UNIT 1 – Introduction to Company Law.

Meaning
Section 2(20) of the 2013 Act defines the term “Company” to mean “a company incorporated
under the Companies Act 2013 or any previous company law.”

Lord Justice Lindley, “A company is an association of many persons who contribute money or
money’s worth to a common stock and employ it in some trade or business, and who share the
profit and loss (as the case may be) arising therefrom.

Features of a Company

Separate legal entity

⮚ A company has a distinct entity independent of its members or people controlling it.

⮚ A separate legal entity means that only the company is responsible for repaying
creditors and getting sued for its deeds.

⮚ The individual members cannot be sued for actions performed by the company.
Similarly, the company is not liable to pay the personal debts of the members.

Limited liability

⮚ A company may be limited by guarantee or limited by shares. In a company limited by

shares, the liability of the shareholders is limited to the unpaid value of their shares.

⮚ In a company limited by guarantee, the liability of the members is limited to the amount
they had agreed upon to contribute to the company's assets in the event of it being
wound up.

Perpetual succession - A registered company is a stable business organisation. Its life

doesn’t depend on the life of its shareholders, directors, or employees. Members may
come and go, but the company goes on forever.

Common seal - A company, being an artificial legal person, uses its common seal (with
the name of the company engraved on it) as a substitute for its signature. Any document
bearing the company's common seal will be legally binding on the company.
 Transferability of shares - The shares of companies are easily transferable. The
ownership lies with the holder of the shares.

Classification Of companies:

a) Classification based on incorporation

• Statutory Companies
➢ The corporate body is formed by a particular act of parliament or the central or state
legislature. The government fully finances it. The act of the legislature also decides
its powers, objects, limitations, etc.
➢ EX: Reserve Bank of India, State Bank of India, Life Insurance Corporation, Unit
Trust of India, Employees State Insurance Corporation, Oil and Natural Gas
Corporation, etc. are some examples of statutory corporations.
• Registered Companies/ Incorporated Companies
➢ Any company registered as per the Companies Act 2013 or any previous acts are
termed as Registered companies.
➢ In India, all companies other than Statutory companies and chartered companies
are Registered Companies.
b) Classification based on Liability:
• Company Limited by Shares - Liability is limited to the unpaid amount of share
capital.
• Company Limited by Guarantee
➢ A company limited by guarantee does not usually have a
share capital or shareholders but instead has members who act as guarantors. The
guarantors give an undertaking to contribute a nominal amount (typically very
small) in the event of the winding up of the company.
➢ A company limited by guarantee is the structure that is legally preferred for most
non-profit organisations, charity societies, clubs and other similar organisations.
Such companies are non-profit, as the profits are not distributed to the members
but retained in the company or used for different purposes.
• Unlimited companies - Companies do not have any limit on the liability of their
members.
c) Classification Based On the Number Of Persons
• Public Company
➢ A public company means a company which is not a private company. There
must be at least seven persons to form a public company.
➢ You can transfer the shares to the public as there is no limit to the maximum
number of members.
➢ Only a public company's shares can be dealt in on a stock exchange.
• Private Company
A Private Company is a company which, by its Articles of Association, restricts the
following:
(a) The right to transfer shares,
(b) Limits the number of its members to 200 (Previously, it was 50)
(c) Prohibits an invitation to the public to subscribe to its shares or debentures.
• One-Person Company
➢ The Companies Act 2013 provides new form of private company, i.e., one
person company. It may have only one director and one shareholder.
➢ The Companies Act 1956 requires a minimum of two shareholders and two
directors in the case of a private company.

Difference between Public and Private Company:

d) Classification Based On Control
➢ Holding Company - Company which holds 50% or more paid up capital of another
company i.e. Subsidiary Company is known as the Holding Company. Holding
Company controls and manages the entire affairs of subsidiary company.
➢ Subsidiary Company - The Company of which, 50% or more paid up capital over
by another company i.e. Holding Company is known as Subsidiary Company. The
management of Subsidiary Company is controlled by Holding Company. But
Subsidiary Company does not lose its identity.
➢ Government Company - A government company is one in which, 51% or more,
paid-up capital of the company is taken over either by Sate Government or by Central
Government or by both. The government companies are incorporated under Indian
Companies Act. It may be noted that in a government company, government is the
major shareholder and majority of directors are appointed by the government.
➢ Foreign company - It means a company incorporated outside India and having a
place of business in India.

