HISTORY OF COMPANY

 1850 (based on 1844 English Companies Act): Certain merchants of England associated together to
form a Joint Stock company due to business interest in East Asia. The issue was that the liability of
the shareholders was unlimited.
 Thereafter, the company was regarded as a distinct and separate entity. It has a personality separate
from its members. It stands as a distinct person in the eyes of law. However, the liability of members
was not limited. A Director, MD or CEO, having the power to represent, can argue before the Court.
 Act of 1857 (based on English Companies Act, 1856) removed the unlimited liability aspect.
However, it didn’t remove unlimited liability for banking companies.
 Companies Act, 1858 removed unlimited liability of Banking companies
 Companies Act, 1866 It was with regard to trading companies [companies that find emerging
markets (such as base overseas market] for trading purposes). Winding up, registration, incorporation,
etc. were dealt with.
 1913 1914, 1915, 1920, 1926, 1930 and 1932 – series of amendments.
 1950Company Law Amendment Committee (headed by H.C. Bhabha- part of first cabinet of India
representing Commerce Ministry) development of trade and industry in the global market, there was
a need to keep our law in consonance with the pace of development in rest of the world. A report was
submitted calling for a revamping of the Companies Act Thus came about the Companies Act, 1956.
 Depositories Act 1996 (Depositories are a form of securities issued in the form of financial market
instruments) Companies Amendment Act, 1996 for harmonization.
 1991 need to booze capital to make India a more lucrative area of investment. Purpose was to attract
FDI (Foreign Direct Investment- they have a long term investment strategy; they will not only give
capital but will also contribute in terms of infrastructure and other resources; thus they also gain some
control) and FII (Foreign Institutional Investors foreign investors investing in India with a short term
investment strategy; they are only interested in the financial market and the returns earned).

NOTE: Greenfield Project and Brownfield Project. Greenfield project involves work which does not follow
a prior work. Infrastructural projects on the unused lands where there is no need to remodel or demolish an
existing structure are called greenfield projects. For instance: The proposed Jio Institute of Reliance
Foundation in Pune (Maharashtra) under Green Field Project was granted Institute of Eminence status by the
Union Ministry of HRD. On the other hand, the projects which are modified and upgraded are known as
brownfield projects. In this case investment maybe made for purchasing or leasing already existing production
facilities to launch a new production activity.

 FII Regulation, 1995. Thereafter, Foreign Portfolio Investors Regulations, 2014

 Foreign Portfolio Investors (FPI) a much more broader category comprising FII, qualified
institutional buyers, etc.
  2001Buy Back of Securities
 2002Producer Companies a form of cooperative (voluntary association) intending to share
profits, rather than having a large chunk of shareholders getting dividends.
 2006 Director Identification Number [requirement for being a direct-natural person; no academic
qualification] A natural person has to apply before the registry to obtain a DIN. A director identifies
himself before the eyes of law by the way of DIN.
 Act 18 of 2013 Plethora of amendments; a total revamp of 1956 Act; As of now there are 470
sections (earlier 658) from a legislative POV, lot of changes take place and law cannot remain static.
Minor changes are made by formulating corresponding circulars, rules, etc.
Introduced concepts of One Person Company, CSR
 2015 removed minimum paid up share capital for companies
 2017 specifically targeted ease of doing business; ambiguities of 2013 Act were removed more
clarity w.r.t. CSR; definitions of associate companies made more clear.
 2018 Decriminalization of certain offences.

Owner of the Company It is wrong to say that shareholders are owners of the company because there are
cases where there exist incorporated companies without any shareholders. There is nothing in law that makes
the shareholders the owners of the company. They are the members of the company. A company is a juristic
entity and need not be owned by anyone.

Origin of the term ‘Company’ ‘Com Panis’ meaning come together for bread.

NOTE:

Tax (paid by individual); Duty (paid on goods).

One Person Co.  MoA is signed by one person. It acts as a private company. OPCs and small companies
have certain privileges and exemptions.

