ai CHAPTER COMPANY : MEANING AND FEATURES ¢ Meaning of Company Characteristics of Company 3 + Doctrine of Lifting the Corporate Veil Meaning of Company iv i In general, company means an association of persons for a common object. The teri ‘company’ is derived from the Latin word—com means with or together, panis means bread, and originally referred to an association of 3 persons who take their meals together. Company as a form of business is traditionally called ‘joint-stock company’. “By a company is meant an. . association of many persons who contribute money or money's worth to a common stock and employ it for a éommoh purpose The common "stock so contributed is denoted in money and is capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital which each member is entitled is his share. Shares are always transferable, although right to transfer them is often moré or less restricted.”' & However, joint contribution of capital ig) af In partnership firms? also, the capital is brought jointly by the partriers. Company different from partnership is not merely an association of persons, it is an incorporated associatiog of persons created by law to carry on the expressly laid down objects.JA company exists only in the cient to describe acompany. 1. Lord Justice Lindley. * 2. In fact; one may come across a partnership firm or sole proprietorship firm using the word ‘Company’ as a part of its name, eg, Frank Brothers & Company, Gokuldass & Company. Legally such firms are not companies.2 COMPANY ; MEANING AND FEATURES Contemplation of law. Law Creates it and law alone can dissolve it. It may be formed by an Act of Parliament; or by Royal Charter, or by registration under company law. : ; creature of law, it which the charter of its creation confers incidental to its very existence,” Company as a form of doing business has i East India Company was estab} Subsequently, the legislative d Possesses only those properties upon it, either expressly or. as ts origin in 1600 A.D. when the ished by way of a Royal Charter in England. levelopments in the mid-nineteenth century in the UK give rise to the modern form of company. At present, company has become a pre-dominant form of doing the business, This is on account of numerous advantages which a company has. Corporate laws world over have regulations regarding formation and functioning of companies. In India, the Companies Act of 2013 (known as the Indian Companies Act, 2013) contains the law relati i the Act of the Central Legis! .e. Parli it) applies to companies - throughout India on a uniform basis, TAXMANN® Indian Companies Act, 2013 The Companies Act, 2013 was Passed to consolidate and amend thé law relating to companies. The Act comprises of 7 schedules, 29 chapters and 470 sections. The Act extends to received the assent of the Presidént-on the 29th August, 2013. The Act has become applicable from financial year 2014-15, Nature and Scope of Act ¢ Companies Act is the Act of the Central Legislature which applies to companies throughout India on a uniform basis (except that it is applica- ~ Ue th the States of Jammu & Kashmir, Goa, Daman & Diu and Sikkim subjedt to special provisions made and notifications issued by the Central The prpvisions of this Act apply to; (a) Companies incorporated under this Act or under any previous com- pany law; ‘ é : ‘) Insurance companies, except insofar as the salt provisions are incon- ” sistent with the provisions of the Insurance Act, 1938 or the Insyrance Regulatory and Development Authority Act, 1999; the whole of India. The Act of Parliamerit .COMPANY : MEANING AND FEATURES a (Q) Banking companies, except insofar as the said provisions are ineon- sistent with the provisions of the Banking Regulation Act, 1949, (d) Companies engaged in the generation or supply of electricity, except insofar as the said provisions are inconsistent with the provisions of the Electricity Act, 2003; (@ Any other company governed by any special Act for the time being in force, except insofar as the said provisions are inconsistent with the provisions of such special Act; and (f) Such body corporate, incorporated by any Act for the tise being in force, subject to such exceptions, modifications or adaptation, asmay be specified in the notification issued by the Central Government. Machinery for Administration of the Act The Central Government has the overall responsibility for administration and enforcement of the Companies Act. The Ministry of Corporate Affairs (MCA) of the Government of India is the nodal agency/authority which has been given various powers under the Act. Most of the powers are vested to the authorities created under the Act: ; 4 1. Tribunal: The Companies Act, 2013 has introduced National Company g Law Tribunal (NCLT) and the National Company Law Appellate ze Tribunal (NCLAT). The Tribunal isa quasi-judicial body to administer 4 the provisions of the Companies Act. The Tribunal exercises such powers which are conferred on it by the Companies Act, 2013 and” - any other law for the time being in force. 2. Regional Directors: The, Regional Directors are appointed by the Central Government’ who arein-chargeof the respective regions,each region comprising a number of States and Union Territories. They supervise the working of the offices of the Registrars of Companies the Official Liquidators working in their regions. They also maintain liaison between the respective State Governments and the Central Government in matters relating to the administration of the “Go sAct,2013. ; 3. Registra of Companies (ROC): Registrars of Companies (ROCs) appoii by the Central Government under the Companies Act, 2013 are fhe full-time officers appointed in various States and Union Territories who are vested with the primary duty of registering com- panies floated in the respective States and the Union Territories and ensuring that such companies comply with statutory requirements under the Act. The offices of ROC function as registry of records relating to the companies registered with them, which are available\ | TAXMANN® ene _ COMPANY : MEANING AND FEATURES for inspection by members of the’public on payment of the prescribed fee. The Central Government exercises administrative control over these offices. aa . 