Some other types of companies:

Associate company: An associate company, in its broadest sense, is a corporation in which a

parent company possesses an ownership stake. Usually, the parent company owns only a
minority stake of the associate company, as opposed to a subsidiary company, in which a
majority stake is owned. An associate company is a firm that is owned in part by a parent
company entity. Unlike a subsidiary company, the parent will only own a minority or non-
controlling stake in the associate company. Associate company relationships often occur with
joint ventures.

Small Company: Small Company means a company, other than a public company whose
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.
 DIFFERENCES BETWEEN PARTNERSHIP FIRM AND JOINT STOCK
COMPANY

The following are some of the differences between a Partnership firm and Joint Stock
Company.

Particulars Partnership Joint Stock Company

Legislation Partnership firm is regulated under the Joint Stock Company is regulated under
Partnership Act, 1932. the Companies Act, 2013.
Minimum No. of Minimum number of members is two Whereas in Joint Stock Companies,
Members in a Partnership firm. Minimum number is two in a private
company and seven in a public
company.
Maximum No. In a Partnership firm, maximum In a Joint Stock Company, maximum
of Members number of members is 20 in general number of members private company is
business and 10 in banking firms. 200 and there is no maximum limit
regarding number of members in public
company.
Liability In a Partnership firm, liability of each In a Joint Stock Company, liability of
partner is unlimited, joint and several. each shareholder is limited.
Transfer of Transfer of shares is not possible In case of pubic limited companies
Shares without the consent of all the partners shares can be transferred freely.
in a partnership firm
Management Managerial functions of the Shareholders elect the board of directors
partnership are shared by partners and board appoints the experts for each
according their mutual agreement., department.
where as in.
Dissolution Partnership can be dissolved with the Joint stock company can be dissolved
mutual consent of the partners. It may either by ( 1 ). It can be dissolved by
be dissolved if any partner dies retires court. ( 2 ). With the approval of
or become insolvent. majority share holders. ( 3 ). If
corporate charter expires. ( 4 ).It can be
dissolved by the state due to misuse of
powers.
Corporate Veil

A legal concept that separates a corporation's personality from its shareholders' personality
and protects them from being personally liable for the company’s debts and other obligations.

The concept of corporate entity evolved to encourage and promote trade and commerce but
not to commit illegalities or defraud people.

Lifting Of Corporate Veil

At times, it may happen that the corporate personality of the company is used to commit
fraud and improper or illegal acts. Since an artificial person is not capable of doing anything
illegal or fraudulent, the disguise of corporate personality might have to be removed to
identify the persons who are really guilty.

This is known as the ‘lifting of the corporate veil’. The principle of a separate entity is
regarded as a curtain, a veil or shield between the company and its members. The concept of
corporate entity was evolved to encourage and promote trade and commerce but not to
commit illegalities or to defraud people.

When can a corporate veil be lifted?

In case of judicial interpretations such as: Determination of Character, Where Company is

a sham, Presentation of Fraud or improper conduct, Where the company is acting as an agent
of the Shareholders, Protection of revenue, Avoidance of welfare legislation, Punishment of
contempt of court, Ascertaining true nature of transaction if alleged as sham, Determination
of technical competence of company, Formation of Subsidiary Company to act as an agent

In case of Statutory Exceptions such as: Mis-Statement in Prospectus Sec. 34 and 35, Mis-
description of Company’s Name Sec. 12, Failure to refund application money Sec. 39,
Investigation of Ownership of Company Sec. 216, Fraudulent Conduct Sec. 339, Liability for
Ultra Vires Acts.

