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Company Law

Shruti Minocha

Nature of company
 Means a group of persons associated together for attainment of common end ,social or economic.  It has no technical or legal meaning

 Registered company means company incorporated under companies act 1956.
 The laws relating co’s are in company act 1956, the latest amendment made in 2006.  Mostly they are business co’s but may also be formed for promoting art, research ,religion etc.

Characteristics of a Company
 Separate legal Entity  It is separate from its members  Members can enter into contracts with it in the same manner as individuals and he cannot be held liable for acts of the company. Even if he holds the entire share capital  The company property and money belongs to the company and not to share holders Case : salomon vs salomon & co ltd.

 Limited Liability  A company may be limited by shares or it may be limited by liability.  For example if face value of share is Rs.10 and a member has paid Rs. 7, he can be called upon to pay Rs. 3 per share during the life time of company.  In limited by guarantee member, the liability of member is limited to such amount as the member may undertake to contribute to the assets of the company in the event of it being wound up.

 Does not die  Life depends on life of members  Is created by process of law and can be put to an end by it only. Perpetual Succession  It is not subject to thousands of natural shock that flesh is heir to.  Members come and go  Even if all members are dead it continues to exist  Company’s existence persists irrespective of change in composition of its members .

Common Seal  Company has no physical existense Must act through it agents All contracts entered into by its agents must be under the seal of the company It is the official signature of the company .

Transferability of share  Has share capital divided into share Shares are subject to certain condition freely transferable No shareholder is permanently wedded to a company The idea of joint stock company was that shares should be capable of being easily transferable .

 Separate Property  A company is a legal person different from its owners  Capable of owning .enjoying and disposing of property in its own name.  A company is a real person in which all its property is vested and by which it is controlled and managed and disposed of .  Although share capital is contributed by share holders they are not private or joint owners of its property.

Capacity to sue  A company can sue It can be sued It may also inflict or suffer wrongs It can in fact have done most of things done by or to a human being .

Lifting or piercing the corporate veil  From juristic point of view company is a legal person distinct from members.  This is principle is referred to as “veil of incorporation”  The effect is there is fictional veil between company and its members  Company has a corporate personality which is distinct from its members .

 The human being started using this veil of corporate personality blatantly for fraud or misconduct.  This forced law to look behind at persons who are the real beneficiaries of the corporate fiction  The various cases in which corporate veil has been lifted are as follows: .

.  Prevention of fraud or improper conduct: The legal personality of a company may also be disregarded in the interest of justice where the machinery is used for some fraudulent purpose like defrauding creditors or defeating and circumventing law.Cases in which corporate veil is lifted  Protection of Revenue : The courts may ignore the corporate entity of a company if it is formed purely for tax evasion persons.

.Determination of Character of a company whether it is enemy: A company may assume an enemy character when persons in def acto control of its affairs are residents of an enemy country. in such a case court shall examine the character of the person in control and declare company as enemy company.

Contd…  Where company is sham : The courts also lift the veil when company is a mere cloak or sham  Company avoiding legal obligation : Where the use of an incorporation is being made to avoid legal obligation. . the court may disregard the legal personality of the company and proceed on the assumption as if no company existed.

.  Avoidance of welfare legislation : Avoidance of welfare legislation is as common as avoiding taxation and the approach of the courts is considering problems arising out of such avoidance is generally the same as avoidance of taxation.Contd…. the share holders will be liable for the acts of the company.  Company acting as agent or trustee of the shareholders: Where a company is acting as agent of its share holders. It is the question of whether the company is acting as an agent for its shareholders.

the courts ignore the form and take into account the substance.Contd…. Thus when there is a conflict with public policy. Protecting Public Policy : The courts now invariably left the corporate veil to protect the public policy and prevent transactions contrary to public policy. .

made of several persons who compose it Mode of creation Legal Status .Company distinguished from Partnership Difference Regulating act Company Company act 1956 After registration under companies act Has legal personality Partnership Indian partnership act 1932 Registration not compulsory Is not a person in the eyes of law.