4. Official Liquidators: Official Liquidators are the whole-time officers of the Central Government who are appointed to conduct the winding up of companies by the Tribunal, They exercise such powers and and the Central Government. 5. Special Courts: The Central Government may establish as many Special Courts as may be necessary, for the purpose of providing “speedy trial of offences under this Act. Special Court consists ofa single judge who is appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working. Definition of Company under the Companies Act, 2013 Section 2(20) of the Companies Act defines a company as “company means a company incorporated under this Act or under any previous company law”. Thus, a company formed and registered under the Companies Act, 1956.or under any former Indian Companies Act is a company. Company means ‘a company formed and registered under the Indian Companies Act, 2013 or under any previous: company faw’. se _ Company and Body Corporate statute and has a perpetual succession with a common seal, and is a legal entity separate fromthemembers constituting it. The term ‘body corpo- rate’ is wider than the ‘company’ and it includes: Indian Companies Act ¢ Foreign Companies Se @ Corporations formed under special Act of the Parliament\pr of State Legislatures or of a foreign country Public financial institutions as defined in section 2(72) of dompanies Act, 2013 . 3. Before passing of the Companies Act, 2013 Jndian Companies Act, 1956, theIndian Compasies v nee 1850, eater cent Act, 1866, the Indian Companies Act, 1882, and the Indian Spi ‘were the enactments in india for registrat . i These haye since been repealed. cas esther eae Gear 4. Ramaiya A,, ‘Guide to the Companies Act’, Sixth eflition, pp. 54-55. perform such duties as may be entrusted to them by the Tribunal_ ‘Body corporate’ means a corporate entity which is incorporated under a Companies registered under the Companies Act, 20% or any former . | | |COMPANY : MEANING AND FEATURES @ Nationalised Banks ’ ¢ Limited Liability Partnerships registered under the Limited Liability" Partnership Act, 2008. ~~~ However, ‘body corporate’ does not include: (a) A co-operative society registered under any law relating to co-oper- ative societies, and (b) Any other body which the Central Government may, by notification in the Official Gazette, specify in this behalf. Jt may be noted that company isa body corporate but all body corporates are not companies, Characteristics of Company 1. Incorporated Association: Company is an incorporated association of persons which is created by registration under the Companies Act, 2013 (or any former Indian Companies Act). For forming a public company at least seven persons and for a private company at least two persons are required. These persons subscribe their names to the memorandum of association and also comply with other legal requirements of the Act in respect of registration to form and incor- porate a company. 2, Artificial Legal Person: The registration of a company under the Companies Act grants a legal entity to the company enabling it to discharge functions akin toa person suchas the right to acquire and dispose’of.the property, to enter into contract with third parties in its own name, and to sue and be sued in its own name. A company can enter into partnership with one or more individuals or another company, It can buy shares or debentures of another company. Although, a company does not exis} in the physical form—has no body, no soul and no conscience, it has most of thé attributes of a person. It exists but in the eyes of th So, a company can be described as an artificial legal person. Ii has a nationality, domicile and residence but cannot ask for enforce\nent of those fundamental rights which are exclusively available to ational citizens. Not being a natural person, it cannot enjoy the rij under the Constitution of India or Citizenship Act. It was held irt State Trading Corporation of India v, C.T.O that neither the provisions of the Constitution nor the Citizenship Act applytoacompany. eNNVYAX VE, ————__Company ‘Séparate-fronrits constituent members (shareholders). It is an au- tonomous body, self-controlling and self-governing. It can hold and deal with any type of property of which it is the owner, in any way it likes. It can enter into contracts, open a bank-account in its own name, sue and be sued by its members as well as outsiders. The rights and obligations of a company are distinct from its con- stituent members. “Shareholders are not, in the eyes of the law, part owners of thie undertaking. The undertaking is something different from the totality of the shareholders.”> A member cannot claim any ownership rights in the assets of the company either individually or jointly during the existence of the company or in its winding up. The property of the company is to be used for the benefit of the company . and not for the personal benefit of the shareholders. - A director of a company can be the office bearer of the trade union of the workers of the same company. A shareholder, if otherwise qualified, can be the auditor of the same company. At the same time, the members of the company can enter inito contracts with the company in the same manner as any other individyal can. e z Z $ = 3. Independent Legal Entity: A company hasa legal entity distinct and | 5. Short v. Treasury Commissioner (1948) -COMPANY.: MEANING AND FEATURES. 