully disclose all facts relating to the property and
contracts, his interest and profit to the Board of directors or to the
share holders of the company
(4) He must see that the prospectus or statement in lieu of prospectus
does not contain any untrue or misleading statement.
• Legal position of Promoter
In the eye of law, a promoter is neither an agent nor a trustee of the
company. However for all practical purposes the promoter stands in a
fiduciary relation to the company since the company when comes into
existence usually ratifies the contracts made by the promoter with
different parties. But the promoter has to disclose fully the material facts
regarding the formation of the company.
INCORPORATION(REGISTRATION)
• Procedure for registration
The promoters have to first of all decide upon the proposed form of company as
whether it is to be a Public Company or a Private company. In case of a Public
company any seven person and in case of a Private Company any two persons
may join to form an incorporated company. They may form the company with the
company with limited or unlimited liability, limited by shares or by guarantee.
The application shall be accompanied by the following documents
1. Memorandum and Articles of Association of the company with necessary
stamp duty and filing fees according to the authorized capital of the
company.
2. Agreement if any which the company proposes to enter into with any
individual for appointment as manager
3. A statement of the nominal capital
4. A notice of the address of the registered office of the company.
5. A declaration by an Advocate of the Supreme Court or of a High Court
or attorney or a chartered accountant who is engaged in the formation of
the company.
In the case of a public company, the following further requirements are
to be complied with
i. A list of persons who have consented to act as directors
ii. A written consent of the Directors to act in that capacity
iii. An undertaking by the Directors to take up and pay for their
qualification shares
ADVANTAGES OF INCORPORATION
• It defines and formulates the • The articles merely lay down the
fundamental condition of the various means and methods by
company’s incorporations which the company desires to
including the objects for which fulfil those conditions and for
the company is formed. achieving those objects.
MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION
• It defines the powers of the • These create a relationship
company. It is a contract between between the company and its
the company and outside person members as well as members
dealing with it or the world at interse
large.
(b) Set out the following reports for the purposes of the financial information
(i) Reports by the auditors of the company with respect to its profits and losses and
assets and liabilities and such other matters as may be prescribed.
(ii) Reports relating to profits and losses for each of the five financial years
immediately preceding the financial year of the issue of prospectus
(iii) Reports made by the auditors upon the profits and losses of the business of the
company for each of the five financial years immediately preceding issue and assets
and liabilities of its business on the last date to which the accounts of the business
were made up.
(iv) Reports about the business or transaction to which the proceeds of the
securities are to be applied directly or indirectly.
(c)Make a declaration about the compliance of the provisions of this act and a
statement to the effect that nothing in the prospectus is contrary to the provisions
of this Act
(d) State such other matters and set out such other reports, as may be prescribed
(2) Exception :- The above stated section does not apply to
(a) To the issue to existing members or debenture-holders of a company, of a
prospectus or form of application relating to shares in or debentures of the
company
(b) To the issue of a prospectus or form of application, relating to shares or
debentures which are, or are to be in all respects uniform with shares or
debentures previously issued.
(3) Except the exceptions, the provisions of sub-section shall apply to a prospectus
or a form of application whether issued on or with reference to the formation of a
company.
(4) No requirement of issuing prospectus : No prospectus shall be issued by or on
behalf of a company or in relation to an intended company unless on or before the
date of its publication.
(5) Expert not liable for the statement under the prospectus : The prospectus
issued shall not include a statement purporting to be made by an expert
(6) Prospectus to state the delivery of copy and documents to the
registrar
(7) No registration of prospectus by the registrar
(8) Time period for the issue of prospectus
(9) In contravention of the provision
Shares
The capital of the company is divided into different units of a fixed
amount which is known as share. A share is a right to a specified
amount of the share capital of a company, carrying with it certain
rights and liabilities. A share is not a sum of money ,but it is an
interest measured by a sum of money.
Different types of shares
(a)Preference shares
Preference shares are those which have a preferential right for the
payment of dividend during the lifetime of the company. They have
a preferential right for the return of capital when the company is
wound up.
A company may issue following types of preferences
1. Cumulative preference shares :- The dividend payable on these shares goes
on accumulating till it is fully paid. The holders of the cumulative preference
shares will have the right to get the predetermined rate of dividend each
year either from the profits of the year or from the following years.
