COMPANY LAW

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Company
According to Section 2 (20) of the Company Act 2013 "Company means a
company incorporated under this Act or any previous Company Law."

In general, a company is an artificial person, created by law that has a separate

legal entity, perpetual succession, and common seal and has limited liability.
The characteristics of a company are:

1.Voluntary association.
2.Company is an artificial person created by law.
3.Company is not a citizen.
4.Separate legal entity.
5.Company has limited liability.
6.Company has a perpetual succession.
7.Transferability of shares.
8.Common Seal
9.Separate property.
10.Capacity to sue and be sued.
11.Contractual rights.
12.Limitation of action.
13.Separate management.
14.Termination of existence.
Voluntary association

A company is a voluntary association formed by an individual or group of

individuals. Most companies are formed with the motive of profit-making except
the section 8 companies (NGO). Profit earned is divided among the shareholders
or saved for the future expansion of the company.

Company is an artificial person created by law

A company is an artificial person created by law. It is regarded as a legal person

capable of entering into contracts, owning property in its name, suing, and being
sued by others.

Case Law: Union Bank of India vs Khader International Constructions and

others: The Supreme Court held that the word ‘person’ mentioned in Order 33,
Rule 1 of Civil Procedure Code, 1908, includes any company. Thus a company
may also file a suit as an indigent (poor) person.
Company is not a citizen

In State Trading Corporation of India Ltd. vs CTO (Commercial Tax

Officer), Supreme Court held that the State Trade Corporation, although a
legal person, is not a citizen and can act only through a natural person.

Separate legal entity

A company incorporated under the Companies Act, 2013 is treated as a

separate person distinct from its members under the law. Therefore, the
company will be liable for all the acts of the company except any illegal act
done by the directors of the company.

Case Law: Salomon vs Salomon

Company has limited liability

The liability of a company may be limited either by Shares or Guarantee.

Company limited by Guarantee: Liability of shareholders is limited to a

certain amount of guarantee mentioned in the memorandum payable only at the
time of wind up and losses occurred by the company.

Company limited by Shares: Liability of the members shall be limited to the

extent of unpaid money or shares held by them.

Company has a perpetual succession

A company can come to an end only by the process of winding up. The death or
retirement of a person does not affect the life of a company.
Transferability of Shares:

Shareholders of a public limited company can transfer their shares as per the rules
laid down in the articles of association. However, in case of a private limited
company, there might be some restrictions on the transfer of shares.

Common Seal:

The firm is an artificial entity or a person, and therefore cannot sign its name by
itself. It creates the necessity of a common seal that can be used for representing
the decisions made on behalf of the company.
Separate property

As we have already studied, a company is a separate artificial person created by law,

and a company is different from its members. Therefore, a company has its separate
property and can own, enjoy, and dispose of properties in its name.

Case Law: In RF Perumal vs H. John Deavin, it was held that no member can
claim themselves to be the owner of the company’s property during its existence or
its wind up. A company cannot even have an insurable interest in the property of the
company.

Capacity to sue and be sued

A company can sue and be sued in its name and may even sue its members. It also
has a right to seek damages where a defamatory matter is published about the
company, which affects its business.
Case Law: Abdul Haq vs Das Mal:

In this case, Das Mal was an employee in the company and was not paid a salary
for several months, and therefore he sued the directors. The court held that the
remedy lies against the company and not against the directors or members of the
company.

Contractual rights

A company can enter into contracts for the conduct of business in its name.
As a company is not a trustee for its shareholders, a shareholder cannot enforce a
contract established by his company because he is neither a party to the contract
nor entitled to any benefit from it.
Limitation of action

A company cannot go beyond the power stated in its Memorandum of Association.

The Memorandum of Association regulates the power and fixes the objects of the
company. Acts done beyond the powers given in the Memorandum of Association
are ultra-vires and hence treated void.

Separate management

Members may derive profits without being burdened with the management of the
company.

Termination of existence

A company is created by law; throughout its life, carries on its affairs according to
the law; and ultimately is wind up by law. A company can be terminated only by
the procedure of winding up.
Types of Company on the basis of Incorporation:
Statutory Companies :

v These companies are constituted by a special Act of Parliament or State Legislature.

These companies are formed mainly with an intention to provide the public services.

v Though primarily they are governed under that Special Act, still the CA, 2013 will be
applicable to them except where the said provisions are inconsistent with the
provisions of the Act creating them (as Special Act prevails over General Act).
Examples of these types of companies are Reserve Bank of India, Life Insurance
Corporation of India, etc.

