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 governance
Changes
1) Makes the Board of Directors an accountable and responsible
organ of company
2) Protection of small share holders and small depositors
3) Minimum capital requirement for public and private companies
has been prescribed
4) SEBI (Securities Exchange Board of India) can prosecute and
penalize Companies for financial irregularities.
5) Introduction of postal ballot system of passing regulations
6) Directorship reduced from 20 to 15
7) Concept of deemed public companies, has been removed, trust
holdings and appointment of public trustees
8) The period of distributing declared dividends reduced from 40
to 30 days
9) 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 COMPANY
Company - 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 Enterprise
c) An intricate, centralised, economic administrative structure run by
Professional Managers who hire capital from the investor.

- 2 or more persons

- Company and Partnership

i) Greater Capital Mobilization
ii) Limits Personal Liability

- Companies are the structural framework of modern business

EVOLUTION OF COMPANIES
England
 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 Repealed in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 FORM

ADVANTAGES
1. INDEPENDENT CORPORATE EXISTENCE - SEC. 34

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- A legal person / corporate personality / body corporate distinct from
its members
- Partnership not distinct from its Partners
- Case Law - Solomon .Vs. Solomon & Co.
Kondoli Tea Co. Ltd. Re
Dhulia - Amalner Motor Transport Ltd. .Vs.
R.R. Dharamsi

2. LIMITED LIABILITY
- Shareholder liable only on the nominal value of shares
- Limits personal risk
3. PERPETUAL SUCCESSION
- Company never dies
- Like a River
- Members may come and go, but Company can go on forever
4. 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 privacy
7. PROFESSIONAL MANAGEMENT
- Independent functioning of Managers assured as there is no human
employer
8. FINANCES
- Raise Capital by Public Subscription

DISADVANTAGES
1. 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
- Conspiracy
a. Determination of Character
- Case Law - Diamler Co. .Vs. Continental Tyre & Rubber Co.
Peoples Pleasure Park Co. .Vs. Rohleder

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b. For Benefit of Revenue
- Case Law - Dinshaw Maneckjee Petit Re
- Works like a Boomerang
c. Fraud or Improper Conduct
- Formed to defeat or Circumvent Law
- Case Law - Gilford Motor Co. .Vs. Horne
d. 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 granted
2. FORMALITY AND EXPENSE
- Expensive Affair
- Lots of formalities
- Administration as per provisions of Act
- Formalities with Registrar
3. 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