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Unit Nature and "Rypes of Companies: Objegtivb
Unit Nature and "Rypes of Companies: Objegtivb
COMPANIES
Structure
1.0 Objectives
1.1 Introduction
1.2 Definition of a Company
1.3 Main Features of a Company
1.4 One-man C~mpany
1.5 Lifting the Corporate Veil
1.5.1 Under Express Statutory Provisions
1.5.2 Under Judicial Interpretations
1.6 Distinction Between a Company and a Partnership
1.7 Kinds of Companies
' 1.7.1 On the &sss s f Incorporation
1.7.2 'On the Btriii of Liability
1.7.3 On the Busi, of Control
1.8 Association Ne for Profit
1.9 Illegal Associatrons
1.9.1 Meaning
1.9.2 Exceptions
1:9.3 Consequence:
1.10 'Let Us Sum Up
1.11 Key Words
1.12 Answers to Check ;Your Progress '
1.13 Terminal Questias
1.0 OBJEGTIVB
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After studying this unit, yQ should be able to:
e define a company,
describe the characleristks of a company,
0 explain the concept of coporate veil,
s distinguish between a co%any and a partnership
describe the various types)f companies, and
e describe an illegal associatbn.
I
The Companies Act, 1956 came Into force on April 1, 1956, Despite itslthoroughness,
it has been revised from timeto tibe in order to meet the growing needs of protecting
the investors and ensuring efficieqandhonest management of the affairs of the
companies. The latest in th'eserie Companies (Amendment) Act 1988. This
Act provides detailed rules ngar formation and administration of companies
in India. In thisintroductorybnit study the definition of a company, the main
feature a company form of bilsin isation, its distinction from partnership and
the various types of companies t formed in India. . .
I
'n
Th? term 'company' implies an associatio~fa number of persons for some common
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object or objects. In fact, the purposes for icb people may wish to associate are
multifarious but the term 'company' is nor ly reserved for those associated for
economic purpose i.e., to carry on a busines$kpr gain. Partnerships often describe.
themselves as 'A, B. C and Company'. Howetl, this does not make the firm a
company in the legal sense of the word, they ajonly indicating that there are other
persons in the association, i
the ~ o h ~ a n iAct, a
In legal terminology, a company means a Cbmpa incorporated or registered under
e s 1.956or under any of the.etrrli C6ipanies
I ' . Section 3(1)(i)
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Q:tau~pnnyand i l z f'o~n'r?aticn of the Companies Act, 1956 states that a Company means a cornpan) .formed and
regisrcrr~dunder the Acr or nn existing Company. An existing Gompa l y lneans a
Company formed and registered under any of the prev~iousCornpan7 rs Acts. This
.J definition, however, is not exhaustive because it does nof reveal the c haracte~aisticsof
a Company.
A compa~iyis called a 'body corporate' because, as,a consequence 1 :,f incorporation,
the large number of members who constitute the company are legall y merged into (me
body which has a distinct identity of its own. In its legal form, a co IT.pany is an
artificiiil person created by law. It has a separate identity independf:nl t of its members.
This artificial legal person is entitled to many rights and incurs m:m! I liabilities like
any other ordinary human being.
A campany has been defined by Lord Justice Lindley as follows: " E ay a company is
meant an asSociation of many persons who contribute money or rnc ney's worth to a
comlnon stock and employ il in some trade or business, and who rGtdare the profit and
loss (as the case may be) arising therefrom. The common stock s r zontributed is
denoted in money and is the capital of the company. The person s *whocontribute it,
or to whom it belongs, are called members. 'The proportion of c a p ital to which each
member is entitled is his share. Shares are alwpys transferable a Irk ough the right to
transfer them is often more or less restricted."
Anotlicr good definition has been given by ClriefJustice Marsh all. According to him,
"a company is a person, artificial, invisible, intangible and existi ng ~ ~ ninl ythe eyes of
law. Being a mere creature of law, it possesses only those prope riie:; which the charter
of its creation confers upol~it, either expressly or as incidental to i ts very existence."
Accordiilg to Lord Haney, "A company is an incorporated as social:ion which is an
artificial person created by law, having a separate entity, witl- , a pel-petual succession
and a co~nmorlseal."
From the above definitions, it is clear that a company has a c :orpora!te and legal
personality. It is an artificial person and exists only in the e! Ies of law. It has an
independent legal entity, a conllnon seal and perpetual succ :ession.
As a consequence of separate legal entity, the company may enter into contracts
with its members and vice-versa. Thus, a shareholder can be the creditor of the
company.
..""."""...."L"".'...".~..............,*.....,..,,....~~~.~..,.,,.~~~~.~~............~~~.....~~~
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3 Define 'one-man company'.
