Meaning and Definition of Company

In common parlance, a company refers to an assemblage of people who have come

together for some specific purpose; economic, or otherwise; and who have
incorporated themselves into a distinct legal entity in the form of a corporation for
that purpose.

Definition as per Companies Act, 2013

Sec 2(20) merely reads, ‘a company means a company formed and registered
under this Act or under any previous company law’.

Lord Justice Lindley definition

A Company is an association of many persons who contribute money or monies
worth to a common stock and employ in some trade or business and who share the
profit and loss arising therefrom. The common stock so contributed is denoted in
money and is the capital of the company. The persons who contributed to it or
whom it pertains are members. The proportion of capital to which each member is
entitled is his share. The shares are always transferable albeit the right to transfer
is often more or less restricted.

A company is an artificial person created by law, having a separate entity, with a

perpetual succession and common seal. Prof. Haney
.
 Nature / Features of Company

An artificial person created by law, having a separate entity, with a

perpetual succession and common seal.
1. Independent legal entity
2. Limited liability
3. Everlasting existence/Perpetual succession
4. Separate property of company
5. Transferability of shares
6. Capacity to sue
7. Separation of ownership &
Management
8. Proportionate representation
 Kinds of Companies
1. Classification on the basis of Incorporation
a) Statutory companies : These are the companies which are created by a special act of
the Legislature, e.g. Reserve Bank of India, the State Bank of India, LIC.
b) Registered Companies: These are the companies which are formed and registered
under the Companies Act.

2. Classification on the basis of Liability

1. Companies with limited liability
a) Companies Limited by Shares: Where the liability of the members of a company is
limited to the amount unpaid on the shares, such a companies is known as a company
limited by shares.

b) Companies limited by guarantee: Where the liability of the members of a company is

limited to a fixed amount which the members undertake to contribute to the assets of
the company in the event of its being wound up, the company is called a company
limited by guarantee.

2. Unlimited companies: A company without limited liability is called unlimited company.

 3. Classification on the basis of number of members
a) Private company: which by Articles:
1. Restricts the right to transfer its shares, if any.
2. Limits the number of its members to 200
3. Prohibits any invitation or acceptance of deposits from persons other than its
members
4. Prohibits any invitation or acceptance of deposits from persons other than its
members, directors or their relatives.

b) Public company : a company to which the above restrictions does not apply. The
minimum paid up capital is Rs.5,00,000. A private company, which is a subsidiary of a
public company, shall be deemed to be a public company.

Minimum number of members

Public company – 7
Private company – 2

Maximum number of members

Public company – unlimited
Private company – 200
4. On the basis of Control
1. Holding company: A company which has control over other company.
2. Subsidiary company: A company which is being controlled by holding company.

Other types
1. Small company
2. One Person Company
2. Government company: where Central/State/Partly Central and State governments
share in the company is not less than 51 percent.
3. Dormant company: A company that does not trade and has no significant business
transactions.
4. Foreign company: A company which is incorporated under the laws of a different
nation but conducts any of its business activities in India.
Small Company Definition
As per Companies Act, 2013, a Small company means a company,
other than a public company, —

paid-up share capital of which does not exceed fifty lakh rupees or
such higher amount as may be prescribed which shall not be more
than ten crore rupees; and
turnover of which, as per profit and loss account for the
immediately preceding financial year, does not exceed two crore
rupees or such higher amount as may be prescribed which shall not
be more than one hundred crore rupees:
DEFINITION – One Person Company (OPC)

As per provision of section 2(62) of the Companies Act, 2013

defined (62) “one person company” means a company which has
only one person as member.

FORMATION OF OPC [Rule 3]

Only a natural person who is an Indian citizen and resident in India-

– shall be eligible to incorporate a One Person Company;

– shall be a nominee for the sole member of a One Person

Company.

The term “resident in India” means a person who has stayed in India
for a period of not less 182 days immediately preceding one
calendar year.
PRIVILEGES AVAILABLE TO One Person Company

1. The most significant reason for shareholders to incorporate the ‘single-person

company’ is certainly the desire for the limited liability.
2. Businesses currently run under the proprietorship model could get converted
into OPCs without any difficulty.
3. Mandatory rotation of auditor after expiry of maximum term is not applicable.
4. One Person Company needs to have minimum of one director. It can have
directors up to a maximum of 15 which can also be increased by passing a special
resolution as in case of any other company.
5. The provisions of Section 98 and Sections 100 to 111 (both inclusive), relating to
holding of general meetings, shall not apply to a One Person Company.
6. Minimum authorized share capital required for One Person Company having
share capital is Rs. 1,00,000/-.
7. Minimum and maximum number of members for One Person Company is one
only.
Stages in formation of a company
1. Promotion of a company
2. Registration and incorporation of a company
3. Commencement of business

➢ Promotion of a company refers to all those steps which are taken from the time of
having an idea of starting a company to the time of the actual starting of the
company business.

