INTRODUCTION TO INDIAN COMPANIES ACT 2013

Company means a body of individuals associated together for a common goal. But in its legal
sense company means a company registered under the companies Act, 2013 or earlier any
Act.

Meaning of Company law

Company law is that branch of law which deals exclusively with all aspects relating to
companies, such as incorporation of companies, allotment of shares and share capital,
membership in companies, management and administration of companies, winding up of
companies etc.

Meaning of Joint Stock Company:

A Joint Stock Company is an incorporated association, which is an artificial person created
by law, having a separate entity, with a perpetual succession and a common seal.

Features of Joint Stock Companies:

1. Voluntary Association: a Joint Stock Company is a voluntary association. That

means no one can compel another person to become a member of a Joint Stock
Company. Similarly, no one can be compelled to give up his membership of a
company.
2. Incorporated Association: A Joint Stock Company is an incorporated association.
Incorporation or registration under the companies Act is absolutely necessary for an
association of persons or company to become a Joint Stock Company.
3. Specific object: A Joint Stock Company is formed with specific objects which should
be clearly and expressly stated in the memorandum of association of a company.
4. Artificial person created by law: A Joint Stock Company has no physical or natural
existence. It exists only in the eyes of law that it enjoys certain rights and privileges of
a natural person. It means a company can enter into a contract in its own name
through human agencies.
5. Not a citizen: A company cannot claim to be a citizen of the country under
citizenship Act of 1995. But it has nationality, domicile and residence.
6. Separate legal entity: Joint Stock Company has a separate legal entity quite different
from that of its members. This point has been very well emphasized in the leading
case of Solomon v/s Solomon and Company Limited.

Facts of the case: Mr. Solomon incorporated a public limited company, called
Solomon and Company Ltd., to take over his personal boots and shoes business.
Solomon, his wife, daughter and four sons were the subscribers to the M/A. Solomon
held all the shares except one share each of one pound by his wife, daughter and four
sons. The BODs consisted Solomon as the Managing Director and his two sons as
directors. Through the resolution of BODs, Solomon’s personal business was
transferred to Solomon and Co Ltd., at an agreed price of Rs 30,000.

Solomon was allotted 20,000 shares of one pound each and debentures worth
10,000 pounds with a charge on the assets of the company as consideration for the
transfer of business. Within a year of incorporation owing to the general trade

1
 depression, company had to wound up. On the date of the winding up Company’s
position was as follows:

Total assets £ 6,000

Total liabilities:
1. Debenture i.e. secured creditor £ 10,000
(Amount due to Solomon)
2. Unsecured creditors £ 7,000
(Other creditors)
In a suit filed before the House of Lords it was argued on behalf of the unsecured
creditors that:
1. Solomon and Solomon Co. ltd., were one and the same and
2. The company was the mere agent of Solomon
So the unsecured creditors should be paid in priority to Solomon. However the House
of Lords held that the company was in the eyes of law, a separate distinct legal entity
from Solomon and it was not the agent of Solomon. So as a secured creditor, Solomon
was entitled to repayment of his debt in priority to the other unsecured creditors.
Thus a joint stock company has a separate legal existence quite distinct from that of
its members.
7. Separate property: As a company is a legal entity distinct from its members, it has
the right to own, enjoy and dispose of property in its own name.
8. Perpetual succession or continuous existence: “Men may come, men may go but I
go on forever” is applies to a Joint Stock Company. That means members or
shareholders may change, but the company goes until it is wound up according to law.
Thus the life of a company is not affected by the death, insolvency or insanity of its
members.
9. Common Seal: A company, not being a natural or physical person, cannot by itself
put its signature on any documents requiring the company’s signature. Therefore,
there must be some device which could serve as a company’s signature. That device is
the common seal of the company.
10. Limited liability: The liability of the members of a Joint Stock Company is limited.
In the case of a Joint Stock Company limited by shares the liability of members is
limited only to the amount unpaid on their shares irrespective of the liability of a
company.
11. Transferability of shares: The shares of a public limited company are freely
transferable. That means, the members of a public limited company can transfer their
shares to any persons they like without the consent of the company or the other
member.
12. Membership: Any number of persons can become members of a public company, as
there is no limit to maximum number of members. In Private company Minimum
number is 2, in Public Company minimum is 7. In private company maximum
number is 200 and in public company no maximum limit
13. Separation of ownership and management: Members or shareholders cannot
manage a Joint Stock Company because they are numerous and scattered over a wide
geographical area. It is difficult for them to take part in the day- to- day management
of the company. So the day-to-day management of the company is entrusted to a
BOD, elected by the shareholders.
2
 LIFTING THE CORPORATE VEIL
(For Cases - Refer PPT and PDF Material)
A Company is a legal person distinct from its members. According to this principle, there is a
veil between the Company and its members. That means Company has a corporate
personality, which is distinct from its members.
Lifting the corporate Veil means ignoring the separate legal entity of the company and
identifying the members with the company.
It may be noted that lifting the corporate veil of a Company is the discretionary power of the
court. The corporate veil of a Company may be lifted by the Court under the following two
circumstances, viz;
I. Judicial discretion
II. Under statutory provisions
I. Under Judicial discretion:
1. For determining the character of a company:
Where there is a reason to suspect that the persons in real control of the affairs of a
Company are agents of an enemy country, the court may disregard the corporate
personality of the Company. Lifting the corporate veil is necessary in this case
because trading with an enemy is against the public policy.
Case: Continental Tyre and Rubber Company v/s Daimler co ltd.
2. For protecting the revenue of the government:
Where it appears that a company has been formed or is being used for the purpose of evading
tax liabilities, courts may lift the corporate veil.
3. For preventing fraud or improper conduct:
A Company has been formed for concealing the real identity of the owners of the business, or
a company is being used for avoiding a valid legal obligation or a company is being used for
defeating the provisions of any law, the court may lift the corporate veil to find out the real
owners of the business.
4. Where a company acts as the agent or trustee of its members or of another
Company
Where a Company acts as the agent or trustee of its shareholders or the another company-
under an express or implied agreement, the shareholders will be held liable for the acts of the
Company
5. For preventing avoidance of welfare legislation
Avoidance of welfare legislation is as common evasion of tax liability. Where the company
is formed for avoidance of welfare legislation, the court may lift the corporate veil.
6. For protecting public policy
The court may lift the corporate veil for protecting public policy.