Registered Companies:

v Companies registered under the CA, 2013 or under any previous Company Law are
called registered companies.
v Such companies comes into existence when they are registered under the Companies
Act and a certificate of incorporation is granted to it by the Registrar.
Classification of companies:
On the basis of size or number of members in a company:
Public Companies:

v Defined u/s 2(71) of the CA, 2013 – A public company means a company which is not
a private company.
v Section 3(1) of the CA, 2013– Public company may be formed for any lawful
purpose by 7 or more persons.
v Section 149(1) of the CA, 2013 – Every public company shall have minimum 3
director in its Board.
v Section 4(1)(a) of the CA, 2013 – A public company is required to add the words
“Limited” at the end of its name.
v It has a minimum paid-up capital of 5 lakhs or such higher paid-up share capital.
v It is the essence of a public company that its shares and debentures can be transferable
freely to the public unlike private company.
v Only the shares of a public company are capable of being dealt in on a stock
exchange. A private company that is a subsidiary of a public company, will be
considered a public company.
Private companies:

v Defined u/s 2(68) of the CA, 2013 – A private company means a company which by
its articles— a. Restricts the right to transfer its shares;
v b. Limits the number of its members to 200 hundred (except in case of OPC)

v Section 3(1) of the CA, 2013 – Private Company may be formed for any lawful
purpose by 2 or more persons.
v Section 149(1) of the CA, 2013 – Every Private company shall have minimum 2
director in its Board.
v Section 4(1)(a) of the CA, 2013 – A private company is required to add the words
“Private Ltd” at the end of its name.
v It has a minimum paid capital of 1 lakh or such higher paid-up share capital.
v Where 2 or more persons hold 1 or more shares in a company jointly they shall be
treated as a single member.
v Prohibits any invitation to the public to subscribe for any securities of the company;
v Special privileges – Private Companies enjoys several privileges and exemptions
under the Companies Act.
One-Person Company (OPC):

v According to Section 2(62) of the Companies Act 2012, a sole proprietorship is a

company that has only one person as a partner or shareholder.
v The board of directors must have 1 director and its only member can also hold the
role of director.
v In this type of company, the term “nominee” assumes the highest importance
because, after the death of the original member, the business of the company
would cease.
v It is therefore necessary to mention the name of the candidate when registering
such a company.
v It is not followed in other types of companies because they have perpetual
succession.
Types of Company on the basis of Domicile

Foreign company:

v Defined u/s 2(42) of the CA, 2013 – “foreign company” means any company or
body corporate incorporated outside India
v which has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and conducts any business activity in India
in any other manner.
v Section 379 to Section 393 of the CA, 2013 prescribes the provisions which are
applicable on such companies.

Indian Company:

v A company formed and registered in India is known as an Indian Company.

Types of Company Based on Liability

The members of a company have either limited or unlimited liability. The

liability of the company member arises at the time of bankruptcy, company
loss, winding up or paying the company’s debt. Thus, a company established
under the Companies Act, 2013 can also be classified based on the liability of
its shareholders.

Company Limited by Guarantee – Section2(21)

A company limited by guarantee means the member’s liability is limited to the

amount they guarantee to contribute towards the company’s assets. The
member’s liability is limited by the company MOA. The members undertake in
the MOA to contribute the guaranteed amount in the event of the company
being wound up. The percentage of the member’s ownership is based on the
amount guaranteed by them.
Company limited by shares - Section 2(22)-

A company limited by shares means the liability of the company members is

limited by the Memorandum of Association (MOA). The company members
are liable only for the unpaid amount on the shares respectively held by them.
The equity shares held by a member measure the shareholder’s ownership in
the company.

Unlimited Company

An unlimited company means the company members do not have any limit
on their liability. If any debt arises, the member’s liability is unlimited and
extends to their personal assets. Usually, the company entrepreneurs choose
not to incorporate this type of company.
Types of Company Based on Control
Holding company:

Defined u/s 2(46) of the CA, 2013 - A holding company is a company having the
majority of voting powers of another company (subsidiary company). The holding
company is the parent company controlling the subsidiary company’s policies,
assets and management decisions. However, it remains uninvolved in the
subsidiary’s day-to-day activities.

Subsidiary Company:

A company, which operates its business under the control of another (holding)
company, is known as a subsidiary company. The holding company controls the
composition of the board of directors of the subsidiary company or more than 50%
of its voting powers. Where a single holding company holds 100% voting powers,
the subsidiary is known as the Wholly Owned Subsidiary (WOS) of the holding
company. Examples are Tata Capital, a wholly-owned subsidiary of Tata Sons
Limited.
On the Basis of Ownership, companies can be divided into two categories:

Government Company

Under section 2(45) of the Companies Act 2013, a Government Company is

defined as “any company in which not less than 51% of the paid-up share capital
is held by the Central Government, or by any State Government or Governments,
or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a
Government Company

Government Company Features

v An organisation that is owned by the government is financed by both public

and private shareholdings.
v An additional source of finance for the company is the capital market.
v It is a separate legal entity.
v The Memorandum of Association and Articles of Association regulate employee
appointments.
v Its incorporation is governed by the Companies Act of 1956 and 2013,
respectively.
v Management is subject to and governed by the laws of the Companies Act.

