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

The Companies Act defines the legal structure, formation, and management of companies in India. It ensures businesses follow proper corporate rules and maintain transparency in operations. Companies must also follow the Consumer Protection Act to safeguard customer rights and maintain fair business practices.