Base Erosion and Profit Shifting

Fiat Currency and Cryptocurrency

ICO- Initial Coin Offering

CHARACTERISTICS OF COMPANY

1. Separate Legal Personality: A company is an association having an existence separate from its
members. Unlike partnership, the company is distinct from the persons who constitute it. By virtue of
this feature it can be said that no one owns a company.
 Re Kandoli Tea Co. Ltd. 1886
 3 members X, Y, Z transferred a tea estate to a company.
  When estate is transferred, a certain duty is to be paid on the value of the
property/transaction/goods, which is known as the ad valorem duty.
 X, Y, Z claimed exemption from ad valorem duty on the ground that they themselves
were shareholders in the company and therefore, it was nothing but a transfer from them
in one capacity to themselves under another name.
 Court for the first time held that a company is an association distinct in its personality
in the eyes of the law. The company was a body separate from the shareholders and the
transfer is to be treated as a conveyance wherein the shareholders, X, Y and Z are to be
considered as totally different persons.
 Solomon vs. Solomon & Co. Ltd. 1897
 Solomon (‘S’) was a prosperous leather merchant. He converted his business into a
Limited Company- Solomon & Co. Ltd. The company so formed consisted of 7
members- S, his wife and 5 of his children.
 S was also a secured creditor (‘SC’)
 There were also some third parties who were the unsecured creditors (‘UC’) of the
company.
 The company went into liquidation. SCs need to be paid before UCs and so S’s right of
recovery stood prior to the claims of the UCs.
 Contention of UCs is a member of the company along with his family members and is
also the SC and UCs are the third parties and therefore, they need to be paid first.
 The House of Lords unanimously held that S was the agent of the company. He was
entitled to get the money because of his status as an SC. The contention of the UCs was
rejected.
 Lee vs. Lee Air Farming Ltd. 1961
 L formed the company with a share capital of 3000 pounds, of which 2999 pounds were
held by L. He was therefore the major shareholder. He was also the sole governing
director of the company. In his capacity as the controlling shareholder as well as the
sole director, he exercised full and unrestricted control over the affairs of the company.
 He was also a qualified pilot and was appointed as the chief pilot of the company under
the AoA and drew a salary for the same.
 Workmen Compensation Actdeath of employee during course of employment-
compensation from the employer. In this case, company is the employer.
 While piloting the company’s plane he was killed in an accident. Wife filed a suit
arguing that because Lee died during course of employment, he is entitled to
compensation.
  The issue that arose was whether while holding the position of sole governing director,
could L also be an employee or worker of the company.
 It was held that the mere fact that someone was the director was no impediment to his
entering into a contract to serve the company.
 Bacha F. Guzdar vs. CIT, Bombay

[Missing Notes]

2. Incorporated Association: ‘incorporated’ in S. 2(20). A company must be incorporated or registered

under the Companies Act. Minimum number of members required for incorporation is 7 in case of
public companies and 2 in case of private companies (Section 3). However, Section 3 also allows for
formation of a ‘one person company’.
 OPC J.J. Irani Committee: introduced to give a corporate structure to sole proprietorship,
where the risk of business and liability are borne by the sole proprietor or single owner.
 Companies have a more formal structure and require a higher degree of compliance and so a
number of reliefs and benefits are given to OPCs to incentivise the sole proprietors.
 OPC structure confers benefits of corporate structuring such as transparency, proper filing of
returns, ease of getting loans, etc.
 Incorporated: formed under the old or present law.
 OPC is a sub-classification of private company. an OPC cannot be a public company.
 The MoA must mention regarding the formation of an OPC explicitly and it must have a
nominee clause.
 Maximum members private: 200; Banking: ??? Public Company: no limit

