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Frequently Asked Questions - Company Law

What do you mean by Company?
Company means an association of Persons formed and Registered under the Companies Act, 1956 for doing the business activity to get the profits or gain out of it.

Who can form a Company?
Any individual person and artificial persons like company can form a Company Person resident outside India, non-resident Indian, persons of Indian origin, foreign nationals, foreign companies, bodies corporates can also form a company subject to certain compliances of the act.

How many persons are required to form the Company? What are minimum number and Maximum Number of Members Company can have?
In case of Private Company two or more persons and incase of Public Company seven or more persons can form a Company.
Minimum number of Members is 2 in case Private Company and 7 in case of Public Company.
Maximum Number is 50 in case of Private Company and unlimited in case of Public Company.

What do you mean by Promoters?
A promoter is one who actively involved in the formation and incorporation of the Company and who performs the preliminary duties necessary to bring a Company into being and float it i.e. who brings the Company into existence.

What are the Types of the Companies?
Following are the Types of the Companies:
  • Public limited Company
  • Private Limited Company.
  • The association not for Profit or non-trading Companies (Section 25 companies).
  • Producer Company.
Public Companies or Private Companies can be either Company limited by shares or Company limited by guarantee or company limited by guarantee and having share capital.

What is a Private Company?
Section 3 (1) (iii) of The Companies Act, 1956 defines Private Company as Private Company means a company which has minimum Paid Up Capital of Rs. One Lacs or such higher Paid up capital as may
  • restricts the right to transfer Shares
  • limits the number of its members to fifty.
  • Prohibits any invitation to the Public to subscribe for any shares in, or debentures of, the Company
  • Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives
What is a Public Company?
Section 3(1) (iv) of The Companies Act, 1956 defines Public Company as a Company which a) is not a Private Company, b) has a minimum Paid up capital of Rs.5.00 Lakhs or such higher paid-up capital, as may be prescribed, C) is a private company which is a subsidiary of a company which is not a Private Company.

What is the difference between Limited Company and a Partnership firm?
Partnership firm does not acquire legal personality on its registration. But Company does acquire legal personality on its incorporation. In case of Partnership firm liability of Partners is unlimited. But in case of company, Shareholders liability is limited. The Property of the Firms belongs to the partners and they are collectively entitled to it, whereas in the case of Company, the property belongs to the Company and not to its members. Limited company has got the perpetual succession, easy transferability, common seal etc. Limited Company is an artificial person it can sue and be sued.

What about Liability?
Liability in case of limited Company is restricted upto an amount of Shares value contributed by its member.. If the Value of Shares is fully paid, there is no further liability upon the member. Example: A Ltd. issued 1000 shares of Rs.10/- each. Mr. XYZ purchased 100 shares of Rs. 10/- each by paying Rs. 1000. Subsequently company suffered huge losses was required to pay a liability of Rs. 15,00,000/- In this case Mr. Xyz will not be required to pay anything to the Company as he has already contributed his full share value.

When a Private Company is Suitable?
A Private Company is ideally suited for small business or family organizations where capital requirements are limited and which promoters, their friends and relatives can contribute.

Who is a Director?
The human agency through whom the Company acts and by whom its affairs are managed are called Directors and collectively the Board of Directors. The Board of Directors the Company constitute the highest policy making body of a Company. The Board is vested with the supreme powers of management of a Company.

What powers does the Board of directors have?
Board of directors can carry out the entire business of the Company. They have got various powers to run and operate the Company. The powers are subject to the provisions of Articles of Association of the Company and provisions of The Companies Act, 1956. The Board of Directors of a Company shall be entitled to exercise all such powers and to do all such things as the Company is authorised to exercise and do.

Who is the owner of the Company?
Shareholders of the Company are the owners.

Do the directors need to be the shareholders of the Company?
No. Board of Directors need not be the shareholders of the Company. However some Company’s articles requires the director to hold the qualification shares in the Company.

Is there any difference between the shareholders and members of the Company?
Normally the shareholders are the members of the Company or visa verse.

What do you mean by the ‘member’?
Every person who agrees in writing to become a member of a company and whose name is entered in the register of members of the Company shall be a member of the Company.

Who can be a member?
Any person competent to enter into a contract can become a member of a Company.