Formation of a Company

The formation of a company involves early and intricate legal formalities and procedures.
These processes must be completed according to specified authorities and systems before a
business organisation can commence its operations. Just as an individual's body parts develop
before birth, a company undergoes the creation of various aspects and components before
being officially established and ready to start its business:

1. Promotion of a company

2. Registration of a company

3. Certificate of incorporation

4. Commencement of business

1) Promotion of a Company

A business enterprise does not come on its own. The process of business promotions comes

when someone comes up with an idea and ends when that idea is converted into the

process of action. i.e. the formation of business enterprise and commencement of its

business. It is an overall effort that the members of the company put to make the company.

Who is a promoter of a company?

A successful promoter is a creator of wealth and an economic prophet. The person who is

concerned with the promotion of the company, an enterprise is known as a promoter. He

conceives the idea of starting a business and takes all the measures required for bringing

the enterprise into the existence. For example, Dhirubhai Ambani is the promoter of

Reliance Industries.

The promoter finds out the way to generate the money, search business idea, arranges for

finance, gather resource and establish a going concern. The company law has not given any

legal status to promoters. He stands in fiduciary position.

2] Registration of a Company

It is the registration that gives the company a birth or existence. A company is properly

formed when it is properly registered under the Company Act. There is a procedure for the

registration process that every organization must follow. It involves the following
documents and procedures:

Memorandum of Association: It is to be signed by the minimum member that is 7 persons

for the public company and 2 in case of private company. It must be duly stamped.

Articles of Association: The document is signed by all those persons who all have signed the

memorandum of association.

List of directors: A list of directors with their names, address, and occupation is prepared

and filed with the registrar of the companies.

Written consent of the directors: A written consent of the directors that they have agreed

to act as directors has to be filed with the registrar of the company along with a written

approval to the effect that they will take the qualification shares and will pay for them.

Notice of the address of the registrar office: It is also customary to file the notice of the

address of the company’s registered office at the time of incorporation. It is to be provided

within 30 days after the date of incorporation.

Statutory declaration: A statutory declaration mentioning that the requisites of the act and

the rules there under have been compiled. It must be signed by an advocate of the supreme

court or of a high court or an attorney or leader entitled to appear before a high court or a

practising chartered accountant in India, who engages in the company formation or by a

person indicated in the article as a director, managing director, secretary or manager of a

company. It is also to be filed with the registrar of the company.

3] Certificate of Incorporation

The registration of the memorandum of the association, the article of association and other

documents are filed with the registrar. After getting satisfied with the application &

documents submitted, Registrar will issue the Certificate of incorporation’. A certificate of

incorporation is the ultimate proof of the existence of a company.

Incorporation and Commencement of a Company

4] Certificate of Commencement of Business

As soon as a private company gets the certification of incorporation it can start its business.

Once the certificate of incorporation is received by the company, a public company issues a

prospectus for inviting a public to subscribe to its share capital. It fixes the minimum

subscription in the prospectus. Then it is required to sell the minimum number of shares

mentioned in the prospectus.

After completing the sale of the required number of shares, the certificate is sent to the

registrar along with the letter from the bank stating that all the money is received.

The registrar then scrutinizes the documents. If all the legal formalities are done then the

registrar issues a certificate known as ‘certificate of commencement of business’. This is the

conclusive evidence for the commencement of business for the public company.

Registration and Incorporation of Company

A company can get incorporated as various types of businesses which generally depends on

the need and the capital of the business owner. These various types include one person

companies, public limited companies, private limited companies, limited liability

partnerships, foreign companies etc. Barring a few minor differences, all these various forms

are incorporated in more or less the same way.

Memorandum of Association

• Memorandum of Association (MOA) is a legal document which specifies the scope

of business activities of the company and information about shareholding of the
company. The MoA is a document prepared for the Company registration
procedure. Sometimes, it is called the charter of the company.
 • Memorandum of Association (MOA) defines the company’s relationship with its
shareholders. It is the most important document of a company as it states the objectives
of the company.
• The Memorandum of Association is a document which sets out the constitution of a
company and is therefore the foundation on which the structure of the company is built
The Doctrine Of Ultra Vires
• A Memorandum of Association of a company is a basic charter of the company. It is a
binding document which describes the scope of the company among other things. If a
company departs from its MOA such an act is ultra vires.
• If the company does an act, or enters into a contract beyond the powers of the directors
and/or the company itself, then the said act/contract is void and not legally binding on the
company.
• The term Ultra Vires means ‘Beyond Powers’. Doctrine of Ultra Vires limits the company
to the objects specified in the memorandum, the company can be: Restrained from using
its funds for purposes other than those specified in the Memorandum, Restrained from
carrying on trade different from the one authorized.
Articles of Association

Articles of Association is the second important document, which in the case of some

companies, has to be registered with the memorandum. Articles are internal regulations

and bye-laws needed to define how the company will actually operate. Companies which

must have the articles of association are: Unlimited Companies Companies limited by
guarantee; and

Private companies limited by shares.

