INTRODUCTION TO

COMPANY LAW
Basic Principles and Terms
Organisation Sole Partnership LLP One person Private Public
proprietorship company company company
Ownership Individual Partners Partners Individual 2 to 7 Shareholders in
shareholders excess of 7
Liability Unlimited Unlimited- Each Limited to the Limited to Limited to Limited to
Partner is jointly extent of partner’s shareholding shareholding shareholding
and severally contribution.
liable
Management Owner Partners Partners Board of Board of Board of
Directors Directors Directors
Succession None None after death Separate legal Separate Separate Legal Separate Legal
of all partners entity- will legal entity- Entity Entity
continue after but requires
death of partners a nominee
Formation Minimal Optional Compulsory Considerable Considerable Considerable
registration registration but paperwork. paperwork. paperwork.
minimal Application Application to Application to
paperwork to RoC to be RoC to be made RoC and SEBI
made to be made
Profits Individual Partners Partners Individual Shareholders Shareholders
 Transferable
shares

Limited Shared
liability ownership

Five Separation of
Legal principles of Ownership
personality corporate and
law Management
 BASIC TERMS

• Company
• Share
• Share Capital
• Shareholder
• Director
• Memorandum and Articles of Association
 COMPANY

• The term “company” has no strict legal meaning - In re Stanley (1906) 1 Ch. 131
• Section 2(20) – company registered under this Act or a previous company law
• Company Limited by shares - Section 2 (22) - company having the liability of its members limited
by the memorandum to the amount, if any, unpaid on the shares respectively held by them
• Loosely, it refers to a group of people (too numerous to be a firm) who come together for a common
purpose (usually profit) and create a separate legal entity for that purpose
• The moment a company is registered, it is clothed with a legal personality and thus the company
comes into existence
 SHARE

• Share - A unit of ownership in the Company – usually expressed as having a ‘face value’ with a
premium or a discount
E.g. 10 shares of the Company having a face value of Rs 10 each at a premium of Rs 22
Total ‘face value’ of the shares is 10 x 10 = Rs 100
Total value of the shares is 10 x (10+22) = Rs 320
• Is a share tangible or intangible property?
• Share certificate
 SHARE CAPITAL

• The aggregate face value of all the shares of the company

• Expressed in currency and number of shares
E.g. The share capital of the company is Rs 10,000,000 constituting 1,000,000 shares of face
value Rs 10 each
TYPES OF SHARE CAPITAL

Authorised

Allotted /
Issued / Paid
up
1 2 3 4 5 6 7 8 9 10
2
3
4
5
6
7
8
9
10

Authorised share capital – Rs 1000 consisting of 100 shares having a face value of Rs 10 each
Out of this authorised share capital, the allotted, issued and paid up share capital is Rs 400 consisting of 40
shares having a face value of Rs 10 each
 SHAREHOLDER
• The term ‘shareholder’ is not defined
• However, ‘shareholder’ is used interchangeably with the term ‘member’ which is defined as:
• (i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become
member of the company, and on its registration, shall be entered as member in its register of members;
• (ii) every other person who agrees in writing to become a member of the company and whose name is
entered in the register of members of the company;
• (iii) every person holding shares of the company and whose name is entered as a beneficial owner in the
records of a depository;
1 2 3 4 5 6 7 8 9 10
2
3
4
5
6
7
8
9
10

Shareholder A
30 shares Shareholder B
Shareholding of A is Rs 300 10 shares
Shareholding of B is Rs 100
 DIRECTORS Shareholders

• Shareholder appoints directors

• Directors run the company
Board of
• Company provides profits Directors
• Directors must use that profit for the sole
benefit of shareholders

Company
ALTERNATIVE VIEW (THE CONNECTED
CONTRACTS THEORY)

Shareholders Directors
Company
Consumers Vendors
 MEMORANDUM AND ARTICLES OF
ASSOCIATION

• Constitutional documents of the company –

• Memorandum tells you how the Company will behave with the
world outside;
• Articles (also known as shareholders agreement) tells you how the
elements of the Company (shareholders, directors, employees)
will behave with each other.