EXAMPLES:
Indian Oil Corp.
Ltd. Bharat Petroleum Corporation Ltd
Coal India Ltd NTPC Ltd
Hindustan Petroleum Corporation Ltd.

Non-Government Company:

All other companies, except the Government Companies, are known as Non-
Government Companies. They do not possess the features of a government company
as stated above.
Defunct company

A defunct Company means a company which has Nil asset and Nil liability, and failed
to commence business within one year of incorporation.
As per the Companies Act, 2013, a defunct company is a company that is not involved
in any business activities. Such companies’ names get removed from the Register of
Companies under section 248 of the companies act, 2013.

Status of a Defunct Company Limited Liability Partnership in a Defunct

Company:-

v A partnership between two parties ends in a company if the company becomes

defunct.
v It is no longer considered active.
Charitable Companies (Section 8)

Certain companies have charitable purposes as their objectives. These companies are
called Section 8 companies because they are registered under Section 8 of Companies
Act, 2013.
Charitable companies have the promotion of arts, science, culture, religion, education,
sports, trade, commerce, etc. as their objectives. Since they do not earn profits, they
also do not pay any dividend to their members.
Dormant Companies (Section 455)

These companies are generally formed for future projects. They do not have significant
accounting transactions and do not have to carry out all compliances of regular
companies.

Nidhi Companies

A Nidhi company functions to promote the habits of thrift and saving amongst its
members. It receives deposits from members and uses them for their own benefits.
ILLEGAL ASSOCIATION:

Section 464(1) of the Companies Act, 2013, states that any association or partnership
formed exceeding fifty members for a profit gaining business, without registering it
as a company under Companies Act, 2013, is said to be known as Illegal Association.

{Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this

regard. Accordingly, ‘an association or partnership consisting of more than 50
persons is termed as an Illegal Association under Section 464 of Companies Act
2013’}

FINE:
According to sub-section (3) of Section 464 of Companies Act 2013
“Every member of an association or partnership carrying on business in contravention
of sub-section (1) shall be punishable with fine which may extend to one lakh rupees
and shall also be personally liable for all liabilities incurred in such business.”
CASE LAWS
Greenberg v. Cooperstein
EXCEPTIONS TO THE CONCEPT OF ILLEGAL ASSOCIATION IN
COMPANY LAW Section - 464(2)

A. Hindu Undivided Family Carrying On Any Business

It consists of the Karta, who is typically the eldest person or head of the family, while
other family members are coparceners. They are considered as a unit and hold the
capacity of the individual business, it isn’t necessary for the Hindu Undivided family
to register themselves as an association.

B. Partnership or Association if it is formed by professionals who are governed by

any Special Acts

Any partnership or Association, which is governed by special acts, is always within the
purview of the Special Act and it isn’t necessary for that association to register
themselves under the Companies Act, 2013
CASELAWS

Wilkinson v. Levison (1925) 42 T.L.R. 97,

In this Case Court held that ‘the members of an illegal association are
individually liable in respect of all acts or contracts made on behalf of the
association; they cannot either individually or collectively, bring an action to
enforce any contract so made, or to recover any debt due to the association’.

In V. K. Kumaraswami Chettiar vs Additional Income-Tax Officer, 1957 31

ITR 457 Mad,

In this case the Hon’ble Madras High Court observed that “an illegal
association is liable to be taxed”.
Lifting Of Corporate Veil Under Companies Act, 2013

The Companies Act, 2013 clarifies that a company is a separate entity distinct
from its members. But practically, it is an association of persons who are the
beneficial owners of the company and its corporate assets.
This fiction is created by a veil termed the corporate veil.

vlifting the corporate veil under the Companies Act, 2013 means ignoring that a
company is a separate legal entity and has a corporate personality

v separate identity of the company and looks back at the true owners who are in
control of the company.

Case laws:

Solomon Vs. Solomon And Co. Ltd.