7 A company can be held liable for criminal acts. It can be held liable for breach of law and can be made to pay fine. However, no impris- onment of a company is possible. It can be charged with conspiracy to defraud or may be convicted of making use of false documents with intent to deceive. It can also be held liable for torts committed by its employees in the course of their employment. _ On account of the independent corporate existence, the creditors of a company-are creditors of the company alone and their remedy lies against the company and its property only and not against any of its members. Law recognizes the existence of the company quite irrespective of the motives, intentions, scheme or conduct of the in- dividual shareholders. A director or a managing director cannot be held personally liable for the payment of arrears of taxes or salaries of employees due by the company. Similarly, shareholders cannot be held liable for the wrongs or misdeeds of the company. The principle of separate legal entity of the company was judicially recognized by the House of Lords in 1867 in the case of Oakes v. Turquand and Hording (1867). It was then held that since an incor- porated company has a legal personality distinct from that of its members, a creditor of such a company has remedy only against the } company and not against an individual shareholder. Thus, a creditor of anincorporated company has remedy only against thecompany for his debts and not any of the members of whom it is composed. The Soo =js.:.pesitiori-was further clarified by the House of Lords in the famous case of Salomon v. Salomon & Co. Ltd.(1897). The facts of the case are as follows:’ é ; ae: J 4 e owner of a prosperous shoe business. He floated peiemaaarsiek de oie bebo aly seven shareholders - himself, his wife, daughter and four sons. The newly formed company pur- chased the sole proprietorship business of Mr. Salomon for £ 40,000. The purchase consideration was paid by the company by alldgment of £20,000 shares and £ 10,000 debentures and the balance in to Mr. Salomon. The debentures carried a floating charge on thea: of the company. ie és a ii juidation within a year due to depscasion. On wind ae of the company were running sl of its liabilities by £11,000. The unsecured creditors of the compe y * | contended that the company, though incorporated under the Act’ ha neveran independent existence;it wasin fact Salomon pds the Kaine of accompany. On this ground, the creditors’ claimed priority for : ayment of their debts over the debenture-holders (Mr. Salome 5 heres as per the law secured creditors are given precedence for the payment when a company is wound up. CR NNVIRTAXMANN® - COMPANY - MEANING AND FEATURES The pléa of the unsecured creditors that Mr. Salomon and Salomon & | (Co. are one and the same was not accepted by the coust i was beid that the existence of 2 company is quite independent and distinct from its members. Shareholders may also be the creditors of the ommpany. “The company is at law a different person altogether fram the subscribers to the memorandum, and though it may be that after moorporation the business is precisely the same as before, the same persoms are managers, and the same hands receive the profits, the company is not in law their agent or trustee. There is nothing in the Act requiring that the subscribers to the Memorandum should be independent for unconnected, or that they or any of them should take a substantial interest in the undertaking, of that they should have 2 mind or will of their own, or that there should be anything like a balance of power | in the constitution of the company.” Hence the plea of the unsecured | creditors for precedence was rejected. i The concept of separate corporate entity was again confirmed in the case of Lee y. Lee's Air Farming Lid (1961) Compensation Act He was killed in a flying accident In a suit by | his widow fet compensation, the Privy Council beld that Lee and { his company were distinct legal entities which had entered into | a servant of the company. In his capacity of governing dirécior, be could, on behalf of the company, give himself orders, in his other capacity of pilot, and hence the relationship between himself as pilot, and the company was that of a servant and master. In effect the magic of corporate personality enabled him to be a master and servant at the same time and to get all the advantages of both—and of limited liability* The Indian Courts have also unequivocally upheld the independent legal entity of a company in various cases. Re. Kondoli Tea Co. Lid. (1886}—Some persons owned a tea estaic. They transferred it to a company. They claimed exemption from ad valorem (according to value) duty on the ground that it is sim- ply a transfer from them to themselves under a different name. 6. Gower, LCB, “The Principles of Modern Company Law’ Third Ed p* amo eprpPppPpPpPe ge FS »>aessene% 9 7Property or hold it in trust for Possess only a nominal interest in its enforce any right of the com, him. Directors or members also cannot pany in their individual capacity, The concept of independent corporate entity or the Salomon Principle is also known as the veil of incorporation. The law will not g0 behind the separate per: nality of the company to get at members except in ‘Certain ex u tuations. This is ‘explained later in the chapter while explaining the circumstanc -may be pierced, or lifted up. : : 4. Separate Property: The corporate property is clearly distinguished from the members’ propert ty. Members have no direct proprietary rights to the company’s property but merely their ‘shares’, Company cannot be the property of the person who owns all the shares in the company, nor can it be considered to be his agent” No member can either individually or jointly claim any ownership rights in the assets of company during its existence or on its winding up! “No shareholder has any right to-any item of Property owned by the company, for he has'no legal or equitable interests therein.” A’ member cannot have any insurable interest in the property of the company.’ The leading case is: 7. EBM. Co. Ltd. v. Dominion Bank (1937) 8. Mrs. B.F. Gazdar v. The Commissioner of Income-Tax, Bombay (1955) 9. Macaura v. Northern Assurance Co, Ltd. (1925). a es, under which the corporate veil ;- eNNVAKYL10 i COMPANY : MEANING AND FEATURES Macaura v. Northern Assurance Co. Ltd. (1925) Mr. Macaura was the holder of nearly all the shares, except one, of a timber company. He was also the substantial creditor of the company. He insured the company’s tiriber.in his own name. The timber was destroyed by fire after a while. It was held that the insurance company was not liable to compensate as Macaura had no insurable interest in the property. The property of the company belonged to the com- pany only. 5. Perpetual Existence: A company hasa perpetual succession. It has no allotted span of life. The mode of incorporation and dissolution ofa company and the right of the members to transfer shares guarantee the continuity of the existence of the company quite independent of the life of the members. The existence of 2 company can be termi- nated only by law. Being an artificial person, it cannot die irrespec- tive of the fact that its members, even the founders or subscribers to the Memorandum, may die or go out of it. Moreover, in spite of the changes in the membership of the company, it can perform its contracts and enter into future agreements. Thus, members may come and go but the company can go on forever. Re. Meat Suppliers Guildford ‘Lid. During the war, all the members of a private company while in the general meeting were killed by a bomb. Held, the company survived. 6. Common Seal: Acompany isan artificial person andit has no physical ~~ existence, so it cannot sign any document personally. Therefore, it is necessary for every company to have its own common seal which works as its signature. All the acts of the company are authorized by its “common seal” which is the official signature of the company. ‘A document not bearing the common seal of the company will not be binding on the company. eed Separation of Ownership and Management: A company is owned (de facto) by a number of shareholders which is too large a body to ae manage the affairs of the company. Shareholders set the objectives of the company and appoint their representatives or agents (known as directors) to manage the affairs of the company on their behalf to pursue their objectives. The directors, in turn, hire professional man- agers (executives) to run the day-to-day operations of the company under théir supervision and control. The separation of ownership and managementis the distinguished feature of company. The separation has raised many issuesalso which give risé to évolution of corporate 2 governance as the focal point of modern corporations. * yay aais + Members. A private company can be formed:with only two persons KINDS OF COMPANIES fs 929 as members. [Sec. 3] Prospectus. A private company need not issue prospectus. Thus a private company is exempted from complying with the provisions of the Act regarding the issue of the prospectus: [Sec 23(1)] Exemption regarding share capital. Restrictions applicable to public companies regarding kinds of share capital, voting rights, issue of shares with disproportionate voting rights and termination of dispro- portionate excessiverights do not apply to private companies. Further, a private company can give financial assistance for the purchase of subscription of its own shares or its holding company [Sec. 67(2)]}. Exemption regarding directors. A private company enjoys following exemptions regarding directors: (d A private company may have two directors. (i) A private company is not required to appoint independent directors. (ii) Directors of private company need not retire by rotation. (iv) Persons holding an office of profit can be appointed as direc- tors of a company without passing a special resolution. [Sec. 149(e)6)) {v) ‘The provision excluding an interested director from participat- ing in voting at board’s proceedings does not apply toa private company. ‘ : a . Exemption regarding director. The restriction as tomaximum number | of companies of which a person may be appointed as director is 20 in case of private company and 10in a public company. [Sec. 165(1)} . Exemption regarding managerial remuneration. The provisjons of the Act regardirig fixing or increasing the remuneration of agerial personnel of a company are not applicable to private cotypanies. (Sec. 197) . -e . Audit committee. A private company is not required to constitute an audit committee of the Board (Sec. 177). Thus, a private company, on one hand, is able to enjoy all the beifefits of a joint stock company such‘as legal entity, perpetual e&istence, limited liability etc., and on the other hand, it is free from numerous- legal restrictions which apply to a public company. This grants it a greater freedom of action than a public company in several respects:30 KINDS Of COMPANIES Conversion of a Private Company into a Public Company A private company may convert into a public company any time by following the provisions of Section 14 of the Companies Act, 2013. The provisions are: (d) Passing of a special resolution to alter its articles of association to exclude the restrictions of private company viz transferability of shares, maximum number of smembers and prohibition on inviting the public for subscription of securities. (b) Filing of altered articles of association along with a copy of special resolution in the prescribed form (INC 27) to the concerned Registrar of Companies within 15 days of passing of resolution. The company shall cease to be a private company as from the date of alteration of articles of association. Conversion of a Public Company into a Private Company A public company may convert into a private company any time by following the provisions of Section 14 of the Companies Act, 2013. The provisions are: (a) Passing of a special resolution to alter its articles of association to include the restrictions of private company viz transferability of shares, maximum number of members and invitation to the public for subscription of securities. (by Approval of the Tribunal. = (¢) Filing of a copy of order of the Tribunal approval, copy of the altered “ * articles of association along with 4 copy of special resolution in the prescribed form to the concerned Registrar of Companies within 15. days of approval from the Tribunal. ‘The company shall become a private company from the date of approval from the Tribunal. 