Nature and Types of
4 State whether the following statements are true or false. Companies
i) A company is the creation of law.
ii) A company is an artificial person.
iii) Since the company is an artificial person it can commit no wrong nor can it
be sued in its own name.
iv) Like a partnership a company comes to an end w b ~ any
a shareholder of the ;
company dies.
v) A company although is a corporate person yet it is not a citizen.
vi) A one-man company is one in which a single individual holds virtually the
whole of the shares of the company.
vii) The liability of a member is limited to the face value of the shares held by
him.
viii) All contracts entered into by a company must be under its seal.
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2 List four circumstances when'the corporate veil can be pierced?
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Company
1' 1
On the basisof On the basis of On the basis o f
Incorporation Liability Control
Registered Government
Company or Non-Government or Subsidiary
Company
Statutory Foreign
Company or Domestic
Company
Private Public
Company Company
1
Company Limited Company Limited I
Unlimited Company
by Shares by Guarantee
Private
Public
ii) Statutory company: A statut0r.y company is one which is created by a special Act
of Parliament or a State Legislature. Such companies are usually formed for
achieving a purpose related with public utilities. The nature and powers of such.
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companies are laid down in the special Act under which they are created.
However, the provisions of the Companies Act are also applicable to them in so
.far as they are consistent with the provisions of the special Act. Such companies;
Nature end Types of
need not have a memorandum of association. A statutory company has also a Companies
separate legal entity and it is not required to use the word 'limited' after its name.
The audit of such companies is conducted under.the control and supervision of
the Auditor Geneial of India and the annual report of working is required to be
placed before the Parliament or State legislature, as the case may be. Familiar
example of such companies are Reserve Bank of India, Unit Trust of India, The
Life Insurance Corporation of India, State Trading Corporation, The Food
Corporation of India, State Bank of India etc.
;ii) Registered or incorporated company: A registered company is one which is
registered in accordance with the provisions of the Conlpanies Act of 1956 and
also includes the existing companies. By existing company we mean a company
formed and registered under any of the previous Acts. A registered company
comes into existence only when it receives the certificate of incorporation.
Registered companies are governed by the provisions of the Companies Act.
A registered company may either be a private limited company or a public limited
company. A private limited company is one which by its articles of association
(a) restricts the right of transfer of shares (b) limits the number of its members to fifty
(not including the present or past employees) (c) prohibits any invitation to the
to subscribe for any shares o r debentures of the company. On the other hand, a public
limited company is one which is not a private company. The minimum number of .
members to form a private company is two, while for the public company the
minimum number is seven. You will study more about them in Unit 2.
1.9.2 Exceptions
Section 11 does not apply in the following cases:
i) Joint Hindu Family: A joint Hindu family may carry on any business, even for
earning profits and with any number of members without being registered in
pursuance of any Indian Law as required by Sec. I 1 of the Companies Act, 1956
and yet it will not be an illegal association. But, where two joint Hindu families
join hands to carry on business, the provisions of Section 11 became applicable.
I-Iowever, for computing the number oi members of such an association, the
minor members of such families shall not be included.
ii) Stock exchange: A stock exchange is not covered by Section 11 as it is not formed
for the purpose of carriing on any business.
iii) Non-profit earning associations: All religious, charitable, literary, social, sports
And other associations whose object is not to make profit are also not covered by
Section 11.
1.9.3 Consequences
18 The consequences of an illegal association are as follows:
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1 Every member shall be personally liable for all liabilities incurred in such business.
2 An illegal association cannot sue to recover ally af its debts or any other property.
Likewise, no suit can be filed against an illegal association to recover money lent to
it. However, a suit can be filed against every member of %anillegal association. A
suit cannot be filed even if the association is subsequently registered as a company.
3 Every person who is a member of such an association shall be punishable with fine
which may extend to one thousand rupees.
4 An illegal association cannot be wound lop under the Companies Act.
5 No suit can be filed by any rnember for partition, dissolution or for taking account
of an illegal association.
6 Since an illegal association has no legal eAstence, it cannot enter into a contract.
7 The illegality of an illegal association cannot be cured by subsequerit reduction in
the number of its members.
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2 What is meant by a registered company?
............................... i........4......1..r.....e....,.,r.,..,l..........r..r.r..a..r...-..h.....,r
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4 What is a Government Company?
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5 What do you mean by 'Illegal.Association7?
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6 Fill in the blanks.
a) An incorporated company can come irito existence as a chartered company, as
a statutory company and as .............................., company.
b) In a cotnpany limited by guarantee, a member id required to pay the
guaranteed sum only if the company is wound up while he is member or
within............................year after he ceases to be a member.
c) A Government company is one in which not less than. ................. ......per
cent of the paid up share capital 1s held by the Central Government.
d) An auditor for a g'ovemment company is appointed by the Central
OOVclnment on the advice of the .................................
e ) A foreign company which establishes a place of business in India after the
cemmi3hcement of the Companies Act, 1956, shall deliver to the Registrar of
C~fnpanies,necessary documents for registration within ...........................
days of establishing the place of business in India.
f) Under Section............................... of the Act, any association created not
for profit may be exempted by the Central Government and be registered with
limited liability without using the word 'limited' as its last word.
g) An association of persons formed for carrying on 'any other business' for gain
vhould not consist of more than ........................................... persons as
it8 mefibcis.