Can a partnership firm be a member?
A partnership firm is not a legal entity. It is merely a collection of name of the individuals who are its members. Hence it cannot be registered as a member of a Company.

Can HUF become a member?
No, but it can hold the shares in the Company on the name of its Karta.

Can a Company become the member?
Yes, since company is an legal entity it can hold the shares in another company and becomes the member. It can even be a promoter of the Company and can subscribe to the memorandum of another Company.

What are the Rights of a Member?
Following are some of the rights of the member of the Company:
  • to transfer shares,
  • to receive the notice of the general meeting.
  • to vote on resolution at general meeting.
  • to receive dividend when declared by the Company.
  • to elect directors.
  • to hold shares in his name.
What is minimum and Maximum number of Directors Company can have?
Minimum Directors incase of Public Company is three and in case of Private Company is Two Directors. Maximum Directors in case of Public Company is twelve and in case of Private Company is as prescribed by the Articles of Association.

What do you mean by Memorandum of Association?
Memorandum of Association is a document registered by the Company, which contains the fundamental provisions of Company’s constitution. It defines as well as confines the powers and the area of operation of the Company. It not only shows the Object of its formation, but also the utmost possible scope of the operation beyond which its actions cannot go.

What do you mean by Articles of Association?
An article of Association is a document registered by the Company, which contains the rules and regulations governing the internal management of the Company. It constitutes a contract between the Company and its members and Members among themselves defining their respective rights and duties and is binding on all the members.

Is it possible to alter the Memorandum of Association and Articles of Association?
Yes. Company by passing resolution in the general meeting can alter its Memorandum or Articles of Association. The alteration of Memorandum is required to be confirmed by the Registrar.

What is Object Clause and what is its importance?
The object clause determines the capacity of the Company. It indicates the extent of Company’s powers and the sphere of the activities. It defines as well as confines the scope of the Company’s powers and the Company cannot act beyond the powers defined in it.

What is Share Capital?
Share Capital is the total payments made to the Company by all the shareholders on their shares.

What are the different types of the Share Capital?
1) Nominal or Authorised Capital 2) Issued Capital 3) Subscribed Capital 4) Called up capital 5) Paid- up Capital 6) Uncalled Capital 7) unpaid Capital.

Is every Company required to have Share Capital?
No. Only Company limited by shares are required to have a Share Capital. Companies Limited by Guarantee can be registered without having share capital.

What are the different classes of the Share Capital a Company can have?
Company can have only two different class of of share capital. 1) Equity Shares or Ordinary Shares. 2) Preference Shares.

What is the Minimum amount of paid up Capital Company should have?
In case of Private Company, Rs. 1,00,000/- and in case of Public Company Rs. 5,00,000/-

Can Company change its share Capital?
Yes. Company can alter its share capital in the manner prescribed in The Companies Act, 1956.

What title to the ownership of shares does shareholder have?
Shareholder is given a share certificate as a document of title to the ownership of shares. Share certificate is a document issued by a company stating that the person named therein is the registered holder of a specified number of shares of a certain class and that they are fully paid – up or paid- up to a stated amount.

Can shares in a Company be held in a joint name?
Yes shares in a Company can be held in more than one name.

Can a nomination facility is available for the shares?
Yes nomination to the shares is possible by submitting a written request to the Company in form No. 2B

Can Company borrow money from others?
Yes. Company can borrow money from the bankers, financial institutions, other companies, directors, their relatives, shareholders or from other person subject to compliances prescribed under The Companies Act, 1956

What are the methods of Borrowings?
Normally monies can be borrowed by the Company in one or more of the following methods namely: Working capital or term Loans from financial institutions or Banks, issue of debentures, bonds and acceptance of short term or long term deposits.

What do you mean by the term ‘ Debentures’?
Section 2 (12) of the Act defines debentures as “ Debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the Company’s assets or not. Debenture means a document, which either creates a debt or acknowledges it, and any document which fulfills either of these two conditions is a debenture.

Who can exercise the Powers of Borrowings on behalf of the Company?
The power of the Company to borrow is exercised by the directors who cannot borrow more than the sum authorised.

When the Borrowing Powers can be exercised?
In case of private limited company borrowing powers can be exercised immediately after its incorporation and in case of public company only after getting the certificate of commencement of business.