Articles of association may prescribe such regulations for the company as the subscribers to

the memorandum deem convenient. The Act gives the subscribers a free hand. Any

stipulations as to the relations between the company and its members, and between the

members inter se may be interested in the articles. It must also be noted that the document

must not be in violation of the provisions laid out in the act.

Upon the satisfaction of the Registrar, he registers the company, enters its name in the

Register of Companies and issues a certificate called the Certificate of Incorporation which is

talked about in Section 34 of the Companies Act, 2013.

Extra Stuff:

Introduction of new things in companies act 2013:

1) Class Action Suits for Shareholders: The Companies Act 2013 introduces class action
suits to empower shareholders and stakeholders with better awareness of their rights.

2) More Power for Shareholders: The Companies Act 2013 grants shareholders the
authority to approve significant transactions.

3) Women Empowerment in the Corporate Sector: The Companies Act 2013 mandates
the appointment of at least one woman director on the board for certain classes of
companies.
4) Corporate Social Responsibility: The Companies Act 2013 requires certain companies
to spend a specific amount annually on Corporate Social Responsibility initiatives.

5) National Company Law Tribunal: The Companies Act 2013 establishes the National
Company Law Tribunal and the National Company Law Appellate Tribunal, replacing
the Company Law Board, for specialized justice and to ease the burden on courts.

6) Fast Track Mergers: The Companies Act 2013 proposes a streamlined process for
mergers and amalgamations, particularly for holding and subsidiary companies, and
small companies with Indian government approval.

7) Cross Border Mergers:The Companies Act 2013 allows cross-border mergers with
prior RBI permission, facilitating mergers between Indian and foreign companies.

8) Prohibition on Forward Dealings and Insider Trading: The Companies Act 2013
prohibits directors and key managerial personnel from engaging in forward dealings
and insider trading.

9) Limit on Maximum Partners: The Companies Act 2013 sets a maximum limit of one
hundred persons/partners for associations/partnerships, with exceptions for certain
professionals.

10) One Person Company: The Companies Act 2013 introduces the concept of a one-
person company, allowing a single director and shareholder.

11) Entrenchment in Articles of Association: The Companies Act 2013 allows for
entrenchment provisions in the articles of association for additional legal safeguards.

12) Electronic Mode: The Companies Act 2013 promotes E-Governance, enabling
electronic processes for document maintenance, inspection, and financial statements.

13) Indian Resident as Director: Every company must have at least one director who has
stayed in India for at least 182 days in the previous calendar year.

14) Increase in Number of Shareholders: The Companies Act 2013 increases the
maximum number of shareholders in a private company from 50 to 200.
15) Independent Directors: Listed companies must have at least one-third independent
directors on the board. Other prescribed public companies are also required to appoint
independent directors.\

16) Serving Notice of Board Meeting: The Companies Act 2013 mandates at least seven
days' notice, which may be sent electronically, for board meetings.

17) Duties of Director Defined: The Companies Act 2013 explicitly defines the duties of
directors.

18) Liability on Directors and Officers: The Companies Act 2013 does not restrict Indian
companies from indemnifying their directors and officers.

19) Rotation of Auditors: The Companies Act 2013 introduces the rotation of auditors and
audit firms for publicly traded companies.

20) Prohibits Auditors from Performing Non-Audit Services: The Companies Act 2013
prohibits auditors from providing non-audit services to the company to ensure
independence and accountability.

21) Rehabilitation and Liquidation Process: The Companies Act 2013 establishes a time-
bound process for the rehabilitation and liquidation of companies in financial crisis.