Definition of a Company: Lord Justice Lindley says: "By a company is meant an association of persons who contribute money or money's

worth to a common stock and employ it in lome trade or business, and those who share the profit and loss (as the case may be) arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are called members. The proportion of capital to which each member is entitled is his share. They are always transferable although, the right to transfer them is often more or less restricted." Features of a Company: 1. It is a voluntary Association: A company is a voluntary association of persons, in the sense, it cannot compel a person to become its member or give up the membership. To be a member or not, is the personal choice of the person concerned, depending upon the profit or other objectives of the company, which may inspire the person. 2. It is an artificial legal person: The law regards a company as an artificial person, though it has no body, mind, limbs and vision. However, being a legal person, it has certain rights and duties which are enforceable at law. It can act as a natural person like entering into contracts, owning property etc. But a company cannot marry or divorce. It cannot be sent to jail like a natural person. Thus, a company is a creation of law and exists only in the eyes of law. However, it has a name and can sue and be sued in that name. 3. It is formed in pursuit of some specific objectives: A company is formed for achieving certain objectives. Such objectives are stated in the constitution of the company called 'Memorandum of Association'. These objectives should not be either illegal or anti-national. 4. It has a separate legal entity: This is a very important characteristic feature of a company. Separate legal entity for a company denotes that the existence ol a company is independent and separate from its members. In law, the company i regarded as an artificial person which deals in its own name. Thus, a member ol .i company cannot be held liable for the acts of a company, even if he holds tin substantial part of a share capital. 5. It can own separate property: Since a company is a legal person in the eyes of law, it can hold property in its own name. All the properties in the name of the company is its separate property and the members cannot claim to be the owner of the company's property. Thus, the company is owner of all its assets. In India, this principle of separate property was best laid down by the Supreme Court in Bachu F. Guzdar Vs. The Commissioner of Income-tax, Bombay. The Supreme court held that a shareholder is not the part owner of the company or its property. He is only given certain rights by law, e.g., to vote or attend meetings, to receive dividends. 6. Limited Liability: In a limited Company, the liability of its members is limited to the nominal value of shares held by the individual members. Thus, if the shares are fully paid up, the member is liable to pay the amount remaining unpaid. The creditors of the company cannot take action against members of the company to recover the amount due from the 'company'. This is the case with reference to companies limited by shares. In the case of a company limited by guarantee, the liability of the members is limited upto the amount guaranteed by a member. 7. Transferability of shares: The capital of a company is divided into parts, and each part is called (he share. The shares of a company are freely transferable and can be purchased and sold in share market. This characteristic of a company is recognised by Section 82 of the Companies Act, which reads as under: " The shares or other interests of any member in a company shall be moveable property, transferable in the manner provided by the articles of the company.". In other words, the shares of the company are transferable like movable property. However, in a private company, certain restrictions are placed on such transfer of shares, but the right to transfer is not taken away absolutely. 8. Common Seal: A company being an artificial person cannot sign its name on a contract. Therefore, every company is required to have its own seal. The name of the company is engraved on it. The seal acts as the official signature of (lie company. The company shall be bound by only those documents on which (his seal is affixed. 9. Perpetual Existence: Since a company has a separate legal entity, jts existence is not affected by the death, insolvency, lunacy etc., of its member. In Ilie case of a company, "members will come and members will go, but the company will go on for ever." This does not mean that the company can