4 g TAN One Person Company (OPC) ‘The Companies Act, 2013 introduced the concept of One Person Company (OPC). This has made possible to form a company with only one mem- ber. OPC provides benefit of both forms of business- Proprietorship and Company. With formation of an OPC business can be run in same way as a proprietorship by complying with law and keeping liability of the member limited by share or guarantee. Many relaxations have been granted to an OPC in compliance and procedural aspects. oe :KINDS OF COMPANIES 31 ARERR ENA @ 3 Section 2Xé2) of the Act defines OPC as “a company which bas only ome person as 2 member”_In One Person Company legal and financial ability is imited to the company only and not to that person (ie, Gabality is Emited). ) Section 2/65) of the Act provides that a private company includes OPC. All the provisions of the Act applicable to a private company shall also be apphcable to an OPC, unless othenwise excluded from the compliance. Section 3 of the Act also lay down that OPC shall be treated as 2 private company for alll legal purposes with only one member. The Name of One Person Company shall include the word OPC ‘One Person Company’ within bracket below the name of the Company. } The person who is to form an OPC has to give a separate name and legal identity to the Company, under which aff the activities of the. business are to be carmied out. Secondly, the person has to nominate 2 person with that person's written consent asa nominee of the OPC. This person will be the member in case of existing sole member's death or Gsebiity. This provision will ensure perpetuity and conti- nuity to the Bfe of the company. Exemptions of One Person Company @ Number of Directors - Although the new Act restricts number Gwrectors to une in case of OPC, there are no constraints 10 appoint more than one, subject to maximum of 15. a Be The sole member who is an individual shail be deemed to be the first director of the OPC. - (@ The Grectors of OPC are not required to retire by rotation [section 1ISAO/(2)} (@ Bf theres only one director, there is no compulsion to conduct Boerd meetings In case of more than one director, at least one boerd meeting twice in the year is required to be held and gap between the two meetings must not be less than 90 days. (@ The provisions of sections 98, 100 and 111 related to General Mecting, Exireordinary General Meeting, notice and of con- vening general meeting are not applicable tp OPC. If business is required to be transacted at the general meeting by means of ordinary or special resolution if shall be sufficient # the resolution is communicated by the member to company and noted # down in minute's book and simed and dated by the member. gNNVWXVA,TAXMANN® 32 .' KINDS OF COMPANIES (# Financial statement of One Person'‘Company may not iniclude the cash flow statement. @ Central Government may prescribe abridged annual return for OPC. Conversion of OPCs into Private and Public.Companies Ministry of Corporate Affairs, Government of India has issued the Com- panies (Incorporation) Rules, 2014 which provide for conversion of OPC into a private or public company. The rules are as under: Conversion by Operation of Law () Where the paid-up share capital of an OPC exceeds Rs. 50 lakh or its average annual turnover during the relevant period exceeds Rs. 2 crore, it shall cease to be entitled to continue as an OPC. (it) Such OPC shall be required to convert itself within six months into either a private company with minimum of two members and two directors or a public company with minimum of seven members and three directors in accordance with the provisions of section 18 of the Act. (ii It shall alter its memorandum and articles by passing an ordinary or special resolution to give effect to the.conversion and to make necessary changes incidental thereto. (i) Within 30 days, the OPC shall give a notice tothe Registrar-inform——- ing him that it has ceased. to be a One Person Company and that it *_ ig now required to convert itself into:a private company or a public’ i company. : 7 ee i Conversion by Choice One person company can get itself converted into a Private or a Public company after increasing the minimum number of members and directors to two or minimum of seven members and three directors, as the case may be, and by maintaining the minimum paid-up capital as per requirements of the Act for such class of company and by making due compliance of section 18 of the Act for conversion. ; : Holding and Subsidiary Companies i Acompany which controls another company is known asHolding com and the company so controlled is termed as Subsidiary company. pany, As per section 2(87), a company shall be deemed to control another com- pany in each of the following cases: : ais Se uae als Nall (33 KINDS OF COMPANIES || = of the board of directars of other company’s board of directors shall be deemed to be controlled if it can, at its direction lersof all ora majority of the directorships. ne-haif of the total voting power (1) If it controls the majority composition another company, The composition of appoint orremove the hold (2) Ifitexercisesor controls more than on (aggregate of paid up: equity share capit share capital) either at its own or toge! subsidiary companies. (3) A company shall be deemed to be the holding company of another company if another company is & subsidiary of the first mentioned company’s subsidiary (Le. subsidiary of the subsidiary). al and convertible preference ther with one or more of its _ Mustration Company Bis a subsidiary of company A, and company Cis a subsidiary of company B Company Cis a subsidiary of company A. By virtue of the above provision, if company Dis subsidiary of company G company Dwill be a subsidiary of company Band consequently also of company A- A private company which is subsidiary of a public company is regarded as the public company. A subsidiary company cannot be a member of its holding company and any allotment or transfer of sharesin the holding company to its subsidiary will be void. sare ees An associate company is one degree of control which is less a subsidiary. Asper section 2(6) of the Companies Act, 2013 “associate company’, in rela- tion to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. For the of this clause, ‘significant influence” means control of at least 20% of total voting power, or of business decisions under an agreement. Differences between Affiliate, Associate and Subsidiary companies An associate company is partly owned by another company or group ee anseae a ee synonyyno' to describe a company whose. parent only