What is the limit to the Borrowings?
Private Company can borrow any amount after passing the resolution by its Board under Section 292 of The Companies Act, 1956. In case of Public Limited Company the board of directors can borrow upto an amount equal to its paid up capital and free reserves. The further borrowings are governed by the provisions of section 293 of the Companies Act, 1956 and needs the prior sanction of the members of the Company in the general meeting.

Can Company be formed as non Profit Organization?
Yes. Company can be formed for carrying on any non-profit activity and known as section 25 Company.

Is shares in the Company are freely transferable?
Yes in the case of Public Company shares are freely transferable. But in the case of Private Company shares are transferable subject to restrictions contained in its Articles of Association.

Is it necessary that member is required to hold shares in the Company for a particular period?
No. It is not necessary for the members to hold the shares in the Company for particular period. He can sell the shares at his will.

Whether Company is different from its members?
Yes. Company is different from persons constituting it.

Whether Company can own and hold the property in its own name?
A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name.

Whether Company dies like a natural person?
An incorporated Company never dies. The Company will remain the same entity, despite total change in the membership. A Company’s life is determined by the terms of its memorandum of association.

Whether Company is required to be registered?
According to Companies Act, 1956 Company does not Comes into existence unless it is registered under the Companies Act and is incorporated.

How the Company is incorporated?
Promoters need to get the name approval from the registrar and then need to submit the memorandum and articles of association and other documents and forms to the registrar. Registrar upon registration of the same issue the Certificate of Incorporation.

Is it necessary that Company should have distinct name?
A Company being legal entity must have a distinct name of its own to establish its separate identity. The name of the Company is a symbol of its independent corporate existence.

Is it necessary that Company should have registered office?
Yes. The Registered Office of the Company establishes its domicile. It facilitates communications and notices in the name of the Company at that particular address.

What Documents are required to be filed with the Registrar of Companies for Registration of the Company?
The following documents are required to filed with the Registrar of Companies 1) Memorandum of Association, 2) Articles of Association, 3) a statutory declaration in Form No. 1 , 4) Form No. 32 for appointment of Directors, Managing Directors, Manager or Secretary. 5) Form No. 18 for the situation of the Registered Office of the Company.

What is Certificate of Incorporation?
Certificate of incorporation is a certificate issued by the Registrar of Companies and is a conclusive evidence of registration of a Company after compliance of requirements of The Companies Act, 1956.

When can company commence its business?
Private Limited Company can commence its business immediately on receipt of the certificate of Incorporation.

Public limited company after its incorporation need to further apply to the Registrar for getting the certificate of commencement of business. It can commence its business only after receipt of commencement certificate.

What do you mean by the term meeting?
Meeting may be defined as a gathering, assembly or coming together of a number of persons for the transaction of any lawful business.

What are the types of the Company meeting?
Following are the types of the meetings in a Company form of organisation.
  • Shareholders’ or members meetings
  • Statutory meeting
  • Annual General Meeting
  • Extraordinary general meeting
  • Class meetings.
  • Board Meetings
  • Meetings of the Board of Directors of the Company
  • Meeting of the Committee of the Board.
What do you mean by Dividend?
Dividend can be defined as the share, in the profits of the Company available for distribution and divided amongst the members.

Is it necessary for the Company to declare dividend every year?
No. Company is not compulsorily required to declare dividend every year on its equity shares. But if the terms of the issue requires then on preference shares a fixed rate of dividend is require to be declared each year.

Who can declare Dividend?
Shareholders in the Annual General Meeting can declare Dividend only upon the recommended by the Board of Directors. The rate can not exceed the recommended rate.

What do you mean by Interim dividend?
Interim dividend means a dividend declared between two Annual General Meetings. Or it means the dividend other than Final Divided. Final Dividend means a dividend that is declared at the Annual General Meeting.

To whom dividend is paid?
Dividend is paid to the registered shareholder of the share on the prescribed date, or to his order or to his bankers.

When dividend is payable?
Dividend is paid within 30 days of its declaration.

At what percentage dividend is declared on the share capital of the Company?
In case of Equity Share Capital no limit is fixed for declaration of dividend. But in the case of Preference shares dividend should be declared at the percentage fixed at the time of its issue.
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