➢ Procedure for Registration and incorporation

1. Application to the Registrar for availability of name
2. Filing of documents and information with Registrar
a) The memorandum of association
b) The articles of association
c) Prescribed declaration
d) Affidavit of subscribers and first directors – not been found guilty of fraud,
misfeasance or breach of duty under this Act
e) Correspondence address
f) Particulars of subscribers
g) Particulars of first directors – DIN (Director Identification Number) particulars to
be given
h) Consent to act as directors and particulars of interest
3. Registration by the Registrar
4. Issue of certificate of incorporation
a) Corporate Identity number (CIN): On and from the date
mentioned in the certificate of incorporation, the Registrar
shall allot CIN to the company.
b) Maintenance and preservation of documents: The company
shall maintain and preserve at its registered office, the copies
of all documents and information as originally filed with the
Registrar for registration, till its dissolution.
For the incorporation or registration of a company two important documents are required
to be prepared and filed with the Registrar of Companies namely:
1. Memorandum of Association
2. Article of Association

Contents of Memorandum
1. The name of the company, with the last word ‘Limited’ in the case of a public limited
company, or the last words ‘Private Limited’ in the case of a private limited
company.(Name Clause)
2. The State in which the registered office of the company is to be situated (Registered
office Clause)
3. The objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof. (Objects clause)
4. Limited liability (Liability Clause)
5. Share capital (Capital Clause)
6. The memorandum shall conclude with an ‘Association clause’ which states that the
subscribers desire to form a company and agree to share in it.
Legal rules relating to selection of name
1. The name should not be undesirable
2. The name should not be identical with another company’s
name
3. The name should not constitute an offence under law
4. The name should not be a prohibited one
5. The name should end with words Limited or Private Limited
6. Certain names to be used only with permission of central
government
Articles of Association or just Articles are the rules, regulations and bye-laws for the
internal management of the affairs of a company. They are framed with the object of
carrying out the aims and objects as set out in the Memorandum of Association.

Contents of Articles
1. Share capital and variation of rights
2. Lien
3. Calls on shares
4. Transfer of shares
5. Transmission of shares
6. Forfeiture of shares
7. Alteration of capital
8. Capitalization of profits
9. Buy-back of shares
10. General meetings
11. Proceedings at general meetings
12. Adjournment of meeting
13. Voting rights
14. Proxy
15. Board of Directors
16. Proceedings of the Board
Doctrine of Corporate veil (Disregarding the Corporate entity) implies that :
•A company has a separate personality distinct from its members or shareholders.
•This signifies that the company has a life and existence of its own
•Can possess a property and deal with it the way it desires
•Can sue and be sued in its personal capacity.
•Moreover, no shareholder can either individually or jointly claim any ownership
rights in the assets of the company during its continuance of business or on its
winding up.
Exceptions: The various cases in which corporate veil has been lifted are as
follows:
1. Protection of revenue – tax evasion
2. Prevention of fraud or improper conduct
3. Determination of character of a company whether it is enemy
4. Where the company is a sham
5. Company avoiding legal obligations
6. Company acting as agent or trustees of the shareholders
7. Avoidance of welfare legislation
8. Protecting public policy
Doctrine of Ultra Vires – Ultra means beyond and Vires means the powers.
The Latin term ultra vires, means to describe an act which is beyond the powers.
Any transaction (or act) which is not set out in the object clause of the company’s
memorandum, and is not necessarily or reasonably incidental to the attainment of the
object(s), is ultra vires the company, and therefore, void, i.e of no legal effect and
does not bind the company.

Intravires the company and ultra vires the Directors and Articles can be ratified
by shareholders.

Whether a particular act on the part of a company is within its powers is a question
of fact and is decided on the construction of the terms of the Memorandum.
Ultra vires the directors: If an act or transaction is ultra vires the directors (i.e
beyond their powers, but within the powers of the company), the shareholders can
ratify it by a resolution in a general meeting . If an act is within the powers of the
company, any irregularities may be cured by the consent of the shareholders.

Ultra vires the Articles: If an act or transaction is ultra vires the Articles, the
company can ratify it by altering the Articles by a special resolution. Again if the act
is done irregularly, it can be validated by the consent of the shareholders provided it
is within the powers of the company.
Doctrine of Constructive notice: Every outsider deal with a company is deemed
to have notice of the contents of the Memorandum and the Articles of Association.
These documents, on registration with the Registrar assume the character of public
documents. This is known as “Constructive notice of Memorandum and Articles’.

The Memorandum and the Articles are open and accessible to all. It is the duty of
every person dealing with the company to inspect these documents and see that it
is within the powers of the company to enter into the proposed contract.

Doctrine of Indoor management: The outsiders dealing with the company are
entitled to assume that as far as the internal proceedings of the company are
concerned, everything has been regularly done. They are presumed to have read
these documents and to see that the proposed dealing is not inconsistent therewith,
but they are not bound to do more; they need not inquire into the regularity of the
internal proceedings as required by the Memorandum and the Articles.
 Prospectus
❑ When a company allots securities to the public based on an offer
that has been made, any document through which such an offer is
made is known as prospectus.
❑ A prospectus is a legal document that contains all the material
information investors need about the company.
❑ A prospectus will notify the prospective shareholders why the
company is coming is out with a public issue, its financials and how
the issue will be priced.
❑ Any company making a public issue is required to file its
prospectus with the Securities and Exchange Board of India (SEBI),
the market regulator.
Contents of Prospectus
1. General information
2. Reports of financial information
3. Declaration of Compliance
4. Matters and reports as prescribed

Golden rule as to framing of Prospectus

Those who issue a prospectus hold out to the public great advantages
which will accrue to the persons who will take shares in the proposed
undertaking. The public is invited to take shares on the faith of the
representations contained in the prospectus, and it is at the mercy of
company promoters. Therefore everything must be stated with strict
and scrupulous accuracy. Nothing should be stated as a fact which is
not so, and no fact should be omitted the existence of which might, in
any degree, affect the nature or quality of the privileges and
advantages which the prospectus holds out as inducement to take
shares.
In simple words, the ‘golden rule’ is that the true nature of
company’s activities and business should be disclosed in the
prospectus. And the prospectus as a whole must not give a
misleading impression.

Legal rules relating to the issue of prospectus

1. The signing of prospectus
2. The date of prospectus
3. The consent of an expert
4. The registration of prospectus
5. Time for issue of prospectus
6. Disclosures on the issued prospectus
7. The terms of contracts not to be varied
8. Issue of application form for share or debenture