never come to an nid. Since the company is created by the process of law, it can come to an end by llie process of law. 10. Separation ofOwnership & Management: All the members of the company lire supposed to be the owners of the company; but all of them cannot manage llie company. The management of the company is entrusted to the representatives of members, called Board of Directors who are elected by the members. Thus, there is a separation of ownership and management in a company. However, ultimate control of the company rests with the members of the company. Kinds and Classification of Companies: There are different kinds of companies and there are several classifications among them. The most common type of joint-stock company is the company limited by shares. From the point of legal base, there are three kinds of companies, namely, Chartered Companies, Statutory Companies, and Registered companies. a. Chartered companies: Chartered companies are incorporated under special Royal Charter issued by the Kind or Queen. Their powers and actions are governed by the charter. Example: East India Company, Bank of England etc. Such companies are now treated as foreign companies. A company registered under Companies Act is not a chartered company. b. Statutory companies: Statutory companies come into existence by the special Acts of the Parliament or legislature, and they are governed by the special Acts passed for that purpose. Public utility services, electric supply, gasworks etc., are some of the examples of statutory companies. These companies are given some special powers which are not generally possessed by companies registered under the companies Act. Most of these statutory companies will be monopolistic companies in view of their importance in public service. The Reserve Bank of India, L.I.C., Unit Trust, State Bank of India etc., are some examples of Statutory companies. The audit of such companies is conducted under the supervision and control of the Auditor General of India. These statutory companies companies have a corporate existence and can sue or be sued in their own name. c. Registered Companies: Registered Companies are those companies registered under the Companies Act, 1956 or under any previous Companies Act. The majority of companies in India belong to this category. On the basis of liability of members, there are three types of companies1. Companies limited by Shares: A Company in which the liability of each member is limited up to the amount of the nominal or face value of the shares held by him is called a company limited by shares. If the member has paid the full amount of shares, then his liability shall be nil. In case of the shares partly paid-up, the company will call upon the remaining amount at any time. But a share-holder cannot be called upon to pay more than the amount remaining unpaid on his shares. His personal assets cannot be called upon for the payment of the liabilities of the company. Companies falling under this category are called 'Limited Companies' and they are required by law to add the word "Limited" at the end of their names. 2. Companies limited by guarantee: In this case, the liability of the members is limited by a fixed sum which is specified in the Memorandum and beyond which they cannot be called upon to contribute. The Memorandum of a company limited by guarantee shall state that ruch member undertakes to contribute to the assets of the company, in the event of being wound up for the payment of the debts and liabilities of a company, such amount as may be required not exceeding a specific amount. A company limited hy guarantee may or may not have share capital. Such companies are generally formed for the promotion of art, science, culture, ports etc. If it is registered with a share capital, it may by a public company or a private company. Private limited companies must use the word 'Private Limited' us the last words of their names. 3. Unlimited Companies: An unlimited company is one in which the liability of the members is unlimited, the members are also personally liable for the payment of companies' liabilities. In the event of winding up of the company, if the assets of the company are not sufficient to pay its liabilities, then the private property of the members can also be utilised for the payment of company's liabilities. Such unlimited

companies r not in existence today, as they lack the primary characteristic feature of joint-stock companies, viz., limited liability. On the basis of Ownership of the company, companies may be classified into: i. PUBLIC LIMITED COMPANY: This may be formed by a minimum of 7 subscribers. There is no maximum limit to the number of share-holders that a public company can have. A foreign national or a non-resident may also be a share-holder with the approval of the Reserve Bank of India. As the Public Limited Companies have a wide membership, control and operate substantial financial resources, having a larger number of members-creditors and also the Public in general, a number of regulatory provisions have been made under the company law to exercise control on the working of these companies. ii. PRIVATE LIMITED COMPANY: This may be formed by a minimum of two members. Its total membership, however, cannot exceed 50 persons. Its shares cannot be transferred freely, and such a company is also prohibited from inviting the public to subscribe to its shares and debentures. The Private companies are not subject to all the regulator)' provisions that are applicable to public companies. In the case of private company, prospectus or a statement in lieu of prospectus is not required to be issued. Similarly several regulations regarding increasing the subscribed capital of the company, statutory meetings and reports, appointment of directors are not applicable to them. A Private company may commence business on registration by the Registrar without having to obtain a certificate lor commencement of business. iii. GOVERNMENT COMPANY: This is a new concept introduced for the first time in the Companies Act, 1956. Although the number of Government companies is very small in comparison with the number of non-government companies, they account for nearly 75 per cent of the paid-up capital of all companies operating in India. The Companies Act defines a Government Company as a company in which not less than 51 per cent of the paid-up capital is held by the Central Government, a State Government or Governments, or partly by Central and partly by one or more State Governments. This includes a company which is a subsidiary of a government company thus defined. A government company is subject to a regular system of special audit under the direction of the Comptroller & Auditor-General of India, in addition to the normal statutory audit. Section 620 of the Companies Act empowers the Central Government to exempt the government companies from many of the provisions of the Act. Generally, government companies are formed to organise industrial enterprises in the public sector. iv. HOLDING AND SUBSIDIARY COMPANIES: When a company has control over another company, it is known as a holding company and the company so controlled is regarded as a subsidiary company. A company shall be deemed to be a subsidiary company where: 1. One company controls the composition of the Board of Directors of another, the latter becomes a subsidiary of the former, (ii) One company holds a majority of the shares in another company, the latter becomes a subsidiary of the former. 2. One company is a subsidiary of another, which is itself a subsidiary ol some other company, the first-mentioned company shall also become the subsidiary of the last-mentioned company. V. FOREIGN COMPANY: A Foreign company means a company incorporated out side India, hut havim' a place of business in India. The Companies Act requires that within 30 days ol the establishment of business in India, the company should submit the followin;' documents to the Registrar at New Delhi and the State of its location. A. A certified copy of Memorandum and Articles of the company and other instruments of incorporation translated into English. B. The full address of the registered office of the company situated abroad.