3. Limited Liability
 Company limited by shares (on valid call) S. 2(22): "company limited by shares" means a
company having the liability of its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them.
Amount is not always paid on a share completely. Generally, companies follow the practice of
“calls”. For instance, X=Rs. 100; amount paid on first call= Rs. 30; liability of the shareholder=
Rs. 70. Calls are made as and when the company is in need of funds. Before making a call,
reasons are to be discussed with the members. In case a shareholder defaults payment on a call,
his share will be forfeited.
 Company limited by Guarantee S. 2(21): "company limited by guarantee" means a company
having the liability of its members limited by the memorandum to such amount as the members
may respectively undertake to contribute to the assets of the company in the event of its being
wound up.
 Memorandum explains what is the limitation. There is no initial contribution by members and
no share capital. The members who have signed the Memorandum, guarantee to contribute a
certain amount of money in the event of winding up/liquidation/dissolution or any other
exigency.
The rationale behind this concept is to save the company in crisis. Such a concept has become
obsolete due to practical issues associated with it.
They are known as “community interest company” in UK.
 Company limited by Shares and Guarantee members will be liable for the balance amount
of shares. Additionally, they also guarantee to pay a certain amount in the event of
winding up. Practically, they will be first asked to pay the balance amount in case of winding
up. The next resort will be to pay the amount initially guaranteed. All of this will apply
uniformly to all the members to maintain good corporate governance. There cannot be a case
wherein some members subscribe to shares without undertaking to guarantee any amount and
others guarantee to pay specific amounts without subscribing to shares. In other words, there
cannot be 2 classes of members. This can happen if it is approved by the general body of
shareholders and if it has been provided in the AoA in the form of a clause.
 Unlimited Liability Company S. 2(92): "unlimited company" means a company not having
any limit on the liability of its members.
The liability of the members will not be unlimited in essence. If the debt, liability and charges
of a company amount to Rs. 1000, each member can be made liable for the entirety of this
amount. Such member has a recourse. All the other members have to compensate the said
member, or they would be subjected to a legal action against them. The company needs to make
full disclosure as to the liability of the company before the members.
 Exceptions to Limited Liability
 Section 339: Liability for fraudulent conduct of business in case a
member/manager/director exercises fraud against an investor, he shall be made
personally liable
4. Perpetual Succession
 A company is a juristic person which will continue to exist having a separate identity in the
eyes of the law. The company continues to be in existence even on the death of all of its
members.
 Section 302 of the Act: Dissolution of Company by Tribunal death certificate of a company.
5. Common Seal
 No specifications as to the shape and size of a common seal.
 Information contained in a common seal: Name of the company, date of incorporation and
registered office.
  Method 1 2015 Amendment Act has made common seal optional for a company. this was
done in the interest of ease of doing business. In case there are multiple directors or agents
negotiating on behalf of the company, the company has to provide for multiple seals which
increases the risk of tarnishing the authenticity of transactions carried out and misuse of
common seal.
 Method 2If a company has a common seal, it has to provide for the safe custody of the
common seal.
 NOTE: Arts. 2 and 3 of UN Convention on BoE and Promissory Notes
 Section 22: Execution of bills of exchange, etc.
 A general power of attorney or a special power of attorney authorises a person to execute a
BoE or promissory note.
 In the absence of a common seal, authorisation must be made by 2 directors or by a director
and a CS.
 Any member of KMP, officer or employee of the company can execute a contract on behalf of
the company required, a board resolution has been passed in this behalf by the board of
directors [proposal/motion in the first instanceaffirmationauthorisation].
 MoA and AoA: governing documents as to how a common seal is to be used or how
authorisation is done in the absence of a common seal.
 Disqualification of a director is a matter of internal management and third person is not
expected to know this. In such a situation the transaction cannot be cancelled, the company
would continue to be liable. Disqualification shall have a prospective effect and not a
retrospective effect as it affects substantive rights of third parties.
 Construction or Interpretation in case of a general/specific PoA.
 Difference between authorisation and attestation: Authorisation as authorised by BoD
through a board resolution or shareholders’ resolution; Attestation generally AoA provides
for witnesses to attest in certain cases. It is a necessity requiring authentication by signature of
witnesses.
 Whenever a document is executed by PoA  each and every clause in the PoA will be subject
to strict interpretation; It cannot be given liberal interpretation conferring wider powers.
6. Transferability of Shares in a Public or Private Company Section 44
 Share certificate earlier it used to be exchanged for money; after Depositories Act
dematerialisation of shares and creation of demat accounts.
 In a public company it is open for the public to come forward and subscribe to the shares. In a
private company subscription not open for public, made with an objective that capital is
collected from certain known people generally. Such a company does not change its
shareholder composition easily. There is no transferability.
  Movable property; For a private company the only thing that matter how the transfer is
provided for in the AoA. However, there are extra compliance to be followed by public
companies.
 Why there is a differentiation as to transferability in case of public and private companies?
Western Maharashtra Development Cooperation Ltd. vs. Bajaj Auto Ltd.
 Court differentiated on the basis of the objectives of a public company and a private
company.
 Public company cater to public demands and interests. They want the public to
contribute as they cannot restrict their sphere to a few people. Private companies
Increase capital among themselves. They don’t want ownership or equity to be
dissolved.
 Transferability in private companies is not as wide as it is in case of public companies.
 Clauses in AoA of Private and Public Companies
1. Right of First Offer (ROFO) Suppose there is a person A (I) and B (II) and there is a 3rd
party (outsider), C. If A wants to sell his shares, he will first approach B. Normally B will
buy even if the price quoted by A is high. In case B does not want to buy or if B quotes an
amount lesser than what is quoted by A, he will approach the third party who is an outsider.
Either C will quote a sum which will be lower or higher than B. Only if C quotes an amount
higher than that quoted by B, A can sell his shares to C. If C quotes a lesser amount, A can
approach a 4th party and the process goes on till the a party offers the right quotation.
2. Right of First Refusal (ROFR) A will first go to C (3rd party) and determine the market
price of the shares. Then A will go to B. Now B has to match C’s offer or offer more than
that. If B doesn’t want to dissolve the equity of the company, he’ll accept the offer. Least
preferred by outsiders. This would be advantageous for a third party only if he is able to
quote a price so exorbitantly high that the shareholder is unable to match the price.
3. Drag Along majority shareholders ask the minority shareholders to sell their shares to a
third party along with them. This is done so that the minority does not block the sale of
shares in case of a merger.
4. Tag Along Minority shareholders do not want the majority to get all the fruits of the tree.
Minority asks the majority that if they want something, they want to tag along with the
majority.
5. Lock-in Period Clause: Initial members cannot transfer their shares until the expiry of a
particular period of time
 CASE STUDY Bristal Myers Squibb Corp and Celegene Corp [READ UP ON THIS]

