INTRODUCTION TO BUSINESS LAW

COURSE CODE: BUS 360

LECTURE 12:
COMPANY LAW: INTRODUCTION
SOURCE: BOOK 11: CHAPTER 1, COMMERCIAL LAW AND INDUSTRIAL LAW, 27 TH EDITION BY
ARUN KUMAR SEN AND JITENDRA KUMAR MITRA
 Type of Companies
2

Private Company: A private company is one which,

a) restricts the right of the members to transfer their
shares, if any;
b) limits the number of its members (not counting its

employees) to 50; and

c) prohibits any invitation to the public to subscribe
for any shares in, or debentures of, the company.
 Type of Companies
3

Public Company: All companies other than private

companies are called public companies. Public companies
may be classified into three types:
I. companies limited by shares
II. companies limited by guarantee, and
III. (iii) unlimited companies.

Company Limited by Share: In these companies there is a

share capital, and each share has a fixed nominal value
which the shareholder pays at a time or by installments.
The member is not liable to pay anything more than the
fixed value of the share, whatever may be the liabilities of
the company.
 Type of Companies
4

Company Limited by Guarantee: In these companies,

a) each member promises to pay a fixed sum of money in
the event of the liquidation of the company. This
amount is called the guarantee.
b) Sometimes the members are required to buy a share of
a fixed value and also give a guarantee for a further
sum in the event of liquidation.
c) There is no liability to pay anything more than the
value of the share (where there is a share) and the
guarantee.
 Private Company versus Public Company
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1. The number of members in a private company cannot be less than two and
cannot be more than fifty. In a public company, the number of members
cannot be less than seven but no maximum has been fixed. There may be any
number of members.
2. In a private company there must be regulations restricting the transfer of
shares. In a public company there need not be any. By restricting transfer, a
private company can prevent the membership of persons or classes of persons
who are considered to be undesirable.
3. A private company cannot invite the public to purchase its shares or
debentures. A public company may do so.
4. A private company must add the words, “Private Limited” at the end of its
name.
5. Private companies are given certain privileges which are not enjoyed by
public companies.
 PRIVILEGES OF PRIVATE COMPANIES AS
COMPARED TO
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PUBLIC COMPANIES
1. Prospectus: A private company need not file a prospectus or a
statement in lieu of prospectus
2. Issue of new shares: When a public company proposes to increase
its subscribed capital by the issue of new shares, it must comply
with certain rules, the most important of which is that such new
shares must be offered first to the existing equity shareholders pro
rata unless the members in a general meeting decide otherwise.
This provision does not apply to private companies.
3. Commencement of business: A private company can commence
business immediately on incorporation, whereas a public company
has to wait until it obtains a certificate for the Commencement of
Business.
 PRIVILEGES OF PRIVATE COMPANIES AS COMPARED
TO
PUBLIC COMPANIES
7

5. Managerial Remuneration: In the case of public companies and

private companies which are subsidiaries of public companies, the
overall maximum managerial remuneration shall not exceed 11% of
the net profits.
6. Offices of profit: A public company cannot appoint a firm or body
corporate to hold an office of profit under it (except the office of
managing agent, and secretary and treasurer). A private company,
which is not a subsidiary of a public company, may do so.
7. Number of directors: Formerly it was not necessary for private
companies to have directors. The Act of 1956, as amended in 1960,
provides that a private company must have at least 2 directors and a
public company at least 3 directors.
8. Rules regarding directors: The rules regarding directors are less
stringent in the case of private companies which are not subsidiaries
of public companies.
 PRIVILEGES OF PRIVATE COMPANIES AS COMPARED
TO
PUBLIC COMPANIES
8

9. Managing Agents: The Companies Act of 1956 contains

many strict provisions regarding managing agents. But as
regards private companies, which are not subsidiaries of
public companies, the following concessions are made :
 the Central Government may exempt a private company

from compliance with (i) terms of office of managing

agents; (ii) variation of agency agreements; (iii)
termination of agency contact;
 approval of the Central Government is not required for

changes in the constitution of managing agents of private

companies or changes in the articles regarding their
remuneration;