by Every member of company participates in management. unless provided otherwise A partner cannot transfer his share without consent of partners Each partner is an agent and inc Management Transferability of interest Authority of members . Managed by director or MD members have no right in management Shares in company are freely tranferable unless its articles otherwise provide Share holder not an agent and has no powers to bind co.Liability of members Contribute towards Partners are liable satisfaction of the co’s without limit debts and liabilities is ltd.

does not make individuals insolvent Can do anything which partners agree to do Restriction on the powers of a particular partner contained in partnership will not avail against outsiders Insolvency of firm means insolvency of partners Restriction on powers Insolvency of firm and winding up .Powers Powers are limited to those allowed by the objects clause in its MOA Those in article of association of a company are effective as against public because it is public document Winding of co.

owns debt to any Cannot claim member he can claim payment out of its assets when it is wound up Comes to an end when it is wound up according to provisions of act The minimum in co.Debts If co. is 2 in private firm in private co is 2 and public is 7 MAX IMUM NO LIMIT It may be dissolved at any time Dissolution Number of members minimum 2 Max 10 in banking and 20 in others .

Maintenance of Bound by law to No such books maintain books statutory and accounts provision qualified by auditors .

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Classification on basis of incorporation • Statutory Companies * Created by special act of the legislature * Ex.Railways etc. if they are not inconsistent with the provisions of special act under which they are formed . LIC. RBI. * Mostly public utilities and of national importance * Provisions of company act 1956 applicable on them.

• Registered companies * These companies are formed and registered under companies act 1956. * Most commonly found companies are registered companies .

On the basis of liability • Companies with Limited liability • This is of two types 1. Companies limited by shares 2. Companies Limited by guarantee • Companies with Unlimited Liability .

Limited liability • Companies limited by Shares: * The liability of members of a company is limited to the amount unpaid on the shares. * The liability can be enforced during the existence of the company as also during the winding * If shares are fully paid liability is nil * It may be a private or a public company . such a company is known as one limited by shares.

• Companies Limited by guarantee * Liability of members is limited to a fixed amount which the members undertake to contribute to the assets of the company in case of it being wound up. * .culture etc. * * * Has a legal personality different from its members The liability of members is limited The articles of such a company must state the number of members with which the company is registered They are not formed with the purpose of profit but for promotion of art .

without liability is known as unlimited co. Co.) may form an incorporated co.• Unlimited Companies * Sec 12 provides that any 7 or more persons (2 or more in case of pvt. as in ordinary partnership in proportion to the interest in the company It may or may not have share capital It may be public or private Must have its own articles of association.. * * * * * Co. with or without limited liability. . Every member is liable for the debts of the co.

Classification on basis of members • Private Company : It is also called close corporation • A company which has a share capital of Rs. • Prohibits ant invitation or acceptance of deposit from persons other than its members.00.000 or such higher paid up capital as may be prescribed and by its articles • Restricts the right to transfer its shares if any. this meant to preserve the private character. . 1. directors or relatives. • Limits the number of members to 50 not including its employee members (present and past) • Prohibits any invitation to public to subscribe fro any shares in or debenture of the company.

only condition pvt. 100. 100.000 • The debenture holders in co. .• Every private company existing on commencement of companies (amendment) act 2000 with a paid up capital of less than Rs. • Joint holders are treated as a single member. • Must have its own articles of association. cannot issue debenture to public at large.000 shall within a period of two years enhance its paid up capital to Rs. Co. may excedd 50.

• Public Company • Means a company that has a minimum paid up capital of Rs. .5 Lakh or such high paid up capital as may be prescribed: • Is a private company which is a subsidiary of a company which is not a private company • Every public company with a paid up of share capital of less 5 lakh shall within a period of two years from such commencement enhance its paid up capital to 5 lakh.

and private Co.1 lakh 2 50 Rs. 5 Lakh 7 No restriction .Distinction between public co. Difference Private Public Minimum Capital Minimum member Maximum Number Rs.

