MODULE 1

INTRODUCTION TO COMPANY LAW

HISTORY OF COMPANY LAW

 Principles of Indian company law has close connection with English
company laws.
 The word COMPANY derived from 2 Latin words,
COM means TOGETHER
PANIS means BREAD
So, it means it’s the association of people who came together to eat.
 As there were no proper legal mechanisms to regulate, many innocent
people were cheated. This paved way for the Bubbles Act 1720.
CASE OF SOUTH SEA COMPANY
 South sea company was formed by the act of parliament in 1711.
 Company was granted a trade monopoly with South America, but
founders of the company themselves knew that it will not work out
making it an out an out fraud.
 Company made fake promises and idea of getting rich fascinated people.
As a result, stock prices went up really high but later collapsed. This was
a clear instance of market manipulation.
 Many people lost their money and this situation lead to the BUBBLES
ACT OF 1720.
 BUBBLES ACT forbade the formation of any joint stock company unless
approved by Royal Charter.

MODERN COMPANY LAW

 1844- Joint Stock Companies Act (ENGLAND)
So, from then on, companies could be created without Royal
Charter or Act of Parliament.
Now people could register companies by approaching the Office of
Registrar of Joint Stock Companies.
FAILURE- Did not include principle of limited liability.
 1855- LIMITED LIABILITY ACT to resolve above issue.
 COMPANIES ACT 1908,1929 paved way for formation of private
companies.
HISTORY OF COMPANY LAW IN INDIA
 1st legislation for JOINT STOCK COMPANIES ACT – 1850
Modelled on the basis of 1844- Joint Stock Companies Act
(ENGLAND).
Included 1. Registration of companies.
2. Transferability of shares.
 ACT OF 1857- Brought in concept of Limited liability companies.
 Act of 1866(ENGLAND) – Included INCORPORATION,
REGULATION AND WINDING UP.
 INDIAN COMPANIES ACT 1913 – Followed the changes in English
company laws.
 INDIAN COMPANIES ACT 1956 – Was in force for 57 years and had
undergone 25 amendments.
COMPANIES ACT OF 2013
 INDIA- primarily agrarian economy but in 1991 LPG was introduced.

 Govt constituted expert committee under Dr. J.J Irani- to advise on

changes to be introduced.
 2012 – COMPANY BILL Presented and passed in both houses of
parliament.
From 2013- COMPANIES ACT OF 2013 came into existence.
 It has 29 Chapters
7 schedules
470 sections.

FRAMEWORK FOR COMPANY LAW ADMINISTRATION

 In India, administration of Company law is vested with Central

Government.
 Companies Act 2013 – principle legislation to deal with it.
 Ministry of Corporate affairs – exercise power of Central govt.
 In case of listed companies, SEBI has substantial powers.
 Registrar of companies, regional directors also have
considerable powers in their area of jurisdiction.
 2 Tribunals
National Company Law Tribunal (NCLT)
National Company Law Appellate Tribunal (NCLAT)
 Appeals from NCLAT can be filed in supreme court.
Provision for investigating serious frauds – Serious Frauds
Investigation Office (SFIO)

NCLT
 Basic purpose- To have a single forum to deal with civil matters
connected with companies.
 Constituted by central govt through an official gazette.
 No. of members to it – decided by central govt.
 Includes both judicial & technical members.
 President of NCLT – who is/has been a judge of high court for 5
years.

NCLAT
 Main purpose -Hear appeals from NCLT.
 If a person is aggrieved by order of NCLT, then they can appeal
before NCALT within 45 days from date of receipt of copy of
the order.
 Created by central govt through notification.
 Includes both judicial & technical members.
 Chairman & members – appointed by central govt through
notification.
 No. of members- 11
 Chairman/chairperson of NCLAT – who is /has been a judge of
supreme court/Chief justice of high court.

SUPREME COURT
If the party still has appeal against the order of NCLAT, then
they can approach the Supreme court within 60 days from date
of receipt of copy of the order.

Serious Fraud Investigation Office (SFIO)

 Indian Companies Act 2013- Section 211 – Empowers central
govt to establish SFIO.
 Main purpose- To investigate frauds relating to a company.
 Headed by director – not less than the rank of joint secretary
and has experience and knowledge in corporate affairs.
 Govt can appoint experts in the field of banking, IT, law,
corporate affairs.
  Special feature – investigation is EXCLUSIVE.
i.e., if SFIO undertakes investigation, then no other agency can
proceed with the same case.

SPECIAL COURTS
 For criminal offenses committed under the act.
 Central govt – for speedy trial – designates special courts.
 Consist of single judge, appointed by central govt.
DEFINITION OF COMPANY
General definition
Company is defined as an incorporated association of person.
Legal definition
Section 2(20) of the Companies Act, 2013, defines the term ‘Company’ as follows:
“Company means a company incorporated under this Act or under any
previous company law.”
CHARACTERISTICS OF A REGISTERED COMPANY
1. Separate Legal Entity
One of the most distinctive features of a Company, as compared to
other organizations, is that it acquires a unique character of being a separate legal
entity. Hence, when you register a company, you give it a legal personality with
similar rights and powers as a human being.