possesses a minority stake in the ownership of the company which is 20 to 50% of ‘over Which another company éxercises a than the degree of control exercised over oNNVIXVI, the paid up equity shares; if more than 50% of the shares are owned by aTAXMANN® 34 : KINDS OF COMPANIES parent company, it creates a subsidiary. In case of a subsidiary company, another company is.a majority shargholder. In a wholly owned subsidiary the parent company owns 100% of the subsidiary. - Small Company The Companies Act, 2013 has provisions on “small company”. Section 2(85) of the Act defines “Small company’ as a company, other than a public company, whose () paid-up share capital does not exceed Rs. 50 lakh or such higher amount as may be prescribed; or (i) turnover of which as per its last profit and loss account does not exceed Rs. 2 crore or such higher amount as may be prescribed. However, a small company cannot be - aholding company or a subsidiary company or - acompany registered under section 8 of the 2013 Act , - acompany or body corporate governed by any special Act. “Turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year [section 2(91)}. Exemptions of a Small Company So statement [section 240). zi 2. Signing of annual return - In case of Small Company, the annual" return shall be filed by director and company secretary or when there is no company secretary, by two directors [section 92(1)]. Frequency of,Board meetings - In case of a small company, it is fficient if at least one meeting of the Board of Directors has been * - « conducted in each half of a calendar year. The gap between the two mitetings should not be less than nixtety days [section 173(5)]. Central Government has been conferred the power to grant exemption to small Fompanies from any of provisions of the 2013 Act or provide that the provision of the Act will apply with exceptions, modifications and adaptations. It is expected that many procedural relaxations will be given by Central Government to a ‘small company’ under these provisions, 1. Financial statement of small company may.not include the cash flow | |KINDS OF COMPANIES 38 Dormant Company . The Companies Act’ 2013 has introduced the concept of a dormant com: pany, Dormant company can bea company formed for a future project or to hold an asset or intellectual property without there being any significant accounting transaction or a company which Is not active, Section 455(1) of the Act states that where a company is formed and regis tered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar forobtaining the status of a dormant company. ‘Inactive company’ has been defined in section 455 as a company which has not beer carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, orhas not filed financial statements and anoual returns during the last two financial years. Thus, any company which has not been doing any business for the last two years or which has not filed any financial statements and annual re- turns for the last two years shall be inactive company. At the same time an active company doing regular business and regularaccounting transactions, but which has failed to file its mandatory annual returns, then it shall also become a dormant company. “Significant accounting transaction’ is also defined by the Act which means g any transaction other than— e (a) payment of fees by a company to the Registrar; (6) ‘payments made y-it to fulfil the requirements of this Act or any ather law; . 4 : angen . () allotment of shares to fulfil the requirements of this Act; and (@) payments for maintenance of its office and records. A company can apply for a “dormant company” by making an applica- tion in the prescribed form provided that the rules prescribed under the Companies (Miscellaneous) Rules, 2014 have been complied with, The rules provide the following: c 4 (i) Application for obtaining status of dormant company can be made only after obtaining special resolution approval of the shareholders or issuing notice to all the shareholders and obtaining consent of at least 3/4th of the shareholders in value terms; a (i) No inspection, inquiry, or investigation has been ordered or taken up against the company oro prosecution has been initiated against, the company and pending under any court; (ii) The company does not have any public deposits or interest thereon ~ outstanding for payment;TAXMANN® KINDS OF COMPANIES ° (iv) There is no ouistanding loan, secured or unsecured. Jf thera are unsecured loans then consent of the lender should be obtained and enclosed along with the form; (v) There is no outstanding tax dues either to central or State Govern- ment or local authorities; (vi) The company has not defaulted in payment of its workmen's dues; (vii) It is not a listed company. The Registrar shall maintain a Register of Dormant companies in its Records or Portal. In case a company has not filed its annual returns for the last two years, then the Registrar can take it to the dormant company status. However a dormant company is still required to have minimum directors, hold minimum two Board meetings and file minimum one annual financial document with the Registrar. A dormant company can apply to revert back to active status company. As per. the Companies (Miscellaneous) Rules, 2014 a dormant company cannotremainas a dormant company formore than 5 consecutive financial years. If it remains so, then the Registrar shall commence the process of striking off the name of the company from the Records, ie. the company will be removed. Government Company As per Section 2(45) of the Companies Act, Government Company means a company in which not less than 51 per cent of the paid-up share capital is held by: ~“() the Central Government, or (ii) any State Government or Governments, or (ii) partly by the Central Government and partly by one or more State Governments. . ; . Government Company includes a company which is a subsidiary of a Government company. Sa Government Company is a company in whic at least 51% of the pa iat ital ig-held by: ae ai e paid: ees oes aes SARL EA roi ms =| Holding of shares by municipal and othg local authorities or i i é : tat corporations (which are the government bodies) is