7 State Whether the following statements are True or False.
a) Onde a company has been registertid asah unlimited company it cannot be
converted into a limited company without dissolving the company.
b) A government company is not governed by the provisions of the Companies
Act, 1956.
c) In a government company, company's paid up share capital can be held partly
by the Central Government and.,* partly by one or more State Governments.
d) A Fokign company may carry onbusiness in India even without establishing a
plat% of'business in India.
a) A foreign company is a company registered in India and carries on its business
in a foreign country.
f) In case of a holding company and a subsidiary company both companies
continue to enjoy separate legal status.
$) A private company which is a subsidiary of a public company is, for all practical
purpbses, treated like a public company.
. h) An association of persons formed for carrying on banking business can be
formed with a maximum of twenty pirsons as its members.
1) A partnership firm can be a member of an illegal association. I
j) An illegal association has no independent personality. ~
1.10 LET US SUM UP 1
The term 'company'means an association of persons for some common object, which
may be for carrying on some business for profit or for some charitable purposes. The I
Companies Act, 1956 defines a company as "a company formed and registered under
the Act or an existing company". An 'existing company' means a company formed
and registered under earlier Companies Act.
v The essential features of a company are as follows:
i) It is an artificial person created by law.
ii) It has a n independent legal entity.
iii) The liability of members of a company is limited to the unpaid value of shares
held by them or the amount guarantee by them.
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iv)
v)
A company has a perpetual succession i.e., the existence of a'cornpaaay is not
affected by the death or insanity of a shareholder.
Its shares are freely transferable.
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vi) The company, being a juristic person, must have a common seal.
vii) A company can own and dispose off property in its own-name. Although the
shareholders are the owners of the company, the money and property belong to
the company and not to the shareholders.
vdii] A ccrrnpany can sue and be sued in its own name.
Thus, a company differs from a partnership firm in various ways, I
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A one-man company or a family company is one where almost the whale share capital
is held by a single person who takes a few dummy members simply to meer the .
provisions of the Act regarding the minimum number of members. The company is a
legal person distinct from its members. There is d veil, known as corporate veil,
between the company and its members. Sometimes, it may become necessary to
pierce this veil and look at the persons behind the company. This is known as "lifting
or piercing the corporate veil". The circumstances and cases in which the corporate
veil may be lifted can be classified under the.following two heads:
(A) under express statutory provisions; and
(B) under Judicial interpretation.
(A) Under express statutory provisions
i) When the number of members falls below the statutory minimum.
ii) When the person acting for the company fails to disclose his representative
capacity.
iii) When the relationship of a holding and a subsidiary company is to be
established.
iv) For investigation into affairs of related companies.
v) For investigation of the ownership of a company.
vi) For knowing whether there is any fraudulent conduct of business.
(B) Under judicial interpretation
i) For determination of the character df the company.
ii) For prevention of fraud and improper conduct.
iii) For protection of revenue.
iv) Where company is formed to act as an agent'of its members.
v) For avoidance of welfare laws.
Kinds of Companies: Companies may be classified into the following categorick
(i) Chartered companies, (ii) Statutory companies, and (iii) Registered
companies. A registered company may be either a company limited by shares or
a company limited by guarantee or an unlimited company. Such company may,
either be a private company o r a public company, Forelgn companies arc thoee
which are incorporated outside India, but have a place of businesa in India,
A company is deemed t o be the holding company of another, if that other is its
subsidiary. A company is deemed to be a subsidiary of another company only if:
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I. 13 TERMINAL QUESTIONS
1 "Company is an artificial person created by law with a perpetual succession and
is different from the personality of the member constituting it'. Comment.
2 Discuss the concept of corporate veil. Under what circumstances can this veil be
lifted?
3 Distinguish between a company and a partnership.
4 Describe the characteristics of a company.
5 Discuss the circumstances in which lifting of corporate veil is justified
6 What are the different types of companies which may be incorporated under the
Companies Act.
7 Write a comprekensive note on gOVe~mqrlbcompany.
8 Describe special pq:wisions relating to a foreign c6mapany.
9 Distinguish betwe:t:m a Elolding company and a stnbsidialry ccplnpany. Winen a
cornpanty be called a subsidiary of another conrapany? Ilhstrate.
10 Discuss the salient characteristics of an illegal assbciatiom. What are, the
consequences of forming such an asso~iatio~i?
~0f6: These questions will help you to laildersta~rdthe unit better. Try to write
answers P"or ttnern. But do not sab~nnityour answers to tlne University. These arc
for your practice only.