The existence of a company is distinct and separate from that of its members. It
can own property, bank accounts, raise loans, incur liabilities and enter into
contracts.

Also, it has a distinct personality which is different from those who compose it.
Member can also contract with the Company and acquire a right against it or incur
a liability to it. However, for any debts, the creditors can sue the Company but the
members cannot.

A Company can own, enjoy, and dispose of a property in its own name. While the
shareholders contribute to the capital and assets, the company is the rightful owner
of such assets and capital. Further, the shareholders are not private or joint holders
of the company’s property.
CASE LAW

SALOMON V/S SALOMON

Facts:

 Mr Salomon was a sole trader of a shoe making company in England.

 He then incorporated it by selling it to a separate legal person A Salomon
& Co Ltd for £39,000.
 Under the Companies Act 1862 (no longer valid) a company required a
minimum of seven members. The members of A Salomon & Co Ltd was
Mr Salomon himself, Mrs Salomon and his five children.
 Mr Salomon held 20,000 shares whereas the other 6 shareholders had 1
share each.
 The Company still owed Mr Salomon £10,000 so gave him debentures
for this amount which gave him a floating charge entitling him to
payment in the event of liquidation- company went into liquidation.

Issue:

Mr Salomon should be made responsible for company’s debts and shouldn’t be

paid- forgetting he only had limited liability and that the company was a
separate legal person.

The House of Lords decision:

Lord Halsbury: once company is legally incorporated it is an independent

person with rights and liabilities of its own and these aren’t influenced by the
motives of the people involved in its promotion. The company conducts its own
business as a separate person.

2. Limited Liability

One of the important features of a company is the limited liability of its members.
The liability of a member depends on the type of company.

 In the case of a limited liability company, the debts of the company in

totality do not become the debts of its shareholders. In such a case, the
liability of its members is limited to the extent of the nominal value of shares
held by them. The shareholders cannot be asked to pay more than the unpaid
value of their shares.
 In the case of a company limited by guarantee, members are liable only to
the extent of the amount guaranteed by them. Further, this liability arises
only when the company goes into liquidation.
 Finally, if it is an unlimited company, then the liability of its members is
unlimited too. But such instances are very rare.

3. Artificial Legal Person

Another one of the features of a company is that it is known as an Artificial Legal

Person.

 Artificial – because its creation is by a process other than natural birth.

 Legal – because its creation is by law, and
 Person – because it has similar rights to a human being.
Further, a company can own property, bank accounts, and do everything that a
natural person can do except go to jail, marry, take an oath, or practice a learned
profession. Hence, it is a legal person in its own sense.

Since a company is an artificial person, it needs humans to function. These

humans are Directors who can authenticate the company’s formal acts either on
their own or through the common seal of the company.

4.Common Seal

While a company is an artificial person and works through the agency of human
beings, it has an official signature. This is affixed by the officers and employees of
the company on all its documents. This official signature is the Common Seal.

However, the Companies (Amendment) Act, 2015 has made the Common Seal
optional. Section 9 of the Act does not have the phrase ‘and a common seal’ in it.
This provides an alternative mode of authorization for companies who do not wish
to have a common seal.

According to this amendment, if a company does not have a common seal, then
the authorization shall be done by:

 Two Directors or
 One Director and the Company Secretary (if the company has appointed a
Company Secretary).

5. Perpetual Succession

Another important feature of a Company is that it continues to carry on its

business notwithstanding the death of change of its members until it is wound up
on the grounds specified by the Act. Further, the shares of the company change
hands infinitely, but that does not affect the existence of the company.

In simple words, the company is an artificial person which is brought into

existence by the law. Hence, it can be ended by law alone and is unaffected by the
death or insolvency of its members.

6.Separate Property

As company is a legal person, it can buy and sell properties in its name. Even
though members contribute to capital, they are not owners of the company, so
they have no proprietary rights over it.

7.Capacity to sue and be sued

A company can sue and be sued in its corporate name, almost similar to that of a
human being.

8.Transferability of shares

Shares can be easily sold and bought in the share market. However, Articles of
company can prescribe the manner of transfer of shares. Right of transfer cannot
be absolutely prevented but articles of pvt company can include certain
restrictions.

FEATURES- COMPANIES ACT 2013

1. Flexibility
2. Wider scope
3. Liberal administration
4. Strict punishment
5. Strong administrative framework
6. Suited for globalised world
7. Corporate governance and CSR
8. IT

ADVANTAGES &DISADVANTAGES OF INCORPORATION

SL.NO ADVANTAGES DISADVANTAGES

.

1. Limited liability Procedural formalities

2. Separate corporate existence Expensive

3. Perpetual succession Company is not a citizen

4. Transferability of shares Lifting the corporate veil

5. Separate property Corporate scams

6. Capacity to sue and be sued

7. Professional management

8. Opportunity to involve large

no. of investors.