The Doctrine of Corporate Veil and Lifting of Corporate Veil

If it comes to light that members are abusing the statutory privilege, the individuals
involved will no longer be able to hide behind the corporate identity. The Court will pierce
the corporate veil by applying the principle/doctrine known as “lifting of or piercing the
corporate veil.”
Cases in which the court has ordered the veil to be lifted
•If the business commits a fraud.
•It is only on instruments where the corporation does not have a physical presence.
•If the corporation has an antagonistic personality due to its ties to a hostile country.
•If the company’s name is being used to conceal unlawful activity.
Lifting Mechanism of Corporate Veil

The corporate veil can be lifted by:

•Statutory Lifting

Misstatement In Prospectus (Section- 34 and 35)

In a case where the company’s prospectus is misrepresented, the company and
every director, promoter, and every other individual, who authorized such issue of
prospectus shall be liable to compensate the loss to every person who subscribed for
shares on the faith of misstatement.

Failure to return application money (Section-39)

In the case of issue of share by a company, whether to the public or by way of rights
if, minimum subscription as stated in the prospectus has not been received directors
shall be personally liable to return the money with interest, in case application
money is not repaid within a prescribed period.
Misdescription Of Name

As per the Companies Rule,2014, a company shall have its name printed on every official
document, including ( promissory notes, BOE, and such other documents) as may be mentioned.
Thus, where a company’s officer signs on behalf of the company any contract, BOE, promissory
note or cheque or order for money, that individual shall be liable to the holder if the name of the
company is not properly mentioned.

Ultra-Vires Acts

Directors and other officers of a company will be held liable for all those acts they have
performed on the company’s behalf if the same is ultra vires the company.

Fraudulent Conduct (Section 339):

In case of winding up of a company, it comes out that any business has been carried on with
intent to cheat the creditors or any other individual, or for any illicit purpose, if the Tribunal thinks
it proper so to do, be directed in person liable without limitation to obligation for all or any debts
or other obligations of the company.
Judiciary lifting

Due to the rise of corporations and the ever-growing conflict between

corporations and their different stakeholders, courts have taken a more pragmatic
strategy and have lifted the veil of corporate governance.

The following are examples of situations where the court may lift the corporate
veil:-

1.Improper conduct and Prevention of Fraud.

2.Formation of the Subsidiary company to act as Agent.
3.Economic offence
4.Revenue Protection
5.The company used it for illegal purposes.
6.Company ignoring welfare legislations.
7.Company acting a mere fraud.
Meaning of Partnership Firm

A partnership firm is a type of business entity that is formed

by the association of two or more members who have agreed
to share the profits of the business, which is carried on by all
partners or one partner acting for all.

According to Indian Partnership Act, 1932, Section 4 defines

Partnership as – “An agreement between persons who have
agreed to share profits of the business carried on by all or any
one of them acting for all.”
 BASIS FOR
PARTNERSHIP FIRM COMPANY
COMPARISON
Meaning When two or more persons agree to carry on a A company is an association of
business and share the profits & losses persons who invests money towards
mutually, it is known as a Partnership firm. a common stock, for carrying on a
business and shares the profits &
losses of the business.

Governing Act Indian Partnership Act, 1932 Indian Companies Act, 2013
How it is created? Partnership firm is created by mutual agreement The company is created by
between the partners. incorporation under the Companies
Act.
Registration Voluntary Obligatory
Minimum number of Two Two in case of private company and
persons Seven in case of public company.
Maximum number of 100 partners 200 in case of a private company
persons and a public company can have
unlimited number of members.
Audit Not Mandatory Mandatory

Management of the concern Partners itself. Directors

Liability Unlimited Limited
Contractual capacity A partnership firm cannot A company can sue and be
enter into contracts in its sued in its own name.
own name
Minimum capital No such requirement 1 lakh in case of private
company and 5 lakhs in
case of public company.
Use of word limited No such requirement. Must use the word 'limited'
or 'private limited' as the
case may be.
Legal formalities in No Yes
dissolution / winding up
Separate legal entity No Yes
Mutual agency Yes No
Distinction between a Hindu Undivided Family Business and a Company

Hindu Undivided Family Business Company

š A Hindu Undivided Family Business consists š A company consists of heterogeneous (varied

of homogenous (unvarying) members since it or diverse) members.
consists of members of the joint family itself.
š In a Hindu Undivided Family business the š There is no such system in a company
Karta (manager) has the sole authority to
contract debts for the purpose of the business,
other coparceners cannot do so.
š A person becomes a member of a Hindu š There is no provision to that effect in the
Undivided Family business by virtue of birth. company.
š No registration is compulsory for carrying on
business for gain by a Hindu Undivided š Registration of a company is compulsory.
Family even if the number of members
exceeds twenty [Shyamlal Roy v.
Madhusudan Roy, AIR 1959 Cal. 380 (385)].