No. of Directors Must have atleast 3 Must have 2 directors Restriction on appointment of directors Directors must file with Need not do so registrar a consent to act as director or sign an undertaking for qualification of shares Invites public to subscribe By its AOA prohibits such an invitation Restriction on invitation to prescribe for shares Transferability shares and debentures Privileges Are freely transferable Right to transfer restricted by article No such privileges SOME SPECIAL PRIVILEGES .

Quorum Managerial Remuneration If the articles of 2 in this case a company do not provide for a large quorum a minimum of 5 members Cannot exceed No such 11% of the net restriction profit .

of members : May have only 2 members • Allotment before minimum subscription: A private company can allot shares before the minimum subscription is subscribed or paid for • Prospectus or statements in lieu of prospectus : A private co. .Special Privileges of a private company • No. may issue shares without issuing a prospectus or delivering to the registrar a statement in lieu of prospectus.

• Commencement of business : A private company can commence business immediately after formation .• Issue of new shares: A public company issues new shares after expiry of two years after its formation or at any time after the expiry of 1 year from the date of first allotment of shares whichever is earlier. private company has to offer these shares to existing share holders on pro rata basis. • Kinds of shares : Can issue share capital of any kind and with such voting rights.

• Index of members : Need not keep index of members • Statutory meeting and statutory report : need hold and need not make reports • Demand for poll : Even one member present and having voting right may demand poll • Managerial remuneration :Rule of maximum remuneration does not apply to private company .

• No. . need not file with registrar the consent of director to act as such. • Legal position of private company in most respects is similar to public company even if one person holds all the shares the company is a distinct person. of directors : Need not have more than 2 directors • Rules regarding director : Rules are less stringent.

. • Conversion by choice or Volition : If a company so alters its articles that they do not contain provision that makes it a private company . In such a case the provision of the companies act apply to it as if it were not a private company. it shall cease to be a private company. It shall then file with registrar within 30 days either a prospectus or statement in lieu of propectus. the company ceases to enjoy the privileges.When does private company becomes a public company • Conversion by default : When default is made by a private company in complying with essential requirements of a private company .

• Thus a private company becomes public: * * * By filing with registrar Taking steps to raise its membership to atleast 7. Alter the regulation in articles to be consistent with public company .

The reslution should be to change the article to condition as prescribed to make the company private.• Conversion of public into private : A public company may become private by passing special resolution. .

.Classification on basis of control • Holding Company : • A company is known as holding company of another company when control is exercised by the latter over the former called a subsidiary company • A company is deemed to be holding company of another if but only if that the other is a subsidiary.

• A company is deemed to be a subsidiary company of another company in the following 3 cases : .• Subsidiary company • A company is known as subsidiary company when control is exercised by the latter (called holding company) over the former called a subsidiary company.

it becomes subsidiary if controlling company. • Holding of majority shares : Where a company holds more than half the nominal value of equity share capital of another it becomes subsidiary of former. the later becomes subsidiary of former. • Subsidiary of another subsidiary: Where a company is subsidiary of another company which is itself subsidiary of the controlling company . .• Company controlling composition of board of directors: Where a company controls the composition of board of directors of another company.

Governement Company • A government company means any company in which not less than 51% of the paid up capital is held by • The central government • Any state government • Partly by central and partly by any one of the state governments .

co. The CAG would have the power to direct the manner in which the co’s account shall be audited by the auditor. . the report along with audit report is to be placed in the parliament. co –owns it then it shall be placed before the sate govt legislature as well.Rules applicable to govt. • Annual report to be placed in the parliament : A report is to be prepared within 3 months of AGM in which the audit report is placed. in case state govt.’s • Appointment of auditor and audit reports: Auditor is appointed on the advice of CAG.