ADVANTAGES OF INCORPORATION

1. Independent Legal Existence: Shareholders will not face any kind of personal misfortune.
 2. Limited Liability: personal assets of a shareholder cannot be used to meet the liability of the company
3. Perpetual Succession: company exists to exist even if all the members die, retire or become insolvent.
A company’s death certificate cannot be obtained until and unless dissolution is applied for.
4. Transferability: Section 44 Shares are movable goods. They are freely transferable in public
companies.
5. Infinite Membership: Infinite in case of public companies while it cannot be 200 or more (minus
present and past employees and qualified institutional buyer [accredited investors]) in case of private
members.
6. Mobilisation of Huge Resources: Public companies have access to infinite people and hence access
to huge funds. Even private companies can gather huge resources through QIBs.
7. Separate Property
8. Ease in Control and Management: Directors have the power of management. By virtue of holding
shares, shareholders have control but they don’t have to manage the day to day affairs.

DISADVANTAGES OF INCORPORATION

1. Formality and Expense: ot of consolidated financial statements, independent financial statements,

return filing and lot of other compliances for which professionals need to be engaged such as CAs and
CSs. Therefore, a lot of expenses are incurred.
2. Loss of Privacy: Companies are supposed to disclose most information with the sectoral regulators
and the general public. They are unable to maintain secrecy of certain pieces of confidential
information. Loss of privacy is comparatively less in private companies.
3. Divorce of Control from Ownership: Shareholders, having ownership of the assets of the company
in the form of shares, gain control over the company, however, they may not always be in a position
to manage the company or exercise control over it due to lack of competency.
4. Detailed Winding-up Procedure: Winding-up contributories, creditors, Registrar of Companies,
government, directors, etc. Voluntary Liquidation: you are not insolvent but the purpose of the
company is over and so you are willing to initiate the legal process to end the company. This is now
governed by the IBC.
5. Control by few
6. Greater Public Accountability
7. Possibility of Fraud Examples of scams: Enron, Satyam, Goldman Sachs, Xerox, Harshad Mehta,
etc.