2. Non-cumulative preference shares :- These are the shares on which the
dividend does not go on accumulating. If there are no profits or there are
inadequate profits in any year, these shares get no dividend or a partial
dividend.
3. Participating preference shares :- When preference shares are entitled to
participate with the equity shares in the balance of profits of a company in
addition to the stated profits they are known as Participating preference
shares.
4. Non-participating preference shares :- These shares are entitled to only a
fixed rate of dividend. They do not share in the surplus profits which go to
the equity shareholders.
5. Convertible preference shares :- The holders of these shares have a right to
convert them into equity shares within a certain period.
6. Non-convertible preference shares :- The preference shares without a right of
conversion into equity shares are called Non-Convertible preference shares.
7. Redeemable preference shares :- Ordinarily the capital that is raised
by the issue of shares can be returned by the company only on its
winding up. But a company limited by shares, if authorized by its
articles, issue preference shares are to be redeemed.
8.Irredeemable preference shares :- Irredeemable preference shares are
those which are repayable on the winding up of the company only.
(b) Equity shares
Equity shares, with reference to any company limited by shares are those
which are not preference shares. The holder of these shares are entitled
to dividend after the fixed dividend of preference share has been paid. If
no profit is left after paying dividends on preferences shares the equity
shares get no dividend.
COMPANY MEETINGS
A company expresses its will or takes its decisions through resolutions passed
at regularly convened meetings of the share holders and their elected
representatives. Company meetings are meetings of directors or share holders
or the creditors or the debenture holders, who discuss matters relating to the
affairs of the company and take decisions affecting the company.
Different kinds of meetings of a company are:
(I) Meetings of directors
(a) MEETING OF BOARD OF DIRECTORS
Directors together form a body called Board of directors. The power of
management of a company is vested in this Board of directors. So the
Directors meet in order to exercise the powers vested in them. The powers of
the directors at meetings will be determined by the Articles and Companies
act.
(b) MEETINGS OF COMMITTEES OF THE BOARD
Sometimes the directors delegate some of their powers to committees
appointed by the board from time to time. The committees of directors also
hold meetings for formulating their recommendations to the board.
(II) Meetings of members
(a) STATUTORY MEETINGS
Statutory meeting is the first general meeting of the share holders of a public
company. Every public company limited by share and having a share capital,
shall within a period of not less than one month and not more six months
from the date at which the company is entitled to commence business, hold
General Meeting of members which is called statutory meetings.
(b) ANNUAL GENERAL MEETING
Every company shall in each year hold in addition to any other meeting a
General Meeting known as Annual General Meeting. It is one of the most
important general meetings of the share holders.
(c) EXTRA ORDINARY GENERAL MEETING
Any general meeting other than Statutory and Annual General Meeting is
called an Extra Ordinary General Meeting. It is convened to transact any
urgent or extra ordinary business. Extra ordinary general meetings are held
to transact business which fall outside the usual business of an Annual
General Meeting. Authorities that can convene the extra ordinary general
meeting
• The board of directors
• Directors on requisition
• Requisitionists
• Company law tribunal
(d) CLASS MEETING
Where the share capital of the company consists of different classes of
shares, meetings of different classes of share holders may have to be called
in order to discuss matters affecting them. The most frequent case in which
class meetings are required, arises when it is proposed to alter, vary or
affect the rights of a particular class of shares.
(III) Meetings of creditors and debenture holders
(a) MEETING OF DEBENTURE HOLDERS
A meeting of debenture holders may be held for any of the following
purposes (i) varying the security of debentures (ii) modifying the rights
attached to debenture (iii) altering the rates of interest (iv) altering any
provision in the trust deed.
(b) MEETING OF CREDITORS DURING THE LIFE TIME OF THE COMPANY
When a company proposes to make any compromise or arrangement with
its orders, a meeting of the creditors may be called the company law
tribunal may order such a meeting to be called if demanded by the
company or a creditor or a shareholder.
(c) MEETINGS OF CREDITORS IN WINDING UP
When the company is wound up, a meeting of creditors may be called at
the instance of the company or the liquidator to ascertain the total amount
due by the company to its creditors and also to appoint either liquidators
for winding up the affairs of the company or a committee for inspection.