II. Under statutory provisions:

1. Reduction in number of members below the statutory minimum

3
 If a Company carries on business for more than 6 months after the number of its
members has been reduced below the statutory minimum i.e. below 7 in the case of a
public Company or below 2 in the case of a private company, the corporate entity of
the company will be ignored.
2. Failure to repay the application money: If allotment of shares is not made by a
Company, then application money received by the company must be returned to the
applicants within 130 days after the issue of prospectus. If money is not repaid within
130 days, then directors of the company will be personally liable to repay the money
with interest at 6% from the expiry of 130th day.
3. Mis-Statement in the prospectus: If the prospectus of a company contains any mis-
statement or untrue statement then the company is not liable but the concerned
promoter or BOD is liable to pay compensation to the subscriber.
4. Mis-description of a company’s name: Where any director or officer of a company
or any person on its behalf does any Act or enters into a contract without properly
mentioning company’s name and address of its registered office, he shall be
punishable or personally held liable.
5. Fraudulent trading or improper conduct of business: Sometimes in the course of
winding up of a company, it may appear that the business of the company has been
carried on with intent to defraud creditors. In such a case the courts may disregard the
corporate entity.
6. Violation of statutory provisions: Where the directors or members of a company are
guilty of violation of any statutory provisions under the companies Act, the principle
of corporate entity will be ignored.
KINDS OR TYPES OF COMPANIES

(Refer PPT and PDF )

I Classification of companies from the point of view of incorporation or registration.
a) Chartered companies
b) Statutory companies
c) Registered companies
a) Chartered companies: A chartered company is a company which comes into
existence under a special charter issued by a king or Queen. Eg: the East India
Company, The bank of England etc.
b) Statutory companies: A statutory company is a company which is incorporated
under a special Act of the legislature i.e. Parliament. Eg: LIC, RBI, Indian Railways
etc.
c) Registered companies: These are the companies which are formed and registered
under the companies Act, 1956.
II Classification of companies on the basis of liability of the members.

a) Companies limited by shares

b) Companies limited by guarantee
c) Unlimited companies

4
 a) Companies limited by shares: Where the liability of the members of a company is
limited to the amount unpaid on the shares, the company is known as a company
limited by shares.
b) Companies limited by guarantee: Companies limited by guarantee are companies
in which the liability of each member is limited to a fixed amount which he has
guaranteed to meet the liabilities of the company in the event of winding up.
c) Unlimited companies: Unlimited companies are companies in which the liability of
the members is unlimited.

