Unit IV: Companies Act Definition

Companies Act

The Companies Act is a law that governs the registration, regulation, and management of companies in India.

✅ Current Act:

• The Companies Act, 2013 (replaced the Companies Act, 1956)
• It came into effect on 1st April 2014 and aims to improve corporate governance, transparency, and ease of doing business in India.

🧾 Definition of a Company (Sec. 2(20) of Companies Act, 2013)

“A company means a company incorporated under this Act or under any previous company law.”

 Characteristics of a Company

Kinds of Companies

Steps in Formation of a Company

The formation of a company involves the following 4 stages:

1. Promotion

• First step where the idea of a company is developed.
• Promoter identifies business opportunity, arranges resources, prepares documents.

📌 Example: Ratan Tata as a promoter for Tata Consultancy Services.

2. Incorporation (Registration)

Company gets registered under Companies Act by submitting necessary documents to Registrar of Companies (ROC).

Documents needed

• Memorandum of Association (MOA)
• Articles of Association (AOA)
• Declaration by professionals
• ID/address proofs of directors/shareholders

✅ Result: Certificate of Incorporation is issued → Company legally comes into existence.

📌 Example: Flipkart registered as a private company with ROC in Bangalore.

3. Capital Subscription (Only for Public Companies)

• Company invites public to subscribe shares through prospectus.
• Opens a bank account, receives applications and minimum subscription.

📌 Example: Zomato’s IPO where public subscribed to its shares.

4. Commencement of Business

• Private Company: Can start business right after incorporation.
• Public Company: Needs to obtain Certificate of Commencement of Business.

📌 Example: A public company cannot start operations unless it gets this certificate.

Summary Table

Memorandum of Association (MOA)

The MOA is the charter document of a company. It defines the company’s scope of activities, powers, and relationship with the outside world.

🔸 Purpose

• Tells what the company can do and what it cannot.
• Limits the powers of the company.
• Helps investors, creditors, and others understand the objectives of the company.

🧾 Contents of MOA (6 Clauses):

Example Use: Before investing, an investor reads the MOA to check whether the company is allowed to operate in a particular sector.

Articles of Association (AOA)

The AOA contains the internal rules and regulations for managing the company’s day-to-day affairs.

🔸 Purpose

• Acts like the rulebook for internal management.
• Governs the relationship between shareholders and company.

🧾 Key Contents of AOA

Example Use: The AOA may say that board meetings must be held once every 3 months, and decisions require 2/3rd majority.

Prospectus

A Prospectus is a formal document issued by a public company to invite the public to buy its shares or debentures.

🔸 Purpose

• Gives full disclosure to the public about company details.
• Ensures transparency before collecting money from the public.

🧾 Contents of a Prospectus:

Types of Prospectus

Important

Issuing a prospectus with false or misleading information is a punishable offense under the Companies Act.

✅ Summary Table

Directors 

A director is a person appointed to the Board of Directors of a company to manage its affairs. They act as agents, trustees, and officers of the company.

Appointment of Directors

📋 As per the Companies Act, 2013, directors can be appointed in the following ways:

Powers of Directors

Directors get powers through the Companies Act and Articles of Association.

🧾 Statutory Powers (Sec 179):

Duties of Directors

👉 As per Section 166 of Companies Act, 2013, directors must:

Liabilities of Directors

Directors can be liable in the following ways:

🔸 Civil Liabilities

• For breach of duty or negligence.
• Refund of illegal dividends or wrongful loss to the company.

🔸 Criminal Liabilities

• For fraud, misstatement in prospectus, or non-compliance.
• Penalty or imprisonment under various sections.

📌 Example: If a director approves a misleading prospectus, they may be punished under Section 34.

Meetings and Resolutions

✅ Types of Meetings

Frequency:

• First board meeting: Within 30 days of incorporation
• Minimum 4 board meetings per year (one every 120 days)
• AGM: Every year within 6 months of financial year-end

✅ Types of Resolutions:

Quick Summary Chart

Auditor

An auditor is a qualified professional (usually a Chartered Accountant) who checks and verifies the financial records of a company to ensure they are true and fair.

📌 Appointment of Auditor (Sec 139 of Companies Act, 2013)

Rights of Auditor (Sec 143)

Liabilities of Auditor

🔸 Civil Liabilities:

If found guilty of negligence or misrepresentation, the auditor must compensate for loss caused to the company or shareholders.

🔸 Criminal Liabilities

• If auditor makes false statements deliberately in audit reports:
• Fine: Minimum ₹1 lakh, up to ₹25 lakh
• Imprisonment: Up to 1 year
• Liable under Section 447 for fraud (includes jail and penalties).

📌 Example: If an auditor ignores a fraud in the company and shareholders lose money, the auditor can be sued for negligence or jailed if fraud was intentional.

Modes of Winding Up of a Company

Winding up means closing a company and distributing its assets to pay off liabilities.

✅ Main Modes of Winding Up under Companies Act, 2013

Quick Summary Table