LAWS OF MEETINGS
Essential of a valid meeting are
(i) NOTICE OF MEETING
A meeting cannot be validly held unless all those who are entitled to attend it
have been communicated of the date, time, place and business of the meeting.
(ii) QUORUM
The quorum is the minimum number of members required to be present in
person before any business can be validly transacted. The quorum of a
meeting is generally fixed by the articles subject to provisions of act. If the
quorum is not present the proceedings of the meeting will not be valid.
(iii) CHAIRMAN
A chairman is the person who presides over and conducts the proceedings of a
meeting. He is the chief authority in the conduct and control of the meeting.
He should be fully conversant with the conduct of the proceedings of the
meeting.
(iv) AGENDA
Agenda means the list of business or ‘things to be done’ at the
meeting. It is prepared for all kinds of meetings in order that the
meeting may be conducted symmetrically. The agenda is generally
prepared by the secretary in consultation with the chairman of the
company.
(v) MINUTES
Minutes are the official records of the proceedings of the meetings
of a company. They contain description of the business transacted
and the decisions taken threat, in a correct and precise manner.
They represent a complete, true and correct record of the
proceedings of such meetings of the company.
(vi) MOTIONS
A motion is a proposition or a proposal put before a meeting for
discussion and decision. In other words, it is proposed resolution
or a question before the meeting. No decision on an important
(vii) INTERRUPTION OF DEBATE
When the chairman invites a debate on a motion, the debate on the original
motion is interrupted by a number of ways. Interruptions stopping the flow of
the discussion are formal or dilatory motions, amendments, points of order.
(viii) PROXY
Proxy is a personal representative of a shareholder appointed to act as his
agent in a meeting of the company. It also refers to the instrument by which a
person is appointed to act for another at a meeting of the company.
(ix) VOTING AND POLL
The object of holding meetings is to discuss some specific issues and take
decisions on them. Generally, after certain matters are discussed at large, the
decision in favor or against is taken by vote.
(x) RESOLUTIONS
Decisions of a company are made by resolutions of its members passed at
meetings of members. A resolution is the formal decision of a meeting on any
proposal before it. In the case of companies all important matters should be
decided by passing resolutions at duty convened and constituted meetings.
Directors
The persons through whom a company acts and does its business, are termed
as directors. They occupy a pivotal position in the structure of joint companies.
They are collectively called as board of directors. Board of directors is the
supreme policy framing and decision making organ of a company.
Powers of Directors
(1) General powers: The directors derive their powers and authority from two
sources the articles of association and the companies act. The articles
contains a list of powers, which can be exercised by directors. The Act lays
down that the board shall be entitled to exercise all such powers and to do
all such acts and things as the company is authorized to do.
(2) Specific powers: Apart from the general powers of management and
control, specific powers have been conferred on the board of directors. The
act not only prescribes the nature and extent of powers but also specifies
the manner in which these powers may be exercised.
(3) Powers which can be exercised only at Board’s Meetings: The following
powers can be exercised by the board only by means of resolution passed
at Board Meeting and not by circulation of resolution.
• The power to make calls on share holders in respect of money unpaid on
their shares
• The power to issue debentures
• The power to borrow moneys otherwise than on debentures
• The power to invest the funds of the company
• The power to make loans
Restrictions on the board of directors
• Sell, give on lease or otherwise dispose of the whole or substantially the
whole of the company’s undertaking
• Remit or give time for repayment of a loan due from a director
• Invest compensation received by the company in respect of the
compulsory acquisition of any undertakings or properties used for such
undertakings, in securities, other than the trust securities
• Borrow money in excess of the paid-up capital and reserve fund of the
company
• Contribute to any char
LIFTING OF CORPORATE VEIL
Once the company is incorporated it assumes a distinct existence apart from
its members. This is a protection given to the company and it is a veil to the
company. The simple meaning of this principle of lifting corporate veil is that
the appropriate court would not hesitate to lift the legal protection granted to
a company if that legal device is made to cover some illegitimate or
fraudulent activity on the part of the company. The various cases in which
corporate veil has been lifted for the purpose of investigating, are as follows
(1) For protection of revenue: The courts may ignore the corporate entity of a
company where it is used for tax evasion or to circumvent tax obligation.