III On the basis of number of members:

a) Private company
b) Public company
a) Private company: Section 3 of the companies Act, 1956 defines a private company
as a company which,
i) Restricts the right of its members to transfer shares
ii) Limits the number of members to 50
iii) Prohibits any invitation to the public to subscribe its shares or debentures.
b) Public company: Section 3 of the companies Act, 1956 just states that a public
company is a company which is not a private company. So a public company means a
company which by its articles does not-
i. Restricts the right of members to transfer the shares
ii. Limit the numbers of its members
iii. Prohibit any invitation to the public to subscribe for any shares and debentures of
the company

IV Classification on the basis of control:

a) Holding companies
b) Subsidiary companies
a) Holding company: A holding company is a company which controls a subsidiary
company. Therefore a holding company is a company which holds more than 50% of
the nominal value of the equity share capital of another company.
b) Subsidiary company: A subsidiary company is a company which is controlled by a
holding company

V Classification of the companies on the basis of ownership:

a) Government companies
The main features of Government companies are as follows:

 It is registered under the Companies Act.

 It has a separate legal entity. It can sue and be sued and can acquire property in its name.
 The annual reports of the government companies are required to be presented in parliament.
 The capital is wholly or partially provided by the government. In the case of a partially
owned company, the capital is provided both by the government and private investors. But in
such a case, the central or state government must own at least 51% shares of the company.
 It is managed by the Board of Directors. All the Directors or the majority of Directors are
appointed by the government, depending upon the extent of private participation.
5
 Its accounting and audit practices are more like those of private enterprises, and its auditors
are Chartered Accountants appointed by the government.
 Its employees are not civil servants. It regulates its personnel policies according to its articles
of associations.

Advantages of Government Companies

The merits of government company form of organizing a public enterprise are as follows:

1. Simple Procedure of Establishment

A government company, as compared to other public enterprises, can be easily formed as

there is no need to get a bill passed by the parliament or state legislature.

It can be formed simply by following the procedure laid down by the Companies Act.

2. Efficient Working on Business Lines

The government company can be run on business principles. It is fully independent in

financial and administrative matters. Its Board of Directors usually consists of some
professionals and independent persons of repute.

3. Efficient Management

As the Annual Report of the government, the company is placed before both the house of
parliament for discussion; its management is cautious in carrying out its activities and ensures
efficiency in managing the business.

4. Healthy Competition

These companies usually offer healthy competition to the private sector and, thus, ensure the
availability of goods and services at reasonable prices without compromising the quality.
Disadvantages / Limitations of Government Companies

The government companies suffer from the following limitations:

1. Lack of Initiative

The management of government companies always has a fear of public accountability. As a

result, they lack initiative in taking the right decisions at the right time.

Moreover, some directors may not take a real interest in the business for fear of public
criticism.

2. Lack of Business Experience

In practice, the management of the companies is generally put into the hands of
administrative service officers who often lack experience in managing the business
organization on professional lines.

6
 So, in most cases, they fail to achieve the required efficiency levels.

3. Change in Policies and Management

The policies and management of these companies generally keep on changing with the
change of government. Frequent change of rules, policies, and procedures leads to an
unhealthy situation of business enterprises.

b) Non- Government companies

a) Government company: A government company means any company in which at
least 51% of the paid up share capital is held by the Central Government or by any
state government. Eg: HMT, BEL, ITI etc.
b) Non- Government companies: A non- Government Company is a company which is
owned and managed by private investors.

VI Classification of companies on the basis of Nationality:

a) Domestic companies
b) Foreign companies
a) Domestic company: A domestic company is a company which is registered or
incorporated in India.
b) Foreign company: A foreign company is a company which is registered outside India
but has a place of business in India.

Provisions of the Indian Companies Act applicable to foreign companies:

i) Every foreign company must file with the registrar of companies within 30 days
of the establishment of its business in India with the following documents-
 A certified copy of M/A and A/A
 The full address of the registered office of the company
 A list of directors and the secretary of the company
 The name and address of the person authorized to receive any notice
ii) In case of any alteration of the above particulars, the company is required to file a
return of such alteration with the registrar of companies (ROC) within the
prescribed time.
iii) Every foreign company is required to state in every prospectus inviting
subscriptions in India the country in which it is incorporated.

When does a private company become a public company?

A private company may automatically become a public company in certain cases i.e.
automatic conversion or it can be converted into public company by choice.