C. list of Directors and Secretary of the Company. D. The names and addresses of the persons in India authorised to accept documents in India, on behalf of the company and the notice served on the company. E. The full address and its principal place of business in India. Any change occurs in the above particulars, the Registrar must be notified accordingly within the prescribed time. F. The Companies (Amendment) Act of 1974 provides that if not less than 50 per cent of the paid-up share capital, whether preference or equity, is in Indian hands, the provision of the Act as a whole shall apply to such a foreign company, as if it were incorporated in India. G. Foreign companies are now required to file an annual return with the Registrar, besides being subjected to the provisions relating to the maintenance of accounts, cost audit and special audit, and in respect of investigation etc. VI. One- Man Company (Family Company): A company (usually a private company) in which one man holds practically (he whole of the share capital, is known as one-man company. Since a private company can be formed with only two members, a man may take only one other shareholder to constitute a private company and keep for himself a substantial number of shares to have controlling power over the company. In other way, he may take more than one other dummy members'(usually his family members, relatives or friends) who may hold only one or two shares each leaving the bulk of the shares for himself. Such a company may also be called a family company. A one-man company, like any company, is a legal entity distinct from its members. Based on the Business transacted by the company, companies may be classified into1. INVESTMENT COMPANY: An Investment Company is one whose principal business is the acquisition of shares, debentures of other companies, i.e., dealing in securities. In order to prevent investment companies from functioning as catalysts of corporate control the Sachar Committee has recommended a modification of definition of tin investment company to exclude private companies and to include only those public companies which are carrying on business of only underwriting or dealiii!' in shares, debentures or other securities. 2. Non-Profit Company: Section 25 of the Companies Act also permits the registration under a licence granted by the Central Government, of an association not for profit with limited liability without even using the word 'Limited' or the word "Private Limited' to its name, if the following conditions are satisfied. i. It is to be formed as a limited company for promoting art, commerce, science, religion, charity or any other useful objective. ii. It intends to apply its profits, if any other income in promoting its objectives and prohibits payment of dividend to its members. In such a case, a licence may be granted by the Central Government on such conditions and subject to such regulations as it thinks fit to impose. These companies are exempted from complying with the provisions of Sections 147, 160(1 )(aa), 166(2), 171,209 (4) (a), 257,264(1), 285,287,299,301 and 302(2) of the Companies Act either wholly or in part. The licence may at any time be revoked by the Central Government, if the fundamental conditions of licence are contravened. Privileges and Exemptions of a Private Company Section 3 (1) (iii) of the Companies Act, 1956 defines a private company. There are several exemptions and privileges provided in the Act for private companies. The main privileges are as follows: 1. Only two persons are sufficient to form a private company, according to Section 12.

2. A private company may start business immediately after its incorporation. There is no need of certificate of commencement of business. (Section 149). 3. At the time of getting the company incorporated with the Registrar of Companies, the Directors are not required to file with the Registrar their consent in writing to act in that capacity and their undertaking to take up qualification shares, if any (Section 266-5). 4. A private company is not required to issue or file a prospectus or a statement in lieu of prospectus with the Registrar of Companies, according to Section 70. 5. It can proceed to allot shares without having to wait for any such thing as 'minimum subscription' (Section 69). The reason is that a private company i jjl is not required to offer shares to the public. 6. There is no need to have an index of members (Section 151). 7. There is no need for holding statutory meeting or file a statutory report (Section 165). 8. It is not required to offer new shares to existing share-holders in proportion to their share holdings. (Section 81). 9. The Directors of a private company need not retire by rotation, (Section 255) i.e., they can be permanent life directors. 10. All the Directors may be appointed by a single resolution. 11. There is need to have a minimum of two directors only (Section 255). 12. Directors of a private company can vote on a contract in which they are interested. 13. Only two persons can constitute the quorum for the meeting of a private company (Section 174-1). 14. In private company, poll can be demanded by one person present in person or by proxy, if not more than seven persons are present. If the number of members present is more than seven, two members present in person or proxy can demand a poll. (Section 179 (i) (a). Differences between Public and Private Company There are many distinctions between a public limited company and a private limited company. The points of distinctions are as follows: a. Minimum number of members: A public company must have at least seven members to form the company. The private company must have at least two members. b. Maximum number of members: A public limited company can have any number of members beyond the prescribed minimum. That is to say, there is no limit for the maximum number of members. But in the case of private company the number should not exceed 50 (exclusive of past and present employees). c. Number of Directors: A public company should have a minimum of three directors and private company can have two. d. Public invitation for capital: Public company is free to invite the public to buy its shares and debentures; but a private company cannot invite the public to buy its shares and debentures. e. Commencement of business: After incorporation, a public company cannot commence business, unless certificate of commencement of business is obtained. In the case of private company, it can commence business soon after incorporation without getting the certificate of commencement of business. f. Prospectus: A public company should issue and file a prospectus or statement in lieu of prospectus before allotment of shares. A private company need not issue and file a prospectus or a statement. g. Allotment of shares: The public company cannot allot shares without receiving the minimum subscription. The private company can allot shares without raising the minimum subscription. h. Statutory Meeting: A Public company must hold a statutory meeting and must file statutory report with the Registrar within six months from the date of obtaining the certificate to commence business. A private company is not required to hold the statutory meeting and to file statutory report. i. Transfer of shares: Shares are freely transferable in the case of public company; but, in the case of private company, its shares are not freely transferable. j. Share Warrants: A public company cannot issue share warrants; while a private company can issue share warrants.