not to be take rat consideration for this purpose. Pye A Government company may be a private company or ublic A Government private company is not required to add ‘Be Sed ‘aes as part of its name. i37 : KINDS OF COMPANIES . A Gover i , i 3 ere company is not an agent of the government as it is a juristic person dif ‘erent from its members (the government). Specific Provisions regarding Government Companies 3 (1) ae of a government company is appointed or re-appointed yy the Comptroller and Auditor General of India. The Comptroller and Auditor General of India has the power to direct the manner in which the company’s accounts are to ‘be audited by the auditor and give such other instructions regarding any matter relating to the also conduct a supple- performance of his functions as such. He can ts by officers appointed by. mentary test audit of thecompany's account his report to the Comptroller * him. The auditor must submit a copy of and Auditor General and such report, with his comments thereon, shall be placed before the annual general meeting of the company. (2)- Whi ere Central Government is a member ofa Government company, it shall prepare an annual report on the working and affairs of the company within three months of the annual general meeting and place it along with the audit report and comments thereon before both Houses of Parliament. Where a State Governmentis a member of a Government Company, it shall present the annual report on the working of the company along with the audit report and comment thereon before the House(s) of the State Legislature. (3) The Central Governmentmay, by notification in the Official Gazette, direct that any of the provisions of this Act specified in the notifica- tion: Sota sal (a) shall not apply to any Government company ; Or (b) shall apply to any Government company, only with such exceptions, modifications and adaptations, as may be specified in the notification. Foreign Companies As per Section 2(42V of th&Companies Act, 2013 a company incorporated o tside India which- (@ hasa place a place ol usiness in India whether by jtself or through an agent, physically through electronic mode, ane (b) conducts any business activity in India in any other manner. However, where not less than 50 per cent of the paid-up share capital of acompany incorporated outside India and having an established place of business in India, is held or by one or more ns of India bodies corporate incorpora' in the aggregate, ‘foreign company’ means by one or more citize ted in India, whether singly or38 KINDS OF COMPANIES such conipany shall be regarded as if it were a company incorporated in India. (Section 379) . Obligations of a Foreign Company (1) Document to be submitted: Within 30 days of the establishment of the place of business, a foreign company is required to deliver the following documents to the Registrar for registration— (a) acertified copy of the charter, statutes, or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company; and, if the instrument is not in the English language, a certified translation thereof; (8) the full address of the registered or principal office of the company; (©) alist of the directors and secretary of the company, containing the particulars of their names, usual residential addresses, nationality, business occupations, and other directorships held; (d) the name and address or the names and addresses of some one or more persons resident in India, authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company; and (e) the full address of the office of the company in India which is TAXMANN® | to be deemed its principal place of business in India. (Section 380) '(2) Submission of Annual Accounts: A foreign company is-required to submit, in every calendar year, a balance sheet and profit & loss account in the prescribed form along with the prescribed annexures and documents to the Registrar of Companies. (Section 381) (3) Exhibition of the Name: A forei ign company is required to exhibit its name and country of its incorporation outside of ry office where -_ it carries on business in India. It has to be in letters\easily legible in English and local language of the locality in which the’ or place of business is situated. The name of the company and country of incorporatipn must be contained in English on all business letters, bills, adv. rtisements, notices and other official publications of the company. ($ection 382) Association not for Profit or Licensed Companies [Sec. 8) Meaning - Where to the satisfaction of the Central Government an association—‘KINDS OF COMPANIES : 39 (a) isabout tobe formed a: akon rn nited company for promotir commerce, art, science, religion, charity or any other useful object, and . () intends to apply its profi any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members, the Central Government may, by licence, direct that the association may be registered as'a company with limited liability, without the addition to its name of the word “Limited” or the words “Private Limited”. Licenced companies are associations not for profit which have been ranted licence by the Government. Provisions of the Law () Such associations, on registration enjoy all the privileges and obliga- tions, of limited companies subject to the provisions of this section. (i) The licence is granted’by the Central Governmenton such conditions and subject to such regulations as it thinks fit, and those conditions and regulations shall be binding on the association to which the licence is granted. (iif) Itis not necessary for the association to which a licence is so granted g to use the word “Limited” or the words “Private Limited” as any part of its name, unless its articles otherwise provide, (iv) A partnership firm may be a member of any association or compa- ny licensed under this section, but on the dissolution of the firm, its . membership of the association or company. shall cease. :(v) The licence may at any time be revoked by the Central Goyernment, and upon revocation the body shall cease to enjoy the exemption granted by this section. (vi) A body in respect of which a licence under this section is in force shall not alter the provisions