1. Automatic conversion:
7
 a) Conversion by default: If the membership exceeds 50, it shall be treated as public
company.
b) Conversion by operation law: A private company can become a public company in
the following circumstances-
i) Where 25% or more of its paid up capital is held by one or more public
companies.
ii) A private company having an average annual turnover of Rs. 1 crore or more
during the relevant period shall become a public company.
2. Conversion by choice: If a private company so alters its articles that they do not
contain the provision which make it a private company, from the date of alteration it
becomes a public company.

Conversion Process : Refer other material(PDF)

Differences between a Private Company and a Public Company
Private Company
1. The formation is easy
2. For the formation, just one certificate is
required i.e. certificate of incorporation
3. It can commence business immediately after
incorporation
4. It need not file a prospectus with the
registrar of companies
5. Here the name of the company must end
with the words ‘Private Limited’
6. The minimum number of members is 2 and
the maximum is 50
7. It cannot invite the public to subscribe to its
shares or debentures.
8. It can issue 3 types of shares. Viz;
preference, equity and deferred shares.
9. It can allot shares without receiving any
minimum subscription.
10. The shares of a private company are not
freely transferable.
11. Its shares are not quoted in the stock
exchanges.
12. It is not required to hold a statutory meeting
and file a statutory report with the Registrar
of Companies.
13. It is prohibited from issuing share warrants.
14. It need not maintain a separate index of
members.
15. In this case, the notice of a general meeting
may be shorter than 21 days.
16. A member of a private company cannot
Public Company
1. The formation is bit difficult
2. For the formation two certificates are
required i.e. certificate of incorporation
and certificate to commence business
3. It can commence business only after
obtaining the business commencement
certificate
4. It must file a prospectus with the
registrar of companies
5. Here the name of the company must
end with the word ‘Limited’
6. The minimum number of members is 7
and the maximum is unlimited
7. It can invite the public to subscribe to
its shares or debentures.
8. It can issue only two types of shares
viz: equity and preference shares.
9. It cannot allot shares until the
minimum subscription is received
10. The shares of a public company are
freely transferable.
11. Its shares are quoted in the stock
exchanges.
12. It is required to hold a statutory
meeting within 6 months from the date
of commencement of business and to
file a statutory report with the registrar.
13. It is allowed to issue share warrants.
14. It must maintain a separate index of
members when its membership exceeds
50.
15. In this case, the notice of a general
meeting must be of 21 days.
16. A member of a public company can
8
 appoint more than one proxy for the same appoint more than one proxy for the
meeting. same meeting.
17. The quorum for a general meeting is two. 17. The quorum for a general meeting is
five.
18. The minimum number of directors is two. 18. The minimum number of directors is
three.

Private Company: Features, Special previleges (Refer PPT

and other material)

Foreign Company

Sections 380 to 386 (both inclusive) and sections 392 and 393 shall apply to all foreign
companies, Provided that the Central Government may, by Order published in the
Official Gazette, exempt any class of foreign companies, specified in the Order, from
any of the provisions of sections 380 to 386 and sections 392 and 393 and a copy of
every such Order shall, as soon as may be after it is made, be laid before both Houses
of Parliament.

Filing requirements:

9
A foreign company shall file the particulars of the principal place of business in
e-form FC-1 within 30 days of establishment of place of business in
India alongwith the required documents to RoC, Delhi.
The Registrar of the corresponding state shall have access to these documents filed
with the RoC, Delhi.
♦ Stamp Duty Payment:
> Stamp duty on eForm FC-1 can be paid electronically through the MCA portal.
> Payment of stamp duty electronically through MCA portal is mandatory in respect
of the states which have authorized the Central Government to collect stamp duty on
their behalf.
> Now eStamp duty payment is to be done online through MCA portal for all the
states.
♦ Mandatory Attachment(s)
√ Certified copy of the charter, statutes, or memorandum and articles of the company
or other instrument constituting or defining the constitution of the company
(Mandatory).
√ List of directors and secretary of the foreign company (Mandatory).
√ Power of attorney or board resolution in favor of the authorized representative(s)
(Mandatory).
√ Reserve bank of India approval letter (It is mandatory to attach attested copy of
such approval).
◊ Details of other places of business in India (if any)
√ It is mandatory to enter the date of closure of such place of business and also
FCRN of such office
◊ Particulars of place(s) of business in India established on any earlier
occasion(s) other than above (if any)
√ Maximum seven of such offices can be entered. If more than seven then details
can be given in necessary attachment(s).

10