Page 126 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 7: Companies Act, 1956

7.1 Meaning of Company Act, 1956 Notes

The Companies Act, 1956 defines the word ‘company’ as a company formed and registered
under the Act or an existing company formed and registered under any of the previous company

laws (s.3). This definition does not bring out the meaning and nature of the company into a
clear perspective. Also s.12 permits the formation of different types of companies. These may
be (i) companies limited by shares, (ii) companies limited by guarantee and (iii) unlimited
companies. The vast majority of companies in India are with limited liability by shares. Therefore,
it is advisable to define the term ‘company’ keeping in mind this type of company. In India,

the Companies Act, 1956, is the most important piece of legislation that empowers the Central
Government to regulate the formation, financing, functioning and winding up of companies.

The Act contains the mechanism regarding organisational, financial, and managerial and all the
relevant aspects of a company. It empowers the Central Government to inspect the books of
accounts of a company, to direct special audit, to order investigation into the affairs of a company
and to launch prosecution for violation of the Act. These inspections are designed to fi nd out
whether the companies conduct their affairs in accordance with the provisions of the Act, whether
any unfair practices prejudicial to the public interest are being resorted to by any company or a
group of companies and to examine whether there is any mismanagement which may adversely
affect any interest of the shareholders, creditors, employees and others. If an inspection discloses
a prima facie case of fraud or cheating, action is initiated under provisions of the Companies Act
or the same is referred to the Central Bureau of Investigation.
The Companies Act is administered by the Central Government through the Ministry of Corporate

Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company

Law Board, Director of Inspection, etc. The Registrar of Companies (ROC) controls the task of
incorporation of new companies and the administration of running companies.
Under the Companies Act, 1956, the term ‘company’ means “ a company formed and registered
under the Act or an existing company i.e. a company formed or registered under any of the
previous company laws”. The basic objectives underlying the law are :

1. A minimum standard of good behaviour and business honesty in company promotion and
management.
2. Due recognition of the legitimate interest of shareholders and creditors and of the duty of
managements not to prejudice to jeopardise those interests.
3. Provision for greater and effective control over and voice in the management for
shareholders.
4. A fair and true disclosure of the affairs of companies in their annual published balance
sheet and profit and loss accounts.

5. Proper standard of accounting and auditing.
6. Recognition of the rights of shareholders to receive reasonable information and facilities
for exercising an intelligent judgement with reference to the management.
7. A ceiling on the share of profits payable to managements as remuneration for services

rendered.

8. A check on their transactions where there was a possibility of conflict of duty and interest.
9. A provision for investigation into the affairs of any company managed in a manner
oppressive to minority of the shareholders or prejudicial to the interest of the company as
a whole.
10. Enforcement of the performance of their duties by those engaged in the management of
public companies or of private companies which are subsidiaries of public companies

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