of its m orandum with respect to its objects except with the previous appro al of the Central Government signified in writing. - (vii) These associations are not required to have a minimum paid-up capital as required for companies. PRODUCER, COMPAI Concept and Meaning i The Companies (Amendment) Act, 2002 inserted Part IX A (Sections 581A to introduce a new kind of company termed as ‘producer com- ese on the cooperative principles of mutual assistance, patronage andiimited return. . *40. Fi KINDS OF COMPANIES “Producer Company” means fied in section 581B and 1 Company deals ry of As per Section 581A(1) of the Companies Act a body corporate having objects or activities specil registered as Producer Company. under this Act. Produce: primarily with the produce of its active Members for carrying out an: its specified objects. Objects of Producer Company [Sec. 581B] The objects of the Producer Company relate to all or any of the following matters: (1) production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit; (2) processing including preserving, drying, distilling, brewing, vinting, canning and packaging of produce of its Members; : (3) manufacture, saleor supply of machinery, equipment orconsumables ' mainly to its Members; : (4) providing education on the mutual assistance principles to its Members and others; (5) rendering technical services, consultancy services, training, re- search and development and all other activities for the promotion of the interests of its Members; : ae ~(6) generation, tranismission and distribution of power, revitalisation of _ land and water resources, their use, conservation and communica- tions relatable to primary produce;* . = ee are -(7) insurance of producers or their primary produce} (8) promoting techniques of mutuality and mutual assistance; (9) welfare measures or facilities for the benefit of its Members; (10) any other activity, ancillary or incidental to any of these activities which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner; (11) financing of procurement, processing, marketing or other specified activities which include extending of credit facilities or any other- financial services to its Members. TAXMANN® Primary Produce : 2 Producer Company deals only with the “primary produce" of its members, which means: x (i) produce of farmers, arising from agriculture including animal hus- : bandry, horticulture, floriculture, pisciculture, viticulture, forestry,KINDS OF COMPANIES at forest products, re-vegetation, bee raising and farming plantation products; or from any other primary activity or service which pro- motes the interest of the. farmers or consumer, or eee (ij produce of persons engaged in handloom, handicraft and other cottage industries; (i) any product resulting from any of the above activities, including by-products of such product; (iv) any product resulting from an ancillary activity that would assist or promote any of the aforesaid activities or anything ancillary thereto; (¥) any activity which is intended to increase the production or improve the quality of anything referred above. “Producer” means any person engaged in any activity connected with or relatable to any primary produce. Principles of Producer Company Producer Company is based on the cooperative principles of patronage, mutual assistance, and limited return. (1) ‘Patronage’ means the use of services offered by the Producer Company fo its Members by participation in its business activities. (2) Mutual assistance principle requires: _.. _ ._(a)_the membership to be voluntary and available to all eligible _ persons who can participate or avail of the facilities or services of the Producer Company and are willing to accept the duties of membership; : (BD) each Member to have only a single vote irrespective of holding of shares; ‘ovision for the education of Members, employees and oth- BS ers, on the principles of mutuality and techniques of mutt assistance. @NNVINXVL © .Q) Limited return wherein every member receives only a limited return. on the share capital contributed. The surplus if any, remaining after making provision for payment of limited return and reserves may be disbursed as patronage bonus, amongst the members, in proportion totheir participation in the business of the Producer Company, either in cash or by way of allotment of equity shares, or both, as may be 7 decided by the Members at the general meeting.TAXMANN® 42 KINDS OF COMPANIES Difference between Producer Cooperative and Producer Company, Basis Producer Cooperative Producer Company | Registration Cooperative Societies Act. _| Companies Act. Shares Not tradable. Netéradable but trans- ferable. Voting Rights One person one vote but Registrar of Cooperative Societies hold veto power. One person one vote but only active mem- bers can vote. Reserves Not Mandatory. Mandatory to. create reserves. Borrowing Power | Restricted More freedom Role of Registering | Significant Minimal Authority Dispute Settlement| Through Cooperative me- By Arbitration chanism : Benefits of Producer Companies Producer companies allow farmers and other growers to formulate a col- lective production and marketing sirategies, negotiate better terms with buyers, buy inputs and fertilizers iri bulk and receive technical guidance at their doorsteps-Producer companies offer advantages of limited company with minimal administrative control of the Government. It protects the farmers from the influence of local péliticians ahd the State Governments which is overriding in cooperatives. - ne : Formation of Producer Company and its Registration [Sec. 581C] (1) A Producer Company may be formed by: — any 10 or more individuals, each of them being a producer, or — any two or more Producer institutions, or — a combination of 10 or more individuals and Producer insti- tutions. 2 (2) The objects for which a Producer Company is to be formed must be as specified in Section 581B of the Act. (3) The requirements and provisions of the Act in fespect of registration, as per the Act must be complied with. The necessary documents including Memorandum of Association and Articles of Association must be submitted to the Registrar.of Companies. :