(2) For prevention of fraud or improper conduct : The legal personality of a
company may also be disregarded in the interest of justice where the
formation of the company has been used for some fraudulent purpose like
defrauding creditors or defeating law.
(3) When the company is a sham : The courts also lift veil where the
company is mere cloak or sham ie, where the device of incorporation is
used for some illegal or improper purpose.
(4) For avoiding legal obligation : Where the use corporate veil is made to avoid
to legal obligation, the court may disregard the legal personality of the company
and proceed on assumption as if no company existed.
(5) For acting as agent or trustee of the share holders : Where a company is an
agent for its shareholders, share holders are liable for the acts of the company.
(6) For assuming the enemy character: A company assumes an enemy character
when it is trading with an alien enemy or when the persons managing the affairs
of the company are residents in the enemy country or under the control of
enemies. In such a case, court may disregard the corporate veil and declare the
company to be an enemy company.
(7) For avoidance of welfare legislation: It is the duty of the courts in every case
where there is avoidance of welfare legislation, to discover the true state of
affairs.
(8) For protecting public policy: The courts invariably lift the corporate veil to
protect public policy and prevent transactions contrary to public policy.
(9) For investigating into the affairs of the company: The corporate veil may also
be lifted (a) to investigate the lawful object of the company (b) to investigate
mismanagement and oppression by the majority (c) to investigate into the
affairs where there exists a tendency to create monopoly.
(10) When membership has been reduced: If at any time the number of
members of a company is reduced below 2 in the case of a private
company or below 7 in the case of a public company and it carries on
business for more than 6 months while the number is so reduced, every
member who knows of the fact, will become liable for all the debts of the
company contracted during that time.
Doctrine of ‘ultravires’
The term ultra means beyond and vires means powers. Therefore
ultravires the company means beyond the power of a company. The
expression ultravires i.e. beyond powers denotes a very important legal
principle applicable to companies. If any act is done which is not
authorized by the objects clause in the Memorandum of Association such
act shall not be valid and is said to be ultra-vires of the company. Such
acts are void and cannot be validated even by the common consent of
the members in the general meeting. It has been held in a number of
decisions that, “where a company does an act which is ultra-vires no
legal relationship or effect ensues therefrom. Such an act is absolutely
void and cannot be ratified even if all the shareholders agree.” This rule
is obviously made applicable in company matters in order to protect
share holders and the public at large who deal with the company.
WINDING UP OF COMPANIES
Winding up of a company is the process of putting an end to its life. The assets are
distributed among the creditors and shareholders in the manner laid down in the act.
The process of winding up involves the realization of the assets, payment of the liability
to creditors and distribution of surplus.
Modes of winding up of a company
1.Winding up by the tribunal
Winding up of a company by an order of the tribunal is also known as Compulsory
Winding
• Special resolution
It is the share holders who had formed themselves into the company and therefore it is
for them to dissolve the company. So if the company by a special resolution resolved
that it may be wound up by the tribunal, the tribunal may pass a winding up order.
• Failure in holding statutory meeting
The company must hold statutory meeting within 6 months from the date on which the
company is entitled to commence its business. Before holding this meeting, the
statutory report by the directors must also be delivered to the registrar for registration.
• Failure to commence business or suspends its business
If a company does not commence its business within a year from its
incorporation or suspends its business for a whole year, the tribunal may
order for its winding up.
• Reduction of membership below minimum
When the number of members is reduced below 7 in the case of a public
company, and below 2 in the case of a private company the tribunal may
order winding up of the company. An order for winding up under this clause
is rare.
• Inability to pay debts
Tribunal may order for winding up of a company if it is unable to pay its
debts.
• Just and equitable
The tribunal may consider it just and equitable that the company should be
wound if it is of that opinion. The tribunal will consider such grounds to
wind up a company for just and equitable reasons, as are not covered by
the previous clauses.
• Default in filling Balance sheet, profit and loss account or annual return
The tribunal may order for winding up, if the company has made a
default in filling with the Registrar its Balance sheet, profit and loss
account or Annual returns for any five consecutive years.
• Acted against sovereignty and integrity of India
If the company has acted against the sovereignty and integrity of India,
the security of the State, public order, decency or morality , the Tribunal
may order for its winding up.
• Sick industrial company
If the tribunal is of opinion that the company should be wound up under
the circumstances specified, the tribunal may order for its winding up.