Rules regarding Directors: In Public company, appointment and reappointment of directors are subject to Government approval. In the case of private company no government approval is required for appointment, reappointment etc., of directors. l. Managerial remuneration: In Public company, there are legal restrictions in the payment of managerial remuneration. Total managerial remuneration in a public company cannot exceed 11 percent of the net profits. (Section 198). No such restriction applies to a private company. m. Quorum: In public company, if the Articles of the company do not provide lor a large quorum, 5 members personally present are quorum for a meeting. In the liise of private company, it is 2. n. End-words of the company name: A public company should use the words 'public limited' or 'Limited' at the end of the company's name. In the case of private company, the words 'Private Limited' should be added at the end of the rompany's name. In addition to these, as already discussed, a private corhpany enjoys certain privileges and exemptions. CONVERSION OF A PRIVATE COMPANY INTO A PUBLIC COMPANY: The conversion of a private company into a public company may be automatic, due to its default and llic operation of law. The conversion may also take place by choice. A private company becomes a public company in the following circumstances: 1) conversion by default (Section 43); (ii) Conversion by operation of Law (Section I l-A); and (iii) Conversion by choice (Section 44). 1. Conversion by default: As provided in Section 43, a pnvate company may liciome a public company by default, i.e. if it fails to comply with the essential requirements of a private company, viz., restrictions on transfer of shares, limitations on the number of members to 50. and, prohibition of invitation to the public to buy shares and debentures. By default, the private company ceases to enjoy the privileges of a private company and it will be treated as if. it were a public company. However, discretion is given to the court to grant relief to the company from such consequences, where the court is satisfied that the failure to comply with the conditions was accidental or due to the inadvertance or to some other genuine causes, or any reasonable grounds for condoning the default. 2. Conversion by Operation of Law: (Deemed Public Company): According to section 43-A, a private company becomes a public company on the following causes: (a) where 25% or more of its paid-up share capital is held by one or more public company or companies or deemed public company or companies, (b) where the average annual turnover of a private company during the last three consecutive financial years is Rs. 10 crores or more, (c) where it holds 25% or more of the paid-up share capital of a public company, (d) where it accepts, after an invitation by an advertisement or renews any such deposit from the public other than its members, directors or their relatives. 3. Conversion by choice: A private company may choose to become ;i public company, as provided in section 44 of the Act. The following steps should be adopted for converting the private company into a public company. a. Special Resolution: A private company desiring to become a public company must pass a special resolution in order to alter its Articles of Association and deleting restrictions contained therein under Section 3 (i) (iii) (i) restriction;. on transfer of shares, (ii) limitation of maximum membership; and (iii) prohibition of invitation to public for subscription to its shares. A copy of the specinl resolution so passed must be filed with the Registrar of companies within 30 days thereof. b. Increase in membership : If the number of members is less than seven, ii must be raised to not less than seven. c. Increase in number of Directors: If the number of directors is less than < it must be raised to not less than three.

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Within 30 days of passing the resolution, the company shall file with tin-Registrar of companies, a prospectus or statement in lieu of prospectus. CONVERSION OF A PUBLIC COMPANY INTO A PRIVATE COMPANY In order to convert a public company into a private company, the publn company choosingto become a private company should pass a special resolution to alter its articles so as to include in it the provision relating to a private company such as limiting the number of members to fifty, restricting the transfer of shares and prohibiting invitation to the public to purchase its shares and debenture. Such a resolution shall be binding on dissenting share-holders in the following circumstances: a. The conversion is a bonafide one b. It is in the interest of the company as a whole c. It is consistent with the objects in the memorandum of Association. Further, the company should take the approval of the Central Government. This approval must be sought within 3 months from (he date of special resolution. A copy of the special resolution and a printed copy of the altered Articles shall be filed with the Registrar within one month of the date of receipt of order of approval of the Central Government, as per Section 31.

d.