MODULE – 5

THE COMPANIES ACT, 1956 Amending and Consolidating Act / not exhaustive/ governed by

Common Law Amendment Act 2000, enforceable from Jan 01 -> strengthen

corporate governanceChanges1) Makes the Board of Directors an accountable and responsible

organ of company 2) Protection of small share holders and small depositors3) Minimum capital requirement for public and private companies

has been prescribed4) SEBI (Securities Exchange Board of India) can prosecute and

penalize Companies for financial irregularities.5) Introduction of postal ballot system of passing regulations6) Directorship reduced from 20 to 157) Concept of deemed public companies, has been removed, trust

holdings and appointment of public trustees8) The period of distributing declared dividends reduced from 40

to 30 days9) Companies with Rs. Ten lakhs capital without Company

Secretary should submit a Secretarial Compliance Certificate from a Company Secretary of whole time practice.

10) Private circulation of prospectus or offer document to more than 50 persons to be a public issue

11) Restrictions on directors of a Public Company to be appointed in other Public Companies

12) Shareholder can’t be appointed as auditor of Company

Judicial Activism – Supreme Court – Better protection of share holders and creditors.

CORPORATE PERSONALITY

DEFINITION OF COMPANYCompany - No legal or Technical Meaning

1. COMPANIES ACT - “A Company formed and registered under Companies Act” - Sec. 3(1)

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2. COMMON LAW - “A Company is a ‘Legal Person’ or ‘Legal Entity’ and capable of surviving beyond the lives of its members.

‘Like any juristic person a company is legally an entity apart from its members, capable of rights and duties of its own, and endowed with perpetual succession’.

- A legal device to achieve a purpose Therefore,a) Company is a means of co-operation in the conduct of an

enterprise.b) Corporate device is one form of Associated Enterprisec) An intricate, centralised, economic administrative structure run by

Professional Managers who hire capital from the investor.

- 2 or more persons

- Company and Partnershipi) Greater Capital Mobilizationii) Limits Personal Liability

- Companies are the structural framework of modern business

EVOLUTION OF COMPANIESEngland

Commercial Revolution Body corporate by Royal Charter - 17th and 18th Century Bubbles Act of 190 -> Promoting Companies illegal -> Repealed in

1825 The Joint Stock Companies Act, 1844 The English Act, 1948/1985 and 1989

India Joint Stock Companies Act, 1850 Companies Act, 1956 Special Act of Parliament eg. Life Insurance Corporation of India,

1956

NATURE OF CORPORATE FORMADVANTAGES1. INDEPENDENT CORPORATE EXISTENCE - SEC. 34- A legal person / corporate personality / body corporate distinct from

its members

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- Partnership not distinct from its Partners- Case Law - Solomon .Vs. Solomon & Co.

Kondoli Tea Co. Ltd. ReDhulia - Amalner Motor Transport Ltd. .Vs.R.R. Dharamsi

2. LIMITED LIABILITY - Shareholder liable only on the nominal value of shares- Limits personal risk3. PERPETUAL SUCCESSION- Company never dies- Like a River- Members may come and go, but Company can go on forever4. SEPARATE PROPERTY

Walton. J - The property of the Company is not the property of shareholders, it is the property of the Company

5. TRANSFERABLE SHARES- Sec. 82 - The Shares and Debentures or other interest of any

member in a Company shall be moveable property, transferable in the manner provided by the Articles of the Company

6. CAPACITY TO SUE AND BE SUED- Can sue and be sued in its own name- Criminal complaint- Defamation- Infringement of privacy7. PROFESSIONAL MANAGEMENT- Independent functioning of Managers assured as there is no human

employer8. FINANCES- Raise Capital by Public Subscription

DISADVANTAGES1. LIFTING THE CORPORATE VEIL- Some persons are benefitting behind this legal fiction - Case Law - Lee .Vs. Lee’s Air Farming Ltd. - Master and

Servant at the same time- Conspiracya. Determination of Character- Case Law - Diamler Co. .Vs. Continental Tyre & Rubber Co.

Peoples Pleasure Park Co. .Vs. Rohlederb. For Benefit of Revenue- Case Law - Dinshaw Maneckjee Petit Re

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- Works like a Boomerangc. Fraud or Improper Conduct- Formed to defeat or Circumvent Law- Case Law - Gilford Motor Co. .Vs. Horned. Government Companies- A Government Company not an Agent of Government- Except when performing Government of sovereign and not

commercial functions- Where no functioning autonomy is granted2. FORMALITY AND EXPENSE- Expensive Affair- Lots of formalities- Administration as per provisions of Act- Formalities with Registrar3. COMPANY NOT A CITIZEN- Under Citizenship Act or Constitution Part - II- Case Law - State Trading Corporation of India Ltd. .Vs. CTO- Just as you cannot marry a Company- Can claim protection of fundamental rights- Nationality, domicile and residence - Country of Incorporation

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